Post Employment Restraint Update

Workwise receives regular queries from members in relation to Post Employment Restraints which is a standard inclusion in our contract templates. This article from ‘National Workplace Lawyers’ illustrates a recent Court decision where an injunction was granted against an ex employee even though no such restraint was a part of the employment contract itself.

In our opinion employment restraints are a necessary inclusion in contract documentation particularly for employees who hold positions of responsibility and who have access to Company information relating to intellectual property and clients. Call us if you would like further information or assistance in this critical area.

Recently the Federal Court of Australia (the Court) ordered an interlocutory injunction restraining an employee from dealing with his former employer’s clients, even though the employee was not subject to any express post employment restraints.

Background

The employer, APT Technology Pty Ltd (APT), provides mechanical engineering consultancy services throughout Australia. The employee’s contract of employment contained an express confidential information term.

The employee was summarily dismissed on 16 June 2014 for setting up and conducting a rival business in direct competition to APT during his employment, and using APT’s confidential information.

The employee managed to secure many of APT’s clients. APT, even after approaching the clients, was unable to successfully return their business.

The employee acknowledged the breaches but alleged:

• that by the end of July 2014 he had ceased using the confidential information; and
• for that reason, the Court should not grant the injunction restraining him from dealing with APT’s clients or, from using or disclosing APT’s confidential information (as defined in his contract of employment).

Granting an interlocutory injunction

Generally, an interlocutory injunction will only be granted if:

• there is a serious question to be tried or that ‘on the face of it’, a case has been made out;
• there is irreparable injury which will be suffered and for which damages will not be an adequate remedy; and
• the balance of convenience favours granting an injunction.

Findings by the Court

Serious Question

The Court found there was a serious question to be tried, as the employee, for one and a half years prior to his dismissal, set up and conducted a rival business to APT and, made use of APT’s confidential information.

The evidence demonstrated that even after his dismissal, the employee “used and disclosed for his own purposes the contents of APT’s client databases, reports prepared by APT and other business documentation used by APT.”

The Court was scathing of the employee in saying:

“The conduct to which the defendant has admitted constitutes a flagrant breach of his employment contract with APT and a flagrant breach of the various duties owed by him to APT during the course of his employment. He has pursued his own financial interests without any regard to his responsibilities to his employer.”

It was noted that:

• the employee repeatedly assured APT that he was using his best endeavours to secure business for APT from the very same clients he had already approached and serviced in competition with APT;
• the employee retained a copy of APT’s client database on his own computer;
• the employee did not return APT’s confidential information or intellectual property and made false denials about his conduct prior to commencement of the litigation;
• even at the hearing, APT had not been able to retrieve from the employee all the databases he created or accessed during his employment; and
• the employee was actively dealing with clients and former clients of APT and continued to use the software associated with the equipment.

 The Court further found the employee:

“… has had a significant head-start over APT in securing the business of its former and existing clients and in servicing them to the detriment of APT. He has used his position as APT’s employee and the possessor of APT’s confidential information to gain a significant advantage over APT in securing the future business of its existing and former clients.”

The Court determined:

• to grant an order restraining the employee’s use of APT’s confidential information in the terms of the confidential information clause in the employee’s contract of employment; and
• that even though the employee was not subject to a post employment restraint, due to the employee’s ‘head-start’, it granted an order restraining the employee from approaching or dealing with clients of APT. This type of order is often referred to as a ‘springboard relief’.

Adequacy of damages

Damages were found to be an inadequate remedy for the damage already suffered and likely to be suffered from the dismissal until the final determination of the matter.

Balance of Convenience

The balance of convenience favoured APT as the damage to it would be so severe and irreparable that little could be done to reverse its impact if the employee was allowed to continue dealing with the clients.

The fact that the business the employee set up in competition with APT was the employee’s only source of income, was not a relevant consideration as it arose in breach of his duties.

Lessons

• When employees set up in competition with their employer during their employment and use the employer’s confidential information to advance their business and/or cause to the detriment of the employer, the Court may order a restraint in the use of the confidential information, and in some cases such as the present, restrain them from having dealings with the employer’s clients.
• Nevertheless, a properly drafted restraint clause in contracts of employment is a simpler and more effective way to pursue a former employee who attempts to solicit the employer’s clients or employees, or use the employer’s confidential information.
• When significant business is being lost, it is important for employers to conduct a proper and thorough audit. This includes adopting proper forensic measures including using specialists to make the best assessment to minimise the risk and damage to the business.