PR RESE NTAT TION G GUIDA ANCE NO OTES S PART 2: ENFORCEA - - PDF document

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RESTRAINTS OF TRADE: TIPS AND TRAPS FOR ACCOUNTANTS AND FINANCIAL PLANNERS __________________________________________________________________________________ PRESTIGE LEGAL & CORPORATE SERVICES PTY LTD Page 2 of 16 HRX launched proceedings in the Federal Court, seeking to enforce the restraint in Mr Pearson’s contract. Decision: Federal Court’s findings Justice Buchanan of the Federal Court held that the post‐employment restraint was reasonable for the following reasons:

HRX had a “well developed policy” of insisting on post‐employment

restraints;

the parties had agreed, without negotiation, on the definition of “restrained

business”;

there had been considerable negotiation between the parties as to the

duration of the post‐employment restraint;

Mr Pearson was to be paid for 21 months of the two year post‐employment

restraint and was also to receive 8% of the issued shares in HRX as consideration for the post‐employment restraint;

Mr Pearson had received legal advice on the post‐employment restraint;
the two year period of the post‐employment restraint “reasonably

accommodated” the contractual cycle on which HRX operated, as HRX typically entered into two to three year contracts with its clients;

Mr Pearson had a unique and critical position with HRX, being often

perceived as the “co‐founder” and “human face” of HRX and having intimate knowledge of HRX’s client relationships, pricing arrangements and client attraction and retention strategies;

there was evidence that, while still employed by HRX, Mr Pearson had

encouraged two HRX employees to move across to Talent2; and

the restraint had been specifically drafted to protect HRX against the very

thing that Mr Pearson now wanted to do ‐ join a direct competitor of HRX.

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RESTRAINTS OF TRADE: TIPS AND TRAPS FOR ACCOUNTANTS AND FINANCIAL PLANNERS __________________________________________________________________________________ PRESTIGE LEGAL & CORPORATE SERVICES PTY LTD Page 3 of 16 Case B: Wallis Nominees (Computing) Pty Ltd v Pickett [2012] VSC 82 (14 March 2012) Facts: Mr Pickett was an IT specialist at Wallis Nominees (Computing) Pty Ltd (DWS). His employment contract contained a 12 month post‐employment restraint seeking to prohibit him from providing services to any DWS client for whom he had provided specific services whilst in the employ of DWS. Mr Pickett was contracted out to a DWS client to provide IT consultancy services on behalf of DWS on a full‐time basis. The client subsequently offered Mr Picket a permanent position as IT Operations Manager. Mr Pickett accepted the role and resigned from his employment at DWS. DWS initiated proceedings in the Supreme Court, seeking a permanent injunction restraining Mr Pickett from working for DWS’ former client in reliance on the restraint clause in his contract.. Decision: The Supreme Court held that the restraint of trade in Mr Pickett’s employment contract was void and unenforceable. The Court held that the skills and experience Mr Pickett gained in the course of his employment did not constitute a legitimate business interest that DWS was entitled to protect by way of such a covenant. The nature, context and particular circumstances of the tripartite relationship between DWS, Mr Pickett and the client did not place Pickett in a special category that would create a risk of exploitation. Mr Picket was not intended to be the human face of DWS and his role did not include

btaining or extending the client base of DWS. DWS did not propose to develop

goodwill around Mr Pickett and he was not placed in a position where he could exert control over the client’s custom “as a personal asset”. The Court held that something more than mere exposure or interaction with the client by the employee is required to warrant contractual protection. A strong connection to the client must be established and this would include personal or special knowledge of the client and a significant degree of influence. The Court held that even if, contrary to its opinion, DWS had a legitimate interest that the covenant sought to protect, the covenant provides greater protection than necessary in two respects: 1. Mr Picket was prohibited from providing services to clients of DWS that he had been in contact with whilst employed by DWS but to whom he had not actually provided services. Such a relationship would not provide Mr Picket with an opportunity to form the necessary close connection with the client; and. 2. the 12 month duration of the restraint was unreasonable as it would not take DWS 12 months to find an effective replacement employee who would be able to establish a relationship with the client.

