The Federal Court of Australia handed down a significant decision on 24 September 2024. The Court enforced a 12-month restraint of trade condition in an employment contract and ordered that the former employee pay $500,000 in damages to his previous employer for breach of that restraint of trade condition.
Background
The case involved Mr Martin, an employee of AEI Insurance who had been employed for 11 years and was essentially a charismatic figurehead of the business in the Queensland market. Justice Thawley stated in paragraph 2 that:
“From the perspective of many of AEI’s clients, Mr Martin was in practical terms the face of AEI’s business in the Queensland market”.
AEI publicised Mr Martin in this way and made him a point of contact 24/7 for their clients. However, when he resigned from his employment and moved to a competitor (MA Brokers) in 2022, he solicited old clients from AEI to his new employer.
AEI brought the case before the Federal Court on the basis that Mr Martin breached his restraint of trade clause in his employment contract that was valid for up to 12 months after ending his employment. In particular, clause 12(c) of the employment contact provided that the employee must not either directly or indirectly:
“during their employment with the Company and for the Restraint Period [12 months], solicit, canvas, deal with or approach or accept any approach from any person or organisation who was at any time during the last 12 months of the Employee’s employment a client or customer of the Company in that part or parts of the business of the Company in which the Employee was employed and with whom the Employee had dealings with or influence over, with a view to obtaining the business of that client or customer in a business that is the same or similar to or in competition with the business of the Company”
Thawley J was firstly required to make findings of fact regarding the conduct of Mr Martin and whether he was involved in soliciting former clients to his new employer (and if so, how many clients and what loss did this cause?). Second, the court had to form a view as to whether the restraint of trade clause above in Mr Martin’s employment contract was enforceable.
Findings of Fact
The Demise of the Phones
In making determinations of fact, Thawley J made adverse findings about the credibility of Mr Martin. This was particularly linked to the unfortunate demises of various phones used by Mr Martin to solicit contacts. In one instance, Mr Martin informed the parties, approximately 5 days after an order for discovery, that his phone was destroyed when run over by a lawn mower.
The court accordingly inferred that Mr Martin destroyed and/or erased data from each of the relevant phones ‘with a view to frustrating AEI in its attempts to obtain information from the mobile telephones’.
The solicitation of clients
The clients allegedly solicited from AEI to MA Brokers were divided into 3 categories for the utility of assessing Mr Martin’s actions and their ranging affects. The accumulated loss between the below three categories was $617,282 (as calculated by an expert).
The first category contained 16 clients who, based on evidence, were solicited by Mr Martin directly. The first group accounted for a total loss of $222,561 for AEI.
The second category contained 15 clients who were inferred to have been solicited either by Mr Martin himself or by MA Brokers on information provided by Mr Martin. The second group accounted for a total loss of $293,636.
The third category contained 14 clients who were likely to have been contacted by Mr Martin or MA Brokers, although some may have moved to MA Brokers without any or significant procurement. This third ground resulted in a total loss of $101,085.
Thawley J concluded the first two categories of clients were contacted by Mr Martin with a view to move their business to MA Brokers from AEI. Furthermore, Mr Martin had given the identity of numerous clients to MA Brokers who he knew would move their policies because of their current positions, which included the likes of:
- the relationship he had with those clients; or
- his knowledge of their forthcoming insurance needs; or
- the continuity of service he could provide.
Thawley J found that several clients likely would have moved to MA brokers because of their established friendship with Mr Martin. These clients were not necessarily procured from any active soliciting but rather moved as a by-product of his role as a figurehead of AEI.
The Enforceability of the Restraint of Trade Clause
A restraint of trade clause is prima facie void unless it is shown to be reasonably necessary to protect the interests of the business, and the restraint is reasonable in the circumstances. An employee may also prove the restraint is contrary to the public’s best interest if they wish to invalidate the restraint.
Interestingly, in this matter, the separate non-compete clause was not found to be enforceable. That is, the court held that Mr Martin was able to work for a competitor business. However, the ‘non-solicit clause’, which prevented Mr Martin from soliciting clients of AEI, was enforced.
The enforceability of the non-solicit clause was due in part to Mr Martin’s position of trust with clients – he was the “face” of the Queensland market – and accordingly AEI had a legitimate business interest in protecting their client relationships through the non-solicit clauses.
On this basis, the court held that clients who were solicited by Mr Martin or MA Brokers because of Mr Martin’s position at AEI were solicited in breach of Mr Martins restraint of trade clause enshrined in his previous employment contract. Clients who moved to MA brokers without solicitation from Mr Martin were not captured in the non-solicit clause.
Mr Martin’s role was essence to AEI, to grow and be at the forefront of their business meaning AEI placed significant trust in him. However, he misused his knowledge, position and trust with clients to further a competitor causing great detriment to AEI. His disingenuous character shown when breaking the phones and erasing the data reflected adversely on his credibility.
Based on these circumstances, the Court found Mr Martin had breached his employment contract with AEI and ordered damages of $500,000 plus legal costs.
Key Take Aways
It is important to remember that post-employment restraint of trade clauses are prima facie void and unenforceable. The onus is on the employer to demonstrate that the restraint ought to be enforced on the basis that the restraint is reasonably proportionate to protect a legitimate business interest.
This will depend on all the circumstances of the case including, as in this matter, the seniority/trust vested in the employee. Legal advice will always be essential for employers seeking to enforce a restraint, or for employees seeking to undertake further work which may be in breach of a restraint.
It is also important to distinguish between the enforceability of a non-compete clause as opposed to a non-solicit clause which may be easier for an employer to enforce.
Vocare Law is well equipped to assist our employment clients with a wealth of collective knowledge and over decades experience providing insight and advice in this area. Please don’t hesitate to contact our office if you have any questions or require assistance regarding employment issues or need to review or update your policies. Contact us on 1300-VOC-LAW / 1300-862-529 or email: enquiry@vocarelaw.com.au
This article was written by William Johnson.
