Restraint of trade clauses are familiar to lawyers and business people. They often arise in business sale agreements and employment arrangements. This article will focus on the latter. In contracts of employment, restraints of trade often seek to prevent an employee from conducting certain activities during and after their current employment. These activities might include:
- conducting a similar business to their former employer within a certain geographic area for a certain period;
- approaching customers of their former employer; or
- soliciting employees of their former employer to join them at their new business.
Also, businesses that compete to attract employees have been known to enter into restraints of trade that restrict their capacity to solicit each other's employees.
All of these restraints of trade have a common feature: they're agreements between people who are in competition or at least may be in the future be in competition. That may create issues with the "cartel conduct" provisions found in Division 1 of Part IV of the Competition and Consumer Act and implemented in respect of individuals by the Competition Policy Reform Acts. However, there are limited exemptions in the Act for arrangements which may amount to restraints of trade. This article will look at those exemptions, particular how far they go.
Cartel conduct under the Act
Division 1 of Part IV of the Act prohibits entering into a contract, arrangement or understanding which contains a "cartel provision" or giving effect to a cartel provision. Contravening either of these prohibitions can result in serious penalties. From a civil perspective, a cartel provision may be unenforceable on grounds of public policy.
Section 45AD defines a cartel provision. This section is long and complex but for present purposes, it's enough to note the following. A cartel provision may arise where two or more parties who are in competition, or are likely to be in competition, enter into a contract, arrangement or understanding that contains a provision which has:
- the purpose or effect of directly or indirectly limiting the supply, or likely supply, of goods or services to persons or classes of persons by any of the parties;
- the purpose or effect of directly or indirectly limiting the acquisition, or likely acquisition, of goods or services from persons or classes of persons by any of the parties; or
- the purpose of directly or indirectly allocating between any of the parties geographic areas in which goods or services are to be acquired or supplied.
It's clear that the types of restraint of trade referred to above could amount to cartel provisions unless there is an exemption for them in the Act.
Exemptions in the Act for restraints of trade
Section 4M(a) of the Act expressly says that the Act "does not affect the operation of the law relating to restraint of trade in so far as that law is capable of operating concurrently with this Act". Although this section acknowledges the existence of restraints of trade, it does not exempt them from the provisions concerning cartel conduct. For that, we need to look at the definition of "services" and section 51(2) of the Act.
Section 4 defines "services". It expressly says that it "does not include rights or benefits being the supply of goods or the performance of work under a contract of service". As we all know, a contract of service is an employment agreement.
Section 51(2)(b) says that when determining whether a prohibition concerning a cartel provision has been breached "regard shall not be had" to "any provision of a contract of service or of a contract for the provision of services, being a provision under which a person, not being a body corporate, agrees to accept restrictions as to the work, whether as an employee or otherwise, in which he or she may engage during, or after the termination of, the contract".
So what's the upshot of the definition of "services" and section 51(2)(b)? Section 51(2)(b) may provide an exemption for the common types of restraint of trade that exist between an employer and an individual employee, such as the employee being forbidden from (i) conducting the same type of work, during or after the end of their employment, within a particular geographic area or (ii) soliciting customers or employees of their former employer.
The definition of "services" may exempt an agreement between rival businesses not to solicit each other's employees. A provision in an agreement between two competitors that limits their acquisition of "services" from certain classes of persons would be a cartel provision, but "services" does not include "the performance of work under a contract of service", so an arrangement that prohibits rivals from offering employment to each other's employees may be exempt.
Care must be taken in relying on these exemptions because they are limited. For example, an agreement between businesses, which compete to engage independent contractors, not to engage independent contractors used by the other will not be exempt because the definition of "services" excludes work performed under a contract of service but not work performed under a contract for services. As a further example, an agreement between businesses, which compete to attract employees, not to engage each other's employees as independent contractors (as opposed to offering them contracts of service) is unlikely to be exempt. And as a further example, the following scenario is unlikely to be exempt: a business engages a corporation under a contract for services (as opposed to an individual), the business and corporation compete in relation to the provision of certain services, and the engagement specifies that the corporation will not provide those services within a certain geographic area during the term of the contract and for a short period afterwards.
So is a restraint of trade enforceable if it doesn't breach the Act?
Just because a restraint of trade does not contravene the Act does not mean its enforceable. It must still be enforceable according to the law of restraints of trade which is preserved by section 4M of the Act.
The enforceability of restraints of trade is a complex area, but for present purposes it's enough to note the following points.
- At common law, a restraint of trade is unenforceable unless it's reasonable in relation to the interests of the parties to the restraint and reasonable in relation to the interests of the public.
- To be reasonable as between the parties, it must be no more than is reasonably necessary to protect a legitimate interest of the party seeking to enforce the restraint. In an employment scenario, legitimate interests of an employer include protecting their confidential information and connections with customers, but does not include merely protecting them from competition. The categories of legitimate interest are not closed.
- The onus is on the party seeking to enforce the restraint to prove that the restraint is reasonably necessary to protect one of their legitimate interests, while the party being restrained has the onus of proving that the restraint is unreasonable in relation to the public interest.
- Whether the restraint is reasonable depends on many factors, including its duration and geographic reach. Reasonableness is assessed at the time the restraint is entered into.
- If a restraint is reasonable in relation to the parties, it is usually reasonable in relation to the public.
- If the proper law of the contract is NSW law, section 4 of the Restraints of Trade Act 1976 (NSW) allows a court to effectively "read down" a restraint, which would otherwise be void due to it being unreasonable, so that it is enforceable in relation to the particular breach of the restraint. If NSW law doesn't apply, careful drafting may also allow a court to enforce a restraint to a more limited extent, if enforcing it to its full extent would be unreasonable.
The restraint might also be challenged under legislation that addresses certain contractual terms that are unfair, unjust, harsh or oppressive.
Cold-calling in Silicon Valley offers possible new avenue for competition regulators
Restraints of trade have been at the forefront of competition law (also called "antitrust" law) and class action litigation in the United States. In the United States antitrust conduct is regulated by the Sherman Act. Section 1 of the Sherman Act states that:
"Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal."
In 2010 the Department of Justice (DOJ) brought an action against a number of Silicon Valley employers such as Apple and Google for allegedly breaching section 1 by sharing confidential salary information for the purposes of preventing salary bidding wars and agreeing to refrain from cold calling competitors' staff. While the companies conceded that they had arranged not to hire each other's staff, they refused to accept that this was done with an intent to drive down employee salaries. The DOJ's action was settled on 17 March 2011 with the companies agreeing for a period of five years not to enter into any agreement with any other person to refrain from competing for employees of the other person.
A civil class action was also brought against the companies on behalf of over 64,000 employees who claimed that their wages had been suppressed as a result of the alleged conduct. The class action was settled on in September 2015. The companies were ordered to pay $415 million USD for their participation in the arrangement.
In Australia, it is common for competitors to share details such as employee remuneration. This is typically arranged through a third party consulting firm which aggregates salaries from competitors. Once aggregated, the consulting firm releases statistics such as the median salaries to the submitting parties. Up to now these types of arrangements have not been investigated by the ACCC or any other regulator. However, in light of the Silicon Valley action it may be an area of law that gains increased interest from the Australian regulators.
Making sure your restraint of trade passes muster
Restraints of trade concerning workers are very common. They are largely governed by the general law of restraints of trade because they are usually exempt from the cartel conduct provisions of the Act. It is important to be aware of these exemptions, particularly how far they extend. There is no general exemption in the Act for a restraint of trade. Whether it is exempt will depend on the parties to the restraint and the activities it extends to.