In the wake of a recent decision by the Supreme Court of Victoria, employers are reminded that their clients are not automatically off-limits to ex-employees. Where clients transfer their business to former staff, employers must act quickly and decisively to enforce any applicable post-employment covenants and be prepared to obtain and adduce evidence to substantiate the breach.
Real Estate agency loses clients to former employees
In One Dream Enterprises Pty Ltd v Simmonds & Ors  VSC 304, three former employees of a real estate business called 'YPA' defected to a rival local agency. Each of the ex-employees had a clause in their contract of employment with YPA that they would not misuse the employer's confidential information.
Following the ex-employees' departure, YPA lost the property management business of 14 landlords to the new agency and alleged that its former employees had utilised YPA's confidential information in order to poach its clients.
YPA applied for an interlocutory injunction preventing the exploitation of its confidential information and an order for delivery up or destruction of all information relating to YPA's clients or rent roll.
Supreme Court refuses application for injunction against ex-employees
YPA asserted that the loss of its clients (and their ongoing revenue) was the result of its former employees exploiting the confidential information acquired during the course of their former employment.
However, YPA failed to produce sufficient direct evidence to convince the Court that the defendants had downloaded client details prior to the termination of their employment, and that the business YPA lost had not simply run with the employees, who were experienced and established local agents.
Recognised authority has made it clear that (emphasis added):
[an] employer has rights in confidential customer lists and connections and it is quite clear that employees cannot take or copy a list of customers with the intention to using the list later for their own benefit. But in the absence of a valid legally enforceable restrictive covenant, an employee is entitled to rely on any retained knowledge of the customers, their identity, requirements and so on, and this is especially the case where the ex-employee has personally dealt with the customer for some time and could reasonably be expected to recall their details in his mind.1
Specifically, the Court noted that no forensic IT investigation was undertaken in respect of the ex-employees' former computers or mobile phones that linked the loss of business to the misuse of confidential information.
Another critical factor weighing against the grant of the injunction was that YPA had waited some six months from the date of the first client transfer before bringing the application.
The application for the interlocutory injunction was dismissed, and the underlying case described as "not strongly arguable" by the Court.
Lessons for employers when clients are lost to former staff
Employers concerned about the risks posed by competition from ex-employees should:
- Review existing employment agreements and consider the appropriateness of adding restraint of trade or non-solicitation clauses to contracts with senior and client-facing staff (particular industries where these disputes frequently arise include real estate, insurance broking, financial planning and mortgage broking).
- Seek advice as to the validity of existing restraints, remembering that as a matter of law a post-employment restraint is presumed to be void unless it is deemed reasonable having regard to the 'legitimate business interests' of the parties'.
- Take steps to govern employee access to valuable information (e.g. customer lists, supplier pricing), ensuring that such information is only available to those employees who require it, and that systems are in place to monitor any downloads or copying. In this regard, it may be helpful for the employer to retain ownership of the phones and laptops used by the employees on a day to day basis, so that they may be forensically analysed if need be.
- Act quickly when notified of a potential breach of post-employment obligations by a former employee, remembering that delay will be a factor considered by the Court.
- Be prepared to engage forensic IT professionals in order to substantiate claims of breach.
- Consider the quantum of damages and assess these realistically. Revenue projections in respect of lost clients may be discounted if, in the Court's view, those clients could or would have eventually transferred their business irrespective of breach. Damages in respect of lost revenue will not continue indefinitely.
Pointon Partners has extensive experience in advising employer and employee clients in post-employment and restraint of trade matters, including acting for employers and employees in related litigation.
1 Southern Cross Financial Group (Newcastle) Pty Ltd v Rodrigues  NSWSC 621
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.