Employers are often concerned that a former employee is in possession of confidential information, such as customer lists, pricing information, marketing plans and other trade secrets, which might be used to unfairly compete with them.
Similarly, customer facing employees can establish substantial personal connections with their employer’s clients and other business connections which they might seek to later exploit if they leave the employer’s business.
In many cases, the former employer wishes to hold departing employees to contractual obligations restraining the person from joining a business competitor or interfering with key relationships with clients and other third parties (Restraints).
A recent Federal Court of Australia decision of Liberty Financial Pty Ltd v Jugovic [2021] FCA 607 (4 June 2021)demonstrates how well-drafted and customised Restraints, used in appropriate circumstances, can effectively sideline an ex-employee from unfairly competing with their former employer’s business.
Partner, Andrew Tobin, Special Counsel, Damon King and Solicitor, John Hickey discuss the Jugovic decision.
Background
Liberty Financial Pty Ltd (Liberty) was a non-bank provider of loans in the residential, commercial and superannuation fund finance markets within Australia. Mr Jugovic was a senior manager at Liberty for over a decade. He had several key responsibilities including managing the sourcing of funding from clients, such as banks and managed investment schemes, which was then used to lend to borrowers.
ORDE Financial Pty Ltd (ORDE) was another non-bank specialist mortgage lender. ORDE’s business model was largely identical to that of Liberty. It was a new and direct rival to Liberty in the same non-bank finance markets in Australia.
On 20 April 2021, Mr Jugovic gave Liberty two weeks’ notice of his resignation. Three weeks earlier, Mr Jugovic signed an employment agreement with ORDE. Liberty urgently applied for interim orders to enforce the Restraints in Mr Jugovic’s employment agreement to stop him from taking up employment with ORDE for a period of one year.
Outcome
The Federal Court granted Liberty an interim injunction restraining Mr Jugovic from working at ORDE, until a final hearing could be held and determined later in the year. This effectively resolved the entire dispute in Liberty’s favour.
The Court affirmed that being deprived of Mr Jugovic’s services for the interim period: "is the consequence of its [ORDE’s] own decision to take a risk in hiring [Mr Jugovic] in circumstances where I do infer that it was aware of the restraints in his employment agreement with Liberty".
Reasons
Justice Beach held that unless Mr Jugovic was restrained from commencing employment with ORDE, there would be a “real risk” that he may “inadvertently or subconsciously” breach his duties of confidence to Liberty. In reaching that conclusion, Justice Beach referred to the “several barriers to entrants” in the non-bank lending market and Mr Jugovic’s key role as head of Liberty’s treasury team.
Although both Mr Jugovic and ORDE’s Managing Director gave undertakings that they would comply with other Restraints prohibiting the soliciting of Liberty’s clients, Justice Beach found that this failed to answer Liberty’s "prima facie entitlement to enforce its [non-compete] restraint, given… it has a strong case for its reasonableness and enforceability". In that regard, his Honour questioned how Liberty would even know whether there had been a breach of such an undertaking.
Mr Jugovic argued that there had been a repudiation of the employment agreement by Liberty because it had not paid out his accrued annual and long service leave entitlements immediately on termination of his employment, therefore making him no longer bound by the Restraints. Justice Beach held that this argument was underwhelming given the leave entitlements had since been paid by Liberty.
As to the prospect that ORDE might terminate Mr Jugovic’s contract if he was unable to immediately commence work, Justice Beach found the risk to be low and observed that should this actually happen, he had the power to prevent it.
Key lessons for employers
While each matter depends on their own individual facts, decisions such as Jugovic once again make it clear that well drafted Restraints can be enforced by the courts where there is strong case that it is reasonable and necessary to protect the employer's legitimate business interests.
Legitimate business interests usually involve the need to preserve confidentiality of information and the protection from exploitation of personal customer and other business connections. The onus is on the former employer to demonstrate the existence of such legitimate business interests and that the Restraints go no further than is reasonably necessary to protect them.
It is therefore important to carefully draft the scope of operation of the Restraints to maximise the likelihood that they will be enforced in appropriate circumstances. Employers will need to consider what the employee does, with whom they have dealings or relationships, and what the employer wants to, and legitimately can, prevent the employee from doing after the cessation of their employment.
It is equally important for employers to consider whether a potential new employee is subject to Restraints under their former employment contract. If they are, it is important for the new employer to determine whether the Restraints will allow the new employee to perform the work they have been, or will be, hired to perform, or how any Restraints might best be managed to achieve the employer's commercial objectives and minimise the risk of entanglement in litigation.
HopgoodGanim's Workplace and Employment Law team can assist by:
- flexibly drafting Restraints with maximum potential for enforceability;
- helping you to manage the departure of departing employees so as to maximise your ability to protect your business goodwill and other legitimate interests;
- developing strategies to manage the obligations of new employees who bring non-compete obligations with them, with a view to avoiding disputes; and
- advising about the extent to which, if at all, non-compete obligations imposed on a prospective new employee are likely to be binding or impact on their proposed employment with you;
- prosecuting or defending proceedings to enforce Restraints or otherwise protect your confidential information.
For more information about Restraints, please contact HopgoodGanim’s Workplace and Employment Law team.