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RESTRAINTS OF TRADE: TIPS AND TRAPS FOR ACCOUNTANTS AND FINANCIAL PLANNERS __________________________________________________________________________________ PRESTIGE LEGAL & CORPORATE SERVICES PTY LTD Page 4 of 16 Principle 2: Courts will not uphold geographical restraints which are unreasonable. Case A: Interpersonal Pty v Reynolds (1994) 55 IR 357 This case concerned a clause that sought to prohibit the former employee from providing services as a recruitment consultant for the placement of secretarial and administrative staff in the Sydney or Melbourne metropolitan area for a period of 3 months after the date of termination of employment. In this case, it was held that

wing to the vast size of the area concerned there would be unnecessary hardship
n the former employee in enforcing this clause, as it would unreasonably restrain her

from commencing employment with a competitor and from practising her trade. Case B: Hitech Contracting Limited v Linn [2001] (31 May 2001) The Supreme Court of New South Wales approved the enforcement of a restraint clause in an employment contract and issued an injunction preventing a recruitment consultant from working in the NSW recruitment business for 3 months. This decision was also significant because it dealt with ‘cascading restraint provisions’, which operate so that if the strongest restraint clauses were found to be invalid then a narrower restraint would be activated. In that case, the duration cascaded from 12 to 6 to 3 months after termination, and the geographical area cascaded from the whole east coast of Australia to simply NSW. The Court took the view that as a result of the cascading restraints, the narrowest provisions in each restraint were reasonable and upheld the clause. Case C: Darrow v Fresh Food Management Services Pty Ltd [2003] NSWIRComm 264 (15 August 2003) A specialist employee who was restrained from commencing employment with a direct competitor of his previous employer succeeded in having his restraint reduced from 12 to 6 months on the basis that the restraint was unfair and contrary to the public interest, imposed a harsh financial burden on the employee, and because no apparent threat to the former employer was demonstrated on the facts of that case.

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RESTRAINTS OF TRADE: TIPS AND TRAPS FOR ACCOUNTANTS AND FINANCIAL PLANNERS __________________________________________________________________________________ PRESTIGE LEGAL & CORPORATE SERVICES PTY LTD Page 5 of 16 Principle 3: Non‐competition restraint clauses may be read down by the Courts where a non‐ solicitation clause may suffice Case: Office Angels Ltd v Rainer‐Thomas and O’Connor [1991] IRLR 214 A non‐competition clause attempting to protect a former employer’s goodwill by restraining a former employee’s future employment in the same field may be read down by the Courts if the former employer’s goodwill could instead have been adequately protected by a non‐ solicitation clause. Key Point: Where there is no issue of confidential information and the former employer’s interest is simply to protect its goodwill, a non‐solicitation covenant may have more chance of being upheld by the Courts than a clause that purports to prohibit competition in a business in the same field. This is because such clauses do not limit the type of work that the former employee may perform or practice but prevent the employee from doing that work for the former employer’s clients. Principle 4: Non‐solicitation clauses with remote connections will not be enforceable A. Restraints on solicitation have been enforced so that a former employee is restrained from soliciting clients with whom they had any remote connection in the 6 months before termination: Dentmaster (UK) Ltd v Kent [1997] IRLR (636) or with prospective clients whom the employer company has negotiated: International Consulting Services (UK) Ltd v Hart [2000] IRLR 227. B. A clause that attempted to restrain solicitation of customers or clients with whom a former employee had not had any contact was struck down by the Court in New South Wales in the case of Burwood Night Patrol Pty Ltd v Lagarde [1993] 51 IR 118.

