Accountants Discussion Group Restraint of Trade Seminar: Strategies for protecting your business. 14 March 2018 Sydney

Transcription

1 Accountants Discussion Group Restraint of Trade Seminar: Strategies for protecting your business 14 March 2018 Sydney

2 Overview Starting point - the current state of the law in Australia. Implications of recent case law for determining whether restraints are enforceable. Strategic considerations to protect your business.

3 Restraint of Trade Overview Prima facie void for being contrary to public policy and unenforceable, UNLESS: Restraint was reasonable at the time it was agreed to ONLY legitimate interests can be protected Restraint must be no wider than necessary IF valid Breaches or threatened breaches by an Employee may be enforced by an Employer by seeking: Injunction from the Supreme Court; and/or Damages for loss of profit and compensation BUT Circumstances surrounding the termination of the employment of the Employee will be relevant

4 Reasonable Restraints LEGITIMATE INTERESTS A post employment restraint may be enforceable where: An Employee has had access to confidential information The Employee s work involved personal contact with the Employer customers/clients and where the Employee may be able to use those connections to entice customers/clients away from the Employer To protect key staff from being recruited or poached by former colleagues

5 Confidential Information Categories of Confidential Information Confidential information falls into three broad categories: 1. Trade Secrets Information which is confidential to the employer. Information which, if disclosed to a competitor would be liable to cause real (or significant) hardship to the owner of the secret. 2. Know How Information which is confidential but once learned necessarily remains in the servants head and becomes part of his own skill and knowledge applied in the course of his masters business. 3. Trivial Information Information that is confidential but trivial, unenforceable.

6 Goodwill / Customer Connections An Employer is not entitled to be protected against mere competition by a former Employee. But an Employer may be entitled to be protected against unfair competition based on the use by the Employee after termination of employment of the customer connection which the Employee has built up during the employment which in truth belongs to the Employer. A restraint to protect such an interest may be appropriate if and only if the Employee has become viz a viz the client the human face of the business.

7 Anti-Poaching Is such an interest protectable per se or does it require some link to another protectable interest i.e. confidential information? Does goodwill exist in a stable workforce? Do the capacities and personalities of your staff amount to confidential information?

8 Restraint of Trade Flow Chart Senior/high-risk Junior/low-risk Activities Duration Geographic area Has compensation ("consideration") been given for the restraint? Restraint unlikely to be reasonable, therefore unenforceable What clients/key employees do they have access to? Restraints should be limited to those clients/employees Does the employee have a unique/specialised skill set? If so, the noncompete should be limited to the employee working in this capacity for a competitor What key confidential information/ip will they have access to? Restraints should be limited to this confidential information/ip How long will it take to reestablish client connection or renegotiate contract after employee leaves? Duration should be limited to this period How long will the information/ip remain current and commercially valuable? Duration should be limited to this period. What areas will they work in? Restraints should be limited to those areas Pay rise/promotion for existing employees Included in remuneration for new employees

9 Recent decisions Citations > Just Group Limited v Peck [2016] VSCA 334 > Pryse v Clark [2017] NSWC 185 > Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSCA 181 > Monash IVF Limited v Dr Lynn Burmeister (No.2) [2017] NSWSC 903 > Grace Worldwide (Australia) Pty Limited (ACN ) [2017] NSWSC 1296

10 Is your restraint enforceable? Checklist > Where is your restraint reposed: contract (including letter) of employment; separate deed sale of business agreement; other; or combination? The repository of the restraint can have consequences for its enforceability. For example, commercial restraints (eg sale of business agreements) can be easier to enforce than employment restraints. Also, if there is more than one repository, one may better capture the conduct which you want to prohibit.

11 Is your restraint enforceable? Checklist Is the restraint certain? Does the restraint capture the conduct which you want to prohibit?

12 Is your restraint enforceable? Checklist > There are particular legal principles to which a Court will have regard to determine what the restraint means. > See Just Group at [38]: Where there is ambiguity, a restraint clause in an employment contract will be construed in favour of the employee so that, as between two reasonably available constructions, the one which imposes the lesser obligations on the employee will be preferred.

