Australian retail giant Just Group Ltd (JGL) is licking its wounds after the Supreme Court of Victoria refused to enforce the broad restraint of trade contained in the employment contract of a former Chief Financial Officer (CFO).
Just Group Limited v Nicole Peck [2016] VSC 614, which for employersbrings to bear the difficulties faced in protecting confidential information, may prompt businesses to rethink their current employees’ restraint clauses.
The gist of the case
JGL is the owner of several popular Australian apparel brands, including Jay Jays and Just Jeans.
On 7 December 2015, Ms Peck signed a contract of employment with JGL (Contract) and commenced as CFO. The Contract contained an extensive restraint of trade that prevented Ms Peck from engaging in a broad range of activities, with a large number of businesses, for an extended period of time.
In or around April 2016, Ms Peck began negotiating a move to Cotton On Group Services Pty Ltd, one of JGL’s major competitors; resigning from JGL on 2 May 2016. In response, JGL sought to prevent Ms Peck from commencing work with Cotton On, for a period of two years.
Restraints of trade – the law
A contractual restraint of trade is presumed to be void and unenforceable, unless the party relying on the restraint demonstrates that it is reasonable, by reference to the interests of the parties. To be “reasonable”, a restraint must not confer greater protection than can be justified, taking into account the special circumstances of each particular case.
“Restricted Activities”
The restraint of trade in Ms Peck’s Contract contained two limbs:
The first prevented Ms Peck from engaging in any activity that was “the same as, or similar to” any part of the specialty brand and fashion business of JGL. In effect, this broad restraint saw Ms Peck prevented from obtaining employment with businesses to which the confidential information she had obtained as CFO of JGL (Confidential Information) would be irrelevant.
The second limb prevented Ms Peck from engaging in any activity with the 50 brands expressly listed in the Contract as competitors of JGL. Although this second limb was narrower in scope than the first, the Court held that Confidential Information would not be relevant to her employment with all of the listed competitors. As such it was up to JGL to prove that the Confidential Information would be relevant to Ms Peck’s role with each and every competitor listed in the Contract; JGL only adduced evidence in relation to four of the listed brands.
“Restricted Period”
The restraint period in the Contract was drafted as a cascading or “waterfall” clause; operative for 24, 18 or 12 months. The geographic region for the restraint was similarly drafted; to apply in Australia & New Zealand; in just Australia; or in just Victoria.
This increasingly common drafting technique may allow a Court to enforce a narrower restraint where the broader restraint is deemed unreasonable. In this case, even the minimum restraint period of 12 months was held to be excessive. The Contract provided for a probation period of 6 months, during which time JGL could terminate with only a months’ notice. The Court held that it was unreasonable for Ms Peck to be restrained from working for a period of 12 months, but to be entitled to one month’s notice from JGL.
JGL argued that the restraints were reasonable because the Contract was negotiated by Ms Peck, also relying on the clause in which the parties acknowledged that the restraints were reasonable. The Court rejected these submissions, clarifying that an express contractual acknowledgement in a contract of employment negotiated between parties is not determinative of whether restraints of trade are reasonable.
Take home message
Restraints of trade can be critical to the protection of confidential information and trade secrets, especially when employees with access to such information commence work for a competitor. This case demonstrates that drafting a restraint of trade is a delicate exercise: too narrow and the restraint may not sufficiently protect the business’s confidential information; too broad and the restraint may not be enforceable.
Pointon Partners are able to assist in the preparation, review or updating of employment contracts including restraint of trade provisions.
Please contact Michael Bishop, Amelita Hensman or Lachlan Chisholm with any queries.
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