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Appeal Court upholds restraints on former employee

The New South Wales Court of Appeal has upheld the validity of a 30-month restraint of trade contained in a deed entered into between an employer and one of its former employees.

Implications for employers

This case confirms that employers may successfully enforce restraint clauses contained in employment contracts and other agreements with employees, to protect their confidential information and business interests.

However, it is important to note that the reasonableness of each restraint clause depends on its own circumstances. Employers should ensure that any restraint clause is carefully worded and does not restrict an employee’s activities too widely or for longer than is reasonably necessary to protect the employer’s legitimate business interests.

Further, a dissenting judge in this case disagreed with the majority about the appropriate scope of the restraint. This shows that there is still a divergence of opinion at a superior court level about the breadth of enforceable restraints, and underlines the importance of cautious drafting.

Background

We outlined the facts of this case and the trial judge’s interlocutory decision in a previous update.

In summary, the former employee, Mr Miles, was a managing director of a division of Genesys Wealth Advisers Ltd (Genesys). That division provided services to financial planning firms (Member Firms), such as providing financial planning software and professional development seminars. In his role, Mr Miles had access to confidential information of Genesys that identified which Member Firms were generating the most income for Genesys.

On his departure from Genesys, Mr Miles entered into a deed of release that contained 30-month non-solicit and non-compete restraints in exchange for the preservation of Mr Miles’ long term incentive plan benefits with Genesys.

At first instance, the trial judge upheld the restraint clauses, ordering that Mr Miles be restrained from:

  • engaging in a business substantially similar to or competitive with Genesys, in a capacity where he may be able to use any of Genesys’ confidential information to the detriment of Genesys (the non-compete clause), and
  • soliciting Genesys’ clients or customers with whom he had dealt in his employment (the non-solicit clause). The phrase “clients or customers” was held to refer to Member Firms rather than Genesys’ retail customers.

Appeal decision

Scope of “client or customer”

The Court of Appeal upheld the trial judge’s finding that the deed’s reference to “clients or customers” was intended to cover solicitation of Member Firms rather than retail customers of Genesys.

Could Mr Miles have used confidential information to Genesys’ detriment?

Mr Miles argued that many of the documents covered by the restraint were not confidential and out of date. He also argued that he had forgotten much of the detail since he left Genesys because he did not take any documents with him.

The Court of Appeal rejected these arguments, finding that much of the information was confidential and plainly could have been used to Genesys’ detriment. The information could be used to target and formulate attractive offers to Member Firms that had vulnerable client relationships with Genesys, and to structure a competitor company’s business plan by using Genesys’ business plan.

Non-solicit clause

Mr Miles argued that the non-solicit restraint merely stifled competition, rather than protecting Genesys’ legitimate business interests. He further argued that the duration of the restraint (30 months) was too long.

The Court of Appeal held that the non-solicit restraint was reasonable. The information received by Mr Miles in his capacity as managing director was highly confidential and equipped a competitor to attack Genesys’ weak points and damage its relationships with Member Firms. Mr Miles received independent legal advice when he entered into the deed and received value in return for the restraint, namely a proportion of his shares under a long term incentive plan.

In regards to the length of the non-solicit restraint, Mr Miles’ relationship with Member Firms at a senior level was strong and had been built up over almost 20 years. His ability to poach Member Firms would inevitably take a long time for Genesys to “counter and neutralise”. Considering the quality and length of this customer connection, a restraint of 30 months was held to be appropriate and reasonable.

Non-compete clause

While all appeal judges agreed that the restraint on soliciting Member Firms was reasonable, their Honours differed in their assessment of the non-compete clause.

One judge (in the minority on this point) held the non-compete clause was a “blanket” restraint on Mr Miles working in his area of expertise, which was unnecessary given the existing restriction in the non-solicit clause on dealing with Member Firms. It was unlikely that, such a significant time after his employment had ended, Mr Miles would have remembered sufficiently detailed confidential information that he could use to Genesys’ detriment.

However, the majority judges upheld the non-compete clause, finding that the non-solicit clause was insufficient to protect Genesys’ legitimate business interests. It would be very difficult for Genesys to prove a breach of the non-solicit clause, because Mr Miles could find ways of disguising his approaches to Member Firms. Mr Miles would have remembered important confidential information that he could use to Genesys’ detriment, such as the details of clients with whom he had worked closely, even though he did not take any documents with him when he left.

Accordingly, Mr Miles’ appeal was dismissed, and both the non-solicit and non-compete aspects of the restraint were held to be valid and enforceable against him.

Miles v Genesys Wealth Advisers Ltd [2009] NSWCA 25

Who does this affect?
All Australian employers

What do you need to do?
Ensure you are updated on recent developments

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