Australian businesses commonly use contractual restraints to try to protect their intellectual property (IP), confidential information, commercial connections and key employees (Interests) against interference or mis-use by former employees and/or their new employers. The effectiveness of this strategy depends on whether a business has a clear understanding of what IP they own, what Interests can legitimately be protected and what Interests are business critical.
In many respects the decision of Justice Beach in the Federal Court in Liberty Financial Pty Ltd v Jugovic  FCA 607 (Liberty) is a straightforward application of established legal principles relating to such protection.
The decision does, however, illustrate the practical difficulties businesses can face in protecting their Interests, and highlights some of the challenges that may confront businesses that seek to recruit staff from competitors – especially those who possess extensive experience and/or specialised expertise.
This decision clearly shows why an IP strategy is crucial in ensuring that key safeguards are in place to identify and protect a company's Interests. An effective IP strategy should cover the following:
- logging what material IP has been developed and by whom;
- assessing what rights might be available to protect the IP (patents, copyright, designs);
- checking branding and trade mark availability;
- ensuring ownership of IP; and
- confidentiality arrangements.
Recently many businesses have responded to COVID-19 by entering into new markets and products lines (sometimes adjacent to their core business and sometimes totally new). This has generated new, valuable and highly protectable IP. These are particularly pertinent issues at a time where the economy is recovering, the labour market is tight, and access to overseas talent is constrained by border closures.
Five key learnings for business from Liberty
- Embed an IP strategy, preferably endorsed by the Board, which identifies, assesses and protects IP as it is generated or acquired. This will enable the business to understand the Interests that the business ought to protect in the event of termination of employment.
- Make a realistic assessment of what Interests truly require protection, and what price the business is prepared to 'pay' for that protection – thinking about how the business would be impacted if those Interests were transferred to a competitor is a good vantage point to work from.
- Undertake a comprehensive and hard-headed review of the employees whose post-employment activities need to be restrained in the interests of the business. The IP strategy should identify what IP employees have created or contributed to and how ownership of that IP has been dealt with.
- Require potential employees to provide a clear and documented account of any restraints to which they may be subject in consequence of previous employment.
- In addressing post-employment issues, be guided by commercial prudence, and relevant legal principles, rather than emotion. In particular, be mindful of the legal hazards potentially associated with engaging in conduct that could be found to constitute a repudiatory breach of contract on the part of the employer.
What happened in Liberty?
Liberty is one of some 129 lenders that provide loans in the Australian residential, commercial and self-managed superannuation market who are not authorised deposit taking institutions (ADIs). As at June 2020 non-ADIs had a market share of 5% of assets, whilst ADIs (which are mainly banks, building societies and credit unions) held the other 95%. As at the same date, Liberty had some $13bn in assets representing approximately 5% of the non-ADI market. It was headquartered in Melbourne, and had around 350 employees spread across six offices.
Mr Dragan Jugovic (Jugovic) commenced employment with Liberty at its head office in January 2002. By October 2011 he had risen to the position of Team Leader – Treasury. Despite a number of name-changes, he retained this position until he gave two weeks' notice of resignation on 20 April 2021. Three weeks earlier, he had signed an employment agreement with ORDE Financial Pty Ltd (ORDE), and was due to commence employment with that Company on 31 May 2021.
In the course of his employment, Jugovic had access to highly confidential and commercially sensitive information relating to Liberty's activities in the field of wholesale funding.
Liberty is an established player in the industry, having been in operation for some 24 years. ORDE is a new entrant in the part of the financial services market in which Liberty operates. According to Liberty, if ORDE were armed with knowledge of the identity and investment preferences of its clients it would be 'in a very good position to both take advantage of that information and harm Liberty' (para ). Jugovic was seen by Liberty and (presumably) ORDE as an obvious source of such information.
Alarmed at the potential damage to its business that might result from what it saw as the defection of Jugovic, Liberty initiated Federal Court proceedings seeking an injunction to prevent Jugovic from taking up employment with ORDE. It also initiated proceedings against ORDE and its holding company (Wingate Group Holdings Pty Ltd) in tort and under the Corporations Act 2001.
