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Keeping Up the Competition

In all IT firms, there is going to be a degree of staff turnover no matter how well the firm is run. The turnover of staff presents a very real possibility of business competition from the use of trade secrets gained during employment from disgruntled or opportunist former employees. In the IT industry, trade secrets can range from technology not yet disclosed to the general public to confidential source codes in software programs. Whilst common law principles aid in the protection of confidential information gained by an employee from an employer, employers need to take an active approach in protecting their businesses from competitive and unscrupulous former employees. This is most commonly achieved by the inclusion of confidentiality and restraint of trade clauses in employment contracts.

The use of confidentiality and restraint of trade clauses demonstrate an attempt by employers to restrict current and former employees from participating in certain activities which may damage goodwill and cause financial loss to the employer. In general, confidentiality clauses are accepted by the legal community as being easier to enforce in comparison to restraint of trade clauses. For example, where confidentiality clauses are incomplete or invalid for any reason, the courts have been prepared to supplement them with implied confidentiality obligations.

On the other hand, the enforceability of restraint of trade clauses is often questionable and in many instances, such clauses have been found to be unenforceable. The courts have found in numerous cases that restraints imposed by employment contracts are unnecessarily onerous, unreasonable and contrary to public interest. In fact, the general principle is that all restraint of trade clauses are unenforceable and void unless it can be demonstrated that they are reasonably necessary to protect the legitimate interests of the employer whilst also taking into account the interests of the employee and the public at large.

Perhaps Chief Justice Barwick and others of the High Court said it best in the 1971 case of Buckley v Tutty:

“…it is contrary to public welfare that a man should unreasonably be prevented from earning his living in whatever lawful way he chooses and that the public should be unreasonably deprived of the services of a man prepared to engage in employment.”

Employers often argue ‘both parties agreed to the conditions in the contract and so they are bound’. Agreement however, between the parties at the time the employment contract was entered into is not a decisive factor in determining whether a restraint of trade clause is enforceable. Courts have even found that even negotiated clauses between the employee and employer may not be necessarily enforceable if it is not considered to be protecting a legitimate interest and it would be against the public interest to allow the restraint to be imposed. Agreement between the parties to the employment contract should therefore not be solely relied upon by employers when considering whether a restraint of trade clause is enforceable.

This begs the question of how exactly does one effectively restrain a former employee from engaging in undesirable acts after the employment arrangement ceases. The short answer to this question is that an employer must put in place reasonable time and geographic restrictions and reasonable activities that the former employee is restrained from participating in. The restraint must allow the former employee to use their skills and know-how to continue to work within a reasonable routine. The question of what is reasonable can be a difficult question for employers to determine. It generally boils down to the particular circumstances of the case; for example, what field the business specialises in, what skills the employee has and what geographical impact the business has.

Courts have been willing to accept restraint of trade clauses which are tiered in nature in relation to the restrictions imposed by the restraint. An example of such clauses is where a number of geographic and time limitations are specified and the option is given to use a combination of these to enforce a reasonable restraint. A tiered geographical restraint is demonstrated in the following example.

Example

  1. Within the Migration Zone of Australia as defined under the Migration Act 1958 or if this is deemed to be too wide a restraint area;
  2. the State of Victoria or if this is deemed to be too wide a restraint area;
  3. 15 kilometres from the place of trade of the Employer at its current  address and any further address of the Employer or if this is deemed to be too wide a restraint area;
  4. 10 kilometres from the place of trade of the Employer at its current address and any further address of the Employer or if this is deemed to be too wide a restraint area;
  5. 5 kilometres from the place of trade of the Employer at its current address and any further address of the Employer.

Tiered clauses give the Court the option of determining what restraint it considers to be most appropriate in the circumstances. This ensures it is not a case of all or nothing for the employer. These clauses therefore must be drafted carefully to ensure they have the desired result.

In closing, restraint of trade clauses play a fundamental part in all employment contracts. It is important to note that the Courts place a high importance on the need to protect the employer whilst also weighing up the public interest of not enforcing an unreasonable restraint of trade clause. If they are drafted carefully however, such clauses can effectively protect your IT firm’s business from opportunistic former employees.

If you have any specific or general questions in relation to this article, please feel free to contact us.