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Workplace Relations Update |
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| Focus: |
Trade restraints |
| Services: |
Commercial |
| Date: |
30 November 2007 |
| Author: |
National Workplace Relations Team |
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Dibbs Abbott Stillman Lawyers restructured on 1 March, 2009.
The Sydney, Brisbane and Canberra offices are now DibbsBarker.
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Restraints of trade: Can you protect your business without them?
There are two distinct issues at the heart of the restraint of trade doctrine:
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To what extent can employers prevent former employees from using information the employer regards as confidential?
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To what extent can an employer restrain an employee from competing with the employer once he or she leaves?
Information and goodwill are valuable business assets for any employer. Unless an appropriately drafted enforceable restraint of trade clause is incorporated into their contracts, a Court will usually find that there is nothing to prevent former employees from canvassing clients and customers and setting up in competition with their former employer. However, in the Supreme Court of New South Wales decision of Great Southern E-vents Pty Limited v Francesca Peskops [2007] NSWSC 382. His Honour Justice Hamilton held that a key former employee of an events management company could be restrained following dismissal from providing services competitive with those provided by the company to former clients of the company, in the absence of any restraint clause (beyond a clause prohibiting the use of the company’s confidential information).
Facts
The employer plaintiff was a comparatively small but successful events management company. The plaintiff employed the defendant, Ms Peskops, as the sales and marketing manager. Apart from the company’s managing director, Mr Garling, there was a permanent staff of three, with Ms Peskops second to Mr Garling, and some contractors.
Ms Peskop’s written contract of employment contained a clause restraining her from using the company’s confidential information (which was distinguished from information that was part of her general skill and knowledge) after termination of her employment. There was no other restraint clause restraining Ms Peskops from setting up in competition or soliciting clients of the company and importantly, the evidence made clear that the omission of such a clause was intended by the parties at the time the contract was negotiated.
Noteworthy is the fact that there had already been in force at the time of the hearing, an interlocutory injunction restraining Ms Peskops from using the company’s confidential information and compelling her to return such information to the company.
The evidence showed that prior to her dismissal from the company, Ms Peskops was planning with a proposed partner to form an events management business in competition with the company. After termination of her employment, Ms Peskops set up that business and proceeded to contact five key clients of the company. There appeared to have been substantial dealings with Ms Peskops’ new business and one client relating to the provision of gratuitous services to that client. There was no evidence to suggest that Ms Peskops’ dealings with the other four clients had advanced to the extent of any service arrangements with her new business.
The proceedings
The company sought an injunction restraining Ms Peskops from making contact with the five named clients for any purpose relating to the supply by Ms Peskops (or any entity with which she is related), of services of a kind provided by the company. Relief was not sought beyond 31 December 2007 on the basis that the confidential information concerned would have become stale by that time.
The issue before the Court was whether there should or could be a restraint of client contact in circumstances where the sole restraint in the contract of employment involved a restraint on the use of confidential information. Neither Counsel in the proceedings was able to refer the Court to any case where such an injunction had been granted in the absence of a non-solicitation clause.
The company’s case was that any dealing by Ms Peskops with the named client entities would inevitably involve the use by Ms Peskops of the company’s confidential information.
The Court considered the following factors:
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Ms Peskops’ key position in the company;
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The fact that Ms Peskops was the person principally dealing with the five named clients;
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Evidence of particular confidential information which was in Ms Peskops’ possession concerning dealings with those clients on behalf of the company;
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Ms Peskops knowledge of the financial terms on which the company dealt with the five clients including the “budget” for their events, the expenses in relation to those events and profit margin to the company in respect of those dealings;
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Ms Peskops possession of a budgeting document for 2007 which concerned the “real prospects” of each client entity in terms of event budgets and anticipated earned profits.
The company argued that it was virtually impossible that “these few but central facts as to the plaintiff’s dealings with those five entities are not carried and present to the defendant’s mind” and “that that small but central body of information, which is undoubtedly within the definition of confidential information in the employment contract, would not be used by her in dealings with those five clients concerning this year’s events.” Consequently, the company argued that although there was no non-solicitation clause under which relief may be sought, the confidential information, which was entitled to protection under the restraint clause, could only be protected in the circumstances by restraining the plaintiff from dealing with the named client entities for 2007.
The company emphasised the principle that an employee is free to compete with an employer unless subject to a valid contractual restraint on competition. An employee may take advantage of personal relationships built up with customers of the former employer and solicit those customers provided he or she does so without deliberately memorising a customer list.
The Court held, however, that this principle did not in any way affect the prohibition on the use by an employee of confidential information of the former employer for his or her commercial benefit, whether to solicit business from the former employer’s customers or to carry out work for those customers if solicited.
In deciding to grant the interlocutory injunction to restrain Ms Peskops from dealing with four of the named client entities, His Honour took into account the following factors:
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In the absence of the injunction, the company, to obtain monetary relief, would have to prove not only that Ms Peskops obtained the work and made profits but that the profits were obtained by the use of confidential information, which would be very difficult to prove;
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While not the only clients of the company, the loss of the five named clients to the company’s business would damage that business such that the balance of convenience favoured granting the injunction;
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Ms Peskops would not be prevented by the injunction from earning a living because there are still wide fields within the events business within which she could operate;
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As Ms Peskops’ dealings with one named client were on the basis that her services would be provided gratuitously, it was not possible to say that the relevant confidential information of the company would be used by Ms Peskops in obtaining that work;
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In her dealings with the other four (4) named clients, it was reasonably arguable that the use of the particular confidential information referred to would be inevitable and consequently, there should be a restraint from dealing with those clients until the final determination of the proceedings or 31 December 2007, whichever is the earlier.
Significant issues
The case is interesting because for what appears for the first time is that the New South Wales Supreme Court has upheld an application for an injunction to prevent a former employee from soliciting the former employer’s clients in the absence of a non-solicitation clause. But that is not to say that there are hard and fast rules employers can follow to ensure that a restraint of trade covenant will be held to be reasonable. In every case, a court will balance the employer’s desire to protect their legitimate propriety interest with public policy considerations, which protect a person’s right to earn a living in whatever lawful manner he or she chooses. Each case is considered on its own facts and circumstances.
What the case does confirm is that Courts give greater weight to protecting a business’s proprietary interests – goodwill and confidential information, as opposed to its purely economic interests. Had the Court not found on the evidence that disclosure by Ms Peskops of confidential information of the company in her dealings with the company’s former clients was inevitable, it may well have refused the requested injunction on the basis that it was designed merely to prevent competition from a former employee in the absence of any contractual non-solicitation clause.
It is also not enough to have evidence that the employee possesses specific and identifiable confidential information to ensure a restraint of trade is upheld. There must also be evidence that disclosure of that information to a competitor would damage the employer’s interests.
The information in this document is provided for general guidance only. It is not legal advice, and should not be used as a substitute for consultation with professional legal or other advisors. No warranty is given to the correctness of the information contained in this document, or its suitability for use by you. To the fullest extent permitted by law, no liability is accepted by DibbsBarker for any statement or opinion, or for an error or omission or for any loss or damage suffered as a result of reliance on or use by any person of any material in the document. This publication is copyright. Apart from any use as permitted under the Copyright Act 1968, it may only be reproduced for internal business purposes, and may not otherwise be copied, adapted, amended, published, communicated or otherwise made available to third parties, in whole or in part, in any form or by any means, without the prior written consent of DibbsBarker.
Workplace Relations Update
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Author: Cara Seymour | Senior Associate | Sydney
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