Protecting Your Business Interests

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1 August 2004 Protecting Your Business Interests Restraint Of Trade Clauses Restraint of trade clauses, which seek to prevent former employees or owners from engaging in activities that compete with the business they have left, are increasingly common. Recent Court decisions indicate that non-compete clauses will be enforced if reasonable and necessary to protect legitimate business interests. Brilliant Lighting case (25 June 2004) - The Supreme Court of Victoria considers the principles in assessing the enforceability of a restraint of trade clause The Victorian Supreme Court refused to enforce an Australia-wide post-employment restraint clause which sought to prevent a lighting salesperson from taking employment or having any involvement with a competitive lighting company. Beaches & Bush case (29 August 2003) - Plaintiff successful in demonstrating the reasonableness of geographic and temporal restraints The New South Wales Supreme Court confirmed the enforceability of a 6-month post-termination restraint imposed on a real estate agent. The Court assessed the reasonableness of the duration and the territorial restrictions in the post-termination restraint clause having regard to the agent's role during the course of his employment and his close working relationship with the agency's customers. Cream case (22 April 2004) - Restraint of trade clause imposed on a vendor of a business must be reasonable having regard to the purchaser's legitimate business interests The Full Court of the Supreme Court of Western Australia refused to enforce a 10-year restraint of trade clause imposed on the vendor of a livestock transportation business in Western Australia. The Court held that the period of the restraint and the territory in relation to which the restraint applied was unreasonable having regard to the purchaser's legitimate business interests. Recent Cases - Restraint of Trade Clauses Brilliant Lighting (Aust) Pty Ltd v Baillieu [2004] VSC 248 (25 June 2004) The Supreme Court of Victoria confirms the principles to be considered in assessing the enforceability of a restraint of trade clause. Brilliant Lighting Pty Ltd operates a lighting business. Mr Baillieu was employed by Brilliant Lighting as a lighting sales representative for a period of some 15 months until May 2004, when he resigned and commenced

2 working for a competing lighting business, Martec Pty Ltd. His base salary was $40,000 per annum plus commission. Baillieu's employment contract with Brilliant Lighting included the following post-employment restraint: "3. Conditions of Termination - The Employee covenants that he shall not for a period of three months from the date of termination of his employment, anywhere in Australia, whether directly or indirectly, singularly or jointly with or on behalf of any other entity, without the prior consent of Brilliant Lighting: 3.1 carry on, advise or be engaged or interested in or associated with any business or activity which is directly or indirectly competitive with the Company." Brilliant Lighting issued proceedings in the Supreme Court on 23 June 2004 against Baillieu to enforce the postemployment restraint prohibiting him from working for a competitor. Hollingworth J confirmed that Brilliant Lighting bore the onus of establishing that the post- employment restraint was reasonable in the circumstances. He applied the principles in Hartley Limited v Martin [1] and Nordenfelt v Maxim Nordenfelt Guns and Ammunitions Co. Ltd [2] to assess the validity and scope of the restraint. Hollingworth J refused to enforce the post-employment restraint because some of the prohibitions in the clause went further than reasonably necessary to protect Brilliant Lighting's legitimate business interests. The Judge held that: (i) The geographical restraint with reference to " anywhere in Australia" was too wide to be enforceable. Brilliant Lighting's business operated only in Victoria and Mount Gambier. (ii) The restraint on the activities of Baillieu was too wide-ranging. The attempt to prevent Baillieu from taking employment of any nature whatsoever with a direct or indirect competitor, rather than to seek to restrict his activities as a salesman, was more than was reasonably necessary to protect Brilliant Lighting's legitimate business interests. Whilst Hollingworth J considered that a restraint period of 3 months was an appropriate period to protect Brilliant Lighting's legitimate business interests having regard to the nature of Baillieu's activities whilst an employee, he declined to grant injunctive relief as the other elements of the post-employment restraint were unreasonable. Beaches & Bush Properties v Jennings [2003] NSWSC 798 (29 August 2003) Plaintiff successful in demonstrating the reasonableness of geographic and temporal restraints Beaches & Bush Properties is a real estate agency carrying on the business of selling residential property and the management of rental properties from its offices in Ulladulla, NSW. Mr Jennings was employed by Beaches & Bush Properties as a salesperson from October 2002 until August The employment agreement between the parties included provisions prohibiting Jennings from participating in or being employed for the purpose of providing the services of a real estate agency for a period of 6 months postemployment termination. The restraint applied to the area surrounding Ulladulla and was described as an area from "Bendalong through to Bawley Point."

