Key points

• A post-employment non-compete restraint will only be enforceable where there are special circumstances that demonstrate that the clause is reasonably necessary to protect a legitimate business interest of the employer requiring protection (e.g. confidential information).

In a high-profile dispute involving two multinational organisations, the Victorian Court of Appeal has confirmed that post- employment restraint of trade provisions will only be justified if they are reasonably necessary to protect an employer’s legitimate business interests.1 This case serves as a strong reminder to employers that a court will not impose broad or ambiguous post- employment restraints on employees. 

Background

On 7 December 2015, Ms Nicole Peck signed a contract of employment with Just Group Limited (Just Group) for the role of Chief Financial Officer. Just Group is the parent company of popular brands including Smiggle, Peter Alexander, and Portmans. Ms Peck commenced the position in early January 2016, however, shortly after on 2 May 2016, Ms Peck tendered her resignation.

Prior to her resignation, Ms Peck had been negotiating with Cotton On Group Services Pty Ltd (Cotton On) in respect of an offer of employment as their General Manager. Ms Peck only informed Just Group of her intention to commence employment with Cotton On shortly prior to her last day of employment.

On 2 June 2016, Just Group commenced proceedings in the Supreme Court of Victoria seeking injunctive and declaratory relief to enforce the post-employment restraint clauses in Ms Peck’s contract of employment. The restraint clauses in Ms Peck’s contract were intended to prevent Ms Peck from working for a competitor, in this case Cotton On, for a specified period of time after her employment with Just Group ended.

The central issue in the proceedings was whether the post-employment restraints in Ms Peck’s contract of employment were enforceable, and accordingly whether she could be prevented from working for Cotton On for the period of the restraint.

The restraint

The primary restraint which underpinned Just Group’s claims against Ms Peck included restricted activities within Australia and New Zealand during her employment and for a period of between 12 and 24 months after its termination. These restricted activities were set out as follows:

Restricted Activities—

Personal Engagement means directly or indirectly:

(a) being engaged, concerned or interested in;

(b) assisting or advising in respect of; or

(c) carrying on any activity:

(i) which is the same as, or similar to, any part of the specialty brand and fashion business of a Group Company in which you were involved, or in respect of which you received Confidential Information, in the Connection Period; (the First Limb) or

(ii) for or on behalf of any of the entities operating the brands listed in Annexure A, their assignees, successors or transmittees (from which, it is acknowledged, Just Group and the Group have a legitimate interest in withholding their confidential information and their connections with customers, employees and suppliers) (the Second Limb).

Decision at first instance— Supreme Court of Victoria

At the outset, the Court highlighted the basic principles governing restraint of trade clauses, particularly noting that:

• restraint of trade provisions that impose obligations on an employee after the employment relationship has ended are prima facie void and unenforceable. This is because they are contrary to the public policy interest of every person being able to carry out his or her trade freely; and

• a post-employment restraint will only be justified in special circumstances, where the restriction is reasonably necessary to protect the former employer’s legitimate business interests.

In considering whether the postemployment restraints in Ms Peck’s employment contract were enforceable, Justice McDonald considered each part of the restraint clause in detail in order to determine its impact on Ms Peck and whether this was reasonable.

Interpretation of the First Limb

Justice McDonald held that the First Limb went well beyond that which was reasonable to protect Just Group’s legitimate interests. Under the contract, Ms Peck was restrained from engaging in any activity which “is the same as, or similar to” any part of the business of Just Group. His Honour determined that the effect of this was to prevent Ms Peck from being employed by any retailer of apparel or stationery in any position. He considered this to be too broad because it prevented Ms Peck from taking up employment with competitors in positions where confidential information acquired during her time with Just Group was irrelevant to the new employer.

Accordingly, his Honour concluded that this restraint was unreasonable.

Just Group submitted that the term “engaged, concerned or interested in” in the First Limb did not cover employment in any role and should be interpreted to only include roles to which the confidential information that Ms Peck was expected to acquire at Just Group would be relevant. They argued that it would be fanciful if Ms Peck accepted a position with a competitor as a checkout operator or shelf stacker, and therefore the clause should be construed to exclude “improbable contingencies”.

Justice McDonald rejected this argument. His Honour reasoned that if the First Limb is unreasonable in any of the circumstances in which it could operate, then it is unreasonable and you cannot exclude unreasonable events which fall within the terms of the clause merely because they are unlikely to eventuate.

In assessing the reasonableness of the restraints, Justice McDonald said that the disparity between the notice periods in the contract’s termination provisions and the restraint provisions was a relevant factor. Under Ms Peck’s contract, Just Group had the right to terminate her employment in the first six months of her employment on one month’s notice, which triggered post- employment restraint periods of between 12 months and two years. His Honour found that this disparity, even where the restraint was confined to the minimum of 12 months, rendered the restraint unreasonable.

Interpretation of the Second Limb

The Second Limb prevented Ms Peck from being engaged in “any activity...for or on behalf of any of the entities operating the brands listed in Annexure A”. There were 50 brands/entities listed in Annexure A, including Cotton On. In order to determine whether the clause was reasonable, the Court had to consider whether each entity in Annexure A actually competed with Just Group, not just Cotton On. However, Just Group only led evidence regarding the commercial activities of four of the 50 named brands/entities (Target, Big W, Kmart, and Cotton On).