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RESTRAINTS OF TRADE: TIPS AND TRAPS FOR ACCOUNTANTS AND FINANCIAL PLANNERS __________________________________________________________________________________ PRESTIGE LEGAL & CORPORATE SERVICES PTY LTD Page 6 of 16 Principle 5: Protection of ‘legitimate interests’ enforceable; Unlimited geographical area restraints are unenforceable Case A: Austress‐Freyssinet Pty Limited & Ors v Kowalski [2007] NSWSC 399 Facts: A company in New South Wales sought to restrain its former Managing Director and shareholder, Mr Kowalski, from exercising any rights as a director and shareholder of the company he subsequently joined which was engaged in the same type of

business. The restraint clause was found in a shareholders agreement. The restraint

prevented Mr Kowalski from being involved (which included being a shareholder) in any business which was the same or similar that of the company bringing the action and was unlimited as to geographic area and included 3 alternative time periods of 3 years, 2 years and 1 year. Decision: In this case, it was found by the Court that:

the restraint protected a legitimate interest in retaining the value of the
business. However, the restraint was too broad as it would have prevented Mr

Kowalski from being a shareholder in a publicly listed company engaged in a similar business to the company. Therefore, the Judge excluded this part of the restraint from the clause.

an unlimited geographic area was unreasonable as the company did not
perate worldwide. The Judge said that Australia would be reasonable.
a 3 year period was reasonable. This was in light of the fact that Mr Kowalski

had been with the company and in that type of business for over 20 years and, therefore, departure to a competitor could be very detrimental to the company. Case B: Nomad Modular Building Pty Ltd v Smith [2007] WASC 117 Facts: A company, Nomad Modular Building Pty Ltd, sought to restrain a former employee, Mr Smith, from taking up employment with competitor, Australian Portable Buildings (APB), shortly after he resigned from Nomad. The restraint clause in Mr Smith’s employment contract prevented him from being engaged in a competing business and from soliciting or interfering with clients, employees and contractors of Nomad in WA and Queensland for a period of 6 months. Decision:

Nomad had a genuine interest to protect – it was reasonable to protect its

relationship with customers who knew Mr Smith and to protect itself against the loss of employees and contractors who undertook its work. Also the extent

f the restraint was reasonable as it did not prevent Mr Smith from working at

all ‐ it only prevented him from working for a firm making portable buildings.

the restraint for WA and Queensland was reasonable. Nomad’s main business

was in WA but it was planning to establish a business in Queensland and Mr Smith had knowledge of Nomad’s plans and strategy for Queensland.

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6 months was reasonable but the Judge found it was probably the maximum

that could be applied. Principle 6: Restraints will be enforceable only to the extent reasonably necessary Case A: Rich v BDO Kendalls [2007] QCA 147 Facts: Mr Rich was a partner of the accounting firm, BDO Kendalls. He retired as a partner

n 30 June 2005 but then became an employee of the firm for a year until 30 June
2006. Then, Mr Rich took a job as an in‐house accountant for a client of BDO. BDO

sought an injunction claiming Mr Rich was in breach of the restraint clause in his partnership agreement with BDO. The restraint clause prevented Mr Rich from working for clients of BDO, was unlimited as to area and had a number of alternatives as to time ranging from 1 year to 3 years from Mr Rich’s retirement as a partner. Decision: In this case, the Court held that:

a restraint against all clients of the firm was justified (and not just the clients Mr

Rich acted for) as partners share the assets of the firm and its

goodwill. Furthermore, the restraint was limited to clients of BDO and,

therefore, Mr Rich could still work and offer his services to many other people.

even though the restraint had no territorial limitation, as the firm only operated

in Queensland, that brought its own limitations.

Mr Rich should be restrained for 3 years after he retired from providing advice

to former clients of BDO, including his new employer. Case B: Koops Martin v Dean Reeves [2006] NSWSC 449; Reeves v Koops Martin Financial Services Pty Limited [2006] NSWCA 221 Facts: Mr Reeves was a financial planner for Koops Martin Financial Services Pty Limited His employment contract provided that on ending his employment at Koops Martin for the next 12 months he could not — within the city of Coffs Harbour — directly or indirectly, accept instructions to perform any financial planning work from any current or past clients of Koops Martin. Reeves resigned from Koops Martin and moved to a competing firm. At this new firm, Reeves accepted instructions from several clients of Koops Martin. Then Koops Martin applied for an injunction to restrain Reeves from breaching the contract. Reeves cross‐claimed for an order under section 4(3) of the Restraint of Trade Act 1976 (NSW) that the restraint was invalid. Decision: The NSW Supreme Court held that while Reeves had not enticed clients away from Koops Martin or revealed confidential information, he had accepted instructions and performed financial planning work in breach of his contract with Koops Martin.

