Restraints and post-employment restrictions

Contributed by CatherineRusso and current to 27 July 2018

The primary mechanisms available to employers to protect confidential and proprietary information are:

• to impose and enforce post-employment restraints in appropriate circumstances; and
• to ensure contracts of employment contain specific obligations regarding disclosure of information.

Post-employment restrictions

Many employment contracts contain clauses to restrict or prevent an employee from carrying out certain activities related to employment after their employment contract ends. This includes restrictions against:

• competition;
• solicitation of clients, customers or suppliers; and
• solicitation of employees and contractors.

Such clauses are usually limited by reference to a particular activity, a particular time period and a particular area of operation.

Contracts of employment also commonly contain provisions that prohibit a former employee using or disclosing the former employer’s confidential information during the course of employment with future employers

Enforcing restraints

Post-employment restraints are notoriously difficult to enforce. The starting point at law is that a restraint of trade is unenforceable for public policy reasons. A court will only enforce restraints to the extent that they are reasonable and necessary to protect the employer’s legitimate business interest, usually confidential information or goodwill.

For example, in Devil Dog Pty Ltd v Cook [2017] WASC 27, the Court held, on an interlocutory basis, that there was a prima facie case that 10 years was a reasonable period of time to restrain Mr Cook.

In that case, Mr Cook established a business called Matchtec Hydraulics that specialised in the service and repair of hydraulic cylinders and componentry. Mr Cook sold the business to Devil Dog Pty Ltd in 2014 for $650,000, of which $588,700 was attributable to goodwill and $61,300 to plant and equipment. Mr Cook remained as an employee until June 2016, when he began employment in a hydraulic engineering business called Allwest that had been founded by one of Matchtec’s former employees.

Devil Dog applied for an injunction against Mr Cook preventing him from engaging in any hydraulic engineering business, soliciting or accepting business from any of Matchtec Hydraulics’ clients, or interfering with the relationship between Devil Dog and Matchtec Hydraulics’ clients in Western Australia.

The Court found in Devil Dog’s favour for the interim injunction for 3 reasons:

1. a large proportion of the purchase price was attributed to goodwill suggests that the Business did have the benefit of repeat business from its customers and enjoyed some degree of customer loyalty;
2. the evidence on the whole suggested that Mr Cook has a strong personal connections with customers of the business, which he established, and that it will take time for that connection to be severed; and
3. the 10-year restraint period is what was negotiated and agreed between the parties in the context of a commercial sale of business at arms’ length.

Notwithstanding this, the Court expressed significant reservations about the reasonableness of the 10 year restraint noting that it appeared to be “at the outer edge of what may be considered to be reasonable” (at [35]).