Restraints of Trade-Reasonableness to protect legitimate business interests

One of the key issues in any action to enforce a restraint of trade is whether the terms of the restraint are reasonable to protect the legitimate business interests of the party seeking to enforce it. Restraints typically include a duo of geographical and temporal elements, and these should be cascading to ensure that they will not be severed completely as unreasonable.

Well-drafted terms will consider those issues and the marketplace in which the restraint is imposed and the legitimate interests to be protected, as well as the seniority of positions held by the employees, and balance those aspects against the rights of a party to earn their livelihood.

In McMurchy v Employsure Pty Ltd; Kumaran v Employsure Pty Ltd [2022] NSWCA 201, the NSW Court of Appeal dealt with the issue of restraints under the Restraint of Trade Act 1976 (NSW).

 

Facts

• Employsure conducted a HR and WH&S consultancy business.
• McMurchy was a Business Sales Manager and Kumaran a Business Sales Consultant.
• McMurchcy accepted a position with a competitor, Elmo, and disclosed inter alia, the name of employees who might be approached by Elmo.
• Elmo approached and offered a position to Kumaran.
• Employsure sought injunctions to restrain, Mc Murchy and Kumaran, from accepting positions with a competitor, and to protect confidential information.
• The Employsure employment agreements for each of them both contained a confidentiality covenant and a post-employment restraint of 12,9,6 or 3 months.
• The trial judge allowed the injunctions sought. The employees appealed.

 

As to the Mc Murchy appeal, the court held:

1. Employsure had a legitimate interest to protect through the exclusive employment covenants its interest in the performance of the employee’s duties during the pendency of the contract, including that Mr. McMurchy devote the whole of his skill, time, and attention during business hours to his duties to Employsure and observe his obligations of confidentiality.
2. By taking up employment with ELMO to manage a sales team selling a competing software product whilst still employed by Employsure, Mr. McMurchy proposed to engage in another business that may hinder or interfere with the performance of his duties to Employsure.  The restraint was aimed at the absorption, not sterilisation, of Mr. McMurchy’s capacity by securing the proper performance of his duties.
3. The exclusive employment covenants were reasonable, including during the three-month period of “gardening leave”.
4. Employsure had a legitimate interest in protecting its confidential information through a restraint against competition after the departure of the employee. It is not necessary to identify the confidential information with precision at the time the contract was entered into.
5. That confidential information could be used by ELMO to Employsure’s detriment, given unchallenged findings that Employsure and ELMO were in competition in the supply of the two software products and the nature of the confidential information to which Mr. McMurchy had access, including the marketing, shortcomings and potential development of the BrightHR product.
6. A post-employment restraint of nine months from 12 January 2021 was reasonable (that is, six months from termination of employment on 12 April 2021). There was no error in this evaluative assessment of the trial judge which took into account the contractual consensus of a longer restraint of 12 months, the length of time Employsure’s confidential information remained current and of commercial advantage, and Mr. McMurchy’s status as Manager of BrightHR.
7. There was no error in the discretionary decision that injunctive relief should be granted enforcing the restraint for a period of six months from 12 April 2021, nor in granting a declaration to that effect in lieu of an injunction.
8. The finding by the trial judge that Mr. McMurchy’s conversation materially influenced Mr. Kumaran’s decision to leave Employsure and join ELMO was open, given the finding that Mr. McMurchy took an active role in ensuring Mr. Kumaran left his employment.
9. This case is distinguishable from situations where one employee had discussed employment opportunities with other potential employers with another employee who had already independently decided to leave their employment.

 

As to Mr. Kumaran/ELMO’s appeal

1. The “correctness” standard of appellate review applies to a challenge to the finding that the restraint was reasonable.
2. Employsure had a legitimate interest in protecting its confidential information through a restraint against competition after the departure of its employee.
3. It was reasonably contemplated that Kumaran would have access to confidential information, including by virtue of promotion which was also in the parties’ contemplation at the time of the contract. That Kumaran in fact had access to confidential information, including about the productivity of the sales team and about customer data, identities and dealings, given his client-facing role was relevant to what was foreseeable at the time of entry into the restraint. A restraint to protect against misuse of confidential information was reasonable.
4. However, a restraint for a duration of nine months was unreasonable and the trial judge’s finding to the contrary was set aside. Nine months was excessive given the finding that much of the information to which Mr. Kumaran was exposed would no longer be in his memory.
5. Given the nature of his low-level position and duties, the parties should be taken to have reasonably expected that the currency of any confidential information obtained by Kumaran would be short-lived.
6. Employsure did not submit for a reading down of the duration of the restraint for a lesser period than nine months, and so it was unnecessary to consider such alternatives or re-exercise the discretion to grant injunctive relief for a lesser period.

 

Summary

Restraint of trade litigation is increasingly common in the commercial world as companies vie for new talent and business growth in competitive environments.

However-care needs to be taken in recruitment, particularly with higher levels and executive appointments to ensure that any new employees are free from previous employment restraints and that poaching of employees from competitors is also approached cautiously. Successful companies are generally willing to incur significant legal fees in balancing out those costs against allowing a competitor to secure an advantage in the marketplace by employing their key or senior staff.

The decision is also a reminder that restraint of trade clauses must be reasonable based upon a wide range of criteria to be enforceable.

 

If you have any queries as to the enforcement of restraints of trade, please contact us.

 

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