Justice Beach granted interim injunctions against Jugovic on 4 and 24 May 2021. The purpose of the proceedings that are the subject of this Insight was to determine whether such relief should be extended until the hearing and determination of the matter, or at least until the expiry of a 12-month restraint in Jugovic's contract of employment.
At a late stage in the interlocutory proceedings, Jugovic raised an argument that by failing to pay out his accrued long service and annual leave entitlements at the time of termination of his employment, Liberty had committed a repudiatory breach of his contract of employment, thereby relieving him of his obligations under the restraint clauses in his contract. This argument did not commend itself to Justice Beach in the circumstances of this case.1
Jugovic's legal and equitable obligations
Clause 12 of Jugovic's contract of employment consisted of a fairly standard restraint of trade clause, whereby Liberty sought to constrain certain of his post-employment commercial activities for specified periods in specified areas. In particular, clause 12.1 provided that:
The Executive [Jugovic] will not, from the date of termination of their employment, within the Relevant Area and for the Relevant Time, directly or indirectly, on the Executive's own account or on behalf of or in association with others carry on, be engaged, employed or involved in any capacity in any business or activity to provide services which are the same as or similar to those the Executive provided to the Company or Group at any time within the 12 months immediately preceding the date on which the Executive's employment terminated. For the purposes of this clause "engaged, employed or involved in" includes direct or indirect involvement as a principal, agent, partner, Executive, shareholder, unitholder, director, trustee, beneficiary, manager, consultant, adviser or financier. [Emphasis added]
Clause 12.2 went on to set out a series of restrictions intended to prevent Jugovic from soliciting customers or clients of Liberty to cease doing business with the Company, or to reduce the amount of business they do with it. It also purported to prevent Jugovic from inducing or attempting to induce executive or managerial employees of Liberty to resign from the Company, whether in breach of their contracts of employment or otherwise.
As is common practice with post-employment restraints, clause 12 included a series of 'cascading' restraints as to both duration and area. As appears below, these were intended to ensure that if a particular restraint was adjudged to be in unreasonable restraint of trade, that restraint could be struck out ('blue pencilled') and replaced by the next restraint in sequence. In Jugovic's case the 'Relevant Times' consisted of periods of 12, six, three and one month(s), whilst the 'Relevant Areas' ranged, in five steps, from all of Australia to a 20 km radius from Liberty's Melbourne office (being the location at which Jugovic was based immediately prior to termination of his employment).
In addition to the restraints set out in clause 12, Jugovic was also under a series of contractual obligations in relation to the use and disclosure of 'confidential information' – on a very broad definition of that term. These duties were set out in clause 9 of his contract of employment, and were in addition to his equitable duty of confidentiality – which would operate to constrain his post-employment use of confidential information irrespective of any contractual provision in relation to that issue.
In addition to his contractual and equitable obligations, Jugovic was also under a statutory duty of confidentiality as set out in section 183(1) of the Corporations Act 2001:
A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:
- gain an advantage for themselves or someone else; or
- cause detriment to the corporation.
Liberty based its application for injunctive relief on all of these provisions. For purposes of this Insight we focus principally on the post-employment restraints set out in clause 12. This reflects the approach adopted by Justice Beach on 4 June 2021, when he agreed to Liberty's application for an extension of the injunctive relief he had originally granted on 4 and 24 May.
Before looking more closely at the relevant legal principles and their application in the circumstances of Jugovic's resignation from Liberty and his acceptance of an offer of employment with ORDE, it should be noted that Jugovic's contract with his new employer contained a provision to the following effect:
You warrant that you have disclosed to the Company information about any possible restrictions on you which may affect your ability to perform the duties set out in this agreement.
You further warrant that, other than any restrictions disclosed to the Company, you are not under any obligation or restriction which would interfere or conflict with your employment in this role or your obligations and duties under this agreement.2
The significance of this provision will become apparent later in this Insight.
The relevant legal principles and their application
The common law has traditionally been deeply antagonistic towards contractual provisions that sought to restrain the post-employment activities of former employees. This reflects a fundamental assumption that the law should not tolerate rules or practices that interfere with the free operation of the market. On this reasoning employers should, for example, be free to hire whomsoever they please on whatsoever terms they please. By the same token, employees should be free to work for whomsoever they please, on whatsoever terms they choose. Of course these assumptions are subject to many qualifications – especially those imposed by statute, industrial instruments, trade unions and equity. Nevertheless the common law does remain basically hostile towards contractual provisions, and commercial practices, that can be seen to be in unreasonable restraint of trade.
