Employers are increasingly prepared to seek to enforce restraint of trade clauses against former employees in today's competitive labour market. This is demonstrated in three recent decisions of the New South Wales and Western Australian Supreme Courts. These cases indicate that while the Courts will not enforce unnecessarily broad or uncertain restraints, employees who ignore reasonable restraints or operate under a ‘cloak of deception’ will receive little mercy.
Woolworths v Banks(NSW Supreme Court)
Woolworths attempted to restrain Mr Banks, a former executive employee, from accepting employment at Myer for a six month period after leaving Woolworths. It relied on a clause in Mr Banks' employment contract that prevented his employment by a ‘competitive business’ for a period of up to 12 months after his employment with Woolworths ended.
Woolworths argued that:
- Myer was a ‘competitive business’ as defined in the restraint clause; and
- the restraint was reasonably necessary to protect information confidential to Woolworths and known by Mr Banks.
Woolworths' claim was rejected by the Court. It was found that the needs of the two companies were quite distinct and that Myer did not fall within the definition of a business competitive with Woolworths. As evidence of this, the Court noted that Myer's CEO had previously been employed by Woolworths without Woolworths seeking to enforce a similar restraint.
The Court also found there was insufficient evidence that Mr Banks possessed any of Woolworths' confidential information that would benefit Myer. In any event, Mr Banks provided the Court with an undertaking to honour his confidentiality obligations to Woolworths. Therefore, the restraint was not reasonably necessary.
Sear v Invocare Australia Pty Ltd(Western Australia Supreme Court)
Ms Sear worked for Invocare as a funeral home manager. Ms Sear had been unemployed since 2004, when her employment agreement expired and Invocare did not offer her future employment.
Ms Sear's employment contract contained a restraint of trade clause. She had received a total of $500,000 from Invocare in annual instalments as consideration for the restraint. However, Ms Sear wanted to establish a business in the industry and sought a declaration that the restraint was unenforceable.
The restraint clause precluded Ms Sear from working in funeral services within specified geographic areas and for specified periods of time. The combination of the different geographic areas and time periods were said to constitute separate and independent restraints of differing size and scope. Ms Sear argued that the restraint clause was unenforceable because it was:
- void for uncertainty; and
- wider than reasonably necessary to protect Invocare.
Invocare counterclaimed for the return of the $500,000 paid to Ms Sear in the event the restraint clause was found to be unenforceable.
The Court found that the restraint clause was not uncertain. It was clear that the different combinations of geographical areas and time periods operated as separate restraints even though they were cumulative and, in some instances, overlapping. Further, the range of activities and roles Ms Sear was prevented from undertaking or assuming were found to be reasonable.
However, the geographical area of the restraint was declared wider than was necessary to protect Invocare's interests. This was because the narrowest restraint area was a five kilometre radius from Invocare's business premises, which included an area called Northam. While Ms Sear did not have any client involvement in Northam during her employment, it could not be severed from the restraint. The restraint was therefore unenforceable.
The Court also refused to order the repayment by Ms Sear of the $500,000 on the basis that:
- there was not a total failure of consideration for the payment;
- the payment was not a mistake; and
- the contract contained no implied term that the sum would be returned if the restraint clause was declared unenforceable.
Brinks v Kane(New South Wales Supreme Court)
Mr Kane was employed by Brinks (a cash logistics business) as a business development executive. His role was the attraction of customers and maintenance of existing business relationships. For the last six months of his employment at Brinks, Mr Kane was its ‘human face’.
Mr Kane accepted employment with MDS, one of Brinks' competitors. Brinks commenced proceedings against Mr Kane, arguing that Mr Kane had breached and, without restraint, would continue to breach, conditions of his employment contract. It was claimed that Mr Kane had breached his restraint of trade and confidentiality clauses by:
- accepting employment at MDS, a company performing substantially similar functions to Brinks;
- enticing Brinks' employees to seek employment with MDS;
- diverting Brinks' business opportunities to MDS;
- soliciting Brinks' clients for the benefit of MDS; and
- providing Brinks' confidential records to MDS.
It was alleged that Mr Kane was engaging in these activities at the same time that he was telling his Brinks colleagues that he would not seek work at a competitor organisation. Instead, he told them that he was going to work in an entirely different field.
Brinks' application to restrain Mr Kane was successful, with the Court granting a temporary injunction to enforce the three month post employment restraint. In reaching its decision, the Court stressed that employers are not entitled to protection from mere competition. They may, however, rely on restraints that are reasonably necessary to prevent disclosure of confidential information or the exploitation of their customer base.
A significant body of evidence was identified that showed Mr Kane had engaged in activities inconsistent with his obligations to Brinks under his employment contract. In particular, the Court emphasised evidence of deceit by Mr Kane. Mr Kane's contention that he was offering his services to MDS in an area other than the cash logistics field was rejected.
The Court concluded that as Mr Kane had only been employed by MDS for 1 week his efforts at enticing customers from Brinks were unlikely to have been successful. However, the Court found that there was a strong case to be tried that Mr Kane would seek to entice customers away and, in doing so, he would use Brinks' confidential information.
While the Court considered the hardship Mr Kane would suffer if restrained from employment with MDS, it concluded that any potential hardship was largely self induced.
Implications for Employers
These decisions highlight that Courts will enforce restraint of trade clauses that are reasonably necessary to protect legitimate business interests. However, the importance of careful drafting cannot be emphasised enough. It is often a fine balancing act between drafting a restraint that protects your business interests and will be considered reasonable, but that is not so broad that it is too uncertain to be enforced.
Where monetary payments are made as consideration for a restraint of trade clause, organisations should ensure that the employment contract provides for the repayment of the amount if the restraint is declared unenforceable.
We can assist you to prepare restraint of trade clauses that are appropriate for your business. Restraint clauses are particularly important for senior or managerial employees, as well as sales staff who, as part of their role, have ready access to client and customer contacts.
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