Restraints of trade – some things you need to know

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Whether a restraint of trade is enforceable is a question that comes across my desk regularly, in equal numbers from employers and employees. The rumour that “restraints of trade are not worth the paper they are printed on” is exactly that—rumour.

Part of the reason for the misunderstanding is that attempts to prevent competition are, prima facie, unlawful. This means that measures taken by an employer merely to prevent an ex-employee from competing against them, usually referred to as a non-compete clause, will not be upheld by the courts.

This does not mean that a restraint of trade clause will not be upheld, however, as these clauses are different from non-compete clauses. To ensure an employment agreement contains an enforceable restraint, the employer must first establish that they have a legitimate “proprietary interest” that needs protecting. Examples of proprietary interests include client relationships, pricing and marketing strategies and client lists. It does not necessarily include confidential information alone, as most employment agreements contain both implied and express restrictions on an employee using confidential information for any other purpose than to benefit their employer, which applies both during employment and following its termination.

For a restraint to be enforceable there must be a legitimate proprietary interest that warrants protection, and the restraint must be reasonable and necessary to protect that interest.
Restraint clauses usually prohibit an employee from doing certain things (such as contacting or doing work for an employer’s current/recent clients) for a certain period of time following termination, often over a specified geographic location. Where the court holds that a restraint is not reasonable as it is too long in duration, too broad in scope or covering an area that is unreasonably large, the court may modify the restraint to make it reasonable, or may refuse to uphold it at all. It is therefore important to ensure from the outset that the restraint clause is reasonable.

Clearly what is “reasonable” is going to vary from case to case. Some factors to consider when drafting a restraint are the seniority of the employee (key personnel would be subject to a longer restraint period than others), specifying a reasonable geographical distance from a specified location (usually the head office address or the address where the employee usually works from) and states what the employee is restricted from doing.  In some cases, the restriction may only apply to soliciting (approaching) the employer’s clients. Other restrictions may prevent an employee from dealing with any of the employer’s clients that the employee has carried out work for over the past 12 months.

The imposition of a restraint on an employee’s activities following termination of employment usually comes at a cost to an employer—referred to in legal terms as “consideration” which can simply be defined as “something of value.” If the restraint clause is in the employment agreement from the outset, the consideration is usually held to be the mutual promises the parties have committed to in the employment agreement. Where an employer wishes to introduce a restraint clause to existing employees, where no restraint previously existed, the employer will need to offer additional consideration, such as a pay rise or other beneficial term. Failure to do so means you are imposing an additional burden on an employee while offering nothing more in exchange for this.  In that case, a court would be unlikely to uphold a restraint which extracted from an employee a promise not to do something in exchange for nothing in return.

Finally, even without a restraint of trade clause, employees can still be held liable for taking steps to set up in competition against their employer while currently employed and/or working out their notice. In the 2012 case of Rooney Earthmoving Ltd v McTague, Whiting & Bartlett three employees were found to have breached their implied duties of fidelity, trust and confidence and good faith to their employer by setting up a competing company, soliciting clients and staff and using unlawfully obtained quotes to undercut their employer and divert the work to the new company they had set up, all done during their notice period. Their employer successfully sued them for nearly $4.3 million in damages.

Take home tips for employers are to ensure that their employment agreements are robust and expressly include the implied terms of fidelity, trust and good faith. Careful consideration should also be given to any restraint of trade clauses and ensure the terms are reasonable and necessary to protect a legitimate proprietary interest.

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Erin Burke

Employment Lawyer and Director at Practica Legal Email: erin@practicalegal.co.nz phone: 027 459 3375

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