Restraints of trade and confidential information.

The departure of a key employee can give rise to considerable risk and concern.

In the excitement of starting a new job, an employee may fail to consider or ignore their current employment contract and the restraints imposed on them, which usually will include a restraint on the use of confidential information.

The remedy for an employer who faces loss of an employee to a competitor and a risk of that employee and the competitor misusing confidential information, will include an injunction on an interim and urgent basis if necessary, and a claim for any loss or damages suffered.

Often, the decision to seek urgent injunctive relief comes only when it is realised that the employee who gives notice to leave has commercially valuable confidential information that in the hands of their new employer (who is a competitor) can cause loss and damage.

The relevant principles in deciding whether to restrain an employee from breaching a restraint of trade and from using confidential information usually start with the terms of any contractual restraints.

Those principles can be summarised as follows:

  1. “A term in a contract, which is a restraint of trade (‘a restraint clause’), is presumed to be void as contrary to public policy.
  2. The presumption may be rebutted if there are special circumstances that demonstrate the covenant to be:
    • reasonable as between the parties; and
    • not unreasonable in the public interest.
  3. The test of reasonableness varies depending on ‘the situation the parties occupy and so recognising different considerations which affect employer and employee and independent traders or business men, particularly vendor and purchaser of the goodwill of a business’. A court takes a ‘stricter view’ of restraint clauses in employment contracts; and will more readily uphold a restraint clause in favour of a purchaser of the goodwill of a business than a restraint clause in favour of an employer. In particular, a purchaser of a business is entitled to protect itself from competition by the vendor; but an employer is not entitled to protect itself from competition per se by an employee.
  4. A restraint clause in favour of an employer will be reasonable as between the parties, if at the date of a contract:
    • the restraint clause is imposed to protect a legitimate interest of the employer; and
    • the restraint clause does no more than is reasonably necessary to protect that legitimate interest in its:
      1. duration; or
      2. extent.
  1. It is well established that employers do have a legitimate interest in protecting:
    • confidential information and trade secrets; and
    • the employer’s customer connections.
  2. For the legitimate purpose of protecting the employer’[s] confidential information, a restraint clause does not need to be limited to a covenant against disclosing confidential information. It may restrain the employee from being involved with a competitive business that could use the confidential information.
  3. The onus of proving the special circumstances from which the Court may infer ‘reasonableness between the parties’ is on the person seeking to enforce the covenant. However, if an employee or other covenantor alleges that the restraint clause is against the public interest, the burden of proving that proposition is on the employee/covenantor.
  4. Once the facts that are contended to constitute the special circumstances have been established, it is a matter of law whether the restraint clause is reasonable as between the parties.

Even if the employment contract does not contain any reference to protecting confidential information-there are still good avenues to support an action to protect that information, including:

  1. Implied duties arising for the employment relationship
  2. Fiduciary duties
  3. Corporations Act

If you own a business and fear that a departing employee may be either intending to breach a contractual restraint of trade or may seek to misuse confidential information, then you may need to act quickly to minimise the likelihood of any damages.

Of course – prevention is always better than cure – and it helps to have robust and complete employment contracts dealing with matters such as a restraint of trade and protection of confidential information, and for the employee to receive a reminder of those obligations upon cessation of employment.

Please don’t hesitate to contact us if you need any advice on these matters.

Michael Sing

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