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not unreasonable as to length (12 months);
not unreasonable in prohibiting Reeves from accepting instructions from

clients of Koops Martin;

excessive in prohibiting Reeves from accepting instructions from customers
f Koops Martin other than those whom he had acted for previously; and
excessive in that it prohibited Reeves from accepting instructions from

customers of other divisions of Koops Martin. The Court ordered that until 1 year after his employment with Koops Martin ended, Reeves would be restrained from directly or indirectly: 1. approaching or enticing or endeavouring to entice away from Koops Martin any persons, firms or companies who were clients of Koops Martin; and 2. accepting any instructions to perform any financial planning or advisory work for any such person. Principle 7: Evidence is required of (1) competition from the new employer; (2) improper conduct by the former employee Case A: Woolworths v Banks [2007] NSWSC 45 (24 January 2007) Facts: At the time he resigned from his employment with Woolworths Limited (Woolworths) to commence employment with Myer Limited (Myer), Mr Banks was engaged as Woolworths’ Senior Regional Property Manager. After giving notice of his resignation, Mr Banks’ manager requested he continue to work in his position to complete a handover process. Mr Banks had indicated he wished to leave Woolworths as soon as possible. During his period of notice, Woolworths made no attempt to restrict Mr Banks’ access to its confidential information. Mr Banks’ employment contract with Woolworths contained a clause concerning his

bligations in respect of confidential information both during and after employment.

It also contained a clause purporting to restrain him from being involved with a “competitive business” for a maximum period to be determined by Woolworths and notified to him. On his resignation, Woolworths gave Mr Banks a cheque for 6 months’ pay and notified him that the restraint in his contract would apply for 6 months. Shortly afterwards, Mr Banks commenced employment with Myer in the role of General Manager, Property. Woolworths argued that Myer was a “competitive business” for purposes of the restraint clause. Woolworths applied to the Court for an interlocutory injunction to enforce the restraint to protect its confidential information.

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RESTRAINTS OF TRADE: TIPS AND TRAPS FOR ACCOUNTANTS AND FINANCIAL PLANNERS __________________________________________________________________________________ PRESTIGE LEGAL & CORPORATE SERVICES PTY LTD Page 9 of 16 Decision: The Court confirmed the well‐established principle that a person seeking to enforce a restraint of trade must show that the restraint is no wider than is reasonably necessary to protect its legitimate interests. The Court also noted that Woolworths must show there was at least a serious question to be tried that it was entitled to final relief. If not, the Court should refuse to grant the interlocutory injunction because the 6 month restraint period would elapse before the final hearing. Woolworths was unable to demonstrate it had a strong case that Myer was a “competitive business”, as defined in the employment contract. The Court took into account that a similar restraint was contained in the employment contract of another former senior employee of Woolworths. However Woolworths had not sought to enforce the restraint when that employee left to join Myer. The Court found it was a reasonable inference to draw, in the absence of explanation, that Woolworths therefore did not consider Myer to be a “competitive business”. The Court also noted that the validity of a restraint is to be considered at the time it is made, and Woolworths’ evidence concerning competition from Myer was prospective. The Court acknowledged that the payment by Woolworths to Mr Banks of 6 months’ pay meant it was unlikely there would be any prejudice to Mr Banks if the restraint was upheld. However, given the Court’s perception of the weakness of Woolworths’ case, it refused to grant the injunction. Though it did not need to do so, the Court then considered whether the restraint could be enforced to protect Woolworths’ legitimate interest in its confidential

information. On the evidence, the Court found there was no real likelihood that the

