13 Sep 2012
Full Federal Court enforces two year global non-compete restraint
by Abraham Ash, David Birch, Joe Catanzariti
It is crucial, both for employees and for employers, to obtain considered legal advice before commencing or resisting proceedings to enforce a post-contractual restraint.
Enforcing post-employment restraints can be difficult. A commonly held lay person's belief is that such restraints are generally unenforceable. The Full Federal Court, in unanimously upholding the enforceability of a two-year global non-compete post-employment restraint, has demonstrated the error in this approach (Pearson v HRX Holdings Pty Ltd  FCAFC 111 – Clayton Utz acted for the successful employer).
HRX is a human resources outsourcing company. Brent Pearsonwas a director of the company. In February 2005, shortly after the company was founded, Mr Pearson was engaged as its managing director and only employee. Throughout his employment, Mr Pearson occupied a number of different executive positions.
Aside from his executive roles, Mr Pearson was also HRX's rainmaker. He was invariably HRX's lead presenter to current or prospective clients – being presented as "the embodiment of HRX" or "the human face of HRX".
Mr Pearson was also HRX's leader of innovation. At first instance, Justice Buchanan accepted that MrPearson was:
"a key component of HRX’s success to date in first entering, and then growing in, a small and competitive market in Australia. Various witnesses referred to Mr Pearson "sprinkling fairy dust" and Mr Pearson in his evidence did not seem uncomfortable with characterisations of this sort."
Initially Mr Pearson did not have a written contract, though it was always contemplated that one would be executed. After nearly a year, while occupying the role of Chief Operating Officer, Mr Pearson executed a written contract. This contract contained a provision which restrained Mr Pearson from accepting employment with or engaging in a business "similar to or competitive with" HRX, for a period of two years from cessation of employment with HRX.
Mr Pearson eventually decided to leave HRX and accepted an offer as a senior executive with a direct competitor of HRX, Talent2. HRX sought to enforce the restraint of trade clause in Mr Pearson's contract to prevent Mr Pearson departing to one of its strongest competitors.
Findings at first instance
At first instance, Justice Buchanan held:
the restraint clause was the subject of specific negotiations over some months;
both parties acknowledged Mr Pearson's intimate involvement in HRX's business;
Mr Pearson obtained specific legal and accounting advice in relation to the post-employment restraints clause;
HRX shares were issued to Mr Pearson, representing specific consideration for the post-employment restraints;
both parties accepted the restraints as reasonable (by express acknowledgement in the restraint clause);
HRX had a well-developed policy, of which Mr Pearson was familiar, of insisting upon post-employment restraints with its executives;
the restraint clause provided that Mr Pearson was restrained for a period of two years, but that Mr Pearson would be paid for all but three months of the restraint period; and
the period of two years was referable to HRX's business, since it typically entered into two or three year contracts with its clients. A two-year restraint would prevent Mr Pearson intruding upon HRX's efforts to renew its existing contracts.
For these reasons, Justice Buchanan held that the two-year non-compete restraint was enforceable (HRX Holdings Pty Ltd v Pearson  FCA 161).
Full Federal Court Appeal
Mr Pearson appealed to the Full Federal Court. Mr Pearson argued that Justice Buchanan erred in failing to appreciate that any legitimate interest of HRX, in protecting itself from competition by Mr Pearson after the termination of his employment, was adequately protected by the non-solicitation restraint and the confidentiality provision in Mr Pearson's contract. Mr Pearson contended that the extra protection afforded by the non-competition clause, unconfined by geographical limitation, was unnecessary and unreasonable.
The Full Federal Court accepted that HRX's customer connections, which are the source of its income, were a legitimate business interest which could support a reasonable restraint of trade, given that Mr Pearson controlled HRX's customer connections. The Full Federal Court emphasised that the principal function of Mr Pearson during his employment relationship with HRX was the actual development and retention of HRX's customer base and the pursuit of new business on HRX's behalf. The Full Federal Court also accepted that HRX had an interest in ensuring the diligent and faithful pursuit by Mr Pearson of business opportunities for HRX.
The Full Federal Court held that the non-solicitation and confidentiality provisions were insufficient to protect HRX's interests in protecting its customer connections:
HRX's interests in protecting its customer connections went beyond its interest in confidential information and therefore the confidentiality provision was insufficient protection;
the non-solicitation provision did not protect HRX from the risk that its customers would move their business to Talent2 without any encouragement from Mr Pearson;
the non-solicitation provision did not protect HRX from existing customers taking new business to Talent2 upon an invitation from Mr Pearson; and
the non-solicitation and confidentiality provisions did not provide sufficient practical protection to HRX, given the difficulties of proving breach. Indeed, the Full Federal Court noted that Mr Pearson had already breached the non-solicitation clause and HRX might never have known if it had not commenced litigation. Following his resignation from HRX, Mr Pearson had written an email to one of HRX's clients saying: "I cannot solicit your business… but I believe you can solicit my services if you know what I mean."
Having established that the non-competition restraint protected a legitimate interest of HRX, the Full Federal Court turned to whether the restraint was reasonable for the protection of that interest.
The Full Federal Court held that the restraint was reasonable, given that Mr Pearson had received consideration for his post-contractual restraints as part of a commercial arrangement between the parties.
The Full Federal Court noted that the lack of geographical limitation to the restraints did not make the restraints unreasonable, given that the nature of the industry in which HRX and Talent2 are engaged meant that the needs of customers in one country could be met by services provided or arranged by persons physically in another country.
Finally, it observed that restraining Mr Pearson from competing in the competitive human resources recruitment industry would not offend the public interest in the ready availability of such services in Australia, particularly since Mr Pearson was proposed to be employed overseas.
Pearson v HRX Holdings Pty Ltd is a significant decision because it demonstrates that post-contractual restraints can be enforceable even where:
- the restraint is non-competition, rather than merely non-solicitation;
- the restraint period is a two-year period; and
- there is no geographical limitation to the restraint.
However, it was the specific circumstances of Mr Pearson's employment and the terms of his restraint which led to the restraint being enforced on Mr Pearson.
The Pearson proceedings at first instance and on appeal demonstrate the fact that the enforceability of a post-contractual restraint for a particular employee is highly dependent on the individual circumstances. In turn, this demonstrates that it is crucial, both for employees and for employers, to obtain considered legal advice before commencing or resisting proceedings to enforce a post-contractual restraint.
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.
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