In the context of contractual provisions that seek to restrain former employees in selling their labour in the market, this hostility finds expression in a presumption that contractual terms that are in restraint of trade are void as contrary to public policy. The presumption can, however, be rebutted if the restraint can be shown to be reasonable as between the parties, and not unreasonable in the public interest.
The presumption of invalidity applies in a range of contexts – including in relations between employer and employee, and purchaser and vendor of the goodwill of a business. Furthermore, it is generally assumed that courts will be more reluctant to enforce restraint clauses between employer and employee than between purchasers and vendors – presumably because of the perceived power imbalance between employers and individual employees, and the personal nature of the employment relationship.
For an employer/employee restraint to be found to be reasonable, it must be directed to the protection of a legitimate business interest of the employer – employers cannot simply protect themselves against competition per se. In the proceedings before Justice Beach the defendants argued that by seeking to prevent Jugovic from commencing employment with ORDE, Liberty 'does not seek to protect any legitimate business interest, but merely seeks to delay competition by ORDE' (para ). This line of reasoning was decisively rejected by Justice Beach (para ):
It is the illegitimate leveraging off Mr Jugovic that it [Liberty] is concerned with given Mr Jugovic's intimate knowledge of and involvement with Liberty's business.
Not only must a party that is seeking to enforce a restraint be able to show that the restraint is directed to the protection of a legitimate business interest of that party, it must also be able to show that the restraint is reasonable as to duration and extent.
This helps explain the use of the kind of cascading clauses that were included in clause 12 of Jugovic's contract of employment as described earlier. The idea here is that courts will sometimes be prepared to strike out a restraint that is adjudged to be too broad (for example as to duration), but to enforce another provision that is considered to be reasonable. The courts will not, however, re-write a restraint to conform to its perception of what would be reasonable in the circumstances – the parties must 'have sown the seeds of severance' in the express terms of their contract. This explains why the restraint in Jugovic's contract offered four different durations and five different areas of application. The alternative restraints gave the court the option of striking out the durations and/or areas it considered to be unreasonable and enforcing the first restraint in the sequence that it considered reasonable. What the court could not do was substitute a duration or area of its own choosing (say a restraint of four months' duration extending to a radius of 10 km of Liberty's Melbourne office). Furthermore, if the court considered that none of the restraints were reasonable, then the restraint clause would fail in its entirety.
In the event Justice Beach found (para ) that Liberty had 'a strong case to establish that it has a legitimate business interest to protect and that the [clause 12] restraint does no more than is reasonably necessary to protect that legitimate business interest.'
In support of its case in the Federal Court, Liberty sought to rely upon an import from the United States in the form of the 'inevitable disclosure doctrine'. According to Justice Beach (para ):
This is a common law doctrine by which a Court can prevent a former employee from working for a competitor of his former employer where doing so would require the employee to depend upon his former employer's trade secret information, even though there is no evidence of actual disclosure. The inevitable disclosure doctrine applies where the employee knows his former employer's trade secrets, and the employee's work for the new employer substantially overlaps with the work of the former employer based on the same role, industry and geographic region.
Justice Beach indicated (para ) that he was 'inclined to the view' that 'there is no reason why the doctrine of inevitable disclosure cannot form part of my equitable jurisdiction', however he also indicated that at this stage in proceedings he would 'refrain from engaging in any innovative incrementalism' – leaving the potential incorporation of such a doctrine in Australian law for consideration in the context of the trial on the merits of the case.
These observations aside, no Australian court appears yet to have expressed any view on the merits or otherwise of the doctrine of inevitable exposure. In light of the fact that, for the reasons canvassed below, there must be doubt as to whether Liberty will ever come to trial, the detailed consideration of the 'potential invocation' of the doctrine foreshadowed by Justice Beach may have to wait for some time. It should be noted, however, that the doctrine has not attracted universal support in the United States and that a leading authority on the law of confidentiality in Australia has expressed serious reservations about the advisability of incorporating this doctrine in Australian law.3
It should also be noted that had Jugovic's late-entry repudiation argument been upheld, he could well have been relieved of his obligations under the restraint and confidentiality clauses in his contract of employment. This reflects the fact that a common law repudiatory breach of contract will, if accepted by the 'innocent' party, relieve that party of all obligations under the contract - unless it can be shown that the restraint was intended to operate even in the face of such breach.
