PR RESE NTAT TION G GUIDA ANCE NO OTES S PART 2: ENFORCEA - PDF document

PR RESE NTAT TION G GUIDA ANCE NO OTES S ‐ PART 2: ENFORCEA ABILITY OF R RESTRAINT CLAUSES Principle e 1: Each h case depen nds on its ow wn facts, eve en though th he restraint m may be the s same. Case A: HRX X Holdings Pt ty Ltd v Pear rson [2012] F FCA 161 (1 M March 2012) Facts: Esta ablished in Ja anuary 2005 by Katrina L Leslie, HRX is s a human re esources out tsourcing com mpany offerin ng recruitme ent process o outsourcing a and consulta ancy services s, human reso ources outso ourcing and recruitment t technology y to clients. . The emplo oyee, Mr Pea rson, was e ngaged as a an employee e of HRX in February 20 005. He was s initially emp ployed as ma anaging dire ctor and wa s publicly re eferred to as s the “co ‐ fou under” of HRX X. Throughou ut his emplo oyment Mr Pearson was s expected t to, and did, , play an inte gral role in business de evelopment. Mr Pearso n had a sign nificant clien nt facing role . He was oft ten the lead presenter t o HRX’s pros spective clie ents. Mr Pea rson was rega arded as hav ving a “very special abilit ty” to conne ect with pros spective clie ents, gain thei r trust and convince the em of the b benefits of e engaging HRX X. Various w witnesses refe erred to Mr P Pearson “spr rinkling fairy dust” on clie ents; and Mr r Pearson ha ad access to a all of HRX’s c confidential information n and was in nvolved in th he developm ment and app lication of it ts pricing an nd other bus siness mode els. Mr Pears son had an intimate know wledge of H RX’s client re elationships and the stra ategies it use ed it used to attempt to re etain clients when their c contracts we ere due to ex xpire. At t the time of f Mr Pearso on’s appoint tment, there e was no w written emp ployment cont tract in place e. An Executive S Services Agr reement wa as executed d by HRX a and Mr Pe arson in Dec ember 2005 5. The execu utive service es agreemen nt provided that it com mmenced ope ration from m 14 Febru ary 2005 o onwards. It contained a two ye ar post ‐ emp ployment res straint. Mr Pearson was s to be paid for 21 mon nths of that t two year peri od and also receive shar res. Mr Pea arson had ne egotiated thi is restraint w with HRX, initi ally proposin ng a six mon nth post ‐ emp ployment res straint witho out pay. He obtained lega al advice at th he time. Thro oughout Mr Pearson’s e employment t with HRX, he engaged d staff on c cascading rest raints of up to 12 mont ths. He ema ailed one pr ospective em mployee sta ting that “the e restraint cla ause is impe erative for ou ur business.” Mr Pearson gav ve 2 months s’ notice of his resignat ion on 29 S September 2 2011 and indic cated that h e would be c commencing g with a direc ct competito or, Talent2.

R ESTRAINTS OF TRADE : T IPS AND TRAPS FOR ACCOUNTANTS AND FINANCIAL PLANNERS __________________________________________________________________________________ HRX launched proceedings in the Federal Court, seeking to enforce the restraint in Mr Pearson’s contract. Decision: Federal Court’s findings Justice Buchanan of the Federal Court held that the post ‐ employment restraint was reasonable for the following reasons:  HRX had a “well developed policy” of insisting on post ‐ employment restraints;  the parties had agreed, without negotiation, on the definition of “restrained business”;  there had been considerable negotiation between the parties as to the duration of the post ‐ employment restraint;  Mr Pearson was to be paid for 21 months of the two year post ‐ employment restraint and was also to receive 8% of the issued shares in HRX as consideration for the post ‐ employment restraint;  Mr Pearson had received legal advice on the post ‐ employment restraint;  the two year period of the post ‐ employment restraint “reasonably accommodated” the contractual cycle on which HRX operated, as HRX typically entered into two to three year contracts with its clients;  Mr Pearson had a unique and critical position with HRX, being often perceived as the “co ‐ founder” and “human face” of HRX and having intimate knowledge of HRX’s client relationships, pricing arrangements and client attraction and retention strategies;  there was evidence that, while still employed by HRX, Mr Pearson had encouraged two HRX employees to move across to Talent2; and  the restraint had been specifically drafted to protect HRX against the very thing that Mr Pearson now wanted to do ‐ join a direct competitor of HRX. P RESTIGE L EGAL & C ORPORATE S ERVICES P TY L TD Page 2 of 16

