Restraint of trade clauses are notoriously difficult to enforce. In order to be enforceable, the employer needs to demonstrate that it has a legitimate business interest to protect and that the clause it has used to try to protect this interest goes no wider than is reasonably necessary.
Three interesting decisions were handed down in February this year which demonstrate the difficulties of successfully drafting and enforcing restraint of trade clauses. These decisions also highlight the importance of employee conduct as a factor in decisions on restraint-related injunctions, and the misplaced optimism of employers who pay consideration for their employees’ adherence to restraint clauses.
Woolworths v Banks [2007] NSWSC 45
In this case, Woolworths sought to restrain a former employee from commencing employment with Myer. The restraint of trade clause in question provided for Woolworths, the employer to elect in writing for the restraint to apply. In the case of the employee’s resignation, Woolworths made this election. The employer’s application for an interlocutory injunction was unsuccessful before the New South Wales Supreme Court.
The Court held that there was no evidence that Myer was a ‘competing business’ within the meaning of the restraint clause. The fact that the employer had failed to enforce a restraint against another employee who went to Myer suggested that it did not consider Myer to be a competitor. In a related point, it was also held that there was no real likelihood that any confidential information possessed by the employee would be of any value to Myer. This was a consequence of the significant disparities between the businesses.
The conduct of the employee was also a relevant factor. The employee gave an undertaking to the Court that he would continue to honour his obligations in relation to confidential information and intellectual property, and further, there was no conduct on his part which suggested hostile intentions in that regard. Woolworths Ltd v Olson [2004] NSWCA 372 (Olson) clearly distinguished that the employee had engaged in conduct which demonstrated a willingness and indeed, an intent to misuse confidential information belonging to his former employer.
Brink’s Australia Pty Ltd v Kane [2007] NSWSC 62
In this case, the employer, whose business was the secure transport of money and other valuables, sought to enforce a restraint clause against a former employee. The employee left to take up a similar position at another company involved in cash logistics services. There was evidence that while working out his notice period at the company, the employee attempted to divert customers and business opportunities to his future employer, MDS, as well as passing on sensitive company information to an MDS employee. The application for an interlocutory injunction in the New South Wales Supreme Court succeeded.
A key factor in the decision was again the conduct of the former employee. The employee’s conduct raised a serious question as to whether he would, unless restrained, use confidential information belonging to the employer. The Court noted the similarity of the employee’s conduct to that of the employee in Olson, and stated that the facts in the present case suggested the same conclusion reached in Olson.
The Court also considered whether hardship to the employee was a factor going against the granting of the injunction. It was noted that in this case, although hardship would be caused to the employee in the form of deprivation of income, that hardship was largely self-induced. This was, of course, a reference to the deceitful conduct engaged in by the employee towards the end of his employment with the company. The Court determined that although hardship was still relevant as a possible bar to the granting of an interlocutory injunction, the self-induced nature of that hardship reduced the weight of that particular factor.
Sear v Invocare Australia Pty Ltd [2007] WASC 30
This case centred on the enforceability of a restraint clause which provided monetary consideration to the employee in exchange for being bound. A former employee of a funeral directing business sought to have the restraint declared unenforceable. The employer counterclaimed to recover $500,000 paid to the employee over a ten-year period as consideration for the employee’s continuing adherence to the restraint.
The Supreme Court of Western Australia, held that the clause was unenforceable, and further, that the former employer was not entitled to claim back amounts paid to the employee as consideration. So, enforcing an unenforceable restraint is a non-starter even if you have paid good money for it. This case highlights, once again, the importance of ensuring that restraint clauses are not drafted wider than is necessary to protect the employer’s business interests. Here it was held that even the narrowest area restraint imposed by the clause was wider than necessary for the protection of the employer’s interests. This was because the narrowest area restraint included an area in which the employee had no prior involvement with clients of the business. Further, it was held that any restraint applying beyond the ten year period of the employee’s employment could only protect confidential business information and established customer connections.
This case also underlines the fact that paying consideration in return for an employee’s observance of a restraint can be an expensive and ultimately, futile exercise on the part of the employer. This will be the case where the restraint is otherwise unenforceable and a claim for repayment, such as was made in this case, fails.
The employer in this case put forward several bases for its counterclaim, including mistake, total failure of consideration, and estoppel. The counterclaim was rejected by the Court on all bases, despite the fact that the agreement provided for the employee’s salary to be reduced by $50,000 per year if the restraint was breached or found to be unenforceable. However, the $500,000 outlaid by the employer was not a complete loss, because as the Court noted, the employer had received the benefit of the restraint over the term of the agreement, which was 10 years.
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