Employment / Workplace

Holding Employees to Account: Restraint of Trade Clauses

The Employment Court has upheld restraint of trade clauses in a number of cases recently, demonstrating that the days when restraints were widely regarded as "not worth the paper they're written on" are over.

The starting point for restraints is that they are unlawful as being anti competitive and accordingly against public policy. However, where the employer has a genuine "proprietary interest" to protect, such as, trade secrets, pricing, client, or other confidential information, the Courts can and will hold employees to their restraint obligations.

A carefully drafted restraint provision is crucial to enforceability and restraint obligations need to fit the particular circumstances of the employment relationship and the interest the employer is seeking to protect.

For example, a restraint may seek to stop an employee, for a period of time, from:

  • Soliciting the employer's clients/employees;
  • Dealing with the employer's clients/employees;
  • Working in competition within a geographical area.

An employer may potentially claim against the employee and new employer acting in breach of a restraint clause, by seeking to enforce the restraint and/or to recover losses suffered because of the breach.

Allright v Canon New Zealand Limited

In Allright v Canon New Zealand Limited, Canon successfully argued that the three month restraint in Mr Allright's employment agreement was reasonable to protect its confidential information. As the Chief Financial Officer (CFO) for Canon, Mr Allright had been privy to confidential information during his employment by, for example, attending Board meetings.

Mr Allright then resigned to take an identical role with direct competitor and argued that the confidential information provision in his agreement was enough to protect Canon's confidential information and that the restraint was unnecessary and unreasonable.

The Court accepted Canon's argument that there was a risk of innocent or inadvertent disclosure of information, where the new role with Canon's competitor was identical and the information Mr Allright held about Canon's business would be directly relevant, and upheld the restraint.

Green v Transpacific Industries Group (NZ) Limited

In Green v Transpacific Industries Group (NZ) Limited, the Court upheld Mr Green's three month restraint, preventing him from working in competition with Transpacific in the North Island. Mr Green had left Transpacific to join a smaller competitor in a different region.

The Court commented that non competition provisions are generally unlawful as anti-competitive behavior is against the public interest with non solicitation provisions, to stop employees from soliciting clients of the employer, more likely to be reasonable and readily enforceable.

AFFCO v Warmington

In AFFCO v Warmington, two plant managers left AFFCO for a competitor company, ignoring their employment agreements which contained a three month restraint. The employees argued that they had been told by a senior manager that the restraints would not be enforceable and alleged unfair bargaining by AFFCO. The employees also argued that AFFCO had no proprietary interest to protect and that AFFCO's sole purpose in attempting to enforce the restraint was to harm its competitor. The employees' new employer gave evidence that any information the employees had about AFFCO would be of no use to it.

The Court applied Canon and upheld the restraint on the basis that AFFCO had a proprietary interest in its confidential information and a right to protect this interest. There was some dispute as to what the employees had been told by the senior manager and the Court did not accept the allegation of unfair bargaining. The Court commented that given the expectation that senior managers have a level of commercial awareness in negotiating their own agreements, they could not reasonably have relied on this assurance anyway.

Comment

Employers can rely on and enforce reasonable restraint of trade clauses. It is important to give some thought to what protection is needed to ensure the clause fits the purpose, at the time the employment relationship commences.

Whether a restraint clause is reasonable and enforceable depends on all of the circumstances, including:

  • The industry involved;
  • The Employee's position with the Employer and the position they're seeking to move to;
  • Details of the "proprietary interest" the Employer is seeking to protect;
  • Type of protection sought by the restraint (eg non solicitation, non competition);
  • Extent of restraint in terms of geographical area and time period;
  • The reasons for termination.

It is important to remind employees of restraint obligations on termination of employment and that any necessary action is taken swiftly, because timing is crucial to successfully upholding restraints. We recommend that employers seek advice about restraint of trade clauses to ensure that they achieve their intended purpose.

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The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.

 

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