confidential information Mr Banks possessed would be of benefit to Myer. In addition, Mr Banks had given an undertaking to the Court that he intended to honour the confidentiality obligations in his employment contract with Woolworths. The fact that he was allowed to serve out his notice period with unrestricted access to the confidential information was also relevant. The Court inferred from this that Woolworths did not, at that time, regard the prospect of Mr Banks taking up employment with Myer as involving any threat to its confidential information. Woolworths’ application for an injunction to restrain Mr Banks working for Myer was dismissed. Case B: Brink’s v Kane [2007] NSWSC 62 (25 January 2007) Facts: Mr Kane was employed by Brink’s Australia Pty Ltd (Brink’s) in February 2006 as a business development executive in its cash logistics area. Mr Kane’s role was to attract new customers to Brink’s and service and maintain relationships with existing

clients. As such, he was the “human face” of Brink’s. In early December 2006, Mr

Kane advised his manager of his decision to resign from his employment at Brink’s.

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n 12 January 2007. Mr Kane’s employment contract with Brink’s contained restraint
f trade and confidentiality clauses.

The restraint clause sought to restrain Mr Kane for three months post‐employment from:

soliciting clients or employees of Brink’s away from Brink’s
being employed or otherwise engaged to provide services to a client of

Brink’s, and

performing substantially similar functions or duties as those he performed

for Brink’s. The contract also contained a clause requiring Mr Kane to return all property and confidential information to Brink’s on termination of his employment. Mr Kane was leaving Brink’s to become an employee of another company, referred to as MDS. There was evidence that between November 2006 and termination of his employment in January 2007, Mr Kane sought to:

divert business opportunities from Brink’s to MDS
solicit clients of Brink’s to take their business to MDS, and
entice employees of Brink’s to leave Brink’s and commence employment at

MDS. There was also evidence that showed Mr Kane, while still employed by Brink’s,

btained and provided to MDS information that Brink’s claimed was confidential to

it, including customer lists and pricing information. Brink’s applied to the Supreme Court of New South Wales for an injunction to enforce the restraint against Mr Kane. Decision: There was a substantial amount of uncontroverted evidence concerning Mr Kane’s conduct in seeking to solicit customers and employees away from Brink’s, and that he sought to do so in an “underhanded and deceitful” way. On that basis the Court accepted there was a serious question to be tried that in the last six weeks of his employment Mr Kane acted improperly. The Court found there was a serious question to be tried as to whether Mr Kane, unless restrained, would be performing a substantially similar function or duty as the

ne he performed for Brink’s. The Court also found there was a serious question to

be tried that MDS was a competitor to Brink’s in the provision of cash transport services.

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Mr Kane’s conduct in gaining access to one of Brink’s’ customer lists on false

pretences

his provision to MDS of Brink’s customer pricing information, and
the large volume of customer contracts found in his office after his

departure. Mr Kane conceded there was a serious question to be tried that he would breach the restraint clause if the injunction did not issue. However he argued that Brink’s case was not a strong one and this should be taken into account by the Court when exercising its discretion in deciding whether to grant the injunction. The Court disagreed and noted that any hardship suffered by Mr Kane as a result of the injunction being granted would be self‐induced, adding: …it is perhaps something that Mr Kane should have considered when he accepted Brink’s offer of employment, including as he did, the clauses to which I have referred… he should have thought of it when… he sought to deceive his colleagues and superiors as to his intention from 8 December 2006 to 12 January 2007… [and] sought to misuse confidential information of Brink’s. The Court ultimately held this was a “clear case” for the grant of the injunction. In particular, the conduct of Mr Kane gave rise to a “very significant apprehension” that he would, unless restrained, abuse the obligations he still owed to Brink’s. The Court granted the injunction sought by Brink’s. Principle 8: Restraint payments are no guarantee of enforceability Case: Sear v Invocare Australia Pty Ltd [2007] WASC 30 In this decision, the Supreme Court of Western Australia declared a restraint of trade clause to be unenforceable because it was unnecessarily wide in its geographical

coverage. This decision is notable because it indicates that a restraint for a longer

period than is usual in an employment context may be entertained by the Courts if entered into in conjunction with a sale of a business. Facts: The former employee, Ms Sear, had been a shareholder and manager in a family funeral business and established within that business a distinctive brand for personalised funeral services. Invocare Australia Pty Ltd (Invocare) acquired the funeral business in 1994, agreeing to employ Ms Sear for 10 years. Ms Sear’s employment agreement included a restraint under which she agreed to not be involved in any business providing funeral and related services or in any business that was similar or competitive to Invocare during the period of employment, and for up to 5 years afterwards. The geographical area to which the restraint applied

