Courts are demonstrating an increasing willingness to enforce non-compete clauses, particularly for senior employees. The Federal Court recently relied on the protection of a customer base, rather than the more traditional basis of protection of confidential information, to enforce such a clause. A Supreme Court decision also relied upon the power of two ex-employees to attract clients to enforce a three year non-compete clause.
In the Federal Court proceedings of Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111, a former director agreed to a clause which prohibited him from accepting employment with a business 'similar to or competitive with' his employer for two years after termination of his employment. He also agreed to a non-solicitation of client clause, which is the more common way to protect client relationships.
The employee decided to resign on 12 August 2011, citing dissatisfaction with management. However, the Court found a week before resigning, a competitor had offered the employee a senior role, which he accepted. The new role was based in Hong Kong, however, the employee was to supervise the new employer's employees who competed with the former employer in Australia.
The Court noted the employee's former role involved developing and retaining customers and pursuing new business. The employer's interest in protecting its customer base was therefore sufficient to justify restraining the employee from the new employment.
The Supreme Court decision of OAMPS Gault Armstrong Pty Ltd and Anor v Glover and Anor [2012] NSWSC 1175 concerned two marine insurance brokers who were made redundant with effect from 9 September. They were previous owners of a business which was acquired by the new employer. Their new employment contracts restrained them from working for a competitor for up to 3 years, post-employment. The new employer, who was a competitor, announced the employees' appointment as "joint regional heads" on its website on 12 September. On the same day, the former employer received letters from two clients advising the new employer would be their exclusive broker for marine insurance.
The judge thought the clients transferring their business on the same day as the media release was material and that the former employer would be exposed to the probability of loss of custom attributable to the brokers' "force of attraction" in the marine insurance industry. In other words, as the Court said, "the means of power of attraction is a protectable component of goodwill."
What does this mean?
The cases demonstrate that courts can enforce non-compete clauses to protect customer bases and to counter the force of an ex-employee to attract clients, and not simply to protect confidential information.
How can we help?
We can draft post-employment restraints to protect your relationships with clients, staff and your confidential information and goodwill.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.