Restraints of trade and reasonableness

What follows is the headnote to a recent important decision of the Court Of Appeal of the Supreme Court of New South Wales in a  case involving challenges to the validity of employment restraints of trade and an analysis of what is reasonable and what is not.

“HEADNOTE

[This headnote is not to be read as part of the judgment]

Employsure Pty Ltd (Employsure) is in the business of providing human resources and workplace health and safety consultancy services. In 2019, Employsure launched BrightHR and BrightSafe, software programs to manage and automate human resources functions for small to medium enterprises.

Mr David McMurchy was appointed as Employsure’s Outbound Sales Manager in February 2018 and then as Manager, BrightHR in June 2019, which the primary judge found to be senior roles involving the development and execution of Employsure’s business strategy. His 2018 employment contract included confidentiality and exclusive employment covenants, including that he would not, without prior written consent, engage in outside employment that, in the reasonable opinion of Employsure, may hinder or otherwise interfere with the performance of his duties. The contract also included a post-employment restraint that he would not be engaged in a business in competition with Employsure for a period of 12, 9, 6 or 3 months.

Mr Arumugam Kumaran commenced employment with Employsure in February 2018 as an Outbound Business Sales Consultant. In November 2019, he became a Business Sales Partner in the Inbound Sales team, which the primary judge found to be the most senior level of sales employee. His 2018 employment contract contained a confidentiality covenant and a post-employment restraint similar to Mr McMurchy’s contract.

In October 2020, ELMO Software Ltd (ELMO), a software provider of cloud human resources, payroll and rostering time software, announced that it had acquired Breathe, a “self-service HR platform” for small businesses. ELMO launched this new software product in February 2021. Employsure and ELMO were competitors in relation to the BrightHR and Breathe software products.

In December 2020, Mr McMurchy accepted a position with ELMO managing a sales team selling Breathe software and gave Employsure four weeks’ notice of his resignation which was ineffective, being less than the three months’ notice required under his contract. Mr McMurchy also offered to supply ELMO with the names of potential Employsure sales employees and provided Mr Kumaran’s name to ELMO’s recruiter, having earlier approached Mr Kumaran about a role with ELMO. On 12 January 2021, Employsure gave Mr McMurchy three months’ notice of termination and directed him not to attend the office, but to remain available during business hours to respond to queries and perform duties as requested, under “gardening leave” provisions of his contract.

In late January 2021, Mr Kumaran accepted employment with ELMO as account executive, supporting existing customers of, and seeking to sell to potential customers, ELMO’s Breathe software. His employment with Employsure ended on 10 February 2021.

Employsure commenced separate proceedings against Mr McMurchy and ELMO, and Mr Kumaran and ELMO, to enforce the confidentiality obligations and the competitor restraint.

The primary judge held that:

  1. the exclusive employment covenants were reasonable and Mr McMurchy breached those covenants by taking up employment with ELMO whilst still employed by Employsure;
  2. a post-employment restraint for nine months from 12 January 2021 was reasonable and injunctive relief was appropriate to enforce this restraint for a period of six months following the end of Mr McMurchy’s employment on 12 April 2021 (Ultimately, a declaration to this effect was made in lieu of an injunction.);
  3. Mr McMurchy breached his contract of employment by encouraging and inducing Mr Kumaran to leave his employment with Employsure, and ELMO knowingly induced and assisted Mr McMurchy in this breach; and
  4. a post-employment restraint of nine months was reasonable following the end of Mr Kumaran’s employment with Employsure on 10 February 2021; and injunctive relief was appropriate to enforce this restraint until 10 November 2021.

Both Mr McMurchy and Mr Kumaran, together with ELMO, appealed challenging those findings and the declarations and injunctive relief giving effect to those findings.

Held (Gleeson JA, Leeming and Kirk JJA agreeing) dismissing Mr McMurchy/ELMO’s appeal and allowing Mr Kumaran/ELMO’s appeal.

As to Mr McMurchy/ELMO’s appeal:

1   Employsure had a legitimate interest to protect through the exclusive employment covenants its interest in the performance of the employee’s duties during the pendency of the contract, including that Mr McMurchy devote the whole of his skill, time and attention during business hours to his duties to Employsure and observe his obligations of confidentiality: [43].

2   By taking up employment with ELMO to manage a sales team selling a competing software product whilst still employed by Employsure, Mr McMurchy proposed to engage in another business that may hinder or interfere with the performance of his duties to Employsure: [44]. The restraint was aimed at the absorption, not sterilisation, of Mr McMurchy’s capacity by securing the proper performance of his duties: [45]. The exclusive employment covenants were reasonable, including during the three-month period of “gardening leave”: [46].