The grant of injunctive relief to enforce contractual rights or to protect equitable interests is a matter for the discretion of the court dealing with the case. This is a particularly important factor in circumstances where relief is sought pending full trial of the matter – especially where the grant or refusal of interim relief may, in effect, constitute a final determination of the substantive issue.
This helps explain why, in order to obtain the relief it sought, Liberty not only had to demonstrate the reasonableness of the restraint upon which it wished to rely, but also had to meet two further requirements:
- Firstly – it had to show that it had 'a sufficient likelihood of success to justify the grant of the injunction, with such sufficiency being dependent upon the nature of the right being asserted and the practical consequences that are likely to flow if an injunction was granted': that is, it had to make out a prima facie case; and
- Secondly – it had to show that the balance of convenience favoured the grant of an injunction. For that purpose it was necessary consider 'what the inconvenience, injury or injustice to the applicant would be if the injunction were refused' and to weigh that against the inconvenience, injury or injustice to the respondent if the injunction were granted.'4
In the present case, Justice Beach found that there was a strong prima facie case that the restraints in clause 12 were enforceable (clause ), and that the balance of convenience favoured the grant of the relief sought by Liberty (paras  and ).
In reaching this conclusion his Honour was mindful that his decision on the application before him 'may practically amount to final relief' (para ). He recognised that in many circumstances that 'may tip the balance of convenience in a defendant's favour' and that in such circumstances the applicant may need to show a stronger prima facie case than would otherwise be the case (para ).
Justice Beach clearly considered that Liberty had succeeded in doing this in the case before him. In reaching that conclusion he appears to have been influenced by a number of factors, including:
- that if Jugovic commenced work for ORDE before trial, Liberty might find it difficult to prove breach of the restraint by inadvertent disclosure or use of Liberty's confidential information, or to prove loss because of misuse of such information (para );
- that in cases involving enforcement of a negative stipulation (as here), relief would rarely be refused on the basis that damages would be a sufficient remedy (para );
- that Liberty was likely to be 'substantially disadvantaged' if Jugovic took up his employment with ORDE (para ), and that his arguments to the contrary were not convincing;
- that undertakings offered by Jugovic in relation to abiding by the non-solicitation terms and involvement in certain kinds of transaction were not a sufficient answer to Liberty's case (paras , );
- that Jugovic accepted employment with ORDE knowing the potential consequences [(para ), and that ORDE was aware of the restraints when it engaged him (para ) ;
- that it was unlikely that ORDE would terminate Jugovic's employment if the injunction were granted, despite Jugovic's stated expressions of concern to the contrary; and
- that Jugovic would not suffer significant financial loss as a consequence of grant of the injunction, in light of the fact that Liberty had undertaken to pay him his pre-termination salary for the duration of the period of the injunction (para 300]).
Learnings for other businesses
As noted at the outset, Liberty is in many respects little more than a straightforward application of established principles concerning restraint of trade and the grant of interim injunctions. However, the decision of Justice Beach does serve as a timely reminder of the importance of, and the legal and practical difficulties associated with, the protection of intellectual property, confidential information, commercial connection and key employees.
Most employers include 'restraint clauses' in their contracts of employment of managerial and professional staff. Usually, this is done in the body of a written contract, although occasionally it takes the form of a deed which is appended to, or referred to in, the written contract.
In principle this is sound commercial practice, however the issues that were in contention in Liberty, and the manner in which they have played out thus far, clearly suggest that the protection of some or all Interests requires more care and attention than is sometimes accorded to it.
The starting point for a business that wishes to protect itself against the ill-consequences (which Liberty apprehended in the circumstances of the departure of Jugovic) must surely be to identify what Interests the business wants and needs to protect. Is it all of them? Or just some of them? Or, none of them?
