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9 October 2014 Can the Springboard principle be applied to restrain a former employee?

By Richard Ottley, Partner


In Brief

Employers have struggled in the past to find ways of restraining a former employee from setting up in competition and from soliciting their clients and their goodwill in the absence of a dedicated restraint of trade covenant contained in the employee's contract of employment.

However, a recent decision of the Federal Court of Australia in APT Technology Pty Ltd v Aladesaye [2014] FCA 966 (5 September 2014), seems to have come to the aid of employers in this situation, by determining that the "springboard principle" can apply to former employees in certain circumstances.


The springboard principle

The springboard principle was considered in the United Kingdom in a case of Terrapin Limited v Builder's Supply Company (Hayes) Limited [1967] RPC 375.  Briefly stated, in that case the defendant manufactured prefabricated portable buildings according to the design of the plaintiff.  In order to manufacture these portable buildings, the defendants had received from the plaintiff: manufacturing details, specifications and technical information and know-how. After the contract ended the defendant started offering for sale, a prefabricated building which included many features of the plaintiff's original design, in competition with the product being offered by the plaintiff.  The plaintiff sued. 

The defendant claimed its obligation of confidence was discharged by the plaintiff having sold buildings and published brochures which disclosed all features of the building (in other words the confidential information to which the defendants had been subject, could easily be ascertained by reverse engineering and reading the material in the public domain). 

The trial judge, Roxburgh J, considered that it was clear the defendants had derived a significant advantage from the confidential information provided by the plaintiff and had used it as a springboard in order to compete with the plaintiff. As such, it was appropriate that it now be placed under a special disability in the field of competition, in order to ensure that it did not get an unfair start.  Accordingly, an interlocutory injunction was granted to restrain the defendants in connection with their activities.

The springboard principle appears to have originated in the context of commercial transactions and to date has had an uncertain application to employment related matters in Australia.

NATIONAL SURGICAL PTY LIMITED V MCPHEE [2010] FCA 972

In September 2010, Collier J of the Federal Court, had cause to consider whether or not the springboard principle should be applied in the context of an application by National Surgical against its former employee, Mr McPhee, in which it sought, amongst other things, to restrain Mr McPhee from performing work for Life Healthcare and other competitors within Queensland and northern NSW. 

Mr McPhee was the Business Unit Manager of National Surgical's spine unit.  National Surgical had engaged Mr McPhee to distribute specialist surgical equipment to various hospitals and other medical and health organisations. At no time during Mr McPhee's employment had he entered into a written contract of employment.  He had however, signed a confidentiality contract with his employer.

A key issue for determination was whether the confidential information to which Mr McPhee had been privy during his employment could be used as a "springboard" in the sense in which it had been used in the Terrapin case, in connection with Mr McPhee's proposed new employment with Life Healthcare.  Mr McPhee argued, amongst other things, that no injunction should be granted restraining him from working with Life Healthcare as he was not under any contractual restraint covenant with his former employer. 

In considering the application of the springboard principle, Collier J, noted the paucity of decisions on the application of this principle where it was sought to be applied to restrain a previous employee from working with a competitor on the basis of an apprehend misuse of confidential information.  Collier J ultimately declined to grant the interlocutory relief sought on a number of grounds.  Importantly, he noted that there was no authority of which he was aware, where the court had made an order tantamount to a restraint of trade in relation to an unwritten contract of employment in circumstances derived from the springboard principle.

APT Technology Pty Ltd v Aladesaye [2014] FCA 966

This matter came before Foster J in the Federal Court who granted an injunction on 5 September 2014.

The plaintiff in this case, APT Technology Pty Ltd, carried on business providing mechanical engineering consultancy services.  The defendant, Mr Aladesaye had been employed for some 6 years before he was dismissed on the grounds of conducting a rival business in competition with APT's Adelaide business.  It was not disputed that the defendant had, for over a year, conducted a rival business in competition with his employer's business in Adelaide.  It was also not disputed that he used and disclosed APT's confidential information and had continued to do so since termination of employment.

APT sought to restrain the defendant from dealing with its clients whilst the defendant did not accept such a restraint was either necessary or appropriate.  In evidence, APT described its business as one which provided machine condition monitoring solutions, testing, engineering and improvement and analysis for clients using highly specialised equipment.  Its database included details of various measurement points on each item of machinery tested.  A database was set up for each client allowing for testing results and historical information to be recorded which was used to discern changes in machinery that went over time.  Such information was very valuable to APT's business.

The defendant's employment contract contained various express obligations reflecting his duty of fidelity. It also included an express term requiring devotion of his full time attention to the performance of his duties for APT whilst in its employment and not to be involved in any activity similar to or competitive to that of its employer.  There was also a detailed confidentiality provision together with restrictions on the use of the intellectual property of his employer, including a term specifying, all inventions, improvements, designs and creations in the course of employment belonged to his employer.

Following a "drop off" in business in the Adelaide office, APT undertook an investigation in which it was revealed that the defendant had effectively been providing services to APT's clients through a business he had established called AVRE. According to APT, reports produced by the defendant through AVRE were formatted in almost identical terms to APT's engineering reports. There were also a number of similarities in other aspects of the business. 

In June 2014, the defendant was confronted by APT with the information about his activities and according to APT, confessed to operating the AVRE business in competition with APT. His employment was immediately terminated. According to APT it was apparent that from early 2013 until shortly after the commencement of the proceedings, that the defendant had had in his possession, the following information:

  • The identity of APT's clients and information relevant to services performed for them;
  • APT's databases;
  • A collection of engineering and other reports;
  • Details of APT's business plans and forecasts;
  • Knowledge of APT's charges to its clients; and
  • Use of various equipment and associated software.

APT testified to the fact that it suffered very substantial damages and losses and that the continued use of APT's confidential information by the defendant would potentially cause it irrecoverable losses.  In particular, it noted that the defendant had been able to charge clients up to 50% less than what APT charged, due in part to the fact that the defendant had little start up costs for the business.

Foster J considered that the conduct which the defendant had admitted to constituted a flagrant breach of his employment contract and a flagrant breach of various duties owed during the course of his employment. He observed that the defendant continued to deal actively with clients and former clients of APT and also continued to use software used by his former employer, although he noted the defendant now said he would cease to do so. 

Having considered the authorities in relation to the springboard principle and in particular various comments made by Jessup J in Wilson Parking Australia 1992 Pty Ltd v Rush [2008] FCA 1601, Foster J decided that APT was entitled to an interlocutory non solicitation injunction despite there being no restraint covenant.  The restraint period set was for some 5 months (or further order). Foster J was satisfied that the balance of convenience and justice favoured the granting of the injunction and that APT had legitimate and reasonable concerns that if the defendant was left free to continue dealing with APT's existing and former clients pending the final determination of the proceedings, then it could suffer damage so severe and irreparable that little could be done to reverse its impact.

Conclusion

The decision in APT Technology Pty Ltd v Aladesaye is now authority for the proposition that the springboard principle (which had its origins in commercial transactions) may be applied in employment situations in some circumstances.  In particular, it may inform the granting of an injunction to restrain a former employee from soliciting clients of their former employer. 

It needs to be borne in mind that in the case of APT Technology Pty Ltd v Aladesaye, the circumstances were clear cut and the breach by the defendant of his obligations to his employer, were significant.  It would be dangerous to assume that in the future, in the absence of a restraint covenant, an injunction to restrain solicitation of clients of a former employer will be freely available, however, there is now a clear authority for making the argument.

For further information, please contact:

Richard Ottley, Partner  |  Phone: +61 2 9233 5544  |  Email: rbo@swaab.com.au

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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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