Many employers shy away from using non-compete restraint of trade clauses in their employment agreements, thinking that they are “not worth the paper they are written on” and won’t be enforced by the courts. However, a recent Supreme Court of Queensland decision is proof that a well drafted restraint that prohibits post-employment competition can be enforceable.
In AGA Assistance Australia Pty Ltd v Tokody [2012] QSC 176 (25 June 2012), final injunctive relief was awarded in favour of the employer, preventing a former national sales executive from working for a competitor for a period of up to 12 months from the date of her resignation.
Here, partner Andrew Tobin and associate Damon King outline how the employer in this case was able to prove that a non-compete obligation was warranted.
Key facts in the Tokody case
- The employer attempted to enforce a restraint provision that prohibited a departing senior sales executive from being employed by a direct business competitor in the travel insurance industry.
- The judge found that the employer was entitled to reasonably protect itself from the misuse of the confidential information the employee was privy to, and the exploitation of customer connections she developed, during her long-term employment.
- The employer was able to enforce the restraint nationally for a period of up to 12 months because the scope of the restraint was found to be no broader than reasonably necessary to protect the employer’s legitimate business interests.
- This case demonstrates the importance of seeking professional legal advice when preparing employment agreements for senior employees, particularly to tailor restraint clauses that ensure that any action ultimately taken to enforce the restraint is likely to be successful.
Background to the Tokody case
AGA Assistance Australia is an insurance company that specialises in providing insurance for customers who book travel online through providers such as Webjet and Virgin Australia.
From 2000 until July 2011, Ms Tokody was employed in a number of senior sales executive roles, most recently under a written contract signed on 12 April 2011.
This employment agreement contained a term which stopped Ms Tokody from being employed in a similar or competing business after ceasing employment with AGA.
The non-compete provision specified alternative periods for the restraint duration - three months, six months and one year - each starting when she ceased employment. Ms Tokody argued that all of these alternatives were unreasonable and therefore void.
Otherwise, she did not dispute that the restraint, if it was enforceable, should apply throughout the whole of Australia, considering the nationwide sales activities she undertook during the course of her employment.
The facts of the case
The trial judge decided the following:
- No other employee was paid significantly more than Ms Tokody, except for the CEO. Her base salary was $235,000 plus superannuation, and she was also entitled to an annual bonus of 35 percent of her base salary if she achieved certain KPIs. She agreed that for six years, until her departure, she had been at a managerial level that reported directly to the CEO “in a sales and client relationship capacity”.
- Some 60 percent of the employer’s business was in travel insurance, and the relationship between Ms Tokody and certain key clients was critical to its business. The contracts with these key clients were often for about three years.
- Ms Tokody was involved in tendering for or negotiating contracts with these key clients, and was aware of the terms of those contracts, including details of the agreed commissions and fees to be paid by the employer. She also attained knowledge of the profitability of the business received through these clients, by becoming aware of the extent of claims from insurance issued through a certain client, and other relevant information such as the prices for particular policies. None of the information related to contracts or profitability was publicly known. It was likely to be very valuable to the employer’s competitors in competing for the work available from these clients.
- Ms Tokody also directly dealt with relevant representatives of the key clients, with evidence that she entertained one or more of these people at sporting events and other similar occasions. These types of dealings and relationships were of a kind which can be legitimately protected by a restraint against working for a competitor. In no case was the connection apparently so strong that the client saw the only attraction in dealing with the employer as being the personal involvement of Ms Tokody. But more likely than not, at least some of these relationships were such that there was the potential that a change in Ms Tokody’s employment would contribute to a change in the insurer with whom the client did business.
- The employer’s legitimate business interests warranted a restraint preventing Ms Tokody from working in a competing business in Australia for a limited time.
- Notwithstanding the presence of the employer’s protectable interests, the court still had to consider whether the scope of the restraint, in any of its alternative forms, was broader than reasonably necessary to protect those interests.
- In assessing what is required by way of reasonable protection, it is necessary to identify the relevant risk. There is a need to assess the time during which the advantages of the personal connection with clients and knowledge of confidential information would diminish to a point that they would no longer be worthy of protection by a restraint against employment in a substantially similar or competing business.
- As to the advantage gained from personal connections, the employer would be expected to address that by appointing a replacement to build something of the same goodwill over time, reducing the risk of the defendant using the extensive knowledge and personal influence she acquired (as the person in charge of attracting and retaining key clients) in working for a competitor.
- The confidential information itself was likely to have a ‘shelf life’ of more than twelve months, considering the contracting arrangements with key clients were usually for a term of three years.
- In light of these facts, the court upheld the non-competition restraint as being reasonable for a period of one year.
The findings in this case
A restraint of at least 12 months was held to be reasonably necessary to protect the employer from the risks posed by Ms Tokody’s use of relevant information about key clients and by her personal relationships with individuals from those key clients.
Notably, prohibiting the misuse of confidential information and including non-solicitation restraint obligations that prohibited Ms Tokody from poaching key clients in her employment contract did not stop the court from enforcing the additional non-competition restraint.
Finally, the court observed that any alleged failure on the employer’s part to properly foster existing business relationships with key clients after Ms Tokody’s departure was irrelevant to the enforceability of the restraint when considering an application for final injunctive relief. However, such facts may be relevant when considering a claim for compensatory damages for contractual breach.
For more information about drafting and enforcing post-employment restraint obligations, please contact HopgoodGanim’s Industrial and Employment Law team.