Restraint of trade clauses are commonplace in the business arena.
Advice from an experienced and knowledgeable Business Lawyer can make all the difference in settling disputes and protecting your business or livelihood.
In this article, we will examine a recent restraint of trade dispute and offer insights into this often misunderstood area of law.
Table of Contents
Background to the Case
An interesting case from 2022 involved an application for an injunction against a former employee restraining her from competing against her former employer.
The Applicant, an injectables clinic claimed to have a special trade secret lip filler technique and asserted that a former employee was using this confidential information and trade secret in her own injectables business.
The Applicant applied to the Court to enforce a restraint of trade clause and stop the former employee from using that confidential information in her own business.
The former employee, who denied all of the allegations, had only worked for the business for some 9 months before leaving and setting up her own business. She refuted the allegation she had poached clients from her former employer, and claimed that her clients had all come from her own Facebook advertising.
In this case, it appears the dispute was privately settled (which is commonplace in these disputes), as no decision has been published.
How are restraints of trade enforced?
When seeking to enforce a restraint, the Applicant has the onus to prove two elements to the Court:
The restraint is reasonable to protect its legitimate business interests; and
The scope of the restraint goes no further than what is reasonably necessary for its protection.
For further reading, see the decision of Stenhouse Australia Ltd v Phillips [1973] 2 NSWLR 691).
The fundamental starting point in attempting to enforce a restraint clause is to prove that it is needed to protect a legitimate/reasonable business interest.
The Court will assess the reasonableness of the restraint as at the time of entering the contract – contemplating the potential confidential information/trade secrets/commercially-sensitive information that the employee may be exposed to during their employment – and not at the time of the termination of employment.
In seeking to enforce that restraint, the Applicant would need to satisfy a Court that the restraint is reasonably necessary to protect its genuine business interests, and goes no further than that.
Legitimate Business Interest
The following non-exhaustive list of categories have been recognised as “legitimate business interests” that are protectable and can justify post-employment restraint:
Confidential information;
Trade secrets
Business connections / client relations (known as “goodwill”);
Client/supplier lists;
Operating procedures;
Technology and software;
Business plans;
Commercially-sensitive information; and
Retaining staff.
Is the Restraint Reasonably Necessary?
In assessing whether or not a restraint is reasonable, the Court looks at various factors.
A restraint clause that extends to geographical areas where the employee has never been employed, or which applies indiscriminately to all areas will often be held to go beyond what is reasonably necessary.
Courts will consider the geographical spread of the employer's operations, the locations of the employer's clients and the goodwill of the employer's business. Similarly, a restriction that extends in time beyond what is adequate to protect the interests of the employer will be unenforceable.
Some confidential information will become outdated quite quickly, and consequently could only justify a short restraint period.
In determining the reasonableness of restraint clauses, Courts take an individualistic approach by considering the specific circumstances of each case and issues such as:
The geographical area of the restraint;
The time period of the restraint;
The interests of the employee;
The legitimate business interests of the employer;
The employee’s salary;
The bargaining power between the parties;
The scope of the activities covered by the restraint; and
Public interest considerations, such as the right for employees to earn a living from their personal skills/qualifications/experience and freedom of trade.
Restraint Time Periods
In deciding this factor, Courts often consider:
The seniority of the former employee’s role; and
The level of sensitive and/or confidential information that the former employee was exposed to; and
An assessment as to the length of time that the confidential information “remains current and of a commercial advantage”; and
Whether an employee has been adequately compensated for the restriction period; and
Any power imbalances between the parties when negotiating the restraint of trade clause, and whether independent legal advice was received prior to signing the Employment Contract.
Conclusion
Restraint of trade clauses certainty have their place to protect the legitimate interests of businesses, but this can be a very complex and uncertain area of law for many employers and employees.
Choosing the right Business Lawyer in Townsville can protect your interests, whether you are an employer seeking to enforce a restraint, or an employee looking for guidance on your obligations.
If you would like to discuss the enforceability of your restraint clause, reach out to the experienced team of Business Lawyers at Sarinas Legal.