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Enforcing restraint of trade clauses in employment contracts- What are the determining factors?

In March and April 2014, the Supreme Court of New South Wales handed down three decisions considering the operation of restraint of trade clauses in employment contracts.  Coincidentally, all three involved restraints within the media and advertising industry.

Key points to note from the cases include:

1. The operation of restraint clauses and the relief that follows will turn on a practical observance of the facts of the case;
2. The procedure adopted by the aggrieved party in enforcing the restraint will also impact the relief provided and, whether relief will be granted at all; and
3. The practicality of the restraint sought to be enforced will also be taken into consideration.

The three cases below deal with other claims, facts and principles of law, however, this article focuses on restraints.

The Facts

– Network Ten Pty Ltd v Seven Network (Operations) Ltd [2014] NSWSC 274; BC201402583

Between 24 February 2014 to 6 March 2014, Network Ten Pty Ltd (“Network Ten”) negotiated with Mr Stephens to secure his employment as its director of scheduling and acquisitions.  On 6 March 2014, Mr Stephens signed an employment agreement with Network Ten, which provided that his employment with Network Ten commenced on 9 June 2014 for a fixed term of 2 years.  Clause 5 of the employment agreement sought to bind Mr Stephens not to, except with the written consent of Network Ten “… undertake any other trade, business or profession or become an employee agent or contractor of any other person and to devote the whole of his time, attention and ability during work hours and at other times as reasonably necessary to the faithful and diligent performance of the duties and responsibilities assigned to him by Ten.”

Having attempted contact with Mr Stephens on 6 March 2014, Mr Stephens’ employer at the time, Seven Network (Operations) Limited (“Seven Network”) sent Mr Stephens an email on 7 March 2014, attaching a proposed letter of agreement in respect of his ongoing employment.  Late on 9 March 2014, Mr Stephens drafted an email to Network Ten advising that he was not going to take up employment with Network Ten.  On 10 March 2014, Mr Stephens signed the letter of agreement proffered by the Seven Network.  Network Ten then sought an interlocutory injunction by summons filed on 14 March 2014.

Brereton J’s Findings

In determining final orders for interlocutory relief, Brereton J adopted the standard approach of asking first, whether there is a serious question to be tried for a final injunction and, second, whether the balance of convenience favours the granting of the injunctive relief sought.  The principles that guided Brereton J were, where there is a seriously arguable case for final relief of some kind, but damages would be a sufficient remedy, an interlocutory injunction will not be awarded, and where injunctive relief at a final hearing would not be awarded due to other discretionary grounds, an interlocutory injunction will also be declined.

On this last question, Brereton J emphasised that with regard to the field in which Mr Stephens works, one must take a practical approach to the effect of the contract, the restraint and the injunction sought.  As Mr Stephens was nearing the end of his career and it was unlikely that Mr Stephens would work anywhere other than Australia or that Network Ten would consent to him undertaking some other trade, business or profession, Brereton J rationalised that granting an injunction to enforce the restraint on its terms would “…effectively sterilise Mr Stephens and reduce him to the alternative of working for Ten or being idle, a result that equity will not countenance.”  Brereton J further explained that granting an injunction against Seven Network would have the same effect as granting an injunction against Mr Stephens himself, that being to enforce Mr Stephens’ contract of personal service with Network Ten or else be left without employment from an alternative employer.

The Facts

– Fairfax Media Management Pty Ltd v Harrison [2014] NSWSC 470; BC201403005

Mr Harrison commenced employment with the plaintiff, on 5 January 2009, as Director of Fairfax Digital, a subsidiary of Fairfax.  In October 2011, he was promoted to the position of Commercial Director – Metro Media and signed a new executive service contract with Fairfax dated 13 October 2011. The post contractual restraints stated:

10. RESTRAINTS

10.1 The Executive shall not for a period of twelve (12) months after termination of Employment for any reason:

(A) Approach, either directly or indirectly, on his own account or for any other person, any employee, contributor, supplier, agent, customer or client of the Group with a view to enticing them away from the Group; nor

(B) Incite, encourage, counsel, assist or be in any other way involved with any other person (whether directly or indirectly, on its own account or for any other person) in approaching directly or indirectly any employee, contributor, supplier, agent, customer or client of the Group with a view to enticing them away from the Group.

10.2 The Executive must not for a period of six (6) months from the date of notification by either party of the termination of Employment, for any reason, anywhere within Australia:

(A) Carry on, be engaged or interested in, in any capacity, solely or with any other person/s, directly or indirectly, (including as an employee, contractor, agent, consultant, contributor, shareholder, joint venturer, principal, director, adviser or otherwise, whether paid or unpaid); or

(B) Be otherwise associated with, any business which is, or may be in the future, in competition with the Executive’s Business Unit (except as the holder of not more than 5% of the issued capital of any company whose shares are issued on a recognised stock exchange).

