Cactus Imaging Pty Ltd v Peters

[2006] NSWSC 717

CITATION:	Cactus Imaging Pty Limited v Glenn Peters [2006] NSWSC 717
HEARING DATE(S):	16 June 2006
JUDGMENT DATE :	18 July 2006
JURISDICTION:	Equity Division
JUDGMENT OF:	Brereton J
DECISION:	(1) Order that Defendant be restrained from directly or indirectly disclosing to any other person Plaintiff’s confidential information as particularised, except as may be required by law. (2) Order that until 28 September 2006, Defendant be restrained from: canvassing, soliciting or endeavouring to entice away from Plaintiff any person who or which at any time during the preceding twelve months were or are clients or customers of Plaintiff or in the habit of dealing with Plaintiff; soliciting or endeavouring to entice away, for the purpose of being engaged within NSW in any business of the same nature as Plaintiff’s business, any person who was as at 28 September 2005 a sales representative of the Plaintiff in New South Wales; and counselling, procuring or otherwise assisting any person to do any such act. (3) Order that Defendant pay Plaintiff’s costs.
CATCHWORDS:	RESTRAINT OF TRADE – Employer and employee – sales manager – confidential information – whether information relating to plaintiff’s internal costs, pricing rates and parameters, marketing strategies, and features of special equipment is confidential – held, they are at least “know-how” of the quality that can be protected by a confidentiality covenant – Validity – whether restraint on solicitation of customers protects a legitimate interest of plaintiff in confidentiality of its pricing parameters and marketing strategies – held, it does - whether restraint also protects legitimate interest of plaintiff in customer connection - held, it does – Reasonableness – whether restraint excessive insofar as it prohibited dealing with customers other than those with whom employee personally dealt – where restraint on solicitation of customers is supported by protection of confidential information as well as by protection of customer connection - held, it can legitimately prohibit solicitation of existing clientele whether or not defendant serviced them and whether or not they were customers prior to defendant’s departure - Duration – whether excessive – where restraint supported by legitimate interest in protection of whole of customer connection a significant proportion of which would take a year to establish relationship with replacement employee, and also in protection of confidential information which might remain useful for up to twelve months, and parties had agreed on twelve month restraint – held, 12 months is reasonable – Non-recruitment or anti-poaching covenant – covenant prohibits employee from soliciting other employees of plaintiff after his departure – whether a prohibition on recruiting desirable staff is a restraint of trade – held, it is – whether such restraint supportable by a legitimate interest of employer – held, it protects legitimate interest in confidential information, and also in staff connection - Restraints of Trade Act applied to limit scope of non-recruitment restraint.
LEGISLATION CITED:	Restraints of Trade Act, 1976 (NSW), s 4
CASES CITED:	ANI Corporation Ltd v Celltite Australia Pty Ltd (1990) 19 IPR 506 Arthur Murray Dance Studios of Cleveland Inc v Witter 105 NE (2d) 685, 706 (Ohio, 1951) Attorney-General of the Commonwealth of Australia v Adelaide Steamship Company Ltd [1913] AC 781 Aussie Home Loans v X Inc Services [2005] NSWSC 285 BSC Building Materials Supply Co Ltd v Cheung Chi Hung (1998) HKCFI 991 Business Seating (Renovations) Ltd v Broad [1989] ICR 729 Coote v Sproule (1929) 29 SR (NSW) 578 Corrs Pavey Whiting and Byrne v Collector of Customs (Vic) (1987) 14 FCR 434 Daly Smith Corporation (Australia) Pty Limited v Cray Personnel Pty Limited (NSWSC, Young J, 14 April 1997, unreported) Dawnay Day & Co Limited v De Braconier d’Alphen [1997] IRLR 442 Dewes v Fitch [1920] 2 Ch 159 Ecco Personnel Pty Ltd v Barrett (NSWSC, Young J, 2 September 1996, unreported) Emperor Resorts International Limited v Wong Chi Hang (2004) HKDC 41 Esso Petroleum Co Ltd v Harper’s Garage (South Port) Ltd [1968] AC 209 Faccenda Chicken Ltd v Fowler [1987] 1 Ch 117 G W Plowman & Sons Limited v Ash [1964] 1 WLR 568; [1964] 2 All ER 10 Geraghty v Minter (1979) 142 CLR 177 Guildford Motor Company v Horne [1933] 1 Ch 935 Hanover Insurance Brokers Limited v Schapiro [1994] IRLR 82 Harlow Property Consultants Pty Limited v Byford [2005] NSWSC 658 Herbert Morris Ltd v Saxelby [1916] AC 688 Hitchcock v Coker (1837) 6 Ad & El 438; [1835-42] All ER Rep 452 Ingham v ABC Contract Services (UKCA, 12 December 1993, unreported) Kao Lee & Yip v Koo Hoi-Yan [1995] 1 HKLR 248 Kearney v Crepaldi [2006] NSWSC 23 Kone Elevators Pty Limited v McNay (1997) ATPR 41-564 Konski v Peet [1915] 1 Ch 530 Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449 Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1958] 2 All ER 65 Lindner v Murdock’s Garage (1950) 83 CLR 628 Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472 Lumley v Gye (1853) E&B 216, 118 ER 74 Mason v Provident Clothing & Supply Co Limited [1913] AC 724 Nordenfelt v Maxim Nordenfelt Guns & Ammunition [1894] AC 535 Orton v Melman [1981] 1 NSWLR 583 Petrofina (Great Britain) Limited v Martin [1966] Ch 146 Portal Software Pty Ltd v Bodsworth [2005] NSWSC 1179 Rosewood Advertising Pty Limited v Hannah Marketing Pty Limited [2000] NSWSC 1034 Saltman Engineering Co Limited v Campbell Engineering Co (1948) 65 RPC 203 SBJ Stephenson Ltd v Mandy [2000] IRLR 233 Smith v Ryngiel [1988] 1 QdR 179 Stenhouse Australia Limited v Phillips [1974] AC 391 Tank Lining Corporation v Dunlop Industrial Pty Ltd (1982) 140 DLR (3d) 659 TSC Europe (UK) Ltd v Massey [1999] IRLR 22 Twenty-First Australia Inc v Shade (NSWSC, Young J, 31 July 1998, unreported, BC9803667) Vandervell Products Ltd v McLeod [1956] RPC 185 Woolworths Limited v Olson [2004] NSWCA 372 Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317
PARTIES:	Cactus Imaging Pty Limited (plaintiff) Glen Peters (defendant)
FILE NUMBER(S):	SC 1925/2006
COUNSEL:	G Sirtes (plaintiff) N Gye w B Adams (defendant)
SOLICITORS:	Somerville & Co (plaintiff) Hall Payne Lawyers (defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BRERETON J

