Background

James Warburton was employed as chief sales and digital officer at Seven Media. An opportunity arose to move across to Network Ten (Ten) as chief executive officer. Mr Warburton accepted that position on 2 March 2011, intending to commence his new role on 14 July 2011.

At the time he signed with Ten, Mr Warburton was subject to an employment contract with the operating company, Seven Network (Operations) Limited (Seven).

As a senior executive at Seven, he was also a subscriber for shares in Seven's holding company through a management equity plan (MEP) and its associated subscription agreement (MEP Deed). The other signatories to the MEP Deed included Seven Group Holdings, the private equity firm KKR and other senior executives of Seven.

The MEP Deed contained a restraint of trade (or 'non-compete') clause which prevented subscribers from working for competing organisations for 12 months after they cease "to be employed or engaged by a Group Company".

Although Mr Warburton did not perform his customary duties at Seven from 2 March 2011 onwards (and was locked out of Seven's premises), absent any termination or repudiation by Seven his employment contract did not legally terminate until 14 October 2011. The period between the cessation of duties and the final legal termination of contract is usually referred to as 'gardening leave'.

Seven sued in an attempt to enforce the restraint of trade clause in the MEP Deed, arguing that Mr Warburton could not start at Ten until 14 October 2012 (being the period under contract until the gardening leave expired, plus the 12-month restraint of trade under the MEP Deed).

Restraint "unreasonable''

Mr Warburton argued that the 12-month restraint period was unreasonable. The judgement reiterates established case law, stating that:

  • in principle, courts will enforce negative covenants that restrain an employee from competing against his or her employer; but
  • such covenants will only be enforced to the extent necessary to reasonably protect the legitimate commercial interests of the party it benefits.

This reinforces the basic position in Australian law that, regardless of the agreement between the parties, Australian courts will independently evaluate the reasonableness of that restraint and enforce the minimum reasonable restraint.

In general, the reasonableness of a restraint is tested at the time of execution. However, even if the restraint is reasonable when considered as at the date of contract, the court always retains a discretion to withhold or limit injunctive relief if a proper basis is established at the hearing.

In this case, enforcement of the restraint was treated as equitable discretionary relief and the question of reasonableness was tested at the time of the hearing.

The reasonableness of a restraint is heavily affected by commercial and practical matters, and the court will evaluate a restraint with reference to the facts of the particular circumstances.

The court examined matters specific to the media industry (including the timing of annual advertising negotiations) and the type of confidential information possessed by Mr Warburton (which included Seven's advertising rates and approach to negotiations).

The court decided that, in the context of the annual cycle of advertising negotiations, Mr Warburton would not be in a position to use any of Seven's confidential information after 1 January 2012 and it would be unreasonable for the restraint to extend past that date.

This outcome reinforces the considerable discretion open to a judge when enforcing a restraint of trade. The 10-month restraint period was not one of the subclauses in the restraint of trade clause, instead reflecting the court's independent assessment of reasonableness as at the date of the hearing.

However, the judgement does give some comfort to private equity investors that a restraint in an MEP subscription agreement is enforceable in principle and that the court will consider the protection of investment at the holding company level as a legitimate commercial interest.

Restraint not "uncertain''

The MEP restraint was drafted in a waterfall clause, with time periods of:

  • 12 months;
  • 9 months; and
  • 3 months.

There were also four geographical areas (ranging from "any region of the world" in which Seven group companies are carrying on business, down to a 300km radius around towns in which Seven group companies are carrying on business).

Mr Warburton argued that the clause was void for uncertainty. This argument failed, although the court did reaffirm that it is theoretically possible for a waterfall clause of this nature to have so many options as to be void for uncertainty.

However, striking out a clause for uncertainty is the court's last resort and requires the clause to be so unclear that it is unworkable. In this case, notwithstanding the number of combinations available, the court was able to give effect to the intention of the parties.

Respresentation from David Leckie that no restraint would be enforced

Mr Warburton also argued that there was a representation from his superior at Seven, David Leckie, that the MEP restraint would not be enforced. As reflected in the judgement, the statement in question was:

"You know me. If you want to leave to do Ten, no dramas. We will let you go and just get on with it. You know what I am like. No dramas."  

Although Mr Leckie denied making the representation, the judge preferred Mr Warburton's testimony and found it had been made in substantially these terms.

However, the judgement rejected the argument that this statement prevented the enforcement of the restraint because:

  • the representation did not convey the legal proposition that the restraint in the MEP would not be enforced (in fact, the judge concluded that neither Mr Leckie nor Mr Warburton were referring to the restraint in the MEP Deed during the conversation);
  • Mr Warburton did not believe that the statement had legal impact and did not sign with Ten in reliance of the statement (and, if he had done so, his reliance would have been unreasonable);
  • Mr Leckie did not expect that Mr Warburton would rely on his statement; and
  • the restraint in the MEP Deed was for the benefit of all the participants, including KKR. Even if the statement had been in an express and binding form, Mr Leckie had not represented himself as able to bind KKR in respect of the MEP (and was in fact not able to do so) and Mr Warburton was aware of this.

Start of restraint (2 March or 14 October)

Seven sought to enforce the MEP's 12-month restraint from the end of the gardening leave, arguing that "ceasing" employment required actual termination of the employment contract.

The judge decided that this was not reasonable, as:

  • Seven had only sought a maximum protection of 12 months under the MEP, and Seven's argument would have imposed a 17 month restriction;
  • at signing both parties would have considered that 12 months was the maximum restraint (the intention of the parties);
  • including gardening leave would create a variable restraint period dependant on the length of time left to run on the employment contract; and
  • Seven's interpretation of the clause required a very strict and technical reading which was rejected in favour of a plain-language, ordinary reading.

The restraint period for the MEP was therefore held to start on 2 March 2011, being the effective termination date rather than the contractual termination date.