By Michael Tamvakologos and Elizabeth Tan
Seyfarth Synopsis: An enforceable restraint of trade can be a key business asset, giving an employer time to recover when a senior employee has left the business for a competitor. Like a good insurance policy, it’s a big relief to have it when you need it.
Australian law regarding restraints of trade has its history in 19th Century England and the prevailing concerns of that time. Of course the law has developed incrementally since then. However, by and large, an employee restraint protects certain interests within defined geographical boundaries such as a city, state or country. This made sense in a bricks and mortar world of commerce, but how can employers protect their interests in the modern digital economy?
We have worked with a range of clients to protect their interests across borders. Novel thinking is required to draft employment restraints so that they are effective within the established legal framework. Our Australian Partners have litigated hundreds of restraint of trade cases and have developed a deep understanding of the issues and what it takes to win. We share some thoughts below:
- Ensure restraints protect the right cyber micro-markets
Cyber-markets can be broken down into many possible divisions: by country location, product or service, individual seller/retailer website, personal characteristics of the consumer (age, gender, occupation, hobbies) among other things. What this means is there are sections within any market which a departing employee may lawfully target which will not affect an employer’s current business. Say, for example, an employer operates an online gambling business for rugby and AFL which serves clients in Australian capital cities but does not offer services for online horse racing in the UK. A departing employee might be able to set up a competing website, also operating geographically from Australia, to offer online gambling in UK horse racing. The cyber micro-markets are different, so the two companies are not competing in that market. But there is room for a restraint to work in areas of overlap subject to the terms of the restraint covering the correct cyber micro-markets.
- Confining an employer’s cyber-trade interest to its client list
Where an employer provides a range of services in a cyber micro-market, the most efficient and clear way to protect its interests – for example, the legitimate interest of client connections, may be naming particular clients in a market, along with other appropriate terms. This type of drafting can be effective to protect relationships built with particular clients situated within defined boundaries.
- Enforcing cyber-market restraints where an employee engages in cyber-trading within the boundaries of an enforceable geographic restraint
Essentially, this means that an employer who reasonably restrains employees by geographical restraints is to be entitled to have this capture cyber-business within the geographical restraint. For example, an employer can protect its interest in client connections regarding their telemedicine counselling services provided to public and private hospitals in, say, Sydney and Melbourne against former employees providing competing services to customers in these locations for a certain period of time, but would not be entitled to restrain a former employee from providing the same services to patients in aged-care homes in Perth, Adelaide or the United States. A restraint will be effective so long as it is well drafted and ensures that providing services to clients through the internet within this geographic boundary is prohibited.
The above framework for drafting restraints supports the following public policy benefits:
- Ensuring a level of trade and (not unfair) competition while offering reasonable protection of an employer’s legitimate interests; and
- Allowing markets to grow and prosper for the benefit of consumers.
Keep enforcement front of mind where cross-border litigation is a possibility
A cyber-restraint, like the internet itself, is a global construct. But courts are country and state based and their jurisdiction is usually limited by geography. That made sense when most trade was local but can be problematic when trying to enforce a restraint across borders.
A 2017 decision of the Western Australia Supreme Court provides an example. Naiad, a U.S. employer sought an interlocutory injunction to restrain a defecting employee from operating a competing business in Western Australia. After grappling with the applicable law and jurisdiction, the Court concluded that the reasonableness of the restraint was governed by US (Connecticut) legal principles (given particular terms of the contract) but the grant of an injunction was governed by Western Australian law.
The situation is complicated because some countries (for example, Australia and the United Kingdom) have arrangements in place to recognise each other’s Court judgments and orders meaning that international litigation encounters less problems. But this is not so as between many other countries. The upshot is that it is important to consider how a restraint term will be enforced up front. Otherwise, there may be a right but no real way to achieve a remedy.
For more information on this topic, please contact the authors, your Seyfarth Attorney, or any member of Seyfarth Shaw’s Labor & Employment or International Employment Law Teams.