13 Is your restraint enforceable? Checklist > Is the restraint reasonable between the parties and not contrary to the public interest? (See, e.g. Grace Worldwide, Just Group cf Pryse, Burmeister.) Does the Restraints of Trade Act 1976 (NSW) apply? If so, this may increase the prospect that the Court will hold that it is reasonable. Restricted Activities Personal Engagement means directly or indirectly: a) being engaged, concerned or interested in; b) assisting or advising in respect of; or c) carrying on any activity: 1. which is the same as, or similar to, any part of the specialty brand and fashion business of a Group Company in which you were involved, or in respect of which you received Confidential Information, in the Connection Period; [ the first limb ] or 2. for or on behalf of any of the entities operating the brands listed in Annexure A, their assignees, successors or transmittees (from which, it is acknowledged, JGL and the Group have a legitimate interest in withholding their confidential information and their connections with customers, employees and suppliers) [ the second limb ].

14 Is your restraint enforceable? Checklist > If part of the restraint is unreasonable, can it be severed? > See Just Group at [39]: The first is that the impugned part must be capable of simply being removed as if simply crossed out with a blue pen; a court can remove words from a restraint clause but not rewrite it. Secondly, the part to be severed must be an independent covenant and capable of being removed without affecting the meaning of the remaining part. The only change should be to the sphere of operations of the clause. The second step means that if elimination of the invalid promises changes the extent only but not the kind of the contract, the valid promises are severable.

15 Is your restraint enforceable? Checklist > What are the consequences of repudiation on the enforceability of the restraint?

16 Remedies for breach of restraint clauses Remedies against the former employee (or other party breaching the restraint) > Remedies against the former employee include: interlocutory injunctions; final injunctions; and damages.

17 Remedies for breach of restraint clauses Remedies against third parties > Actions may exist against third parties such as a new employer or business partner of an employee who provided the restraint. Often this is because the new employer knew of the restraint but induced the employee to breach it. Such remedies include: interlocutory injunctions; final injunctions; and damages.

18 Remedies for breach of restraint clauses Remedies for related statutory and other breaches > This paper only deals with remedies for breach of a restraint. However, often a breach of a restraint is coupled with other breaches such as: breach of confidence; breaches of the Corporations Act 2001 (Cth) for example: > section 182 (misuse of position); or > section 183 (misuse of information). Such breaches can give rise to additional remedies such as an account of profit.

19 STRATEGIC CONSIDERATIONS TO PROTECT YOUR BUSINESS What would I do? > Information gathering exercise > Engage a PI > Engage a forensic IT expert > Check ASIC records

20 STRATEGIC CONSIDERATIONS TO PROTECT YOUR BUSINESS What would I do? > Was there a breach during employment? Breach of duty > Preliminary discovery > Most importantly move quickly Greater chance of obtaining an injunction Courts disinclined to stop someone from working if already started Slow them down

21 STRATEGIC CONSIDERATIONS TO PROTECT YOUR BUSINESS Contact your lawyer and strategise > Provide them with information you have gathered > Consider whether there are any other claims available Misuse of confidential information Leverage to negotiate > Consider whether to sue/involve/contact new employer > Reason for doing so? Implicate them in wrongdoing Competition can be delayed Difficult start for former employee

22 STRATEGIC CONSIDERATIONS TO PROTECT YOUR BUSINESS Steps you should take > Arrange a meeting with exiting employee ASAP > Retrieve phone and other devices > Confirm situation in writing and remind them of their obligations > Preserve your customer connection > Another letter on termination reminding them of obligations > Write to the new employer > Apply more pressure

23 STRATEGIC CONSIDERATIONS TO PROTECT YOUR BUSINESS Broader strategic considerations > Go hard precedent impact > Apply pressure Need a reasonable restraint clause as a starting position Costs Negotiations can include a broad range of matters Example of BFD > Consider the use of notice periods > Garden leave

24 Drafting Issues Drafting an enforceable restraint Commensurate to employees position. Prohibited activites are targetted and are relevant to the legitimate interest seeking to protect. Reviewed and updated to reflect the employees current role. Consideration given and advice sought MUST BE clear Cascading Restraints Liquidated damages.

25 Contacts Tony Gooch Principal Lawyer Workplace Relations Sydney, NSW D: E: tony.gooch@mk.com.au

26 @mklawyers Macpherson Kelley > New South Wales Sydney > Queensland Brisbane > Victoria Melbourne Dandenong mk.com.au Commercial Litigation & Dispute Resolution Private Clients Property & Construction Workplace Relations