The Facts
Employee’s employment contract includes restraint of trade clause
A case heard in the Supreme Court of NSW in 2017 concerned an employment restraint in a worker’s employment contract.
The company in question manufactured and sold school uniforms in NSW. The employee had worked in that industry for many years before she joined the company in July 2015.
Her employment contract with the company included a “restraint of trade” clause, preventing her, in the event she left her employment at the company, from starting up her own business in competition with the company for a period of either three or six months.
The employment contract also contained a clause requiring her to refrain from misusing or disclosing confidential information of the company, either before or after termination of her employment.
Employment restraint removed when new employment agreement drafted
The employee informed the general manager of the company that she wanted to set up her own business. During that discussion, she mentioned the restraint of trade clause in her contract and the fact that she would not be able to start up her own business for six months because of that provision.
The general manager understood that the employee would be selling school uniforms in competition with the company. Nevertheless, he authorised replacing her original employment contract with a new agreement, which instead contained a more limited “non-competition” clause that prevented her from “canvassing, soliciting or inducing customers and suppliers not to continue their relationship with [the company]”.
Employee begins to set up own business while still employed by company
However, the general manager later became aware that prior to any discussion of her resignation and while she was still employed by the company, the employee had already started setting up her own business and seeking to attract customers.
It also emerged that as part of these preparations, the employee had copied for her own use confidential information belonging to the company, including “DST files” for some schools and other educational institutions. (A DST file is a computer program used by a computerised embroidery machine to embroider the logo and other details onto a school uniform.)
The company took the view that the second employment contract should be regarded as void because of the employee’s conduct and bad faith.
It was up to the court to decide whether the employment restraint in her original employment contract should be enforced.
Expert commentary on the court's decision
Restraint of trade must go no further than necessary to protect employer’s interests
In the case Georges Apparel Pty Ltd v Giardina [2017] NSWSC 290, the court decided not to grant the restraint of trade order requested by the company, Georges Apparel.
It is relevant that restraint of trade clauses are presumed invalid as contrary to public policy, unless the company can prove that it is reasonable having regard to the interests of the parties and the public interest in free and competitive markets.
Restraint of trade must go no further than what is necessary for the protection of the legitimate interests of the employer. Legitimate interests include interests of a proprietary nature, including confidential information and customer goodwill.
In this case, the court found that there was no link between the conduct of the ex-employee, Ms Giardina, in starting her business before leaving the company, and the company’s entry into the post-employment agreement which would make the agreement voidable.
Protecting company’s interests does not require absolute prohibition of competition
The court took the view that the protection of Georges Apparel’s legitimate interests did not require an absolute prohibition on Ms Giardina working in competition with the company. It was sufficient to enforce the post-employment obligations agreement, and allow the company to assess what confidential information Ms Giardina had in her possession.
Rather than acceding to the argument that Ms Giardina should be restrained from competing against the company altogether, the court ordered that she submit all of her computers, tablets, mobile phones and electronic storage devices to an independent expert for an objective assessment of what, if any, confidential information belonging to Georges Apparel was in her possession.
The court determined that this course of action reflected the appropriate balance between the interest in protecting the company’s business and protecting Ms Giardina’s interests.
Finally, the court noted that there is also a public interest in Ms Giardina continuing to make her skills available in trade and commerce, even if this is not a crucial consideration where her skills and services are not unique or uniquely valuable.