Tullett Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC 852; (2008) 175 IR 414; Woolworths Limited v Olson [2004] NSWCA 372 applied; Kone Elevators Pty Ltd v McNay (1997) ATPR 41-564 referred to.

3   Employsure had a legitimate interest in protecting its confidential information through a restraint against competition after the departure of the employee: [52]-[53]. It is not necessary to identify the confidential information with precision at the time the contract was entered into: [54]. That confidential information could be used by ELMO to Employsure’s detriment, given the unchallenged findings that Employsure and ELMO were in competition in the supply of the two software products and the nature of rhe confidential information to which Mr McMurchy had access, included the marketing, shortcomings and potential development of the BrightHR product: [57]-[58].

Miles v Genesys Wealth Advisors Ltd [2009] NSWCA 25; (2009) 201 IR 1 applied.

Isaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343; [2018] NSWCA 163; Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472; Emeco International Pty Ltd v O’Shea (No 2) [2012] WASC 348; (2012) 225 IR 423 referred to.

4   A post-employment restraint of nine months from 12 January 2021 was reasonable (that is, six months from termination of employment on 12 April 2021). There was no error in this evaluative assessment of his Honour which took into account the contractual consensus of a longer restraint of 12 months, the length of time Employsure’s confidential information remained current and of commercial advantage, and Mr McMurchy’s status as Manager of BrightHR: [70].

Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9; [2006] NSWSC 717 referred to.

5   There was no error in the discretionary decision that injunctive relief should be granted enforcing the restraint for a period of six months from 12 April 2021, nor in granting a declaration to that effect in lieu of an injunction: [85].

Tullett Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC 852; Ainsworth v Criminal Justice Commission (1992) 175 CLR 564; [1992] HCA 10; Maitland Main Collieries Pty Ltd v Hunter Valley Coal Corporation Pty Ltd [2006] NSWCA 258 referred to.

6   The finding that Mr McMurchy’s conversation materially influenced Mr Kumaran’s decision to leave Employsure and join ELMO was open, given the finding that Mr McMurchy took an active role in ensuring Mr Kumaran left his employment: [93]-[96]. This case is distinguishable from situations where one employee had discussed employment opportunities with other potential employers with another employee who had already independently decided to leave their employment: [103]-[104].

Hodgson v Amcor Ltd [2012] VSC 94; (2012) 264 FLR 1; AMP Services Ltd v Manning [2006] FCA 256 distinguished.

As to Mr Kumaran/ELMO’s appeal

7   The “correctness” standard of appellate review applies to a challenge to the finding that the restraint was reasonable: [129]-[130].

Warren v Coombes (1979) 142 CLR 531; [1979] HCA 9; Minister for Immigration and Border Protection v SZVFW (2018) 264 CLR 541; [2018] HCA 30; Sun v Chapman [2022] NSWCA 132 referred to.

8   Employsure had a legitimate interest in protecting its confidential information through a restraint against competition after the departure of its employee. It was reasonably contemplated that Mr Kumaran would have access to confidential information, including by virtue of promotion which was also in the parties’ contemplation at the time of the contract: [133], [135]. That Mr Kumaran in fact had access to confidential information, including about the productivity of the sales team and about customer data, identities and dealings, given his client-facing role ([125], [127]), was relevant to what was foreseeable at the time of entry into the restraint: [139]. A restraint to protect against misuse of confidential information was reasonable: [142].

9   However, a restraint for a duration of nine months was unreasonable and his Honour’s finding to the contrary should be set aside. The finding was irreconcilable with the related finding that much of the information to which Mr Kumaran was exposed would no longer be in his memory: [147]. Given the nature of his low-level position and duties, the parties should be taken to have reasonably expected that the currency of any confidential information obtained by Mr Kumaran would be short-lived: [148].

Stenhouse Australia Ltd v Phillips [1973] 2 NSWLR 691 referred to.

10   As Employsure did not submit for a reading down of the duration of the restraint for a lesser period than nine months, it is unnecessary to consider such alternatives or re-exercise the discretion to grant injunctive relief for a lesser period: [152].”

 

 

 

McMurchy v Employsure Pty Ltd; Kumaran v Employsure Pty Ltd [2022] NSWCA 201 delivered 11 October 2022 per Gleeson JA, Leeming  and Kirk AJJ

 

Here is a link to the decision

McMurchy v Employsure Pty Ltd; Kumaran v Employsure Pty Ltd – NSW Caselaw