Restraints off in court confrontations

Widespread labour shortages and near record low unemployment rates have prompted an increase in the movement of workers hoping to ride the highs of the state’s cyclical, commodities-based economy.

The restricted labour pool has forced some companies to look to their competitors in the hunt for skilled staff and that is having a ripple effect, prompting a wave of employee restraint litigation.

Non-compete clauses, or restraint-of-trade clauses, are often buried within employment contracts to prevent staff from joining a rival company and taking confidential information, trade secrets and clients with them.

Their application is decided on a case-by-case basis, with the court tasked with balancing the employee’s right to work against the former employer’s right to protect legitimate business interests.

In assessing the merits of the application, a court must also review the duration of the restraint, the geographical area it applies to and the breadth of activity it seeks to control.

These restraints have long been considered almost unenforceable: notoriously difficult to argue and costly.

But the use of restraints has grown during the past decade, according to MinterEllison partner and workplace head Kathy Reid, with more employers willing to draw on them to safeguard their interests.

Several cases before the state’s Supreme Court in recent months support this notion.

Earlier this month, Perth-based recruitment agency Talentko initiated a lawsuit against three former senior account managers in a bid to stop them taking clients and confidential information to rival Collar Talent Group.

According to a writ lodged and obtained by Business News, Talentko is taking the trio to court over allegations they breached a contract promising not to provide services to a rival business, solicit clients or disclose confidential information for a period of at least six months.

The legal action was launched one week after real estate giant Cygnet West took former investment services manager Shane Isaacs to court in a bid to retrieve confidential information it claimed was being used at franchisor-turned-rival Colliers.

The lawsuit centred around “valuable” confidential commercial information Cygnet West claimed was in its former employee’s possession and had been used while working for Colliers.

During the most recent hearing, Justice Jeremy Curthoys said it was his belief that people tended to go with the salesperson, not the company, highlighting the issues associated with lawsuits between companies and former staff.

“Things like this tend to make lawyers a lot of money and the cost often seriously outweighs the benefit,” Justice Curthoys told the court.

That case followed a landmark decision by Justice Marcus Solomon, in which Emission Assessments lost its 11th-hour bid to stop its former senior environmental scientist from joining rival Ektimo over concerns about the exchange of confidential intellectual property.

Emission Assessments claimed the former employee had breached a contract preventing him from working for the company’s only competitor based in Western Australia, while also submitting that he had copied its confidential information without permission.

Underpinning the lawsuit were serious concerns about the impact an employee with broad access to the company’s commercial practices, financial information, technical processes and tender documents could have on its ability to continue securing work with its biggest client – Alcoa – if he joined Ektimo.

But Justice Solomon decided the restraint went beyond that reasonable for the protection of Emission Assessments’ interests, dismissing the request for urgent court intervention.

Despite the outcome in this case, Ms Reid attributed the rise in the number of cases to the increasing willingness of the court to enforce restraint clauses, and employers’ more considered drafting of such contractual matters.

Another contributing factor has been sweeping changes to restraint legislation in NSW, which has subsequently increased their enforceability.

Ms Reid said MinterEllison often prepared for a wave of restraint litigation during a labour shortage, but that the current one had been more intense.

“The labour market absolutely plays a role; every time we have a labor shortage, we all brace ourselves for a wave of restraint litigation, because generally, that follows,” Ms Reid told Business News.

“Every cycle, WA experiences a wave of restraint litigation, and we generally expect it.

“This current one is like the others, but probably slightly more brutal.

“There’s a shorter, sharper, shortage and, as a result, we’ve had a pretty rapid escalation in the number of restraint matters coming across the desk.”

With up to 95 per cent of cases settled through mediation behind closed doors, quantifying the impact the labour crisis has had on restraint litigation is difficult.

Anecdotally, Ms Reid estimates the proportion of the firm’s matters involving restraint cases could grow four-fold during a labour shortage, jumping from five to 25 per cent.

Ms Reid said the matters were often time intensive, requiring the firm to deploy additional resources to cope with the growing caseload.

Critics have claimed restraint of trade clauses should be reviewed, blaming them for stifling competition, suppressing labour mobility and stymying innovation.

Ms Reid argued that employers invested heavily in upskilling staff, and the threat of staff being allowed to use that investment to further business at a rival company was a disincentive to that investment.

“I think if employers are comfortable the investment they make will be protected, then they’re more likely to invest in developing those staff, and that leads to an increase in innovation and collaboration,” she said.

“At the end of the day, a restraint is not forever; you can get away with a restraint for three, six or 12 months.

“All the restraint does is level the playing field for a period to allow you to maximise the investment that you put into that staff member.”

However, Ms Reid was quick to point out that restraints were difficult and costly to pursue, and evidence of wrongdoing was often difficult to obtain.

“You have to be very precise about the drafting of these restraints; if you get one or two words wrong, you can kiss your chances of success goodbye,” Ms Reid said.

“You really need the employee to be kind of the face of the business, someone who’s been given access to proprietary information or very mission-critical clients.

“It’s expensive, and they’re not easy from an evidentiary point of view either; it’s a bad look to be asking your clients to give you evidence that your former employee has committed a breach of restraints.

“When it comes to an employer’s chances of success, the difficulty is that the court will only give you what’s necessary.

“You might not get 100 per cent of what you want, even if you win.”