Are Restraint of Trade Clauses Enforceable in Employment Contracts?

The Supreme Court of Victoria again recently considered the issue of whether a post-employment contractual restraint of trade is enforceable. It was held that such restraint of trade provisions will only be justified if they are reasonably necessary to protect an employer’s legitimate business interests.

The base position is that restraint of trade clauses that extend beyond the termination of an employment contract are void and unenforceable. As discussed below, courts will step in to enforce restraint clauses only when they are carefully tailored to a particular situation between the respective parties and reasonable in the circumstances to protect a former employer’s business interests.

Background of Just Group Case

Nicole Peck was employed by Just Group Limited (“Just Group”) as a Chief Financial Officer in December 2015. Her contract of employment contained post-employment restraints of trade. The restraint clauses prevented Ms Peck from working for a competitor for a specified period of time after her employment at Just Group ended. Ms Peck resigned from her position not long after her commencement on 2 May 2016.

Prior to resigning, Ms Peck was involved in pre-employment negotiations with Cotton On Group Services Pty Ltd (“Cotton On”) regarding a position as their General Manager. Just Group became aware of Ms Peck’s intention to commence employment at Cotton On shortly before her employment ended.

On 2 June 2016, Just Group initiated proceedings in the Supreme Court of Victoria seeking to enforce the post-employment restraints in Ms Peck’s employment contract. The central issue in this dispute was whether Ms Peck could be restrained from commencing employment at Cotton On for the specified period. The specified period was between 12 and 24 months after her employment contract ended.

The contract of employment referred to restrictive activities which provided the following:

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:

(i) 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

(ii) 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, Just Group and the Group have a legitimate interest in withholding their confidential information and their connections with customers, employees and suppliers) (the Second Limb).

The First Limb

The First Limb purported to restrain Ms Peck from being involved in a business that was in competition with any part of Just Group with which she had been involved previously, regardless of whether the confidential information was relevant to that business. Justice McDonald considered this to be too broad. It essentially meant that Ms Peck was not allowed to be employed by a competitor, even when the confidential information she may have acquired during her employment with Just Group was not relevant to her new employer. It was held that the First Limb restraint clause extended beyond what was reasonably required to protect Just Group’s business interests.

The Second Limb

The Second Limb purported to prevent Ms Peck from being involved with some 50 entities or brands, listed in Annexure A of the employment contract. Cotton On was one of the listed entities.

In order to determine the reasonableness of the Second Limb, the Court considered whether each listed entity was actually in competition with Just Group. Just Group led evidence for only four of the 50 entities (including Cotton On) arguing that their commercial activities were in competition. Due to lack of contrary evidence, Just Group requested that the Court infer that the other 46 listed entities also undertook similar commercial activities which were also in alleged competition. The Court did not agree.

The Court held that it was not appropriate to make this inference in favour of Just Group. Woolworths Ltd, for example, was a listed entity which has numerous businesses that undergo commercial activities of many different kinds which do not compete with Just Group. In drawing this inference, Ms Peck would have been prohibited from working in any business under Woolworths Ltd, even though the subject confidential information would have been irrelevant to her new employer. It was on this basis, that the Court found the clause to be unreasonable and, therefore, unenforceable.

Soon after the Court’s judgment, Just Group filed an appeal which was heard by the Victorian Court of Appeal in December 2016. The appeal was dismissed.

The bottom line: restraints of trade in employment contracts must be tailored to prevent an employee from working in a role for a competitor where the confidential information acquired by the employee during their term of employment will be relevant to the new employer. There also needs to be a degree of probability that the confidential information will be misused by the employer. Where the restraints are too broad, the employer runs the risk they will be unreasonable and not aligned with valid protection of its business and commercial interests.

Meghan Warren specialises in providing legal advice and services in the medical and healthcare industry. Contact Meghan Warren, Director and Senior Associate of Burke & Associates Lawyers on mwarren@burkes-law.com or (03) 9822 8588.