Published: 28 October 2016
Author: Ryan Carlisle Thomas
Court blocks unreasonable restraints of trade put on executive
Just Group Limited ("JGL") v Nicole Peck (2016) VSC 614
The Supreme Court of Victoria has knocked back an executive contract that blocked an ex-employee from accepting a new position with another company.
The Court held that the restraints within the employment contract were too broad and more than what was reasonably necessary to protect legitimate commercial interests.
The finding is important because it helps to further define and protect the interests of employees who have unreasonable restrain of trade clauses inserted into their contacts.
In the case of Just Group Limited ("JGL") v Nicole Peck (2016) VSC 614, JGL attempted to restrain its Chief Financial Officer (Ms Peck) from working with a potential rival entity, Cotton On Group Services Pty Ltd ("Cotton On") as a General Manager, Finance and Treasury.
Ms Peck was employed for a short period commencing from 6 January 2016 before resigning on 2 May 2016.
Her contract of employment contained for various restraints on activities which generally included prohibiting her from engaging or using any confidential information (as defined in her contract) with any other potential rival or competitor. Confidential information was defined to include business plans, research and development, customers, staff; training and policy manuals; planning or marketing strategies; accounting procedures and financial information; contracts, agreements; retainers (fees); client lists and supplier network lists.
The restraints were intended to prevent Ms Peck from working in "Restricted Activities" in Australia and New Zealand; otherwise in Australia or alternatively in Victoria for periods of between 12 to 24 months after the termination of her employment.
The “Restricted Activities” included Ms Peck from being concerned or interested in, assisting or advising in or carrying on in any activity:
- Which were the same as, or similar to, any part of the specialty brand and fashion business of her old employer or in respect of which she received confidential information; or
- For or on behalf of any of the named entities operating the brands listed and attached to her contract (this included 50 entities/brands including Cotton On).
Further, for six months from the date of her employment, a probation period applied to Ms Peck's employment which entitled either party to terminate the employment arrangement by giving one month's notice. Thereafter, each party had to give twelve months notice in writing.
The contract went on to state that both parties acknowledged that:
- JGL – had a legitimate interest in protecting its business; and
- JGL and Ms Peck agreed that the restraints were reasonable to protect that legitimate interest.
The Court's findings - was there a legitimate interest the employer could protect?
The Court held the restraints within the contract were too broad and more than what was reasonably necessary to protect JGL's commercial interests.
It found that the company had properly set out what its "legitimate interest" was in relation to its contract with the employee, namely that the employee would have access to "confidential information", which was essential to JGL's market position, brand advantage and ability to operate effectively, or that Ms Peck otherwise had commercially sensitive information which included:
a) Financial reporting, sale patterns, promotion and business plans, pricing, marketing, recruitment;
b) Confidential supplier network, product design and development;
c) Chain and logistics network;
d) A period between any new design project and its eventual release to the market would be at least six months and sometimes longer (suggesting that any misuse of design products could potentially prejudice their business);
e) Ms Peck had access to commercially sensitive designs and information about concepts ( product ideas) which if released to the market would diminish the competitive advantage.
Were the restraints reasonable?
The Court held that for a restraint clause to be reasonable it must focus on what the restraint allows or prohibits a party to do. The Court found that:
- The restriction in Ms Peck's contract restraining her from engaging in “any activity” meant her personal activities not what she was "capable" of undertaking in her new role. Restraining Ms Peck from undertaking any activity would mean that she would also be restrained from undertaking work as a shelf stacker or sales assistant with a competitor. This was too broad;
- The confidential information that Ms Peck had access to in her role at JGL was not relevant to her new role, and so the restraint went beyond what was reasonable to protect JGL's legitimate interest in protecting its confidential information;
- In relation to the list of brand/entities specifically listed in her contract, JGL had failed to lead any evidence that the level of competition between it and those entities were the same as or any greater than it and Cotton On and so did not discharge the onus of establishing that those entities were "in competition."
- The restraint periods ranging from 12-24 months were unreasonable because there was a disparity between on the one hand the employer being only obliged to give 1 month notice on termination within the probation period, yet seek to enforce a restraint period of between 12-24 months.
The Court was not able to "sever" any of the invalid restraint clauses from the contract so that it would remain valid. The court decided that because the restraint clauses were either unreasonable or went beyond what could be seen as protecting the legitimate interests of JGL, severance could also not save any part of the particular restraint clause in question.
What you need to know
If you intend to embark on any new activity or post with a competitor, it is important to seek legal advice on whether what you intend to do contravenes either your employment contract or any other obligation, such as a duty not to disclose commercially sensitive information.