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RESTRAINTS OF TRADE: TIPS AND TRAPS FOR ACCOUNTANTS AND FINANCIAL PLANNERS __________________________________________________________________________________ PRESTIGE LEGAL & CORPORATE SERVICES PTY LTD Page 12 of 16 was described by reference to various distances from Invocare’s premises, which were located both in metropolitan and rural areas. Ms Sear’s employment continued throughout the 10 year period but was not then extended by Invocare. Following the cessation of her employment, Ms Sear wanted to establish a business in the funeral services industry and applied to the Court for a declaration that the restraint provision in her employment contract was unenforceable on the basis that it was uncertain and too wide. In each of the 10 years of her employment with Invocare, Invocare paid Ms Sear $50,000 to compensate her for the restraint ‐ a total of $500,000. Invocare claimed this should be repaid to it if the restraint was found to be unenforceable. Decision: The Court confirmed the basic rule that every restraint is presumed to be unenforceable but that this presumption can be rebutted if the restraint is reasonable in the interests of the parties and the public interest. It also confirmed that such clauses are to be construed with reference to the time when the agreement about the restraint is entered into. The restraint contained step clauses regarding its duration and geographic application, allowing the Court to sever provisions that were determined to be too wide in favour of a narrower provision. Ms Sear argued that the restraint was therefore void for uncertainty. The Court did not accept this argument. Ms Sear also argued that the restraint was unreasonable when weighing the interests of Invocare in protecting its customers against Ms Sear’s interest in her

wn connection with them. The Court noted that the purchaser of a business is

entitled to protect its purchase by entering into a restraint to protect itself from competition from the vendors and its managers. The Court further noted it would not be appropriate for it to consider a covenant in an employment contract in isolation from the overall context of the business sale. The Court gave detailed consideration to the significant capital value for which Invocare purchased the business. It also considered Invocare’s need to protect its

investment. The Court found the brand of the business with which Ms Sear was

associated was an interest that Invocare could legitimately seek to protect through a restraint clause with Ms Sear. On that basis, the Court found the limitation in the restraint as to the description of business to be reasonable. However, the Court declared that the restraint was wider in its geographical scope than was necessary to protect the interests of Invocare’s business. The narrowest geographical area to which the restraint applied was an area within a five kilometre radius of any of Invocare’s premises, which included a premises in a regional area. However, the brand in which Ms Sear had been involved only operated from Invocare’s metropolitan premises: not from country offices. The Court also commented that there was no consideration paid for the continuation of the

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RESTRAINTS OF TRADE: TIPS AND TRAPS FOR ACCOUNTANTS AND FINANCIAL PLANNERS __________________________________________________________________________________ PRESTIGE LEGAL & CORPORATE SERVICES PTY LTD Page 13 of 16 restraint after cessation of the employment, notwithstanding that $50,000 had been paid for each year during her employment. The Court granted Ms Sear the declaration she sought and refused Invocare’s counter‐claim for the repayment of the $500,000.The employment contract did not provide for such repayment, and Ms Sear had carried out her employment duties for the agreed duration of her contract. Principle 9: Reasonableness of each restraint clause depends on its own circumstances Case A: Miles v Genesys Wealth Advisers Ltd [2009] NSWCA 25 Facts: In this case, the former employee, Mr Miles, was a Managing Director of a division

f Genesys Wealth Advisers Ltd (Genesys). That division provided services to

financial planning firms (Member Firms), such as providing financial planning software and professional development seminars. In his role, Mr Miles had access to confidential information of Genesys that identified which Member Firms were generating the most income for Genesys. On his departure from Genesys, Mr Miles entered into a deed of release that contained 30‐month non‐solicitation and non‐ compete restraints in exchange for the preservation of Mr Miles’ long term incentive plan benefits with Genesys. Decisions: At first instance, the trial judge upheld the restraint clauses, ordering that Mr Miles be restrained from:

