Justifying a restraint of trade

Restraints of trade are provisions in employment agreements which restrict the way in which an employee can act after their employment ends. 

Four important aspects about restraints of trade are:

  1. Initially they are void and unlawful because restraints are contrary to public policy;
  2. A restraint must protect some legitimate proprietary interest;
  3. The scope of its limits must not be unduly restrictive; and
  4. A restraint will not be enforced merely to protect the employer from competition by a former employee.

Primarily, restraints of trade are unlawful, but they can be upheld if they are reasonable and no wider than necessary to protect the former employer’s proprietary interest. Recently is has become common for employers to seek the enforcement of restraints of trade.  The onus of the establishing whether restraint of trade provision is reasonable and enforceable is on an employer who is seeking to enforce the restraint.

In the employment court case of Transpacific Industries Group (NZ) Limited v Harris [2013] NZEmpC 97 a restraint of trade clause which prevented the employees from working for a competitor for three months after the termination of their employment was held to be unenforceable. The two employees involved were business development managers. Mr Green had management responsibilities for securing large business accounts and Mr Harris had responsibilities for securing new customers among small sized businesses. The restraints included prohibitions against working for a competitor, dealing with customers, soliciting employees and disclosing confidential information.

The non-competition clause in the employment agreement stated that the services performed may be of special, unique, unusual, extraordinary and intellectual character.  The agreement also provided that the employee appreciated that the employer may suffer serious injury if the employee took the knowledge and skills acquired during the employment and applied them for the benefit of a competitor.

The court found that the restraint was far too wide to be enforceable as the relevant clause tried to prevent the employees from using their skills they had obtained over time in their employment.  The Court considered the restraint unenforceable unless it could be modified.

Although the proprietary interest of confidential information can justify restraint, a restraint cannot be used to simply to deny a competitor a valued employee.

Thus, the court held that if it modified the restraint, the clause would transform to one substantially different from the expressed reason for the restraint.  Although the court accepted that both employees had access to confidential information, and that this was a legitimate proprietary interest to be protected, however, once the existence of a legitimate proprietary interest had been established, the restraint must be shown to be no wider than is reasonably necessary to protect that interest.

The case shows that employers must carefully identify the reason for the inclusion of the restraint in an employment agreement. The restraint cannot simply prevent employees from using their skills and general knowledge in their future employment. 

Accordingly, it is important that extra care is taken when drafting restraints of trade to ensure the clauses specifically address what proprietary interest the employer wants to protect. The use of generic restraint clauses should be avoided.

Contact me if you need help with either preparing or challenging a restraint of trade.