Pre­serv­ing your busi­ness through restraint of trade clauses

In brief – Employ­ee con­tracts need con­fi­den­tial­i­ty and restraint of trade clauses

The val­ue of a busi­ness is typ­i­cal­ly mea­sured by its good­will, assets and abil­i­ty to retain staff. In order to pre­serve and pro­tect this val­ue, it is impor­tant that employ­ers include suit­able con­fi­den­tial­i­ty and restraint of trade claus­es in their employ­ees’ con­tracts of employment.

Why are restraint of trade claus­es impor­tant for your business?

The val­ue of a busi­ness becomes test­ed when long-stand­ing employ­ees leave. From the employ­ee’s per­spec­tive, they will often have devel­oped close rela­tion­ships with both col­leagues at work and the client base of the busi­ness, learned the trade secrets of the busi­ness and be keen to con­tin­ue work­ing in the indus­try by either estab­lish­ing their own busi­ness or work­ing for a com­pet­ing business.

It is in these cir­cum­stances that the busi­ness will either breathe a sigh of relief for includ­ing suit­able restraint of trade and con­fi­den­tial­i­ty claus­es in the employ­ee’s con­tract or rue its fail­ure to do so. In the for­mer sce­nario, employ­ers need to under­stand that even a well-draft­ed restraint clause may not pro­vide pro­tec­tion in all cir­cum­stances. In the lat­ter sce­nario, employ­ers need to be aware that not all hope is lost because the law may offer some assistance.

What inter­ests can a restraint of trade clause protect?

The inter­est of the employ­er which a restraint seeks to pro­tect is known as its pro­tectable inter­est. There are essen­tial­ly two cat­e­gories of pro­tectable inter­est which may sup­port a court order to restrain an employ­ee. One is good­will, which includes cus­tomer con­nec­tion and staff con­nec­tion. The oth­er is con­fi­den­tial infor­ma­tion.

In the lat­ter cat­e­go­ry, a dis­tinc­tion is to be drawn between trade secrets of a busi­ness, which give it an advan­tage over com­peti­tors and know-how”, which is gen­er­al knowl­edge and skills gained by an employ­ee dur­ing the course of employment.

The law gen­er­al­ly requires that employ­ees are free to use know-how but may be restrained from using or dis­clos­ing trade secrets. How­ev­er, where know-how includes infor­ma­tion con­cern­ing the busi­ness of the employ­er (not hav­ing the sta­tus of a trade secret) and this infor­ma­tion is cov­ered by an express con­fi­den­tial­i­ty pro­vi­sion, that infor­ma­tion may be pro­tect­ed from use or dis­clo­sure by the employee.

Pro­tect­ing these inter­ests through a restraint of trade clause

A restraint of trade clause will gen­er­al­ly be includ­ed in a con­tract of employ­ment at the com­mence­ment of employ­ment, although some­times they are intro­duced dur­ing the cur­ren­cy of the employ­ment, often through a deed.

The clause will typ­i­cal­ly include restraints which pre­vent the employ­ee from:

  • Solic­it­ing clients of the busi­ness post employ­ment (non-solic­i­ta­tion clause)
  • Poach­ing employ­ees of the busi­ness post employ­ment (non-poach­ing clause)
  • Estab­lish­ing or work­ing in a com­pet­i­tive busi­ness to that of the employ­er post employ­ment (non-com­pe­ti­tion clause)
  • These claus­es will invari­ably be sup­port­ed by a con­fi­den­tial­i­ty clause impos­ing oblig­a­tions of con­fi­den­tial­i­ty on the employ­ee and defin­ing what infor­ma­tion is to be pro­tect­ed as con­fi­den­tial information”.

Restraint claus­es are often qual­i­fied by ref­er­ence to geo­graph­i­cal area and time. The rea­son for includ­ing such qual­i­fi­ca­tions is the recog­ni­tion that a restraint of trade clause will only be enforced to the extent that it was rea­son­able to pro­tect the employ­er’s legit­i­mate inter­ests. Accord­ing­ly, restrain­ing an employ­ee from work­ing for a com­peti­tor of the employ­er for an unlim­it­ed time and geo­graph­i­cal area will gen­er­al­ly be unrea­son­able in pro­tect­ing the employ­er’s inter­ests and thus be unenforceable.

What if your employee’s con­tract did not have a restraint clause?

In the event that an employ­er fails to include a restraint clause in an employ­ee’s con­tract, there are var­i­ous legal avenues which may be able to pro­tect con­fi­den­tial information.

The first avenue con­cerns the employ­ee’s implied duty of good faith and fideli­ty. This duty applies dur­ing the cur­ren­cy of the employ­ment and requires the employ­ee not to act in a man­ner inim­i­cal to the inter­ests of their employ­er. It car­ries with it an oblig­a­tion not to divulge con­fi­den­tial infor­ma­tion or use it in a way that is detri­men­tal to the employer’s inter­ests. For exam­ple, if the employ­ee copies cus­tomer lists for use after the employ­ment ends, it is a breach of the duty of good faith and fideli­ty and can give rise to legal reme­dies by the employer.

The sec­ond avenue avail­able for employ­ers seek­ing to restrain employ­ees post ter­mi­na­tion is the equi­table duty of con­fi­dence. In order to enforce this oblig­a­tion, an employ­er will need to show that:

  • The con­fi­den­tial infor­ma­tion is specif­i­cal­ly identifiable
  • The con­fi­den­tial infor­ma­tion has the qual­i­ty of con­fi­dence about it and is not common/​public knowledge
  • The con­fi­den­tial infor­ma­tion was impart­ed in cir­cum­stances giv­ing rise to a duty of confidence
  • There is mis­use or threat­ened mis­use of the con­fi­den­tial infor­ma­tion with­out the for­mer employ­er’s consent

Impor­tant­ly, the courts have estab­lished that the use of the employ­ee’s gen­er­al know-how post-employ­ment will not con­sti­tute a breach of this duty. Rather, this equi­table duty of con­fi­dence relates to the mis­use of trade secrets or high­ly con­fi­den­tial infor­ma­tion which meet the four cri­te­ria list­ed above.

Anoth­er pos­si­ble employ­er rem­e­dy lies in sec­tion 183 of the Cor­po­ra­tions Act 2001 which pro­hibits employ­ees of a com­pa­ny from improp­er­ly using infor­ma­tion to gain an advan­tage for them­selves or some­one else or cause detri­ment to the com­pa­ny. Sig­nif­i­cant­ly, this duty con­tin­ues after the employ­ment has end­ed. The courts have found that there will be no breach of this sec­tion where there has been no find­ing of any breach of the equi­table duty of con­fi­dence (See Del Casale & Ors v Arte­do­mus (Aust) Pty Lim­it­ed [2007] NSW­CA 172).

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