engaging in a business substantially similar to or competitive with Genesys, in a

capacity where he may be able to use any of Genesys’ confidential information to the detriment of Genesys (the non‐compete clause), and

soliciting Genesys’ clients or customers with whom he had dealt in his

employment (the non‐solicit clause). The phrase “clients or customers” was held to refer to Member Firms rather than Genesys’ retail customers. Appeal decision Scope of “client or customer” The Court of Appeal upheld the trial judge’s finding that the deed’s reference to “clients or customers” was intended to cover solicitation of Member Firms rather than retail customers of Genesys. Could Mr Miles have used confidential information to Genesys’ detriment? Mr Miles argued that many of the documents covered by the restraint were not confidential and out of date. He also argued that he had forgotten much of the detail since he left Genesys because he did not take any documents with him.

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RESTRAINTS OF TRADE: TIPS AND TRAPS FOR ACCOUNTANTS AND FINANCIAL PLANNERS __________________________________________________________________________________ PRESTIGE LEGAL & CORPORATE SERVICES PTY LTD Page 14 of 16 The Court of Appeal rejected these arguments, finding that much of the information was confidential and plainly could have been used to Genesys’ detriment. The information could be used to target and formulate attractive offers to Member Firms that had vulnerable client relationships with Genesys, and to structure a competitor company’s business plan by using Genesys’ business plan. Non‐solicit clause Mr Miles argued that the non‐solicit restraint merely stifled competition rather than protecting Genesys’ legitimate business interests. He further argued that the duration of the restraint (30 months) was too long. The Court of Appeal held that the non‐solicit restraint was reasonable. The information received by Mr Miles in his capacity as managing director was highly confidential and equipped a competitor to attack Genesys’ weak points and damage its relationships with Member Firms. Mr Miles received independent legal advice when he entered into the deed and received value in return for the restraint, namely: a proportion of his shares under a long term incentive plan. In regards to the length of the non‐solicit restraint, Mr Miles’ relationship with Member Firms at a senior level was strong and had been built up over almost 20

years. His ability to poach Member Firms would inevitably take a long time for

Genesys to “counter and neutralise”. Considering the quality and length of this customer connection, a restraint of 30 months was held to be appropriate and reasonable. Non‐compete clause While all appeal judges agreed that the restraint on soliciting Member Firms was reasonable, their Honours differed in their assessment of the non‐compete clause. One judge (in the minority on this point) held the non‐compete clause was a “blanket” restraint on Mr Miles working in his area of expertise, which was unnecessary given the existing restriction in the non‐solicit clause on dealing with Member Firms. It was unlikely that, such a significant time after his employment had ended, Mr Miles would have remembered sufficiently detailed confidential information that he could use to Genesys’ detriment. However, the majority judges upheld the non‐compete clause, finding that the non‐ solicit clause was insufficient to protect Genesys’ legitimate business interests. It would be very difficult for Genesys to prove a breach of the non‐solicit clause, because Mr Miles could find ways of disguising his approaches to Member Firms. Mr Miles would have remembered important confidential information that he could use to Genesys’ detriment, such as the details of clients with whom he had worked closely, even though he did not take any documents with him when he left. Accordingly, Mr Miles’ appeal was dismissed, and both the non‐solicit and non‐ compete aspects of the restraint were held to be valid and enforceable against him.

