The Case

In January 2016, Ms Peck commenced work with Just Group Ltd (JGL) as its Chief Financial Officer. Ms Peck’s contract of employment contained a 2-year post employment non-compete restraint. On 2 May 2016, Ms Peck resigned and informed JGL she had accepted an offer of employment from its competitor, Cotton On.

JGL commenced proceedings to stop Ms Peck working for Cotton On in breach of the restraint clause. JGL claimed that the non-compete restraint was necessary to protect its legitimate business interests in its confidential information, which Ms Peck had been exposed to during her employment.

The Verdict

Justice McDonald of the Victorian Supreme Court confirmed that only restraints that are reasonable are capable of being enforced. The onus of proving a restraint is reasonable rests with the employer. The employer must prove the restraint goes no further than protecting the employer’s legitimate business interests.

The restraint sought to stop Ms Peck from engaging in any activity that “is the same as, or similar to” any part of the business of JGL. The Court found that this restraint was unreasonable because it prevented Ms Peck from being employed in any part of a competitor’s business, even in a capacity in which she had not worked with JGL and where the confidential information she had acquired would be irrelevant.

Ms Peck’s contract also prevented her from engaging in any activity for, and on behalf of, 50 listed entities. This meant Ms Peck could not work for businesses that did not even compete with JGL. The Court accepted that there was evidence that Cotton On and JGL were competitors and it may have been reasonable to restrict Ms Peck from working with Cotton On for a period of time. However, as the clause contained another 49 companies in which it was not reasonable to enforce the restraint, the whole clause failed.

Furthermore, the restraint applied for 2 years throughout Australia and New Zealand. While this part of the clause could be read down to operate only in Victoria for 12 months, the Court found that given Ms Peck’s employment could be terminated on 1 month’s notice in the first 6 months, even a 12-month restraint was unreasonable.

Lessons

To be capable of enforcement, a post-employment restraint must be reasonable and not unduly restrictive. It must go no further than protecting an employer’s legitimate business interests.

While the Restraint of Trade Act 1976 (NSW) can assist in NSW and drafting the clause as a cascading restraint clause can also be useful, the content must still be reasonable in terms of activities, geographical operation and duration to be capable of being enforced.

Please note: Case law is reported as correct and current at time of publishing. Be aware that cases in lower courts may be appealed and decisions subsequently overturned.