Background
Facts
Decision
Comment


Background

In Seven Network v Warburton the New South Wales Supreme Court upheld a restraint of trade that had the effect of delaying a leading television executive's plans to move from Channel Seven to competing network Channel Ten with effect from July 14 2011. Although he shortened the time period, Justice Pembroke found that the restraint contained in James Warburton's terms of employment was reasonable and restrained him from joining Channel Ten until January 1 2012.

Warburton unsuccessfully ran counterarguments that:

  • the restraint was invalid;
  • Channel Seven was prevented from enforcing the terms of the restraint because of a conversation between him and Seven's chief executive officer, David Leckie, on February 23 2011; and
  • Channel Seven had repudiated his employment contract (ie, had shown an intention of not being bound by its terms) by requiring Warburton to leave the premises, quarantining him from staff and clients and providing him with no work to do.

The court noted that under the terms of his employment contract, Channel Seven was not required to provide Warburton with work of a particular kind, or indeed any work at all if it so chose.

Facts

Warburton held the position of chief sales and digital officer of the Seven Media Group. He had general responsibility for the 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 attracted advertisers which paid substantial sums to Seven. Advertisers contracted with Seven either directly or through agency buying groups.

While performing his role, Warburton had daily meetings to discuss sales revenue results, sales strategy, client management issues and agency management issues. The court also noted that Warburton had a sound grasp of the terms of trade entered into by Seven 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'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, Warburton was bound by a management equity participation (MEP) deed, which was designed to protect the multimillion-dollar investments of Seven and private equity firm Kohlberg Kravis Roberts & Co (KKR) in Seven. The terms of the MEP deed imposed lengthy post-employment restraints on executive participants from competing with Seven or its subsidiaries.

Seven sought to restrain Warburton from joining a competitor until 12 months after the expiry of his employment contract – that is, 12 months after October 14 2011. 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 Seven's premises (March 2 2011) and should run for only six months.

Decision

The terms of the MEP deed 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 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. Seven contended that Warburton should be restrained for a further 12 months following the expiry of his employment contract on October 14 2011 – that is, until October 14 2012. The court held that that was unreasonable, given that Warburton had already been excluded from Seven's premises and had been quarantined from Seven's confidential information, clients and staff since March 2 2011. The court concluded that the words 'ceases to be employed or engaged' in the MEP should be read as applying from March 2 2011 onwards, despite Seven continuing to be under an obligation to pay Warburton under his employment contract until October 14 2011.

The judge found that the only logical reason for the protection afforded by the 12-month restraint was Warburton's access to confidential information, staff and clients during the course of his employment. So that there was no doubt, the judge stated that he had formed the view that any restraint that extended beyond January 1 2012 would exceed what was necessary for the reasonable protection of the plaintiffs' legitimate interests.

As a general rule, the 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 Warburton will be prevented from earning a living in the television industry will be relatively short, from October 14 2011 to January 1 2012.

Warburton's arguments that the restraint clause was void for uncertainty did not succeed. The judge 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 the circumstances.

In order for a post-employment restraint to be enforceable, an employer must have a legitimate interest to protect. On analysing 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 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.

Comment

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 Warburton's commencement at Network Ten, there were some unfavourable findings about Seven's chief executive officer as a witness, and that Warburton's evidence about the meeting on February 23 2011 was to be preferred. Ultimately, however, that issue was something of a sideshow.

For further information on this topic please contact Tom Griffith at Piper Alderman by telephone (+61 2 9253 9999), fax (+ 61 2 9253 9900) or email (tgriffith@piperalderman.com.au).