[PPT] - Around the Globe Australia and Japan 7 March 2013 Dominique PowerPoint Presentation

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37 Offices in 18 Countries

Webinar Series: Confidentiality and Restrictive Covenants Around the Globe Australia and Japan

7 March 2013 Dominique Hartfield Anna Elliott Sayaka Kasahara

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Today’s presenters

Jane Bullen Partner and today’s moderator UK jane.bullen@squiresanders.com Dominique Hartfield Senior Associate Perth, Australia dominique.hartfield@squiresanders.com Anna Elliott Senior Associate Sydney, Australia anna.elliott@squiresanders.com Sayaka Kasahara Associate UK (Japan) sayaka.kasahara@squiresanders.com

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Australia - overview

What are the key areas of the law in Australia?
What types of protection and restraints are available in

Australia?

How do I make contractual terms stick?
What other legal options are available, such as the use of

confidentiality clauses/agreements?

What practical steps and strategies can be implemented to

protect your business?

What is the impact of social media?
What are the available remedies in Australia?

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Australia – Key areas of the law

At common law, restrictive covenants in an employment

context are prima facie void

However the courts will enforce a restraint so long as it is

not wider than is reasonably necessary to protect an employer’s legitimate business interests

Recognised interests include:
Protection of confidential information
Protection of customer relationships
Protection of stable workforce
Common types of restraint:
Non-compete (i.e. cannot work in the industry)
Non-solicit (e.g. customers)
Non-poaching (e.g. employees)

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Making contractual terms stick…

In assessing the reasonableness of a restraint the courts

will consider the extent of the activities being restrained, the geographic area and the time period during which the restraint operates

Other assessing factors taken into account arise from the

circumstances at the time the contract was entered into, the nature of the business and clientele, the employee’s position and relationship with customers, and any amounts paid for the restraint

Limiting the scope of the restrictions will maximise

chances of enforceability

Use of cascading restraints by employers
Use of a restraint payment clause

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Australia - key areas of law

Notice of termination – the use of extended notice periods in

employment agreements

Garden leave – the use of garden leave provisions to protect the

employer while the employee is still employed

Liability of employers for inducing a breach of contract

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Australia – case examples

Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111
Full Court of Federal Court upheld a 2 year ‘no-competition’ and ‘no-

interest’ restraint

Employee had received a restraint payment and the period reasonably

accommodated the contractual cycle on which the company operated

Seven Network (Operations) Ltd 7 ors v James

Warburton (No 2) [2011] NSWSC 386

Supreme Court of NSW found a non-compete restraint clause contained

in a management equity participation deed was valid and granted an injunction restraining the employee for a 10-month period within Australia.

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Australia – other legal options

New South Wales - employers have the benefit of the

Restraints of Trade Act 1976 (NSW)

Stacks Taree v Marshall [2010] NSWSC 34
Statutory duties - the Corporations Act 2001 (Cth) imposes a

number of duties on directors, officers and (in some cases) employees, including:

s181 - duty to act in good faith
s182 - must not improperly use position
s183 - must not use information to cause detriment or gain

advantage

Fiduciary duties and implied terms

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Australia – other legal options

Law of confidential information – based on:
Contract - express contractual provision
Equity – equitable doctrine of confidence
Intellectual property:
ownership by agreement
if in the course of employment, employer owns

(no “default” rule for patents)

Remuneration strategies:
discretionary payments
deferred payments
retention bonuses
other options

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Australia – practical steps and strategies

So an employee has resigned. What do we do? Step One Consider options for notice period Step Two Remind employee of restraints and obligations Step Three Conduct surveillance and monitor breaches Step Four Consider remedies in the event of breach

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Australia – evidence gathering

IT investigations
Impact of Workplace Surveillance Act 2005 (NSW), Surveillance

Devices Act 1988 (WA)

In-house investigations vs forensic IT expert
Sources of information include
Work emails (including backups for deleted emails)
Internet access
Deleted files
Link files
Windows registry records for USB key/portable hard drive use
Other sources
Work mobile telephone records
An informant: persuading a departing employee to stay
Clients
Evidence gathering
Impact of social media

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Australia – available remedies

Remedies in the event of breach:
Undertakings
Interlocutory injunctions to enforce restraints

(must be timely)

Preliminary discovery
Anton Piller order
Breach of contract
Breach of fiduciary duties and other equitable

claims

Damages / account of profits (review loss and

damage)

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Australia – summary of practical tips

Restraints (‘enforceable ones’) – identify the

legitimate interest to be protected

Gardening leave and notice provisions
Confidential information and intellectual

property

Strong breach letters and undertakings
Gather evidence and investigate
Take any necessary legal action

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Japan – Overview

What types of protection and restraints are available for the

employer in Japan (during and after employment)?

Post-employment restrictive covenants – are they

enforceable?

What business interests can a company protect?
For how long can a company restrict an ex-employee from

competing?

Is compensation a necessary element?
Remedies – what can you do if an ex-employee breaches the

restrictive covenants?

Making your contract terms stick
What is the impact of social media?

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Japan – Importance and scope

How is an employee’s ability to compete restricted? During employment:

Fiduciary duties/duty of fidelity

– Directors: fiduciary duties/ duty of fidelity

> Express prohibitions to compete under the Companies Act

– Employees: duty of fidelity

> Implied contractual terms preventing the employee from competing –

the Labour Contract Act

Express contractual terms

Post-employment:

No fiduciary duties/duty of fidelity
Need express agreement with the employee not to compete (“post-

termination restrictive covenants”) – by way of contract, work rules, declaration, etc.

