While non-competition restraints can be difficult to enforce, courts may enforce a two year non-competition restraint, with no geographical limitations, if the nature of the employer’s business and the employee’s role in that business justify such a broad restraint. Both employers and employees should be mindful of this and seek legal advice on restraints, particularly where the employee is likely to gain intimate knowledge of critical business information such as the employer’s client base and retention and business pursuit strategies.
HRX Holdings Pty Ltd (HRX) was a human resources outsourcing and consulting company. Mr Pearson was a key component of the success of HRX and was regarded as an innovator in the area of recruitment solutions. As the primary presenter to potential clients of HRX, he had access to virtually all of HRX’s confidential business information, including techniques and facilities used to sell services and HRX’s client retention strategies.
Mr Pearson’s service agreement with HRX purported to preclude him from accepting employment with, or engaging in a business or operation “similar to, or competitive with” HRX for a period of 2 years after termination of his employment with HRX, with no geographical limitation on such restraint. HRX sought to enforce this restraint clause when Mr Pearson proposed to take up employment at one of HRX’s direct competitors.
Mr Pearson appealed to the Full Court of the Federal Court against the primary judge’s decision, arguing that any legitimate interest of HRX was adequately protected by the non-solicitation restraint and confidentiality obligations in the service agreement and the employment restraint was therefore unenforceable at common law.
In dismissing the appeal, the Court found that:
- HRX’s interest in protecting its customer connections was sufficient to justify a restraint on employment with, or engagement in a business similar to or competitive with, HRX’s business. Such interest would not be protected by the non solicitation clause in the service agreement as, given Mr Pearson’s reputation and the fact that his principal function with HRX was the development and retention of the customer base and pursuit of new business, customers may choose to move with Mr Pearson without any solicitation by him. Further, the non-solicitation clause would only apply if a customer ceased or reduced its business with HRX, but not if it brought new business to Mr Pearson;
- HRX’s interest in protecting its customer base also went beyond HRX’s interest in its confidential information (and would not therefore be adequately protected by the confidentiality provisions in the service agreement);
- The fact that Mr Pearson received shares in HRX and also payment for 21 of the 24 months of the restraint (which had never before been agreed with an HRX employee) evidenced a reasonable commercial arrangement between the parties;
- The nature of the business of HRX was such that the needs of customers in say Hong Kong can be serviced by persons in Australia. As such, the lack of express geographical restraint did not render the restraint unreasonable;
- The two year restraint accommodated a normal 2 year contractual cycle within the HRX business; and
- Given the nature of human resource recruitment, there appear to be no geographical barriers to such a market. Further, the public interest is enhanced by arrangements which promote the expansion of Australian business overseas (and the engagement of Mr Pearson on terms which ensured his pursuit of business overseas for HRX).
See the case.