A bitter dispute over a restraint of trade clause has recently been settled between Herbert Smith Freehills lawyers ("Freehills") and a cohort of its former partners, highlighting the importance of restraint clauses in the increasingly competitive market for legal services in Australia.
Restraint clause challenged
Once eight partners of Freehills simultaneously gave notice of their resignation on 1 September 2016, their colleagues soon discerned that they had been poached by a recent entrant to the Australian market for legal services, White & Case LLP ("White & Case").
In the 6 month period that followed, the defecting partners served out the period stipulated in their employment contracts, anticipating commencing work with White & Case at the beginning of March 2017.
Freehills sought to enforce the restraint of trade in its partnership agreement, which purported to prevent the defecting partners from soliciting clients and employees of Freehills, and from commencing work with White & Case, within a six month period following the expiry of each defecting partner's notice period ("Restraint").
In the view of the defecting partners, the Restraint was unenforceable, as Freehills was insulating itself from competition in the legal services market, not protecting its legitimate interests.
Interlocutory injunction granted to Freehills
In February 2017, Freehills took the bull by the horns and applied to the New South Wales Supreme Court ("NSWSC") for a partial injunction. In defending this application, the defecting partners sought to prove that Freehills had suspended each of them from the partnership during the notice period. It followed that in so doing, Freehills had effectively extended the term of the Restraint; making it unreasonable and therefore unenforceable.
The NSWSC granted the partial injunction in favour of Freehills, setting a hearing for July 2017 – but a confidential settlement was reached by the parties in early May. It is understood that the terms of settlement generally enabled the defecting partners to commence work with White & Case on 1 March 2017, provided that they are restricted from soliciting Freehills' clients and employees until 1 September 2017.
Drafting a restraint of trade: getting the balance right
This dispute demonstrates that non-compete and non-solicitation clauses in employment and partnership agreements are difficult to correctly draft. A skilfully drafted restraint clause that balances the interests of both the employer and the employee is far less likely to be successfully disputed by an ex-employee.
Employers have a legitimate interest in protecting their good will, client base, staff and confidential information. The protection of these interests should not lead to an unreasonable restriction on an ex-employee's freedom to earn a living following their departure. The reasonableness of any restraint of trade depends on all of the relevant circumstances; so employers need to tailor their restraints in each case by carefully considering the appropriate restraint period, geographical area and subject matter.
A restraint of trade can be thought of as a chain, which is only as strong as its weakest link; one poorly drafted element of a restraint clause can make the entire restraint invalid. By way of example, a restraint that persists for 6 months in a small geographical area relevant to the employer's business may nevertheless be unreasonable if it prevents the employee from working with any competitor, as opposed to only the employer's direct competitors. By the same token, a restraint that protects all confidential information is less likely to be enforceable than a restraint that protects confidential information that is relevant to a job with the employer's direct competitors.
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.