For the purpose of this clause ‘Executive’s Business Unit’ means that part of the Group’s business in which the Executive worked at any time in the twelve (12) months immediately prior to the termination of his Employment.”

On 1 June 2013, Mr Harrison was appointed to the role of Group Sales Director of APM, a division of Fairfax.  In this role, Mr Harrison had overall responsibility for managing the relationship between Fairfax and the advertisers who placed advertising in their publications.

On 10 December 2013, Mr Harrison resigned from APM.  Mr Harrison commenced as CEO of Yahoo!7 on 9 April 2014. Fairfax brought their application on 17 April 2014.  By the time the matter came on for hearing, Mr Harrison had offered undertakings and acknowledgments as follows:

1.1 I acknowledge and agree that I will not, without the prior written consent of Fairfax Media Management Pty Ltd (Company), communicate to any company, firm, individual or entity or any combination thereof any Confidential Information acquired by me in the course of my employment with the Company, including any Confidential Information relating to the operations, functions or activities of the Company or any member of the Fairfax Group except to the extent that such Confidential Information has become public knowledge (other than as a result of a breach) or I am required by law so to do.

1.2 For the purposes of clause 1.1 above, “Confidential Information” has the definition ascribed to it in my employment agreement with the Company dated 13 October 2011 (Employment Agreement).

1.3 In accordance with my obligations under clause 10.1 of the Employment Agreement, I will not, for 12 months after the termination of my employment with the Company, i.e. until after 5 February 2015:

(A) Approach, either directly or indirectly, on my own account or for any other person, any employee, contributor, supplier, agent, customer or client of the Fairfax Group with a view to enticing them away from the Fairfax Group; nor

(B) Incite, encourage, counsel, assist or be in any other way involved with any other person (whether directly or indirectly, on my own account or for any other person) in approaching directly or indirectly any employee, contributor, supplier, agent, customer or client of the Fairfax Group with a view to enticing them away from the Fairfax Group.

1.4 I have not performed and will not perform any services for Yahoo!7 Pty Ltd (Yahoo) in relation any advertising agencies prior to 11 June 2014 including but not limited to:

(A) Aegis (comprising Mitchell Media, Carat and Vizium);(b) OMG (comprising OMD and PHD);(c) GroupM (comprising Mindshare, Maxus, Media Edge, Mediacom);(d) MediaBrands (comprising Universal McCann and Initiative); and(e) VivaKi (comprising Starcom and Zenith Optimedia).”

Given the undertakings, the final orders sought by Fairfax were narrowed to a restraint from working from Yahoo!7 until 11 June 2014 (“the Fairfax Final Orders”).
The Court’s Findings

Observing the common law principal that a restraint of trade is unenforceable except to the extent that it is reasonably necessary to protect the interest of the parties and is in the public interest, Ball J determined that Fairfax had a strong arguable case that the restraint imposed on Mr Harrison, as contained in clause 10.2, was no more than what was reasonably necessary in the circumstances of the case.  Ball J reasoned that Mr Harrison, by his seniority, would have become familiar with APM’s business including having access to confidential information going to Fairfax’s competitive strategies, that he would play an important role in Fairfax’s business development  and that Mr Harrison leaving his position would disadvantage Fairfax until his position could be filled.  For these reasons, Ball J decided that Fairfax had a strong arguable case that a six month restraint period was not too long.

Despite finding that the restraint period was not excessive, however, Ball J declined to grant the injunction for the following reasons:

1. On the facts and in light of the undertakings provided by Mr Harrison, Fairfax was not at risk of losing contracts to Yahoo!7 as a direct consequence of Mr Harrison’s move, particularly not over the 7 week period that the injunction would operate;

2. The restraint period of 7 weeks would not decrease the risk of Mr Harrison relaying confidential information to Yahoo!7. Mr Harrison gave undertakings to Fairfax to not use confidential information that would potentially be of assistance to Yahoo!7. Ball J accepted that in the current circumstances, the two businesses were substantially different and that Mr Harrison would not be able to provide confidential information of Fairfax that would immediately assist Yahoo!7;

3. Fairfax did not provide adequate reasons for a four week delay before commencing proceedings, having been put on notice of the risk that Mr Harrison would commence employment with Yahoo!7 on 9 April 2014. Fairfax’s delay was significant in the context of the length of the injunction sought and the fact that Mr Harrison had already commenced employment with Yahoo!7 by the time proceedings commenced.

