The Red Bull decision places a strong emphasis on upholding restraints as part of a bargain between employer and employee.
A recent decision of the Supreme Court of New South Wales demonstrates a willingness of the court to hold executives to their agreement not to compete in certain circumstances.
In Red Bull Australia Pty Ltd v Stacey interlocutory relief enforcing restraint of trade clauses against two former executives was available, even though the relevant restraint periods were due to expire the following month.
Background: employment contracts and restraint clauses
Red Bull Australia Pty Ltd, an energy drink manufacturer, employed Mr Stacey and Mr Graebner as General Manager and Marketing Director, respectively. Under their employment contracts, both executives agreed to a term that they would not directly or indirectly be engaged in any business in competition with or of a similar nature to that of Red Bull after termination of their employment.
On 30 November 2010, both employees were given notice that their employment would be terminated followed by a period of restraint. Mr Stacey was given a six-month notice period followed by a six-month restraint; Mr Graebner was given a one-month notice period followed by a twelve-month restraint. Both restraint periods would end on 30 November 2011.
Directors and employees of another company, Calidris Australia
Following termination of their employment and during their periods of restraint, both defendants became directors and employees of Calidris 28 Australia & New Zealand Ltd, a manufacturer of products described as “a new generation of energy drinks”. Evidence indicated that Calidris Australia would launch an energy drink on the Australian market in October 2011.
Legal proceedings brought by Red Bull
Red Bull sought interlocutory relief against Mr Stacey and Mr Graebner for breaching terms of their respective employment contracts. In particular, Red Bull argued that the specific restraints (of six and 12 months respectively) were not unreasonable given the senior positions held by both defendants.
Both executives had also independently entered into a Deed of Release with Red Bull after notice of their termination was given. A term of the deed stated that the deed contained the entire agreement between the parties and superseded all earlier conduct. The defendants contended that this deed overrode and ousted the restraint clauses in their contracts of employment.
Decision of Supreme Court of NSW
Granting of interlocutory relief requires the plaintiff to:
first establish that there is a serious issue to be tried; and
secondly, persuade the court that the balance of convenience favours the grant of interlocutory relief.
Seriously arguable case?
In this case, the defendants accepted there was “a seriously arguable case”. Justice Rein accepted that the Deed of Release raised an issue of construction, however, the arguments relating to the Deed as well as the representations made to the defendants were “arguable [but] not particularly strong”.
Balance of convenience in favour of granting injunction?
When considering the balance of convenience in granting the injunction, on the one hand, the defendants gave undertakings to the court that they would cease engagement with Calidris and any other competitor to Red Bull until the restraint clauses expired. Calidris Australia, although not a party to the proceedings, had instructed that it was also willing to undertake to exclude the defendants from the business until after 30 November 2011. Importantly, it was also accepted by Justice Rein that it would be a “significant interference in their plans” to force the defendants to resign from Calidris for the brief period of time until the expiry of the restraint.
On the other hand, the factors militating in favour of the injunction were several.
First, the plaintiff had given an undertaking as to damages which would cover the lost income of the defendants in the event that the interlocutory order was found to be wrongly granted at a final hearing. There was no evidence that Mr Stacey and Mr Graebner would not be re-engaged as directors or employees at the end of the restraint period, or after a court hearing should they be successful in defending the restraint case against them.
Second, the defendants, in their new capacity as directors of Calidris Australia, were effectively engaged to “run the company in Australia”. This put them in conflict with their obligations under the restraint clauses in their employment contracts with the plaintiff, assuming that those restraints are valid and enforceable.
Third, Justice Rein found that the undertakings by the defendants were ineffective in dispelling all concern that the defendants might act contrary to the interests of Red Bull. Justice Rein pointed to the previous decision of Cactus Imaging Pty Ltd v Peters, which enforced the idea that the “plaintiff is advantaged by a restraint clause in being able to stop somebody working for a competitor without having to prove exactly what the employee, or the former employee has done or is doing for the competitor”. Justice Rein considered that the plaintiff’s claim that Calidris was a competitor, “even if a relatively small one, is very likely to be made out on the evidence”.
Finally, Justice Rein had regard to the senior positions held by the defendants at Red Bull, their level of remuneration under their contracts, and said that the restraints were “part of the bargain”.
Based on the evidence of the plaintiff, it was appropriate to force the defendants to give up their jobs until the restraint period ended.
This case shows that a short period between the judgment and the expiry of the restraint period is a matter which “cuts both ways”. Despite potential inconvenience to an employee, the decision of Justice Rein places a strong emphasis on upholding restraints as part of a bargain between employer and employee.
This article was first published in the Employment Law Bulletin, May 2012