Rose Litigation Lawyers have recently assisted several employers to take urgent legal action against former employees who have unlawfully taken their employer’s confidential information, trade secrets and goodwill.

If you are an employer and want to proactively protect your confidential information or want to know what to do upon discovering a former employee has taken confidential information or clients to set up a rival business, then keep reading.

Restraint of trade

A restraint of trade is a contract, or a covenant, in which a party (the covenantor) agrees with any other party (the covenantee) to restrict the employee’s liberty in the future to carry on trade with other persons not parties to the contract in such a manner as employee chooses.[1]

Why can a restraint of trade clause be unenforceable?

Enforcing restraint clauses can be difficult, even when they form part of written, signed contract because the starting presumption is that a restraint of trade clause is unenforceable, as being contrary to public policy.

However, at common law, restraint of trade clauses can be enforceable where they are reasonable because:

• an employer has a “legitimate protectable interest” (First Limb); and
• the restraint of trade clause is “no more than reasonable” for the protection of that legitimate interest (Second Limb).

First Limb: What are “legitimate protectable interests”?

The usual justification for a restraint of trade is a “protectable interest,” which is something akin to a proprietary interest.[2] Protectable interests include trade secrets, confidential information and goodwill including customer connection and staff connection. A business interest may be protectable if the employer is able to demonstrate that it will suffer real harm to the protectable interest if the employee is not restrained.

The Second Limb: What is reasonable?

Once it has been established that there is a protectable interest, the validity of the restraint must be determined by:

• reference to those interests; and
• whether the restraint is “reasonable.”

The onus of proof is on the party seeking to protect their interest to demonstrate the restraint is reasonable in the circumstances. This will often involve demonstrating that the person to be restrained has:

1. relevant knowledge, which must be more than mere personal skills and knowledge, to equip them as a competitor; or
2. was the “human face of the business”, such that they have influence over and can take “customer connections”; or
3. that they have solicited clients or other employee’s to leave the business.

Restraints will be “reasonable”, in the sense that they afford no more than adequate protection to the employer, if:

1. they do no more than prevent an employee from competing against an employer, during or after employment, by preventing the employee stealing the employer’s customers or revealing the employer’s secrets;
2.  they protect the goodwill of a business after its sale; and
3. they prevent a partner competing against the partnership during, or after, the partnership’s termination.

Further, in determining whether a restraint is reasonable, a Court will consider the circumstances surrounding the restraint, including, inter alia:

1. the time period of the restraint;
2. the geographical extent of the restraint;
3. how wide the restraint is;
4. the public interest;
5. the interests of the employee;
6. the relative bargaining powers and strengths of the parties;
7. the legitimate business interests of the employer.

What can the employer do?

Courts have the power to make orders severing all or part of a restraint of trade clause if the clause is not held to be reasonable as between the parties.  Except for in New South Wales, severance is usually only possible where the provision contains a series of overlapping restraints, known as “cascading” restraint clauses.

A “cascading” restrain clause will frame restraints by levels of narrowing geographical areas (for example Australia, or Queensland, or 5kms from the Brisbane CBD) and/or descending duration (for example 12 months, or 6 months or 3 months).

A well drafted clause of this type presents employers with a range of legal arguments about what might be reasonable, even if part of the clause is severed by a Court.

Court action?

If it can be shown that the former employee is arguably causing the employer to suffer loss for which an award of damages will be inadequate compensation, it might be possible to obtain an injunction (at least on a temporary basis) restraining the employee from breaching a restraint or misusing their employer’s confidential information.

It is essential to avoid delay and take immediate action when seeking an injunction because the Court cannot restrain things that have already happened. One of the most important things an employer can do is take steps to preserve evidence, for example by engaging a computer forensics expert to take an image of the employee’s machine and analyse the data

To be granted an interlocutory injunction, the employer must establish a serious question to be tried (for example, a serious question about whether there has been breach of an enforceable restraint or misuse of confidential information), that the balance of convenience favours the injunction being granted, and that damages would not be an adequate remedy.

Rose Litigation Lawyers can help you

If you require urgent advice about enforcing a restraint of trade clause, want to know whether what the employee has taken is in fact confidential information or a trade secret, need assistance with drafting a cascading restraint of trade clause, or want to apply to the Court for an injunction, contact Rose Litigation lawyers today.

[1]  Petrofina (Great Britain) Ltd v Martin [1966] Ch 146 at 180; [1966] 1 All ER 126 at 138 (Diplock LJ).

[2] Vandervell Products Ltd v McLeod [1956] RPC 185 at 192; Tank Lining Corp v Dunlop Industrial Pty Ltd (1982) 140 DLR (3d) 659 at 664.