RESTRAINT OF TRADE AND POST-EMPLOYMENT RESTRAINTS

• A non-solicitation clause may prevent a person soliciting the custom of or dealing with clients and soliciting or enticing away employees.
• A non-compete clause may preclude a person from working in a market.

Non-inducement clauses are also often part of the post-employment restrictions.

We deal with some principles about these post-termination clauses below.

RESTRAINT OF TRADE: EMPLOYMENT AND REASONABLENESS

The presumption is that the restraint of trade is invalid unless it can be proven to be reasonable. That is, it must be proven to be reasonable to be enforced by an employer of a former employee. An employer can write a restraint and reach too far in its terms.

The onus (or the burden) rests with the person enforcing the restraint to prove that the restriction(s) imposed was/were reasonable.

The question of whether a restraint is reasonable is a question of law not fact. An unreasonable restraint has no contractual effect. The validity of the restraint must be decided as at the date of the agreement imposing it; at the time the agreement was entered into by the parties. It is not tested retrospectively at the date of enforcement. What transpires  after the restraint is entered into is not relevant.

“The construction of a contractual provision (like a statutory provision) involves consideration of the text, context, evident purpose and fairness of the provision.”

(Richmond v Moor Stephens Adelaide Pty Ltd [2015] SASCFC 147; Project Blue Sky v Australian Broadcasting Authority [1998] HCA 28)

A contractual provision should be construed objectively by what a reasonable person would have understood it to mean. (Bytan Pty Ltd & Ors v BB Australia Ltd [2012] VSCA 233 at [10]).

In employment contracts, the parties to the contract are not corporate entities, they are individuals in the ordinary sense and different rules in terms of reasonableness apply to restraints. The restraint clauses may survive termination of the agreement, but there is no longer a salary being paid to the ex-employee and that person may need to find work and a livelihood. In a commercial sense, the substantive consideration for the restraint clause is questionable. It is hard to conceive that a market-based salary is substantive consideration for a clause that could keep someone out of a market when the salary is no longer paid after termination.

Courts are less likely to apply a restraint for any significant duration against an employee where the employment relationship has ceased. The purchase of a business is a different kind of contract. In a commercial contract, a court will take into account the business purpose of the contract and the provision. To the extent possible and permissible, the court will permit a provision a business like construction.

Restraint clauses may be enforceable to the extent reasonably necessary to protect the legitimate business interests of the party seeking the enforcement of the restraint. A restraint can only go so far as to protect the employer’s legitimate interests. If a court finds that a restraint goes beyond what is reasonable to protect legitimate business interests, then the restraint of trade clause will not be enforced. The interests that can typically be protected include interests in commercial information, such as: sensitive information; confidential or such other trade secret information of the enforcing party; customer connections; goodwill; customer lists; or, service provider relationships.

NON-SOLICITATION

In matters involving employment restraints, the concept of solicitation has been given a broad interpretation, so that acting upon contact initiated by a client of a former employer was considered to be solicitation: see for example, Barrett & Ors v Ecco Personnel Pty Limited [1998] NSWSC 545.

In the modern age of electronic communication, this can include broad social actions, such as using social media to promote a business.

Planet Fitness Pty Limited v Brooke Dunlop & Ors [2012] NSWSC 1425 (Planet Fitness) the NSW Supreme Court granted injunctions against a personal trainer who was performing work as an independent contractor for Planet Fitness. The personal trainer’s contract had a clause stating that during the term of the agreement, and for three months after it terminated, she must not “solicit, canvass, or secure the custom of any person who is the Company’s client”. After ceasing to perform work for Planet Fitness, the personal trainer posted on her Facebook page that she could offer beneficial arrangements with Genesis (the business she had commenced working for) whereby her former clients with Planet Fitness could train with her on a reduced rate. It was established that many of the personal trainer’s Facebook friends were customers of Planet Fitness and that a number of them had cancelled their membership and commenced exercising at Genesis. The NSW Supreme Court ordered the personal trainer to:

• remove the relevant Facebook post;
• not make any further posts of this nature; and
• not otherwise act in breach of the restraints.

CONFIDENTIAL INFORMATION

An employee of a former emlpoyer may have no relevant solicitation restraints that may be enforceable, but there may be contractual, equitable and statutory obligations in respect of confidential information and proprietary information of a former employer.

Restraint of trade and solicitation cases are often brought with and/or including claims relating to the disclosure of confidential information.

A post-employment solicitation case may have a contractual basis. There are also statutory prohibitions and equitable duties relevant to breaches of confidence and use of information. While an employee of a former employer may have no relevant solicitation restraints, there may be contractual, equitable and statutory obligations in respect of confidential information and proprietary information of a former employer.

In addition to the contractual obligations, statutory claims can also be made, such as those provided for in sections 182 and 183 of the Corporations Act 2001 (Cth):

• Section 182 prohibits an employee of a corporation from improperly using their position to gain an advantage for themselves or to cause detriment to the corporation by which they are employed.
• Section 183 prohibits an employee of a corporation from improperly using information obtained by reason of that employment to gain an advantage for themselves or to cause detriment to the corporation. This duty continues after the person stops being an officer or employee of the corporation.

RESTRAINT OF TRADE: RELIEF AND ENFORCEMENT

Carefully drafted and balanced restraints in employment contracts can “stick” and be enforceable after termination. There are many factors to consider. The legitimate interests of the party seeking to impose and enforce the restraint must be tested.

Most cases deal with injunctive relief; being the prevention of something occurring or reoccurring. Clauses can be enforced in equity by injunction.

Where another party’s solicitors draw up the contract and when drafting the restraint of trade, it is important to reflect and anticipate what the parties are agreeing to do or not to do in the agreement or deed. Business interests such as protecting clients can be legitimately protected.

A distinction should be drawn between the significance of risk of a court finding a restraint is reasonable and the significance of a risk of litigation. Irrespective of the prospects of success of a potential claim in a court, proceedings may be threatened or commenced. A litigious stance may be taken for commercial or other purposes.

Crawford de Carne have a keen interest and significant experience in litigation, and drafting of, restraints, non-solicitation, non-compete clauses. Our lawyers have acted to enforce and defend enforcement of employment restraints, non-solicitation clauses, equitable duties and other restraint of trade matters.

If you need advice or assistance, feel free to call Marc de Carne on (02) 9189 5905 or email [email protected].

GENERAL AND CONTACT INFORMATION

The article, the content and references made are intended to keep an audience updated with information. It is not intended that the article or part of it should be relied upon as advice. Information provided may not apply to in all circumstances or in particular situations. If you do want particular advice or you have any questions, we welcome you to contact us on (02) 9189 5905 at [email protected]