It should not, for example, be assumed that all commercially sensitive information, or all intellectual property necessarily merits protection. The point here is that if the protective net is cast too wide the courts may be reluctant to enforce the restraints – especially in proceedings where the business is seeking interim relief. It may also be the case that the 'cost' of protecting a particular Interest would, in some instances, outweigh the benefit.
It is even more important to ensure that those Interests that really do require protection are clearly identified, and that the most efficacious measures available are put in place to provide the greatest possible level of protection.
Just as it is important to identify the Interests that truly do require protection, it is also of the utmost importance to identify at the outset which holders of those Interests need to be restrained, and from what activity.
Sometimes the answers to these questions will be obvious – but not invariably. For example, if a restraint has to be purchased (e.g. through salary maintenance during a period of enforced inactivity, or the provision of other benefits) then there is little point in paying that price to employees who, despite their seniority, have little access to commercially sensitive information and/or only a limited capacity to harm the business. By the same token, if relatively junior employees have access to, for example, potentially damaging confidential information or IP, then it may be appropriate to restrain their post-employment activities despite their lack of temporal or organisational seniority.
Having determined what Interests are to be protected, and which employees are to be restrained from what conduct in what circumstances, it is then necessary to determine how these objectives can most effectively be achieved.
In that context, it is unwise to assume that a pro forma employment agreement provided by the business's legal advisors can appropriately be utilised in all circumstances. It is important, presumably with appropriate legal and financial advice, to tailor any proposed restraint to the circumstances of the business and the Interests that are to be protected.
It must be recognised that no matter how carefully thought through and crafted restraints may be, they are very hard to enforce. This stems from a number of factors:
- the common law's traditional hostility towards contractual provisions or commercial practices that are in restraint of trade – as reflected in the presumption of invalidity and the restrictive approach to rebuttal;
- the fact that the nature of the legal process being what it is, the practical utility of a restraint may be long gone by the time enforcement proceedings are concluded; and
- the restrictive attitude of the courts to granting interim relief – especially where doing so may, in effect, determine the final outcome of the proceedings.
Nevertheless, the decision in Liberty shows that it is possible to enforce contractual restraints in appropriate circumstances.
By the same token several aspects of that case were unusual. Jugovic's area of expertise was particularly specialised, and appears to have been particularly critical to Liberty's business. Similarly, ORDE's attack on Liberty's business was very direct, and depended for its probable efficacy on its obtaining the services of Jugovic, or one of a small number of other individuals in the non-ADI sector. And for all that, Liberty ended up undertaking to pay a disloyal employee's salary to an extended period, whilst receiving nothing in return beyond the fact that he could not provide service to a competitor.
It is also important to bear in mind that, as noted earlier, if an employer were to engage in conduct that constituted a repudiatory breach of contract on its part it may stand to lose the benefit of any restraint provisions in the contract. Such repudiatory conduct could include, for example, refusing to permit the employee to serve out their notice period or depriving them of some accrued contractual or statutory entitlement.
Liberty also serves as a timely reminder that businesses that engage employees who have formerly worked for competitors may themselves have a measure of legal and/or commercial exposure in consequence of that engagement. In this instance, ORDE seems to have targeted a key employee of a competitor as part of a commercial strategy, and came unstuck in the face of a restraint clause that a court was prepared to enforce at the instigation of a determined litigant. It is easy to conceive of situations, however, where the new employer simply went to the market and recruited an employee who was looking for work. If the employee was subject to a restraint, and a litigious former employer, then the new employer might well find themselves in a similar predicament to ORDE (even though its intentions were beyond reproach).
This serves to highlight the wisdom of the warranty sought by ORDE from Jugovic. It availed them little in the circumstances of that case, but clearly in other situations it could be very much in the interests of the new employer to be aware of possible restraints upon the activities of a new employee deriving from previous employment.
1– See  FCA 607, -, and also the discussion later in this Insight.
2 Quoted at  FCA 607, .
3 G Dal Pont, Law of Confidentiality, (2 ed), 2020, [15.25].
4 The relevant principles were helpfully summarised by Justice Beach in the earlier case of Re Walden Cloud Group Pty Ltd (atf Walden Cloud Group Trust) (admins apptd) (2021) 149 ACSR 637, -, and reproduced at [2021} FCA 607, .
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.
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