Other restrictions (during and post-employment):

Act of tort
The Unfair Competition Prevention Act (in relation to trade secrets)

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Japan – Types of restraints available

Types of restraints:

Non-compete
Non-solicit
Non-deal
Non-poaching
Prohibiting the use of confidential information

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Japan – Enforceability: overview

Restrictive Covenants

legitimate business interest
f the employer

Freedom of Occupation

constitutional right of an

ex-employee Limitation on what can be agreed

Key considerations paid by the courts when deciding the enforceability:

1. Is there a clear agreement with the employer and the ex-employee

as to the scope of the restrictions?

2. Is there a legitimate business interest of the employer to protect?
3. What was the position/role of the ex-employee while in employment?
4. What acts of competition are restricted? For how long?

Geographical area of the restrictions?

5. Is there compensation paid to the ex-employee?
6. Public interest?
7. Other circumstances specific to the case?

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Japan – Enforceability: closer look

What do they mean?

1. Clear Agreement.

Have you clearly agreed with the ex-employee the terms of the restrictions, e.g., what acts are prohibited, for what competitors the ex-employee is prohibited to work, for how long, etc.? If not, the courts will render the restrictive covenants void.

2. Legitimate interest of the employer.

What interests of the employer can be protected?

Trade secrets (will be given high level of protection) and other

confidential information (what confidential information will be protected?).

Trade connections with customers.
Maintaining the stability of the workforce.

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Japan – Enforceability: closer look

3. Position of the ex-employee while in employment.

Was the ex-employee in a position to access the important information of the company? Is it reasonably necessary to impose restrictions on an ex- employee in that position for protection of the company’s interests?

4. The actual activities restricted, the duration of the

restrictions, and the geographical area of the restrictions. These must be reasonable and adequate in order necessary to protect the business interest of the employer. No established limit of time which the courts consider reasonable/adequate – it depends on what is considered reasonable under the circumstances of each case.

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Japan – Enforceability: closer look

5. Compensation.

Monetary compensation paid to the ex-employee for imposing the restriction? A very important element although it does not need to be paid separately / independently under the name of “compensation” – it can take different forms and different titles, e.g., a higher salary during employment or as part of the severance pay.

6. Public interest.
7. Other considerations.
The disadvantages to be incurred by the ex-employee.
Wrongful conduct on the ex-employee’s side.

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Japan – Making contractual terms stick

The departing employee often starts preparation while still in

employment, e.g., soliciting the customers and poaching colleagues. Although an employee has an obligation not to compete during employment this protection is not thorough; it is still recommended to have express provisions dealing with non-competition / confidentiality in the employment contract/work rules.

Make the scope of the post-termination restrictive covenants clear and

limit them to the extent that is reasonable and necessary to protect the company’s legitimate interests.

Given the seriousness that the courts place on any compensation

paid, include a compensation clause in the agreement.

It is common for a Japanese company to include the post-termination

restrictive covenants clauses in the work rules – by the nature of the document, the clauses can’t avoid becoming general. In order to maximise the chances of enforceability, you should try to obtain an individual agreement or declaration from the employee specifically designed for his/her position.

Reduction (return of part) of severance pay is easier to be upheld by

the courts than non-payment (return of all) of severance pay.

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Japan – Leading Cases

Foseco Japan Limited Case – Nara District Court 23.10.1970
The leading case discussing the enforceability of post-termination

restrictive covenants. The court upheld the 2 year ‘non-competition’ restraint and granted injunction to prevent former employees becoming and acting as the directors of a competitor.

Yamada Denki Co., Ltd Case – Tokyo District Court 24.4.2007
The court upheld the 1 year ‘non-competition’ restraint and ordered a

former area manager to pay back the amount equivalent to half the severance pay and one-month salary (amounting JPY 1,430,000) as damages incurred by the company.

American Life Insurance Company Case – Tokyo District

Court 13.1.2012

The court rendered void the 2 year ‘non-competition’ restraint which

included non-payment of the severance pay in case of breach, reasoning that the restrictions are too broad in terms, and ordered the company to pay full amount of the severance pay (amounting JPY 30,370,000) to a former executive officer (shikkoyaku) .

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Japan – Other legal options

Act of Tort
Unfair Competition Prevention Act – Trade secret

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Japan – Practical points

Practical steps to be taken where competitive activity is suspected/discovered:

Ascertain relevant facts:
Check the relevant employment contracts, work rules and other

agreements with the ex-employee to find out applicable non- competition clauses.

Check the position and role of the ex-employee while in employment.

Was he in a position to access the sensitive information of the company?

Find out if other ex-employees are involved in the competitive activity.
Evidence gathering:
Speak to employee’s colleagues (/customers)
Check the computer system, including electronic diaries, emails,

internet usage

Telephone / mobile records
Unusual or unexplained behaviour

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Japan - Remedies

Available remedies:

Out of court settlement
Injunctions to enforce restraints
Damages
Non-payment / reduction / return of severance pay

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Japan – Social media

Impact of social media

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Contact Details

Dominique Hartfield Senior Associate Perth, Australia dominique.hartfield@squiresanders.com T: +64 8 9429 7500 Anna Elliott Senior Associate Sydney, Australia anna.elliott@squiresanders.com T: +64 8 8248 7804 Sayaka Kasahara Associate London, UK sayaka.kasahara@squiresanders.com T: +44 20 7655 1347

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Disclaimer

The information contained in this presentation is for general

information purposes only and should not be construed as giving the ground for any action or omission in connection with the above material.

This presentation should not be construed as professional

advice on legal or any other matters.

The examples given in this presentation are described with a

level of detail that does not provide for their implementation without additional comprehensive review with due regard to specific relevant facts and circumstances.

The application of laws and statutes may vary depending on

particular circumstances.

Squire Sanders does not assume liability for any damage that

may be caused to anyone as a result of any action (or omission)

n the basis of the information contained herein.

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37 Offices in 18 Countries