The Facts

– Andrews Advertising Pty Ltd v Andrews [2014] NSWSC 318; BC201402069

Originally a part owner of Andrew’s Advertising Pty Ltd (“the Company”), in or about August 2006, Mr Andrews and his wife sold their shares to Adcorp Australia Limited and Mr Andrews entered into an Executive Services Agreement with the Company.  Sometime after, Mrs Andrews became the sole shareholder and director of another company, Andrews Media and Creative Pty Limited (“AMC”) and, later, the sole director and shareholder, and general manager of Smart Retail Pty Limited (“Smart Retail”).

The relevant restraints in the Executive Services Agreement imposed a Restraint Period during the employment plus six months after employment ceased or, if that period was found to be unreasonable, during the employment plus three months after employment ceased.  A Restraint Area was also imposed and defined to mean Australia, or if that was unenforceable, Victoria and New South Wales, or if that was also unenforceable, Sydney and Melbourne and surrounding metropolitan areas to a distance of 50Km surrounding the GPO of each state.  The Restrained Business confined by these parameters was the business of an advertising agency.

Mr Andrews was also restrained from promoting, participating in, operating or engaging in the Restrained Business.  By another clause, Mr Andrews acknowledged that these obligations were reasonable having regard to the interests of the Company and himself.

From about April 2010, the Company became concerned that Mr Andrews was looking to disengage the Company from one of its largest accounts, which was Mr Andrews’ main responsibility (“the Account”).  Soon after, and through negotiation with Mr Andrews, the Account came to an end on 30 June 2010.  By 5 July 2010, a draft agreement was negotiated between AMC and the Account.  Despite agreeing with the Company to try and salvage the Account, and representing to the Company that he had not been offered a role with the Account client internally, Mr Andrews had the intention to leave the Company and pursue his own interests in relation to the Account through his involvement with AMC.

By 19 July 2010, the Company had accepted Mr Andrews’ resignation.  On 1 August 2010, the Heads of Agreement with the Account client was entered into with AMC, for commencement as it ended with the Company.  It is not clear whether Mr Andrews went on to work for the Account client or simply serviced it through AMC, but on 4 August 2010, the Account client had offered Mr Andrews role internally, and from 1 September 2010 to late December 2010, he was employed by the Account as Director of Advertising.  Mr Andrews resigned from that role effective 30 December 2010.

The six month Restraint Period over Mr Andrews with the Company ended on 19 January 2011.

Darke J’s Findings

Observing that the Executive Services Agreement was governed by the law of New South Wales, Darke J applied section 4 of the Restraints of Trade Act 1976 (NSW) (“the Restraint Act”). Section 4(1) provides that a restraint of trade is valid to the extent that it is not against public policy, whether it is in severable terms or not.  Darke J commenced his rationale by considering whether the alleged breach did or would infringe the terms of the restraint properly construed, and determined that the alleged breach did infringe the terms of restraint.  Darke J found that until the end of the Restraint Period, Mr Andrews was within the Restraint Area, participating in, and concerned in, the advertising businesses of AMC and/or Smart Retail, which were providing services to the Account.

The second limb of the test shows whether the restraint, insofar as it applies to the breaches, is contrary to public policy. Darke J drew on established principles, calling for a balance of the interests of both employers and employees, and that an opinion could only be formed on a broad and common sense view of the facts and circumstances of the case at hand.  Darke J also looked to the broader, common law position on restraints of trade, being that a restraint of trade will not be considered contrary to public policy if it is reasonable as between the parties and not unreasonable in the public interest.

Ultimately, Darke J determined that the restraints, insofar as they applied to the breaches, were valid pursuant to the Restraint Act. Darke J considered the importance of the Account, Mr Andrews’ role in maintaining the Account and the mobility of the Account’s custom and the nature of services provided to it. Darke J reasoned that the restraints would provide protection for the Company’s connection with the Account and enable it, through a new employee, a fair opportunity without interference from Mr Andrews to carry out any work in progress and seek continued engagement.  This was Darke J’s finding despite his Honour’s acceptance that the effect of the restraint was to keep Mr Andrews out of his occupation for a period of time.

Restraining an employee from seeking alternative employment with a competing business has some advantageous effects when imposed successfully. However, as the above cases reveal, the Court is unwilling to allow for excessive unemployment to be imposed upon a person. The Court’s understanding of the industry in question is paramount to the final decision when considering the restraint’s validity. This is clearly identified through the above cases which reflect the highly competitive media and advertising markets. Thus, continual use of restraint of trade clauses in employment contracts within these industries is highly probable. Although the recent findings referred to in this article reveal different ways in which the Court considers restraint of trade clauses, it is evident that each restraint issue is decided using an individualistic approach. Despite the fact that inclusion of restraint of trade clauses in employment contracts may be standard procedure for some employers, the enforcement of these restraint clauses may prove difficult in the future. In considering the way forward for restraint of trade clauses, employers will need to revaluate the terms of their restraint clauses and consider whether, in light of the above judgments, their clauses would be deemed too restrictive and impractical to enforce.

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