The Future of non-compete clauses in USA vs Australia

The American

The New York Times in its article titled "How Non-Compete Clauses Keep Workers Locked In" [1] is insightful about the increasing reliance by US based companies on non-compete clauses to restrain the post employment activities of not just white collar workers but also blue collar workers.

According to the article, there has been a dramatic rise in the numbers of employers relying on non-complete clauses to restrain blue-collar workers from working with competitors. It gave an example of a labourer having left his employer (an environment drilling company) for a competitor, then facing a lawsuit by his former employer. The article also reported a mid level sales person who left one job for another to also facing litigation from his former employer.

The Australian Approach

Generally, Australian Courts when interpreting post employment restraint clauses start with the proposition that they are void and unenforceable. This is on the basis that they are contrary to the public interest because a person should not be unreasonably prevented from earning a lawful living and the public should not be deprived of services of that person.

Except restraint clauses may be found to be valid and enforceable if the restraint is “reasonably necessary” to protect the employer’s legitimate business interests. Legitimate business interests generally include income of the business; reputation; confidential information; trade secrets; staff connections and client connections of the employer. Courts will also not substitute a restraint, which is unreasonable but if permitted under the contract, can read them down.

Generally, the broader the restraint, the less likely it will be considered reasonable. (Integrated Group Limited –v- Dillon [2009] VSC 361).

Restraint clauses in employment agreements generally fall within the following categories:

Non compete – these clauses aim to prevent an employee from working in a competing business or carrying on a business themselves in the same industry;
Non poaching – these clauses seek to prevent a former employee from encouraging current employees from leaving the business and joining the former employee at a new business;
Non solicitation – these clauses aim to prevent an employee from soliciting clients away from his or her employer;
Non dealing – these clauses seek to prevent an employee having business dealings or accepting approaches from former clients.

Restraint clauses are separate to the confidentiality obligations which are imposed (or may be imposed) on an employee under contract or in equity (that is even if the contract itself does not express a confidentiality obligation on the employee, the Courts can still apply a duty of confidentiality on the employee not to disclose to any third party any confidential information obtained during their employment). In these cases, there is often an argument about what is “confidential information” and what is the employee’s know-how compared with confidential information of an employer.

Recent cases

In the recent case of Georges Apparel Pty Ltd –v- Giardina [2017 NSWSC 290], the Supreme Court of New South Wales found that a business development manager who had worked with the employer (“Georges Apparel”) and its predecessor company for approximately five years, left Georges Apparel to start her own business supplying the same or similar products (importing and selling school uniforms).

Georges Apparel sought to restrain by injunction, the worker from competing with its business. In that case, the Court held after applying relevant case law including factors relevant to whether an injunction should be granted, that there would be a very serious detriment caused to the employee and to her family (some of whom it held would be at least “must be entirely innocent in whatever is the blame game involved in that case” if the worker was to be prevented from working for longer than was absolutely necessary).

The Court balanced the individual employee’s interests against the employer’s interests (that competing with the employer would cause it financial loss). Ultimately the Court determined that the balance of convenience did not favour granting an injunction to restrain the individual employee.

Although the Court found that there was “a serious question to be tried as to whether the employee had taken and retained confidential information of her employer”, the Court ordered the employee to deliver back all computers, tablets, mobile phones, electronic storage devices to an independent expert so that the parties could determine whether information retained by the employee was confidential information of the employer and once that was completed, the devices be returned to the worker on the basis that she would not delete, amend or overwrite any data on them.

The Court stated that the devices would need to be returned to the employee as soon as the employer undertook imaging (so as to avoid substantial financial impact on her and her family). It was determined that Georges Apparel could then assess whether or not it could take action (for damages or seek a further injunction) once it reviewed confidential information and so it was not necessary to restrain the employee from using that confidential information.

The case demonstrates that the Courts in Australia when deciding whether to retrain an employee’s post employment activities or when considering breaches of confidentiality, will not only review the contract agreed between the parties (both its terms and effect) but consider a range of factors balancing the employer’s interests and employee’s interests before it decides to grant any injunction restraining workers from competing with employers or using confidential information. [2]

However, by comparison, in the recent case of Naiad Dynamics US Inc –v- Vidakovic [2017] WASC 109, the Western Australian Supreme Court was prepared to receive expert evidence from a US based lawyer (in relation to law as it applied in the US State of Connecticut) regarding the interpretation of the specific non-compete clause according to the laws of Connecticut. The Courts made it clear that the application of the US law to that contract was still a matter for the Australian Court.

In this case, the US based employer (Naiad) was successful with its application for an injunction against its former employee (Dr Vidakovic who was a Global Sales Director). Naiad was in the business of designing, engineering, manufacturing, installing and selling maritime stabilisation and other related equipment and sought to restrain Dr Vidakovic from competing with or working with a competitor in Western Australia who was engaged in the same business.

The factors which the Court had regard to in that case were entirely different to the factors which a Court would ordinarily consider (at least in Victoria) because of the incorporation of US based law into the specific contract of employment.

Key learnings for future employment agreements

It is therefore critical that before any executives or other employees agree to any restraint clauses in their employment agreements, that they consult and receive legal advice on the validity and applicability of such agreements going forward.

[1] By Conor Dougherty published 9 June 2017

[2] There are a range of factors that a Court will consider when interpreting either the validity or enforceability of a post restraint clause or breach of confidentiality, which is beyond the scope of this Article to fully detail.