Showing restraint: non-competition law and former employees

When a valued employee leaves, it can be a difficult time for a business. As if to rub salt in the wound, sometimes the same employee surfaces in a rival organisation or starts a business in direct competition. As the realisation sinks in that this person knows some or all of your business methods, practices and even secrets, all of a sudden you’re calling your lawyer to demand immediate legal action.

Unfortunately, this is often the wrong time to ask a lawyer to take action to restrain unlawful competition by a former employee. It can be too late. Most of the necessary action should have been taken before the former employee was recruited. That is, much will depend on the employment contract, organisational policies and procedures and related HR documents being in place before and enforced during the time the (now) ex-employee worked for you.

7 propositions for effective restraint of former employees

What follows is Seven Propositions regarding the duties of ex-employees, as generalised from the decided cases and law in Australia regarding use of confidential information.

In the absence of a valid restraint of trade clause, a former employer cannot prevent a former employee simply from competing.
A former employer cannot normally therefore in such circumstances prevent a former employee from contacting or even soliciting clients or customers of the former employer (but note proposition no. 3).
An employee may not, however, use confidential information obtained in the course of that employment for the purpose of competing with a former employer, or indeed in any other way detrimental to the former employer’s interests.
What amounts to confidential information for this purpose is not susceptible to abstract definition. It will depend on the facts of each instance or case.
There is now a clear trend of authority (ie court case decisions) to the effect that whether one classifies customer or client lists as confidential or not, a departing employee may not take them for the purpose of using them in a competing role.
Neither may a departing employee deliberately memorise the information in such lists for that purpose.
Whether the departing employee takes customer lists or not, generally the departing employee may not solicit or approach a client of a former employer in respect of a transaction current at the time of the departing employee’s departure.

Examples of restraint of trade enforcement

Here’s a few brief examples of attempts in recent court cases to restrain employees, with differing results. Remember each case will depend on the individual circumstances – there are no “blanket” or standard restraint solutions that can be applied.

	Facts:	A former state manager for Aussie Home Loans’ (Aussie) left to set up a rival home mortgage company and poached Aussie staff.
Restraint:	His employment contract stated that he should not, for a period of 12 months after the termination of his employment, ‘solicit, interfere with or endeavour to entice away any employee or contractor of Aussie Home Loans’.
Decision:	The clause was very wide; it restrained the poaching of all Aussie employees and contractors, regardless of their position (or location) or even if the employee had not been there whilst he was at Aussie. The length of the restraint (12 months) was also deemed excessive because of the short termination Aussie could invoke, and the market for the services of loan writers was competitive and fluid.

	Facts:	The New South Wales sales manager for Cactus Imaging Pty Limited left and took up employment with Cactus’ major competitor.
Restraint:	He was prevented, after ceasing employment, from disclosing any of Cactus’ confidential information to other persons, carrying on, or engaging in, a business competitive with Cactus’ business for 12 months after his employment ceased, soliciting Cactus’ clients for 12 months or poaching Cactus’ employees for 12 months after his employment ceased.
Decision:	The court found the employee was in possession of Cactus’ confidential information (eg, basis for quotes and terms of trade) which would give the competitor a significant advantage in taking business away from Cactus. The length (12 months) was reasonable given the information about Cactus’ business would have relevance for up to 12 months, and a competent replacement employee would take some time to become effective and establish rapport with customers.

	Facts:	A Senior Regional Property Manager with Woolworths Ltd for 14 years left and commenced employment with Myer in the role of General Manager Property.
Restraint:	The employment contract restraint prevented the employee competing with Woolworths for a period of six months. Woolworths provided the employee with a cheque for six months of net entitlements.
Decision:	The main question to be tried was, did Myer compete with Woolworths? Interestingly, the court looked at a previous situation where a former Woolworths employee left and became the CEO of Myer, yet Woolworths did not enforce the restraint. Further, Myer introduced evidence that the businesses did not compete which was not challenged or controverted by any evidence led by Woolworths. The court ruled that Myer and Woolworths are not “competitive business” for the purposes of the relevant employment contract.

Need help? Talk to us today about putting in place measures to protect your business from the wandering eye of your employees. We have a range of solutions that can be customised to suit the needs of businesses both large and small.

Case References:

1 Aussie Home Loans v X Inc Services [2005] NSWSC 285
2 Cactus Imaging Pty Limited v Glenn Peters [2006] NSWSC 717
3 Woolworths Ltd v Banks [2007] NSW SC 45 (24 January 2007)

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Noric Dilanchian

Noric Dilanchian is a lawyer, author and educator practising in areas of business law for almost four decades, with a focus on contract drafting and review, and the commercialisation of content, technology, digital assets and intellectual property. Linked In |YouTube

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