Frontline Intelligence: Legal experts - Restraints of trade

by 14 Dec 2011

It is increasingly common for contracts of employment to contain a restraint of trade clause preventing an employee from working in competition with their former employer after exiting the business. However, a significant proportion of employees still believe that restraints are unenforceable and that there’s no need to abide by them when accepting a new position.

The recent decision in the Supreme Court of New South Wales in Red Bull Australia Pty Limited v Stacey [2011] NSWSC 1212 helps focus our minds on the fact that the courts are willing to support employers and enforce restraints if they consider that they are reasonable.

In this interlocutory decision, two senior executives of Red Bull Australia Pty Limited (“Red Bull”) were forced to resign from their new positions with their new employer, Calidris 28 Australia & New Zealand Pty Limited (“Calidris”). The ultimate holding company, based in Luxembourg, is Calidris 28 Group. Calidris manufactures drinks that are described as “a new generation of energy drinks”.

Mr Stacey was the General Manager of Red Bull. Mr Graebner was the Marketing Director. Both employees had signed contracts of employment with Red Bull stating that they wouldn’t directly or indirectly be involved in any business in competition with or in a similar nature to the business being carried on by Red Bull at their termination date “including but not limited to any business concerned with the development, sale, supply, manufacture or research relating to alcoholic or non-alcoholic beverages either containing taurine, caffeine or guarana, or beverages which are marketed as an energy drink …”.

Both employees were terminated on 30 November 2010, Mr Stacey was subject to six months’ notice and a further six month restraint. Mr Graebner was terminated with notice and a 12-month restraint. Both restraints were to end on 30 November 2011.

Red Bull claimed that both men were in breach of their contracts and that neither of the restraint periods was unreasonable in scope or duration, particularly in regard to the senior positions that both men held within Red Bull.

Mr Stacey and Mr Graebner argued the restraints were not enforceable as:

  1. the Deed of Release signed on termination was expressed to be the “entire agreement between the parties” including (as far as they were concerned) the alleged restraints contained in their much earlier-dated contracts of employment;
  2. representations were made to each of them that the restraint clause would not be acted on; and
  3. Calidris was targeting a different segment of the market from Red Bull and any competition would be miniscule.

Ultimately, none of these arguments succeeded. While Mr Stacey and Mr Graebner maintained the restraints were not enforceable, they nevertheless offered a number of undertakings including that they would not be involved with any energy drink brands in competition with, or similar to, the Red Bull energy drink in the Australian market.

Justice Rein found that the men were effectively running the Calidris business in Australia and that Red Bull had a strong argument that Calidris was a competitor. He found that Red Bull was entitled to reject the men’s undertakings as one of the purposes of the restraint was to prevent any potential conflict between the demands of the new employer’s business and that of the previous employer.

As a result, Justice Rein granted the interlocutory injunctive relief sought by Red Bull, namely that the men could not be employed by Calidris during the restraint period. Both men had to resign their positions.

The general principles underlying restraint clauses are these: for a restraint to be enforceable, it must be reasonable, it must protect a legitimate interest of the employer and the extent of the restriction must be no wider than is necessary to protect the employer’s business (including geographical restriction and duration).

As a result of this decision, employees, particularly executives, must be aware that if they sign a contract with a new employer that breaches a pre-existing restraint, they place themselves at risk of a court order requiring them to quit their new jobs.

Carroll and O’Dea frequently provides advice regarding the drafting and enforcement of restraint of trade provisions. As with most legal complexities, “the devil is in the detail”.

About the author

Helen-Anne MacAlister is an Associate at Carroll & O’Dea Lawyers. For futher information phone (02) 9291 7100 or visit www.codea.com.au

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