Restraints of trade: understand the limitations

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However, is it sufficient to have just any restraint? The recent case in the New South Wales Supreme Court Reed Business Information v Seymour [2010] NSWSC 790 provides a warning to employers that restraint and confidentiality clauses in employment contracts need to be well-worded, reasonable and appropriate. Otherwise, employers might find that their options to restrain post-employment competitive conduct and ex-employees’ use of information is limited.

Background facts

Reed Business Information (RBI) publishes (amongst other things) medical publications whose revenue and value is almost entirely derived from advertising sales. Until Seymour resigned to commence employment elsewhere, she worked for RBI as an advertising sales manager. During her employment, she was exposed to and had access to a significant amount of RBI’s confidential information, including information which would damage RBI’s business if it fell into the hands of its competitors (such as advertising prices, business strategies, research data and circulation statistics for its publications).

At the time of Seymour’s resignation, she was subject to a contract of employment which provided for post-employment confidentiality obligations and a restraint of trade. Her confidentiality obligations included having to keep all such information confidential after her employment, not to use it for personal gain and to return all originals and copies to RBI after termination of her employment. The restraint sought to prevent her for 12 months following termination from working in any capacity for a business, publication or joint venture which in the opinion of RBI, is in direct competition with the 3 publications Seymour had worked on during her employment.

Nonetheless, she retained a USB stick containing information confidential to RBI and went to work for UBM as an advertising sales employee in its medical publications division. Seymour advised UBM of her restraint of trade obligations. RBI considered that UBM was its most direct competitor and that their medical publications compete for advertising revenue in similar ways.  Although working in its medical publications division, Seymour avoided working on publications which she thought actually did compete with RBI’s publications. When she attended meetings with clients where advertising for those publications were to be discussed, she took a colleague who could discuss the advertising for those publications and took no part in those aspects of the meetings. However, RBI objected to her working for UBM in any capacity and sought to rely on the terms of the contractual restraint.

Issues in the proceedings

In the Court proceedings, RBI sought an injunction (Court order) to prevent Seymour from continuing her employment with UBM and disclosing any confidential information of RBI.

In considering whether and to what extent to apply the restraints, the judge applied the accepted rule that restraints are unenforceable unless they are reasonable. Reasonableness is judged as at the time the restraint is made, having regard to the interests of the parties and of the public.

Confidentiality clause

The Court found that the confidentiality restraint was expressed too widely as it should not operate beyond RBI’s legitimate interests in its confidential information. The judge noted that what is ‘confidential information’ should not be inferred by the court but should be determined where possible from the parties’ express intentions, and then from the circumstances. While RBI successfully protected some of its key confidential information and restrained Seymour from accessing the USB stick, it could not protect its customer addresses and contact details, which it should have specified in the confidentiality clause.

The lesson for employers

As far as possible, employers need to specify in confidentiality restraints (and employment contracts generally) what information is confidential. When drafting or having your lawyers draft your employment contracts, think about it “as what information would damage my business if it were made public?.

Non-compete clause

The Court also found that the restraint of trade (non-compete) clause was too broad and was therefore unreasonable, as it went beyond RBI’s legitimate interests.  Courts interpret restraints of trade clauses very strictly. Here, the judge noted that “the non-compete clause in this case is not well drafted”. The weak drafting of the restraint clause played a significant part in RBI’s failure to prevent Seymour from working at UBM because to apply the non-compete clause the judge identified areas at UBM where Seymour could work but not be in direct competition with RBI.

Consequently, RBI was only able to prevent Seymour from performing any services for one of UBM’s medical publications which directly competed with one of RBI’s publications. Seymour was still able to work for UBM generally, a direct competitor of RBI, even thought it was still in areas which RBI considered were in competition with its own publications. As Seymour’s only employment prospect was with UBM, to read the clause otherwise would have prevented Seymour from earning a living for 12 months anywhere in the world. There were no geographical limitations on the restraint, which was only expressed to extend for 12 months without providing alternative, lesser timeframes for the judge to choose.

A better worded restraint might still not have prevented Seymour from working at UBM at all, but might have been able to prevent Seymour working in UBM’s medical division for a period of time.

The lesson for employers

Not just any restraint of trade is a good restraint of trade!  Employers need to ensure that they have a well drafted and specific restraint of trade, often with clear geographical and time limits to provide reasonable alternatives for a court to choose from. The restraint should also have clear and precise definitions of key terms (like “client”, “customer”, and “the business of the company”), so that if a judge is forced to interpret your restraint reasonably, she or he can implement as full a restraint as possible.

Contact details

Melbourne

Charles Power, Partner
T: +61 (0)3 9321 9824
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Sydney
Stephen Trew, Partner
T: +61 (0)2 8083 0439
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Brisbane
Paul Hardman, Partner
T: +61 (0)7 3135 0675
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