Australia: Restraint unenforceable – CFO free to jump ship to major competitor

Clauses which are too broad are unlikely to be enforceable, as they are unreasonably restrictive on the employee's ability to obtain other employment.

Employers commonly act to protect the confidential information of their operations by seeking to prevent ex-employees from jumping ship to competitors after their employment ends.

However, in the recent decision of Just Group Ltd v Peck [2016] VSC 614 the Victorian Supreme Court refused to enforce a restraint clause in the employment contract of Just Group Ltd's (JGL) former CFO when she abandoned ship to work for its major competitor, Cotton On.

What was the case about?

The CFO, Ms Peck, commenced working for JGL in January 2016, and tendered her resignation not long after on 2 May 2016. Before her last day at work, she informed JGL that she would be starting work with its competitor Cotton On.

JGL immediately sought to enforce a restraint clause in Ms Peck's employment contract to prevent her from commencing work for Cotton On for a period of two years. JGL claimed that the restraint was necessary to protect its confidential information, which it alleged Ms Peck had been exposed to during her employment.

Justice McDonald accepted that during her employment Ms Peck was exposed to JGL's commercially sensitive information and that JGL had a legitimate interest in protecting its confidential information from disclosure to one of its competitors. However, despite this, the restraints contained in Ms Peck's employment contract were not reasonable and therefore could not be enforced.

Why couldn't JGL prevent its CFO from jumping ship?

Justice McDonald confirmed that as a starting point, a restraint clause in an employment contract will not be valid, unless the party seeking to enforce the clause can establish the restriction is reasonable.

What is reasonable will depend on the circumstances, and a restriction will only be reasonable if the employer can establish it does not go further than to adequately protect the employer.

When Ms Peck signed her employment contract with JGL, she agreed to a series of obligations and restraints which would apply if her employment was terminated. Justice McDonald held that it was relevant that Ms Peck agreed to the restraints, but it was of little value that the contract contained a clause that acknowledged that the restraints were reasonable.

Under the contract Ms Peck was restrained from engaging in any activity which "is the same as, or similar to" any part of the business of JGL. Justice McDonald found that this restraint was unreasonable because it would prevent Ms Peck from being employed in a new role where the confidential information she acquired during her employment with JGL would be irrelevant to the new employer.

Restraint too broad

The contract also contained a list of 50 of JGL's competitors and a clause seeking to prevent Ms Peck from being engaged in "any activity... for or on behalf of any of the entities operating the brands" listed. Justice McDonald held that this restraint was also unreasonable because it would prevent her from working for businesses that did not compete with JGL.

Justice McDonald found that JGL had provided evidence of the level of competition between Cotton On and JGL, and if the clause only sought to restrain Ms Peck from working for Cotton On, this might have been enough to allow JGL to block Ms Peck from working for Cotton On. However, Justice McDonald said the clause had been drafted in a way which meant it could not be considered as 50 separate restraints, and "the evidence which was led in respect of competition between JGL and Cotton On provides no legitimate foundation for a conclusion that the restraints imposed on Ms Peck in respect of the other 49 brands/entities are reasonable".

Restraint period too long

The restraint clauses were to apply anywhere in the geographic region of Australia and New Zealand for 24 months after Ms Peck's employment was terminated.

Similar to many employment contracts, the contract also included an option for a court to enforce narrower restraints (for example, applying the restraint just to the State of Victoria for a period of 12 months) if it was found that the broader period was deemed unreasonable and overly restrictive.

However, Justice McDonald was not prepared to find that even the shorter period was reasonable, because Ms Peck's employment could be terminated on short notice (one month) during the first six months of employment. This meant that Ms Peck could be restrained from working for a period of two years, but only receive one month's notice, which Justice McDonald found to be an unreasonable disparity.

What should employers do?

Employers should be aware that just because an employment contract imposes a restraint on an employee it does not mean that the restraint will be enforced by the courts.

Restraints must be drafted and implemented to protect the company's legitimate interests.

Clauses which are too broad are unlikely to be enforceable, as they are unreasonably restrictive on the employee's ability to obtain other employment.

Cascading clauses can be useful, but must still contain reasonable time-frames and geographical boundaries.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.