Restraints of Trade in review

Restraints of Trade in review

The last few years have seen some important decisions being made on restraints of trade which have both illustrated their benefits as well as various technical issues that must be addressed when they are put in place.  Taking note of these developments is important as we are currently observing that competitors are looking to take market share through the hiring of leading employees from the relevant industry.  A valid restraint of trade clause may well help protect an employer in this situation.  In addition, when the market starts to grow, they will be even more important as there will be an increased chance of new entrants to the market that may look to “poach” employees.  If this is a risk, then employers need to use restraints of trade as one part of their approach to protecting their business. 

Length of restraint period

We have observed that Courts, particularly in NSW, have been increasingly likely to enforce longer restraint periods than in the past.  In the “high water mark” for 2009, the Court of Appeal in New South Wales upheld a restraint in favour of Genesys Wealth Management Limited that lasted for 30 months.  While there were some unique circumstances in this case, it does illustrate that if the employer can prove that information to which an employee has access will remain confidential for this period of time, courts will give serious consideration to enforcing a long term restraint of trade.

One of the issues which consistently arises for employers at the time of looking to enforce restraints of trade, is how they will manage the combination of both a period of gardening leave and the respective period of the restraint that applies following the cessation of employment.  In a case involving Tullet Prebon and Mr Purcell, the Court in New South Wales noted that in determining the reasonableness of the restraint period, regard should be had to when the employment relationship ceased as distinct from the actual end of the employment contract.  This is because when someone is placed on “gardening leave” this brings the employment relationship to an end even though the employment contract is still operating.  Taking this into account, the Court held that a six month restraint period should start from the commencement of gardening leave and not the cessation of the employment contract.  This was because the “advantage” the employee gets from being employed, in respect of confidential information and customer connections, ceases at the point of commencing the gardening leave.  The Court used the Restraints of Trade Act 1976 to come to this decision, which only applies in New South Wales. 

However, employers in all States need to consider how they will manage the interaction between restraints of trade and gardening leave going forward.

Scope

There continues to be new cases that address whether the scope of restraint clauses are too broad and, therefore, unreasonable.  Some of these issues relate to the use of the word “contact”, which can be interpreted to include many forms of interaction that would be too broad to be enforced.  In one case determined in August 2009, Integrated Group Limited looked to enforce its non-compete clause against a former employee who joined a competitor.  However, Integrated failed in its attempt to enforce the restraint clause because it was held that the clause was too broad in that it looked to ensure protection against competition for any group company.  The problem was that the Court determined this would mean that the employee could not compete against any of the companies that were part of the Integrated group located overseas or that operated in industries in which the employee did not work and in respect of which had gained no information during her employment.  In those circumstances, the Court held that the clause was too broad and was therefore unenforceable. 

Tactical issues

Finally, a number of recent cases also remind employers that there are some technical points of which they need to be aware when it comes to enforcement of restraints of trade.  In Northern Tablelands Insurance Brokers Pty Limited v Howell, the Supreme Court of New South Wales held that Northern Tablelands did not terminate the employment of Mr Howell in accordance with the agreement and, therefore, repudiated his contract of employment.  Because it had repudiated the employment contract, Northern Tablelands could not enforce the restraint of trade clause going forward.  This is one of the developing areas of the law in respect of restraints of trade and it will be interesting to see how this will develop going forward.