Effective restraints clauses can be relied to protect legitimate business interests . . . at this stage

Despite recent commentary indicating other international jurisdictions are considering ‘outlawing’ restraints of trade a recent Federal Court of Australia decision (click here) enforced a 12-month restraint period against a manager and required him to pay $500,000 damages to his former employer after soliciting 45 clients to a rival competitor.

The court took into account that the former employee had been engaged to grow the business, had significant client contact during and after business hours and in practical terms was the face of his former employer’s business in initially providing an injunction and then taking further enforcement action.

Out Take

We genuinely support an employer’s entitlement to protect legitimate business interests.

An employee generally takes none of the financial risks that the employer’s owners personally do in creating and maintaining ongoing client relationships. Employees generally receive a wage and/or performance bonuses for their work and ultimately shouldn’t be able to simply ‘take’ their employer’s business with them so that they can personally benefit themselves and/or another employer for something that they didn’t genuinely create.

A restraint doesn’t prohibit the former employee from fairly and genuinely competing ‘forever’. Rather a restraint simply gives the former employer ‘time’ to protect and/or consolidate their client interest. If the clients then leave the former employer after the ‘protected time period’ - we agree they are ‘fair game‘ for the former employee and the market at large.

Action Items

• Only use contractual restraints of trade where you are protecting a legitimate business interest

• Tailor each restraint for the individual - avoid creating a ‘one size fits all’ approach and applying it to all employees as this just ‘dilutes’ the effectiveness of a genuine restraint

• Take immediate action to protect a legitimate restraint - a delay can indicate that the business isn’t ‘genuinely’ seeking to protect an interest

• Look after your customers/clients/employees - restraints are only necessary when you lose or are about to lose one or all of them!

Edge Legal

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