Through the use of contractual provisions, employers often seek to restrain ex-employees from contacting and dealing with their former clients.
Employers may protect their interests by imposing post-employment restraint clauses or by relying on the duty of confidentiality imposed on ex-employees.
Restraints of trade
Restraint of trade clauses are used by employers to prevent former employees from competing with their employer or working for a competitor for a defined period after the termination of employment.
Such a clause will be enforced by a Court provided that it is deemed reasonable in all the circumstances. A restraint of trade may be unenforceable if a Court feels it merely has the effect of stifling competition.
It is established that employers have a legitimate interest in seeking to protect their established customer connections. A particular type of post-employment restraint is a non-solicitation clause, which is used by employers to prevent an ex-employee from luring away the employer’s customers.
Breach of duty of confidentiality
The term “confidential information” refers to information that an employee is not free to use or disclose except as authorised by the employer because of an implied or express term in the contract of employment.
Whether information acquired by an ex-employee is regarded as confidential depends on how the information was acquired. “Subjective” information obtained by the employee during the ordinary course of their employment such as know-how, skill or experience is not regarded as confidential.
“Objective” information obtained by an ex-employee through deliberate steps outside the ordinary scope of their job such as photocopying or deliberately memorising customer lists constitutes a breach of the ex-employee’s confidentiality obligations.
Stricter enforcement of confidentiality obligations of ex-employees?
Until recently, in the absence of a non-solicitation clause, ex-employees who have retained by memory information acquired during their employment without making a special effort to acquire it have not been held to have breached their post-employment confidentiality obligations.
In Great Southern Events Pty Ltd v Peskops [2007], the Supreme Court of New South Wales altered this position. The employee was a former sales and marketing manager who set up a business in competition with her former employer, an events management company. The employer sought to restrain the employee from contacting five previous clients.
The Court granted an interlocutory injunction preventing the employee from contacting four clients of her former employer. This was despite the fact that there was no clause in the contract restraining the employee from soliciting clients of the employer. The employee’s only obligations derived from the presence of a confidentiality clause in the contract.
The employer argued that the employee’s dealings with the employer’s former clients in the circumstances would necessitate the use of confidential information viewed by the employee during her employment. There was no evidence that the employee had deliberately memorised or copied any documents belonging to her former employer.
In granting the injunction, the Court acknowledged the novelty of the proposition that there should be a restraint of client contact in a situation where the sole restraint clause in the contract concerned the use of confidential information.
Nonetheless, the Court felt that the employee’s dealings with former clients could not realistically take place without the use of confidential information. Consequently, the employee should not deal with the former clients in any way, including providing services not previously referred to by the employer.
Advice for employers
Great Southern Events must be treated with caution by employers. The injunction was granted at the interlocutory stage before any in-depth consideration of the legal and factual issues was conducted.
Employers seeking to restrain ex-employees from contacting clients must ensure that they use properly drafted employment contracts which include both an enforceable non-solicitation clause and a confidentiality clause.
Although Great Southern Events indicates the potential for Courts to enforce the confidentiality obligations of ex-employees more strictly, it remains too early to tell whether the position will be adopted in future decisions.
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