Partner, Tom Griffith examines the case Seven Network v James Warburton in which the Supreme Court of NSW upheld a restraint of trade that has the effect of delaying a leading television executive’s plans to move from Channel Seven to competing network Channel Ten with effect from 14 July 2011. Although he shortened it, Justice Pembroke found that the restraint contained in Mr Warburton’s terms of employment was reasonable, and has restrained him from joining Channel Ten until 1 January 2012.
Mr Warburton unsuccessfully ran counter arguments:
- that the restraint was invalid
- that Channel Seven was prevented from enforcing the terms of the restraint because of a conversation between him and Seven’s CEO David Leckie on 23 February 2011, and
- that Channel Seven had repudiated his employment contract (had shown an intention of not being bound by its terms) by requiring Mr Warburton to leave the premises, quarantining him from staff and clients, and providing him no work to do.
The Court noted that under the terms of his employment contract, Channel Seven was not required to provide Mr Warburton with work of a particular kind, or indeed any work at all if it so chose.
Mr Warburton held the position of Chief Sales & Digital Officer - Seven Media Group. He had general responsibility for Seven Media Group’s sales revenue generated from a number of businesses including Seven’s free-to-air television network, its digital television stations, Pacific Magazines and Yahoo!7. The Court noted that those businesses attract advertisers who pay substantial sums to Seven Media Group. Advertisers either contracted with Seven directly or through agency buying groups.
Whilst performing his role, Mr Warburton had daily meetings to discuss sales revenue results, sales strategy, client management issues and agency management issues. The Court also noted that Mr Warburton had a sound grasp of the terms of trade entered into by the Seven Media Group with the agency buyer groups and major direct advertisers. He enjoyed good relations with them, regularly met with them, and was involved in making pitches to them. He necessarily knew and understood Seven Media Group’s negotiation strategy and the extent to which Seven was prepared to offer differential rates or discounts and incentives to different buying groups and direct advertisers.
As well as signing an employment contract with Seven, Mr Warburton was bound by a management equity participation deed (MEP deed), which was designed to protect the multi-million dollar investments of Seven Media Group and private equity firm Kohlberg Kravis Roberts & Co (KKR) in Seven Media Group. The terms of the MEP deed imposed lengthy post-employment restraints on executive participants from competing with Seven Media Group or its subsidiaries.
Channel Seven sought to restrain Mr Warburton from joining a competitor until 12 months after the expiry of his employment contract, that is 12 months after 14 October 2011. Mr Warburton sought to argue that the restraint was invalid, but that if it was found to be valid it should run from the date on which he signed his contract with Channel 10 and was required to leave Channel Seven’s premises, 2 March 2011, and should only run for 6 months.
The terms of the MEP deed relevantly provided that a 12 month restraint would be imposed on an employee who ceased to be employed or engaged by a Group company. The Court found that the purpose of the restraint clause was to protect Seven Media Group, Seven Network Limited and KKR for 12 months after an employee had ceased to have access to confidential information, clients and staff to which he would have been exposed in the course of his employment.
There was an initial question of contractual interpretation. The Seven parties contended that Mr Warburton should be restrained for a further 12 months following the expiry of his employment contract on 14 October 2011, that is until 14 October 2012. The Court held that that was unreasonable, given that Mr Warburton had already been excluded from Seven’s premises, and had been quarantined from Seven’s confidential information, clients and staff since 2 March 2011. The Court concluded that the words “ceases to be employed or engaged” in the MEP should be read as applying from 2 March 2011 onwards. That is despite Channel Seven continuing to be under an obligation to pay Mr Warburton under his employment contract until 14 October 2011.
Justice Pembroke found that the only logical reason for the protection afforded by the 12 month restraint was Mr Warburton’s access to confidential information, staff and clients during the course of his employment. Just so that there was no doubt about the question, Justice Pembroke stated that he had formed the view that any restraint that extended beyond 1 January 2012 would exceed what is necessary for the reasonable protection of the legitimate interests of the plaintiffs.
As a general rule, Courts have been reluctant to uphold post employment restraints that have the effect of preventing a person from earning a living. As it is, the period during which Mr Warburton will be prevented from earning a living in the television industry will be relatively short, from 14 October 2011 to 1 January 2012.
Mr Warburton’s arguments that the restraint clause was void for uncertainty did not succeed. Justice Pembroke found that the relevant clause was comprehensible and workable.
The key issue in the case was whether the length of the restraint was reasonable in all of the circumstances.
In order for a post employment restraint to be enforceable, an empoyer must have a legitimate interest to protect. On analysis of all of the relevant facts, the Court found that Seven and KKR had such a legitimate interest. The restraints in the MEP deed were designed to:
- ensure that the investment of each of the senior management participants was not undermined or devalued
- reduce the risk of devaluation of the business by the departure of any executives to work for competitors
- reduce the risk of misuse of confidential information by provision to its competitors, and
- reduce the risk of dissipation or reduction in the customer connection of the business.
The Court took into consideration the considerable confidential and commercially sensitive information to which Mr Warburton had been exposed in his role at Channel Seven.
Another ground in favour of the 12 month (or 10 month) restraint being upheld was the nature of the negotiation cycle that Seven conducted each year with agency buying groups and major direct advertisers. The Court noted that negotiations tended to commence in April/ May of each year and run until November/ December.
The case is a reminder that the terms of post employment restraints can be enforceable, provided that they can be shown to be in aid of the reasonable protection of the legitimate business interests of the employer.
Media focus on the case has acknowledged that while Seven succeeded in delaying Mr Warburton’s commencement at Network Ten, there were some unfavourable findings about Seven’s CEO Mr Leckie as a witness and that Mr Warburton’s evidence about the meeting on 23 February 2011 was to be preferred. Ultimately that issue was something of a side-show.