Restraint of Trade

Restraints of trade are routinely included in employment contracts (and often independent contractor agreements) to protect an employer’s trade secrets, confidential information, customer connections and staff connections by restricting an employee’s activities after they have left employment.  Restraint of trade clauses will be enforceable to the extent that the restraint is reasonably necessary to protect the legitimate business interests of the employer. Whether a clause is reasonably necessary will turn on the particular clause and facts of the case. 

Last year the Courts looked at restraints of trade in two key cases which we have summarised below.

Commsupport Pty Ltd v Mirow[2018] QDC 134 

Facts 

  • CommsupportPty Ltd operated an information technology services business.  
  • In the course of that business it employed Kurt Mirow as a computer technician.
  • The Restraint Clause stated:

“For a period of three months from the date the employee’s employment with the employer concludes (for any reason), the employee may not directly or indirectly, in any capacity whatsoever: 

  1. Act for any person or entity (natural or otherwise) that the employer had or has as a client during the six-month period immediately prior to the employment with the employer concluding; or
  2. Contact or cause another to make contact with any person or entity (natural or otherwise) that the employer had as a client during the six-month period immediately prior to the employees employment with the employer concluding, with a view to enticing that person or entity to use the professional services of the employee or a third party”
  • At first glance, the restraint clause appears reasonable.

Decision 

  • The restraint clause was found by the Court to be unenforceable.
  • Because the restraint sought to restrain the employee from acting for or contacting any person who had been a customer of the employer in the six months before termination of employment, and did not limit this to those customers with whom the employee had a customer connection, this was found to be a significant contributing factor in the court’s determination that the restraint was unenforceable.

“A point upon which restraints often fail in respect of the customer connection interest, is not that the employee sought to be restrained had no such relationship of influence over customers of the employer, but rather the restraint has been drawn so broadly that it applies not only in respect of those customers with whom there was such a relationship, but also to those whom there was no such relationship. It is at this point that the legitimacy of the interest gives way to the restraint being seen as one merely against competition. The employee could be considered to have no more influence over such customers than a stranger.”

Implications 

The implications of this decision include:

  • First step: all employment contracts should include a restraint of trade clause. 
  • Cascading clauses may assist court in “reading down” provisions. Drafting is crucial. 
  • The judgment is a useful reminder that there is no legitimate interest in an employer using a restraint of trade to prevent competition.
  • It is more likely to be considered reasonable to restrain an employee from dealing with customers post-termination of employment, if part of the employee’s duties at work included cultivating the relationship with those customers. 

Isaac v Dargan Financial Pty Ltd [2018] NSWCA 163 

Facts 

  • From 2012 to 2016, Mr Isaac was engaged as a mortgage broker as an independent contractor for Dargan Financial. Mr Isaac brokered loans for Dargan’s existing clients using Dargan’s client list, as well as bringing in his own customers. 
  • Mr Isaac subsequently commenced work with a rival broker.  
  • Dargan alleged that during his engagement with the rival broker, MrIsaac made use of Dargan’s client list to solicit and organise new loans for nine of Dargan’s existing customers. 
  • During the initial proceedings, the Court upheld Dargan’s claim, finding that by using Dargan’s client list and accepting approaches from Dargan’s existing clients, Mr Isaac was in breach of the restraint of trade covenants. The employer was granted an injunction permanently restraining Mr Isaac’s disclosure or use of the client list. 

Decision 

  • The Court of Appeal allowed MrIsaac’s appeal in part, finding that as Mr Isaac had merely accepted the approaches of existing clients, the non-interference restraint was not breached. 
  • Dargan had a legitimate commercial interest in protecting customer connections and confidential client information – therefore the restraint clause was not unreasonable.  
  • However, the client list entered the public domain when Dargan tendered it in open court without any confidentiality order being sought or made. 
  • As such, there was no utility in granting an injunction to permanently restrain the use and disclosure of information that had entered the public domain.

Implications 

  • Although the restraint clause was reasonable – it was not enforceable.
  • Commencing proceedings may be enough to render confidential information in the public domain. 

Take Home Message 

  • Take care drafting restraint clauses.
  • To be enforceable, there must be a legitimate interest to protect, which can include commercial interests of the business, or goodwill. 
  • The restraint must be no more than reasonably necessary to protect that interest.
  • Restraints in independent contractor agreements can be more complicated, as the goodwill / interests of the principal can be hard to distinguish from that of the contractor’s own business. 
  • When considering the duration of the restraint, think carefully about how the timeframe could be justified to a Court.

For assistance on drafting or reviewing a restraint of trade, please contact our office.

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