Employer argues it has 'legitimate proprietary interests'
The Employment Relations Authority recently dealt with a case involving a sales manager who resigned from his position at a minerals supplier company and quickly started working for a competitor. The case revolved around the enforcement of non-competition and non-solicitation clauses in the employee's confidentiality and restraint agreement.
The dispute raised questions about the reasonableness of restraint of trade provisions, the protection of proprietary interests, and the balance between an employer's right to protect its business and an employee's right to earn a living.
The sales manager argued that the restraint provisions were unreasonable and unenforceable, claiming that his new role was limited to non-customer-facing work. He also maintained that any overlap in employment was due to a misunderstanding about his termination date.
The sales manager had been employed by the minerals supplier company since June 2021, initially as a customer services/inside sales representative before being promoted to area manager (sales) in June 2022. Upon joining the company, he signed both an employment agreement and a separate confidentiality and restraint agreement.
In late April 2024, the sales manager resigned from his position, citing personal reasons. He was on leave for most of his notice period, with his employment officially ending on 24 May 2024. However, it emerged that he had started working for a competitor on 21 May 2024, while still technically employed by the minerals supplier.
The minerals supplier company sought interim orders to enforce the restraint provisions in the confidentiality and restraint agreement, arguing that the sales manager's actions posed a threat to its legitimate business interests.
The case centred on several key issues:
The minerals supplier company argued that it had legitimate proprietary interests to protect, including key customer relationships, confidential information, and intellectual property. It claimed that the sales manager's move to a competitor put these interests at risk.
The sales manager and his new employer argued that the restraint provisions were unreasonable and unenforceable. They said that any overlap in employment was due to a misunderstanding about the termination date and that the sales manager's new role was limited to non-customer-facing work.
The Authority found that the minerals supplier company had legitimate proprietary interests in its customer relationships that could be protected by restraint of trade provisions.
However, it noted that the company's claims regarding confidential information and intellectual property were too broad and lacked specific evidence.
"Based on the affidavit evidence I am satisfied that [the employer] has legitimate proprietary interests in its customer relationships capable of being protected by restraint of trade provisions, which may be at risk with [the worker's] departure to a competing business," the Authority stated.
The Authority also noted that the minerals supplier company had a small workforce of seven employees with a small sales team, which was instrumental in forming strong bonds between the business and its customers.
The Authority examined the reasonableness of the non-competition and non-solicitation clauses in the confidentiality and restraint agreement. It found that the 12-month duration of both clauses was at the upper end of reasonableness, and there was no evidence provided to justify this length.
Regarding the non-competition clause, the Authority noted: "The duration of clause 7.1 of the C&R agreement has not been shown to be either reasonable or necessary to protect propriety interests of [the employer]."
It also found that the geographical scope of the clause was overly broad, as it would prevent the sales manager from working not only nationally but also in Australia.
The Authority also pointed out that the sales manager was not a senior employee nor particularly well-compensated at the time the restraint was entered, which further undermined the reasonableness of the non-competition clause.
The minerals supplier company presented several pieces of evidence suggesting potential breaches of the restraint provisions. These included:
The sales manager and his new employer denied these allegations, providing explanations for each instance and stating that the sales manager had only undertaken training and administrative tasks in his new role.
In assessing the balance of convenience, the Authority considered the potential impact on both parties if interim orders were or were not granted. It took into account the sales manager's conduct during his resignation, the minerals supplier company's need to protect its customer base, and the potential financial losses.
The Authority concluded that the balance of convenience favoured granting some interim orders, but not to the full extent sought by the minerals supplier company. It stated:
"Overall, I find that damages are less likely to be an adequate remedy for [the employer] if I do not make some interim orders. These damages may be difficult to quantify and may continue on beyond any determination I issue – a client lost during the restraint period may be a client lost indefinitely and therefore may represent an ongoing loss."
In considering overall justice, the Authority decided to grant a modified interim order related to the non-solicitation clause. The order prohibited the sales manager from soliciting customers he had dealt with in the 12 months prior to his resignation, but only until 24 November 2024, a shorter period than the original 12-month restraint.
"When I stand back and look at this case, the overall justice favours granting some interim orders, not just because of the arguable case and the balance of convenience. I measure the overall justice by reducing the interim orders sought … [to] a more reasonable timeframe and definition of what constitutes a 'client', for [the employer] to re-establish its customer base," the Authority explained.
The Authority also noted, "To disallow some relief is to effectively allow [the worker] to benefit from his own wrongdoing if I do subsequently find he has breached confidentiality and restraint provisions, and this does not seem right to me."
This case highlights the issues surrounding restraint of trade provisions in employment agreements. It shows the need for employers to carefully draft such clauses to ensure they are reasonable and tailored to protect legitimate business interests.