R ESTRAINTS OF TRADE : T IPS AND TRAPS FOR ACCOUNTANTS AND FINANCIAL PLANNERS __________________________________________________________________________________ Case B: Wallis Nominees (Computing) Pty Ltd v Pickett [2012] VSC 82 (14 March 2012) Facts: Mr Pickett was an IT specialist at Wallis Nominees (Computing) Pty Ltd ( DWS ). His employment contract contained a 12 month post ‐ employment restraint seeking to prohibit him from providing services to any DWS client for whom he had provided specific services whilst in the employ of DWS. Mr Pickett was contracted out to a DWS client to provide IT consultancy services on behalf of DWS on a full ‐ time basis. The client subsequently offered Mr Picket a permanent position as IT Operations Manager. Mr Pickett accepted the role and resigned from his employment at DWS. DWS initiated proceedings in the Supreme Court, seeking a permanent injunction restraining Mr Pickett from working for DWS’ former client in reliance on the restraint clause in his contract.. Decision: The Supreme Court held that the restraint of trade in Mr Pickett’s employment contract was void and unenforceable. The Court held that the skills and experience Mr Pickett gained in the course of his employment did not constitute a legitimate business interest that DWS was entitled to protect by way of such a covenant. The nature, context and particular circumstances of the tripartite relationship between DWS, Mr Pickett and the client did not place Pickett in a special category that would create a risk of exploitation. Mr Picket was not intended to be the human face of DWS and his role did not include obtaining or extending the client base of DWS. DWS did not propose to develop goodwill around Mr Pickett and he was not placed in a position where he could exert control over the client’s custom “as a personal asset”. The Court held that something more than mere exposure or interaction with the client by the employee is required to warrant contractual protection. A strong connection to the client must be established and this would include personal or special knowledge of the client and a significant degree of influence. The Court held that even if, contrary to its opinion, DWS had a legitimate interest that the covenant sought to protect, the covenant provides greater protection than necessary in two respects: 1. Mr Picket was prohibited from providing services to clients of DWS that he had been in contact with whilst employed by DWS but to whom he had not actually provided services. Such a relationship would not provide Mr Picket with an opportunity to form the necessary close connection with the client; and. 2. the 12 month duration of the restraint was unreasonable as it would not take DWS 12 months to find an effective replacement employee who would be able to establish a relationship with the client. P RESTIGE L EGAL & C ORPORATE S ERVICES P TY L TD Page 3 of 16

R ESTRAINTS OF TRADE : T IPS AND TRAPS FOR ACCOUNTANTS AND FINANCIAL PLANNERS __________________________________________________________________________________ Principle 2: Courts will not uphold geographical restraints which are unreasonable. Case A: Interpersonal Pty v Reynolds (1994) 55 IR 357 This case concerned a clause that sought to prohibit the former employee from providing services as a recruitment consultant for the placement of secretarial and administrative staff in the Sydney or Melbourne metropolitan area for a period of 3 months after the date of termination of employment. In this case, it was held that owing to the vast size of the area concerned there would be unnecessary hardship on the former employee in enforcing this clause, as it would unreasonably restrain her from commencing employment with a competitor and from practising her trade. Case B: Hitech Contracting Limited v Linn [2001] (31 May 2001) The Supreme Court of New South Wales approved the enforcement of a restraint clause in an employment contract and issued an injunction preventing a recruitment consultant from working in the NSW recruitment business for 3 months. This decision was also significant because it dealt with ‘cascading restraint provisions’, which operate so that if the strongest restraint clauses were found to be invalid then a narrower restraint would be activated. In that case, the duration cascaded from 12 to 6 to 3 months after termination, and the geographical area cascaded from the whole east coast of Australia to simply NSW. The Court took the view that as a result of the cascading restraints, the narrowest provisions in each restraint were reasonable and upheld the clause. Case C: Darrow v Fresh Food Management Services Pty Ltd [2003] NSWIRComm 264 (15 August 2003) A specialist employee who was restrained from commencing employment with a direct competitor of his previous employer succeeded in having his restraint reduced from 12 to 6 months on the basis that the restraint was unfair and contrary to the public interest, imposed a harsh financial burden on the employee, and because no apparent threat to the former employer was demonstrated on the facts of that case. P RESTIGE L EGAL & C ORPORATE S ERVICES P TY L TD Page 4 of 16