3 Following his resignation in August 2003, Jennings commenced employment with Countrywide Real Estate Agency, which operated its business at Milton and Mollymook, two towns very close to Ulladulla and within the area described in the restraint of trade clause. Beaches & Bush Properties commenced Supreme Court proceedings against Jennings to enforce the postemployment restraint. Austin J examined the reasonableness of the restraint and whether its scope was necessary to protect the interests Beaches & Bush Properties had in protecting its client base. The Judge held that, because of his employment with Beaches & Bush Properties, Jennings had the opportunity to develop a personal relationship with the clients of Beaches & Bush Properties and, as a result, the ability to influence them. Accordingly it was reasonable for Beaches & Bush Properties to apprehend that clients who had dealings with Jennings could, by his efforts, be diverted away from Beaches & Bush Properties' business. In the light of the personal nature of Jennings' role within the business, the restraint period of 6 months was considered to be reasonable. As to the extent of the territorial restriction, Austin J considered that the key issues pointing to the reasonableness of the clause were that Jennings lived some 20 km outside the restricted territory, that it was not unusual for real estate agents in the area to travel significant distances as part of their employment and that there was a significant number of real estate agencies outside the restricted territory which could potentially employ him. Austin J granted a final injunction enforcing the terms of the restraint of trade clause. Employment Contracts - Avoiding Unenforceable Post-Employment Restraints Employers can minimize the risk of invalid contractual post-employment restraints and avoid unlawful interference with their business by former employees by the use of employment contracts with tailored postemployment restraints. Employers need to consider the employee's role within the business, his or her interaction with the client base and what post-termination restriction on the employee's activities are necessary to protect the business. Whether a Court will enforce the post-employment restraint will depend on all the circumstances of the case and the application of the following principles: An unreasonable restraint of trade clause is contrary to the public interest and unenforceable; A person should not be unreasonably prevented from earning a lawful living and that the public should not be deprived of the services of a person prepared to engage in employment. [3] The restraint of trade clauses including: o the extent of the restraint on an employee's activities; o the geographic area within which such activities are restricted; and o the duration of such a restraint, must be reasonable having regard to the employer's need to protect its legitimate business interests. If the activities in the restraint of trade clause are described too vaguely or broadly or do not specifically relate to the duties and responsibilities undertaken by the individual who is being restrained, then the clause may be unenforceable.

4 The relative bargaining power between the parties and the amount paid to the employee in consideration for the restraint on their activities. Restraint of trade clauses are only one way by which an employer may seek to prevent a former employee from interfering with or competing with its business. The employer may, depending on the circumstances of the case, have equitable rights preventing an employee from using customer lists or other confidential information/ trade secrets obtained in the course of his or her employment. Cream v Bushcolt Pty Ltd [2004[ WASCA 82(22 April 2004) Restraint of trade clause imposed on vendor of a business must be reasonable having regard to the purchaser's legitimate business interests The proceedings were in the form of an appeal to the Full Court of the Supreme Court of Western Australia against a judgment delivered by Scott J on 1 May Mr Cream had sold his livestock transportation business "Cream Transport" to Bushcolt Pty Ltd in November 1998 and, as part of that transaction, had entered into a deed including a restraint of trade clause prohibiting him from competing with the business that he had sold in the State of Western Australia for a period of 10 years. Cream had, after a period of some 3 years, decided to re-enter the livestock transportation business in the same area primarily as he had close links to the community and as it was the only job for which it was contended he was qualified. The appeal concerned the reasonableness of the restraint of trade clause and in particular whether the cumulative effect of the restraints imposed on Cream were valid and enforceable. The Full Court held that in considering the reasonableness of any restraint period, the Court must have regard to the commercial reality of the transaction. In this dispute what was of significance was the time required for the relationship between Cream and the business that he had sold to Bushcolt, to be severed to ensure that its clients continue to patronize that business after its sale to Bushcolt. Malcolm CJ (with whom Miller and McKechnie JJ concurred) held that, in the circumstances, the period of 10 years imposed by the restraint was excessive. Malcolm CJ accepted the evidence that the business sold to Bushcolt operated predominantly within a radius of 200 kilometers of the town of Geralton, WA. His Honour held that the restraint of trade covering all of the State of Western Australia was unreasonable and not necessary to protect the goodwill in the business purchased by Bushcolt. Sale of Business Agreements - Protecting your Investment Purchasers of businesses can protect their investment by ensuring that the Sale of Business Agreement includes enforceable restraints which prohibit the Vendors setting up a competitive business. In negotiating a Sale of Business Agreement, purchasers need to: ensure that the restraint of trade clause is unambiguous and appropriate for the circumstances; consider the scope of restraint (geographic area, duration and activities) that is reasonably necessary to:

5 o o sever the relationship between the vendor and the customers of the business; protect the legitimate business interests of the purchaser; specify that part of the purchase price for the business is in consideration for the restraint on the vendor's activities. Non-compete clauses in Sale of Business Agreements should be legally reviewed before signing as their enforceability is subject to ongoing review by the Courts. Stephens Lawyers and Consultants advise on all aspects of business asset protection including postemployment restraint, non-compete clauses in Sale of Business Agreements and their enforcement. Stephens Lawyers & Consultants, August 2004 [1] [2002] VSC 301 [2] [1894] AC 535 [3] Nordenfelt v Maxim Nordenfelt Guns and Ammunitions Co Ltd [1894] AC 535