Just Group asked the Court to infer that, in the absence of any contrary evidence, the other 46 entities in Annexure A only had commercial activities that competed with Just Group. The Court found that it was not appropriate to draw an inference in favour of Just Group that these operating entities only have commercial acitivites that compete with Just Group, especially in circumstances where one of the entities that evidence was provided for, Woolworths Ltd, has businesses which do not compete with Just Group, yet Ms Peck would be precluded from working in any of those businesses. 

Justice McDonald found that this restraint would prevent Ms Peck from taking up employment in a role where confidential information acquired by her during the course of her employment with Just Group would be of no relevance to a new employer, and accordingly this was an unreasonable restraint.

Severance

Just Group submitted that the validity of the Second Limb could be secured by severing all of the brands/entities listed in Annexure A, save for Cotton On. Just Group submitted that when read in conjunction with Annexure A, the Second Limb created 50 discrete covenants and that the word “any” in the phrase “any of the entities operating the brands listed in Annexure A” should be read as any one”.

However, Justice McDonald found that “any” means “no matter which”, and so defined “any of the entities operating the brands listed in Annexure A” as a single covenant restraining Ms Peck from working for any, i.e. no matter which, of the brands/entities listed in Annexure A.

His Honour noted that three clauses within the restraint utilised the drafting technique of cascading obligations, which expressly contemplated the prospect of severance in the event of a finding of invalidity. For example, the restraint period had cascading periods of 24,18, or 12 months after termination. Justice McDonald said that if the parties had intended that the Second Limb in conjunction with Annexure A created 50 separate covenants capable of severance, it would have been a simple matter for the contract to have expressly so provided.

On this basis, Justice McDonald found the clauses were not severable. In any case he said he would have refused to sever all of the brands/entities from the list.

Restraints of Trade Act 1976 (NSW)

In considering the severance of the entities listed in Annexure A, Justice McDonald commented that Just Group had conducted its case by focusing very heavily upon the circumstances of the alleged breach, i.e. Ms Peck’s proposed employment with Cotton On. He said that if the current proceedings were subject to the Restraints of Trade Act 1976 (NSW), Just Group could validly contend that the reasonableness of the restraint should be assessed by reference to Ms Peck’s proposed employment with Cotton On. Under the Restraints of Trade Act 1976 (NSW), the court is able to focus its attention on the actual breach (i.e. working for Cotton On), rather than hypothetical breaches that might apply if the restraint were given its widest effect (i.e. working for any of the brands named in Annexure A).

However, the restraint in this matter was considered under Victorian law. Contrary to the position under Restraints of Trade Act 1976 (NSW), a Victorian court cannot ignore the fact that a restraint goes beyond that which is reasonable. As at the date of the proceedings, Cotton On was one of 50 brands/entities listed in Annexure A and the reasonableness of the restraint created by the Second Limb had to be assessed by reference to all 50 brands/ entities. Justice McDonald reiterated that there was no evidence to suggest that the level of competition between Just Group and those other brands/entities was on par with the competition which exists between Just Group and Cotton On in order to render the clause reasonable.

The Victorian Supreme Court ultimately found that all the restraints imposed on Ms Peck were unenforceable.2

Appeal—Victorian Court of Appeal

Shortly after Justice McDonald handed down his decision, Just Group lodged an appeal which was heard by the Victorian Court of Appeal in December 2016. The appeal was dismissed, with the Court of Appeal unanimously upholding the decision of Justice McDonald. In its judgement, the Court of Appeal sent a strong message to Just Group and the public stating, “the courts are referees, not players; they are not supposed to waste their time adapting illegal covenants at the instance of those who seek to benefit from the illegality”.

Bottom line for employers

• This case is a clear reminder for employers that in circumstances where a post-employment restraint of trade provision is unclear or ambiguous, it is likely to be construed contrary to the employer’s interests. It is important that terms within a restraint of trade provision are unambiguous and defined where necessary.

• A restraint should only prevent an employee from working in a role with a competitor where the confidential information they acquired with their previous employer will be relevant and there is a real risk that it will be misused. If the post-employment restraint provision is broader than this, there is a risk that a court will consider it unreasonable to protect the employer’s legitimate business interests.

• Employers in New South Wales may be able to rely on the Restraints of Trade Act 1976, which empowers the court to read down a restraint that would otherwise be invalid. However, this case demonstrates that the courts will not otherwise be inclined to re-write poorly drafted restraints. Contracts containing restraint of trade provisions should therefore be prepared to apply to the laws of New South Wales in order to have the benefit of the Restraints of Trade Act 1976 (NSW). This will allow the restraint to be drafted in broader terms, but only require an employer to show that the restraint is reasonable in the circumstances of an actual breach.

• Courts may have regard to any disparity between contractual notice of termination periods and post-employment restraint periods in assessing the reasonableness of the post-employment restraint.