The perils of employees jumping ship – cautionary tales on restraints of trade

Restraint of trade clauses are widely known to have an image problem. They receive bad publicity like few other contractual terms. It’s true, courts often label them as ‘void’, ‘contrary to public policy’, and ‘unenforceable’ unless they are shown to be ‘reasonable’.

Despite these hurdles, there is strong commercial demand for valid restraint of trade clauses, and employers are increasingly relying on these clauses to protect their businesses when former employees jump ship to work for a competitor. At worst, a restraint clause can deter employees from obtaining employment with a competitor and disclosing their sensitive commercial information. At best, a well-drafted clause can be enforced by court order, protecting an organisation’s legitimate businesses and attracting damages, penalties and costs.

A recent decision by the Victorian Supreme Court highlights the importance of a carefully drafted restraint clause if an employer wants to successfully enforce a restraint to protect its legitimate business interests. In this case, Just Group was unsuccessful in its bid to rely on a restraint clause to prevent an employee from working with Cotton On because the scope and duration of the restraint were too broad, and therefore void for being unreasonable. This case serves as a cautionary tale to employers about the importance of having a well-drafted restraint clause to increase likelihood of the restraint being enforceable.

Restraints – the basics

Restraints of trade are often included in employment contracts to protect an employer’s confidential information, trade secrets, customer networks and staff connections by restricting an employee’s activities after they have ceased employment. Generally speaking, 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 specific clause and the facts of the case.

Where a current or former employee breaches a restraint clause, an employer can apply for an injunction to prevent the employee from acting in a way that breaches a term of the contract. For example, an employer may seek an injunction that prevents the former employee from contacting its clients, working for a competitor for a defined period of time, or from disclosing information confidential to the employer and its business.

When exercising its discretion to grant an injunction, the task for the court is to determine whether the restraint clause is enforceable.

Clauses which are too broad are unlikely to be enforceable, as they are unreasonably restrictive on the employee’s ability to obtain other employment.

A carefully drafted restraint clause is crucial if an employer wants to successfully enforce a restraint to protect its legitimate business interests.  

Just Group Pty Ltd v Peck [2016] VSC 614

The perils of employees jumping ship – cautionary tales on restraints of trade | Moores

In Just Group Ltd v Peck [2016] VSC 614 the Victorian Supreme Court refused to enforce a restraint clause in the employment contract of Just Group Ltd’s (Just Group’s) former CFO when she jumped ship to work for its major competitor, Cotton On. 

The CFO, Ms Peck, commenced working for Just Group in January 2016, and tendered her resignation shortly after on 2 May 2016.  Prior to leaving she informed Just Group that she was going to work with its major competitor, Cotton On. 

Just Group sought to enforce the restraint clause in Ms Peck’s employment contract to prevent her from commencing work for Cotton On for a period of two years.  It claimed that the restraint was necessary to protect its confidential information, which Ms Peck had access to during her employment. 

Justice McDonald accepted that during her employment Ms Peck was exposed to Just Group’s commercially sensitive information and that Just Group had a legitimate interest in protecting its confidential information from disclosure to one of its competitors.  However, because the restraints contained in Ms Peck’s employment contract were not ‘reasonable’, they could not be enforced.

Justice McDonald confirmed that a restriction will only be reasonable if the employer can establish it does not go further than to reasonably necessary to protect the employer. 

Under the contract Ms Peck was restrained from engaging in any activity which ‘is the same as, or similar to’ any part of the business of the Just Group. Justice McDonald found that the restraint was unreasonable because it would prevent Ms Peck from being employed in a new role where the confidential information she acquired during her employment with Just Group would be irrelevant to the new employer.

Restraint too broad

The contract also contained a list of 50 of the Just Group’s competitors and a clause seeking to prevent Ms Peck from being engaged in ‘any activity… for or on behalf of any of the entities operating the brands’ listed. 

Justice McDonald found that due to a drafting flaw the restraint clause could not be considered as 50 separate restraints, and ‘the evidence which was led in respect of competition between Just Group and Cotton On provides no legitimate foundation for a conclusion that the restraints imposed on Ms Peck in respect of the other 49 brands/entities are reasonable’.

Accordingly, Justice McDonald held that the restraint was also unreasonable because it would have prevented her from working for businesses that did not compete with the Just Group.

Restraint too long

The restraint clause applied anywhere in Australia and New Zealand for 24 months after Ms Peck’s employment was terminated. 

Similar to many employment contracts, the contract also included an option for a court to enforce narrower restraints (for example, applying the restraint just to Victoria for lesser period) if it was found that the broader period was deemed unreasonable and overly restrictive.

However, Justice McDonald was not even prepared to find that the shorter period was reasonable, because Ms Peck’s employment could be terminated on short notice during the first six months of employment. This meant that Ms Peck could be restrained from working for two years but only receive one month’s notice, thereby giving rise to an unreasonable disparity.

What should employers do?

Carefully drafted restraint clauses can greatly assist employers protect their legitimate business interests.

Employers should be wary of any generic clauses. If they are not tailored to the specific circumstances, they are likely to be void and unenforceable.

An employer will have significantly better prospects of enforcing a restraint if:

  • it has a genuine and legitimate interest that needs protecting, and the restraint is limited to protecting that interest;
  • the time period of restraint is commensurate with the employee’s position and access to confidential information;
  • the prohibited activities are similar to the employee’s current activities, and not so broad as to prevent the employee from working at all;
  • the geographical area is not broader than necessary to protect the employer’s genuine and legitimate interests;
  • cascading clauses with alternative time periods and geographical areas enable the clause to be ‘read down’ until it is reasonable; and
  • contracts are reviewed regularly and updated to reflect changes in an employee’s role.

We also recommend that employers remind employees of their post-employment obligations in writing and recover all company property (including confidential information) prior to an employee’s departure.

How we can help

Moores has successfully enforced restraints against former employees of its clients on matters ranging from use of confidential information to soliciting clients and acting in competition.

Moores can assist with drafting and enforcing restraint of trade clauses to protect your legitimate business interests, recovering damages, and protecting your confidential and copyright information.

For more information please do not hesitate to contact us.