Clothing giant Just Group Limited (JGL) recently sought to enforce an injunction against former Chief Financial Officer (CFO), Ms Nicole Peck. Ms Peck had been employed with JGL just five months before she was approached and accepted employment in a similar role with JGL’s direct competitor, Cotton on Group Services Pty Ltd (Cotton On).
On 2 June 2016, JGL commenced proceedings in the Supreme Court of Victoria and from 30 August to 5 September a five (5) day trial ensued. During the trial the fundamental issue for consideration was whether the postemployment restraints in Ms Peck’s contract were enforceable. The restraints restricted Ms Peck from working with 50 brands/entities for a maximum period of 24 months and a minimum period of 12 months.
The restraints operated to restrict Ms Peck from engaging in, assisting or advising in respect of or carrying on any activity:
- which was the same as, or similar to, any part of the speciality brand and fashion business of JGL in which Ms Peck was involved, or in respect of which she received confidential information (First Limb); or
- for or on behalf of any of the 50 entities (including Cotton On) listed in Annexure A, including their assignees, successors or transmittees (Second Limb).
At trial JGL claimed that Ms Peck had been exposed to intimate knowledge of JGL’s business operations during her tenure and was therefore “indelibly fixed” with JGL’s confidential information. It then sought to have the court read down the restraint to apply only to Ms Peck’s prospective employment at Cotton On, which it submitted was reasonable given the “fierce” competition between the two companies.
His Honour Justice Michael McDonald accepted that Ms Peck had been privy to highly sensitive commercial information during her employment with JGL. He further accepted that JGL had a legitimate interest in protecting that information. Nonetheless, he found that the evidence presented did not advance JGL’s case that the restraints imposed on Ms Peck were necessary to afford such protection.
In assessing the reasonableness of the restraint Justice McDonald observed that the First Limb of the restraint effectively prevented Ms Peck from being employed by any retailer of apparel or stationary, in any capacity. Properly construed, this would encompass a scenario where Ms Peck was engaged as a checkout operator or a shelf stacker.
Further, his Honour observed that enforcing the Second Limb of the restraint would limit Ms Peck from engaging in employment with any of the 50 companies and/or their related entities, including employment in a position in which confidential information of JGL would be of no relevance to a new employer. Justice McDonald used the example of listed competitor, Target, which is owned by West Australian conglomerate Wesfarmers. He suggested that the proper construction of the clause was so broad it would arguably prevent Ms Peck from working in a Wesfarmers operated coal mine.
Finally, Justice McDonald highlighted that the cascading restraint period ranging from 12 – 24 months was unreasonable; having regard for the 1 month notice period upon which Ms Peck’s employment could have been terminated during her initial 6 month probation.
Justice McDonald found that the restraint imposed on Ms Peck was wholly invalid and unreasonable in the circumstances. Ms Peck is now set to commence work at Cotton On on Monday, 24 October 2016, though it is expected that JGL will appeal the decision.
WHAT DOES THIS MEAN FOR EMPLOYERS?
Although post-employment restraints are commonplace in employment contracts there is a presumption at common law that they are unenforceable. This presumption can be rebutted if it can be proven that the restraint is necessary to protect a legitimate business interest. A reasonable restraint is often achieved through a “cascading” or a “ladder” clause which contain a series of overlapping restraints. In this case, although JGL had drafted a cascading clause which allowed for maximum and minimum distances and periods of restraint, the actual drafting of the clause, the extent to which JGL sought to restrain Ms Peck and the extensive list of companies detailed in Annexure A rendered the whole clause unenforceable.
In dismissing JGL’s case, his Honour contemplated that if the restraint clause operated solely by reference to Cotton On, the evidence may have justified the imposition of the restraint upon Ms Peck. However, at common law, unqualified by statute (which operates only in NSW), a court cannot rewrite the terms of a restraint to make it reasonable. The restraint must be assessed by reference to what was contemplated at the date the contract was entered into (ie a restraint of trade against 50 entities), not at the date of breach.
This case has demonstrated the importance of carefully drafted restraint of trade clauses in employment contracts. It serves as a timely reminder to employers to consider revising their restraint clauses to ensure that they have a greater chance of successfully enforcing them if required to do so.