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RESTRAINTS OF TRADE: TIPS AND TRAPS FOR ACCOUNTANTS AND FINANCIAL PLANNERS __________________________________________________________________________________ PRESTIGE LEGAL & CORPORATE SERVICES PTY LTD Page 15 of 16 Case B: Birdanco Nominees Pty Ltd v Money [2012] VSCA 64 Facts: Mr Money was employed as a junior trainee accountant at Bird Cameron Chartered

Accountants. His employment contract contained a post‐employment restraint,

prohibiting him from providing defined services to any client of Bird Cameron for whom he had provided services during the final 3 years of his employment. “Services” were defined as “the practice of chartered accountants, taxation agents, business advisers and activities of a related nature”. If breached, the clause required Mr Money to pay Bird Cameron liquidated damages equal to 75% of the fees incurred by the client for services rendered by Bird Cameron in the last full financial year. Mr Money resigned from his employment with Bird Cameron and commenced part‐ time employment as a qualified accountant with the Szencorp group, who was a major client of Bird Cameron, and with accounting firm Benjamin King Money. The Szencorp group subsequently terminated its retainer with Bird Cameron and sought accounting services from Benjamin King Money. Bird Cameron commenced proceedings against Mr Money in the County Court for breach of the restraint of trade agreement, claiming the liquidated damages sum. Decisions: At first instance The County Court dismissed Bird Cameron’s claim. The Court held the restraint went far beyond what was reasonable to provide adequate protection to Bird Cameron’s legitimate business interests and could therefore not be justified. Furthermore, the Court held that given the wide circumstances in which a breach of the restraint clause might arise, the liquidated damages sum was not a genuine pre‐estimate of Bird Cameron’s loss and damage. Bird Cameron appealed. Court of Appeal decision The Victorian Court of Appeal upheld the terms of the restraint in Mr Money’s employment contract. The Court of appeal determined that the restraint clause was relatively narrow in the sense that it did not prevent the employee from going into practise as an accountant, nor did it limit his provision of accounting services to the entire client base of his former employer. Rather, the restraint was limited to the provision of services to those particular clients of the employer with whom he has an established

relationship. The Court commented that that was precisely kind of connection which,

the authorities make clear, the employer is entitled within reasonable limits, to protect. The Court commented that in the relationship held between an accountant and client is not so unlike the relationship between a solicitor and client. There exists a risk

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RESTRAINTS OF TRADE: TIPS AND TRAPS FOR ACCOUNTANTS AND FINANCIAL PLANNERS __________________________________________________________________________________ PRESTIGE LEGAL & CORPORATE SERVICES PTY LTD Page 16 of 16 whereby the employee has the opportunity‐ and the obligation‐ to develop a personal relationship with the client‐ and to acquire knowledge and understanding of the client’s affairs. These are the very things which are likely to make it attractive to the client to leave the former employer when the employee leaves, in order to maintain that relationship and take advantage of that accumulated knowledge and understanding. The Court went onto say that when these considerations are brought to bear, it seems that [a] three year restraint is perfectly reasonable. What followed were

rders from the Court confirming the non‐solicitation restraint clause.

Did Mr Money provide the defined services to the client? Mr Money argued the restraint was not enlivened because he was not providing the defined “Services” to the client as a qualified accountant. The Court disagreed, finding that the professional accounting services he provided under the supervision

f a qualified accountant were sufficient to establish a relationship of client and

accountant between him and the Szencorp group. The Court held that a “client connection” of a “continuing and recurring” kind existed between Mr Money and the Szencorp group such that the restraint clause was enlivened. Did the restraint protect Bird Cameron’s legitimate interests? The Court found that the customer or “trade” connection Bird Cameron had with those of its clients who dealt directly with Mr Money was a legitimate interest capable of contractual protection by way of restraint. Was the restraint reasonable? The Court held that the restraint was “relatively narrow,” being limited to those particular clients of Bird Cameron with whom Mr Money established a “continuing relationship”. The restraint did not prevent Mr Money from competing with his former employer, as Mr Money was permitted to service Bird Cameron’s clients, subject to paying the relevant liquidated damages sum. Furthermore, the Court found that three years is a reasonable time during which Bird Cameron was entitled to protection against Mr Money soliciting Bird Cameron clients. Was the liquidated damages clause a penalty? The Court held that in light of the narrow circumstances in which this restraint clause could be enlivened, the liquidated damages sum was a genuine pre‐estimate of the loss likely to be suffered by Bird Cameron. Having decided to uphold Bird Cameron’s appeal, the Court ordered Mr Money to pay damages, interest and Bird Cameron’s legal costs.