Australia: Shutting The Gate After The Horse Has Bolted – Enforcing Post Employment Restraints

Employers often seek to restrain former employees from competing against them and protect their commercially sensitive information from use or disclosure by former employees.

The law implies certain duties during the employment relationship, such as a duty not to compete and a duty of confidentiality. However, the only implied duty which survives after termination of employment is not to disclose a trade secret.

Unless there is an express term in a contract which restrains post employment conduct, former employees may compete with their former employers and use the know how gained during the employment.

Some recent cases highlight the complex issues faced by employers when trying to prevent conduct by former employees.

Del Casale v Artedomus (Aust) Pty Ltd¹

Del Casale and Savini were employees and directors of Artedomus. A significant percentage of Artedomus' business was derived from the sale of a particular stone product sourced from Italy at significant effort and expense. Artedomus considered information relating to the source of the stone to be confidential information.

Del Casale and Savini set up a rival business while still employed by Artedomus. When they left Artedomus, Del Casale sold his shares in Artedomus back to the company under a share sale agreement which included a 3 year non-compete clause and a clause prohibiting the use of "commercially sensitive information".

There were no other express contractual post-employment restraints binding Del Casale and Savini.

Artedomus commenced proceedings in the NSW Supreme Court to prevent Del Casale and Savini from using its source of stone.

Burchett J accepted that information relating to the source of the stone was "confidential information" which Del Casale and Savini had obtained while engaged by Artedomus and the use of that information breached their implied duties of confidentiality and to not compete with Artedomus while still employed. Del Casale was also found to have breached the post-employment restraints in his share sale agreement.

Burchett J made orders permanently restraining Del Casale and Savini from using the confidential information. This decision was overturned on appeal.

The Court of Appeal agreed with Burchett J that Del Casale had breached the restraint in his share sale agreement. However, as three years had passed between the agreement being entered into and the appeal, that restraint was no longer operative.

The Court of Appeal looked at the issue of protecting confidential information where there was no contractual agreement, in particular the difference between trade secrets and know how. Hodgson JA stated:

The Court of Appeal held that information relating to the source of the stone was information that could not be separated from the general know-how acquired by Del Casale and Savini.

In the absence of an express contractual term regarding confidential information, the use of this information was not prohibited once the employment had ceased.

Luxottica Retail Australia v Grant²

Grant was employed as an optometrist by Luxottica. She gave notice of resignation after agreeing to join a competitor.

While Grant was working out her notice period she sent a number of emails from her manager's computer to her home email address. Some of the emails contained documents as attachments. She forwarded an email containing sales techniques to her husband who worked for the competitor.

Her manager discovered the emails and Grant's employment was terminated. Luxottica quickly commenced proceedings in the Supreme Court to protect the information in the attachments from being used by Grant in her employment with the competitor.

Grant immediately gave copies of the emails to her solicitors and offered to delete them from her computer.

The Court found that Grant had breached Luxottica's copyright over the information contained in attachments. She was also found to have breached an express nondisclosure of confidential information clause in her employment contract by sending the email to her husband.

In considering remedy, White J determined that the documents did not contain any trade secrets or important financial information. He also accepted that Grant had not obtained any benefit from the emails and that the company had suffered no loss. Grant gave an undertaking to delete the emails from her computer. Consequently only nominal damages of $10 were awarded.

Genesys Wealth Advisers v Miles³

Miles executed a deed of release in return for a severance payment from his role as Managing Director of a financial planning business owned by Genesys. The deed restrained Miles from competing with Genesys within Australia for a 30 month period.

Soon after leaving Genesys, Miles began a new business venture which would compete directly with Genesys. Genesys applied to the Supreme Court for an injunction to enforce the post-employment restraints agreed to by Miles in the deed.

During the injunction proceedings, Miles admitted that he would be approaching Genesys clients with the intention of taking their business. The Court accepted that Miles was in breach and would continue to breach the restraints in the deed.

Palmer J upheld the held 30 month restraint period which Genesys sought to enforce against Miles, finding that the company had a legitimate business interest to protect from Miles because the confidential information which he received during his engagement with the company, including Genesys' strategic plan, equipped him to cause significant damage to it.

Palmer J also held that the territorial reach of the restraint was not unreasonable in the circumstances. The Court of Appeal upheld the decision to the extent that the restraint related to confidential information.⁴

Conclusion

The cases show the importance of ensuring employment contracts include express terms regarding restraints of trade and the post-employment use of confidential information.

As demonstrated in Del Casale, relying on an implied term will only protect information which constitutes a trade secret, not merely know how.

Miles shows that courts will uphold reasonable restraints that are necessary to protect an employers interests.

Injunctive relief is usually only granted in circumstances where employers act quickly. As Grant shows, the effective remedy is to act quickly to stop the relevant conduct.

Courts will be reluctant to shut a gate left open by an employer in the absence of a reasonable post-employment restraint.

Footnotes

1. Del Casale v Artedomus (Aust) P/L [2007] NSWCA 172

2. Luxottica Retail Australia v Grant [2009] NSWSC 126

3. Genesys Wealth Advisers v Miles [2008] NSWSC 802

4. Miles v Genesys Wealth Advisers [2009] NSWCA 25

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.