Deal or no deal? Three recent cases demonstrate that restraint of trade clauses are still a minefield
In HRX Holdings Pty Ltd v Pearson, the Federal Court upheld a restraint of trade clause against the co-founder of a HR outsourcing company, preventing him from competing in the HR outsourcing industry in any way for a period of two years. Sound excessive? Well, in exchange for the restraint, the company agreed to pay him for the duration of the restraint period (barring 3 months) and grant him an 8% shareholding in the company. The restraint clause was drafted specifically with him in mind. The terms of the restraint were negotiated over several months, and at the end of negotiations, the parties expressly agreed that the restraints were reasonable.
So is the key to enforceability seniority and a restraint payment? Not necessarily.
In Birdanco Nominees Pty Ltd v Money the Victorian Court of Appeal ordered a junior former employee to pay his ex-employer $188,000 in liquidated damages following a restraint breach. After resigning, the former employee sought to provide services to a client of his ex-employer, for a significantly cheaper fee. The client chose the cheaper option, and dumped Birdanco. The former employee argued that the work he was performing for the client was different from the work he performed for the client while at Birdanco; because he was now a qualified accountant and had been unqualified while at Birdanco. The Court didn't buy it, and found that the restraint clause was "relatively narrow", was designed specifically to prevent employees after leaving the company from "exploiting relationships with clients in order to re-establish that client relationship in a different employment capacity", and that this is an interest which an employer is entitled to protect.
Does this mean that courts are simply more willing to enforce restraints? Not so.
In Wallis Nominees (Consulting) Pty Ltd v Pickett, an IT manager was not prohibited from taking up a management position with a former client despite there being a restraint of trade clause in his employment agreement. The Victorian Supreme Court found the restraint clause to be void and unenforceable because it ventured further than necessary to protect a legitimate interest; and that the company had failed to identify a legitimate interest that warranted protection. The court found the employee was not the face of the company, did not control the business of the client and his consultancy position was not designed to provide the basis for a special relationship to develop.
Take home message?
A one size fits all approach is not going to do the trick. In drafting restraint clauses, it is vital to take account of the specific interest that the clause is seeking to protect and the circumstances of the employee sought to be restrained. Then you'll have a good chance of being able to enforce the restraint.
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