Protecting your Business from Former Employees

When a key employee leaves a business, a great deal of valuable business information can follow that exit too. An ex-employee can use that information to compete with his or her former employer, by poaching clients, or undercutting the employer on pricing, or potentially engage in other similar damaging conduct.

There are many cases of employees making copies for themselves of customer lists and other vital business information before leaving, and sometimes even emailing that information to themselves.  In these circumstances, the employer can seek an injunction restraining the employee from using the information on the basis that the employee has breached the duties of good faith and loyalty he or she owed to the employer. But those duties end with the employment relationship, and it is not always clear that an employee has copied the employer’s information before leaving. Quite often, former employees set up in competition using information they have learned on the job – information they carry away “in their heads”, and which they cannot leave behind.

Employers often try to guard themselves against this problem by inserting non-competition and confidentiality clauses into the contracts of employment they make with their workers. But how effective is this?  In this article, we examine a recent Supreme Court of Western Australia decision that usefully illustrates some of the problems and issues. 

The facts

In ASPL Pty Ltd -v- Rajakaruna [2019] WASC 269 (ASPL), the Court dealt with an application for an interlocutory injunction (that is, a temporary injunction made pending trial and the final determination of the case) made by a former employer against an ex-employee.

The employer was a company operating an accounting business.  The defendant had worked in the business since 2007 as a junior accountant but had risen through the ranks, qualifying as a CPA in 2012 and becoming a registered tax agent in 2014. The employee left in 2019.

The employee set up his own accounting practice shortly after he left. The employer soon noticed that it was losing some important clients, and discovered that the ex-employee was doing their accounting work. The original employer sued for breach of provisions of the ex-employee’s employment contract. Those provisions sought to impose obligations of confidentiality (which attempted to restrain the employee from using confidential information as well as from disclosing it), and obligations to refrain from interfering with the employer’s contractual relationships with its clients.

Ultimately, the Court was not convinced that the employer had any arguable case against the employee under the contract, and refused to grant an injunction.

What was wrong with the contract?

Confidentiality obligation under the contract

The problem with the confidentiality clause was that it did not place any time limit on the obligation, and this caused the clause to come up against the historical reluctance of Courts to accept and enforce restraint of trade clauses.  

It is trite law that a Court will only enforce clauses that restrain an ex-employee from trading (or future employment) to the extent that they give reasonable protection to the employer’s business goodwill.

An obligation of confidentiality that would stop an ex-employee from providing services to customers or clients of the former employer effectively forever will almost never be enforceable.  The Court may be prepared to read such a clause down, and find that it applies only for a particular period, but the clause itself has to allow this to be done. If it is impossible to achieve this by deleting words from the clause, then the clause will be unenforceable. The Court will not rewrite the clause.

This is why some confidentiality clauses prescribe a series of diminishing time periods during which the clause will be enforceable – a Court can then effectively can ‘delete’ some of those time periods without deleting others.

The clause in ASPL was not drawn in this way: it was not limited to a particular period of time at all.

Interference Obligations under the Contract

In ASPL, the other clause the employer relied upon – which tried to bar the ex-employee from interfering with the employer’s relationships with its clients – also faced problems.  

This clause was in fact part of a wider clause that also attempted to prevent the ex-employee from soliciting (approaching and taking) the employer’s clients. The employer did not seek to enforce that clause, possibly because it had no evidence of actual solicitation. Instead, the employer tried to argue that by providing services to the employer’s clients, the ex-employee was interfering with the employer’s relationships with those clients.

The Court did not accept that the clause was likely to apply at all in the circumstances of this case.

The judge held that ‘interference’ implied some active effort on the ex-employee’s part to solicit the employer’s clients. There was no evidence that the ex-employee had done this. Rather, the evidence was that the clients in question had followed the ex-employee into his new business.

One way of looking at the problem here is that the person who had prepared the contract of employment had tried too hard to avoid the restraint of trade doctrine. Rather than trying to separate the non-interference clause out from the non-solicitation clause (which clearly did come up against the restraint of trade doctrine), the person who prepared the contract had lost touch with the realities of the commercial context in which the contract would be used and had drafted a clause which could only apply in very unusual and rare circumstances.

It may have been, in hindsight, preferable to face the restraint of trade problem squarely, with the limits imposed by the restraint of trade doctrine firmly in mind, and improve on the non-solicitation clause.

Key takeaways

Contractual clauses of the kind discussed above can be used to protect an employer’s business and goodwill, but only if they are limited in their scope so that they only restrain former employees to the extent reasonably required to protect that goodwill. In deciding what is reasonably required, it is necessary to be realistic about the nature of that goodwill and the extent to which an ex-employee’s ability to damage it depends on something more than normal competition.