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17 Jan 2012

Enforcing restraint of trade clauses for executives

by Joe Catanzariti

Two recent decisions of the NSW Supreme Court have shed further light on the court’s approach to enforcing post-employment restraints.

In Red Bull Australia Pty Ltd v Stacey [2011] NSWSC 1212, the court granted an injunction to restrain two former executives from competing with their former employer even though the restraint period was due to expire the following month. This decision shows that the potential inconvenience suffered by the former employee is not superior to a former employer’s right to enforce the restraint. To ensure certainty, any deeds of release entered into with former employers should clearly particularise which obligations will be ongoing.

In Ecolab Pty Limited v Stephen Garland [2011] NSWSC 1095, the court granted an interlocutory injunction that partially enforced post-termination clauses, the consequence being that a former manager was able to continue to work for a competitor of the former employer. The decision shows that it may be more difficult to enforce non-restraint clauses in instances where employees are terminated for reasons beyond their own control, such as redundancy, and that restraints must be reasonable if they are to be enforced.

Red Bull Australia Pty Ltd v Stacey

Facts

Red Bull Australia Pty Ltd is an energy drink manufacturer of which Mr Stacey and Mr Graebner were employed as the general manager and marketing director respectively. Both executives had signed employment contracts containing a term that restrained them from directly or indirectly engaging in any activity or business in competition with or with a similar nature to that of Red Bull after termination of employment with the company.

On 30 November 2010, both employees were notified that their employment would be terminated subject to a notice period. Under their contracts, Mr Stacey was given a six-month notice period followed by a six-month restraint while Mr Graebner was given a one-month notice period with a 12-month restraint. Both restraint periods were to end on 30 November 2011.

Following the terminations, both defendants became employed and appointed as directors of Calidris Australia, a manufacturer of energy and non-energy drinks. Calidris Australia was in its early stages as a company, and evidence suggested that the brand would launch its products into the Australian market in October 2011. The appointments of Mr Stacey and Mr Graebner as executives occurred within their restraint periods.

Arguments

Red Bull argued that Mr Stacey and Mr Graebner breached the terms of their employment contracts. In particular, Red Bull argued that the particular restraints (of six and 12 months respectively) were not unreasonable given the senior positions held by both defendants. Mr Stacey and Mr Graebner argued:

  • the restraint clauses had been ousted by a deed of release which was entered into after they had been given notice of their termination, and the deed was superior to any obligation which may have existed under their employment contracts;
  • the employer had made separate representations to each employee that the clauses in their employment contract referring to restraints did not apply; and
  • the area of competition between the companies is quite small – by manufacturing a “new generation of energy drinks” based on natural (as opposed to artificial) ingredients, Calidris Australia targeted a different segment of the market to that of Red Bull.

Judgment

Justice Rein found that although there were undertakings to the court for both employees to cease engagement with the Calidris energy drink brand until the restraint clauses expired, this was not enough. There was likely to be a conflict between the duties of Mr Stacey and Mr Graebner under their continuing obligation to Red Bull and in their new capacity as directors of Calidris Australia as they were effectively engaged to run the company in Australia.

Rein J pointed to the previous decision of Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717, which enforced the idea that the “plaintiff is advantaged by a restraint clause in being able to stop somebody working for a competitor without having to prove exactly what the employee, or the former employee has done or is doing for the competitor”.

Rein J accepted that the deed of release raised an issue of construction. However, the arguments relating to the deed as well as the representations made to the defendants were “arguable [but] not particularly strong”.

Red Bull, on the other hand, had a strong case for breach of contract by the defendants and there was evidence to suggest that Calidris was a competitor of the plaintiff even if the competition was quite marginal due to Calidris Australia being a new player in the market.

Rein J found that based on the plaintiff’s evidence, it was appropriate to force the defendants to give up their jobs until the restraint period ended. His Honour stated that the short period between the judgment and expiry of the restraint period was a matter which “cuts both ways”.

Although the granting of interlocutory relief for the plaintiff would likely cause the defendants to suffer a “serious interference”, this must be looked at in light of the fact that both Mr Stacey and Mr Graebner were very senior employees of Red Bull who were paid significant remuneration under their contracts. It followed that the restraints that were part of the bargain should be upheld.

Implications

Employers and employees should be aware that courts can and may uphold restraint of trade clauses even when there is a very short period before the clause expires. Employees should be aware of the terms of the employment contract to ensure that they comply with them, especially in relation to restraint clauses.

Ecolab Pty Limited v Stephen Garland

Facts

Stephen Garland was employed by Ecolab Pty Limited as its national sales and marketing manager, floor care. Under his employment contract there were post-termination restraints, including 12-month restraints on being engaged in a competing business (non-compete clause) and soliciting Ecolab’s customers (non-solicit clause), as well as an obligation not to misuse Ecolab’s confidential information.

Mr Garland was made redundant in May 2011. On 18 July 2011, he began working for Karcher Pty Limited as national sales manager, Windsor equipment. Mr Garland had previously sold Windsor equipment during his employment at Ecolab, however Windsor terminated its distribution agreement with Ecolab on 6 July 2011.

Ecolab claimed that Mr Garland solicited its customers, contravening the post-termination restraints of the employment contract. Ecolab sought injunctive relief to restrain Mr Garland from working with Karcher Pty Ltd and soliciting any clients from Ecolab.

Judgment

In cases seeking interlocutory relief, the plaintiff bears the onus of establishing a “sufficiently seriously arguable case” for a final injunction to justify the grant of interlocutory relief. This must be determined by having regard to the “balance of convenience” in granting the relief.

Brereton J found that it was seriously arguable that Mr Garland was or would be, during the restraint period, in breach of both restraint clauses of the employment contract. However, in relation to the non-compete restraint, Brereton J did not consider a court would grant an injunction upon final hearing of the matter.

In his determination, Brereton J relied on the court’s discretion to decide whether to grant injunctive relief. He took into account factors including:

  • Ecolab had restructured which meant that there was little if any impact on the defendant’s relationship with the clients, therefore reducing the reasonableness of the restraint;
  • Mr Garland “was not the author of his own misfortune” but rather Ecolab had “created” the current situation when they terminated him by reason of redundancy;
  • Mr Garland was made redundant by Ecolab after a representation was made that he would stay with the company; and
  • Mr Garland was given a document at the beginning of his employment with Ecolab which stated that the restraint provisions in the contract would not apply.

Further, having regard to the balance of convenience, Brereton J determined that granting injunctive relief to enforce the non-compete provision would deprive Mr Garland of earning until he found alternate employment, and also prevent him from working in an area of his choice.

On the other hand, enforcing the non-solicit provisions would not have such adverse impacts on Mr Garland. Rather, granting interlocutory relief on this basis would essentially “protect such remaining interest as Ecolab has in the customer connection associated with the defendant”.

Accordingly, orders were made restraining Mr Garland in relation to the non-solicit clause until final hearing but not in relation to the non-compete clause. Mr Garland was therefore able to continue working for the competing business.

Implications

As the court has discretion to consider any documentation or representations concerning post-termination restraints in determining whether or not to grant interlocutory relief, employers should carefully considered them before presenting them to employees.

This article was written when Joe was a partner at Clayton Utz and does not necessarily reflect his views as Vice-President of the Fair Work Commission.

This article was first published in the Law Society Journal, February 2012

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.