Tuesday, 18 July 2006

1925/06 Cactus Imaging Pty Limited v Glenn Peters

JUDGMENT

1 HIS HONOUR: The plaintiff Cactus Imaging Pty Limited is engaged in the business of grand format printing, servicing the outdoor advertising industry by producing images for display on large outdoor billboard sites. On 27 April 1999, Cactus employed the defendant Glenn Peters as a salesman, under a written contract which included a provision relating to confidentiality by which Mr Peters agreed not to disclose any information which he might receive arising out of or in the course of his employment (other than that already in the public domain) to any other party (clause 7), a provision for the protection of goodwill by which he agreed for a period of twelve months after the end of his employment not to be engaged in any business of the same nature within New South Wales, nor to canvass, solicit or endeavour to entice away from Cactus any person who or which had at any time during the preceding twelve months been a client or customer of Cactus, nor to solicit, interfere with or endeavour to entice away any employee, consultant or contractor of Cactus, nor to counsel, procure or otherwise assist any person to do any of those acts (clause 9). Ultimately, in 2003, Mr Peters became Cactus’ New South Wales Sales Manager, but he left Cactus on 28 September 2005, to take up employment with Display Bay Pty Limited, a company specialising in the production of small displays and portable signage and having a business different in nature from that of Cactus. However, on 18 February 2006, Mr Peters took up the full-time position of Account Executive at Cactus’ chief competitor, Metro Media Technologies Inc (“MMT”).

2 While Cactus does not seek to prevent Mr Peters from remaining in the employment of MMT, notwithstanding that the contractual restraint, if enforced, would do so, it seeks to have him restrained from disclosing Cactus’ confidential information; and, for a period of twelve months following the end of his employment, from canvassing soliciting or endeavouring to entice away from Cactus any persons who were its clients or customers during the year before Mr Peters’ departure, from soliciting or enticing away any from Cactus any employee consultant or contractor of Cactus, and from counselling procuring or otherwise assisting any person to do any of those acts. An interlocutory injunction to that effect was granted, by Gzell J, on 22 March 2006, and the hearing was expedited.

3 The issues are:

· Does Mr Peters have in his possession confidential information of Cactus? Mr Peters contends that he has not been shown to be in possession of confidential information of Cactus, nor to have breached any obligation of confidence;

· Is the restraint on solicitation of customers no more than reasonable for protection of Cactus’ legitimate interest? Mr Peters contends that the restraint on solicitation of customers is excessive, both as to its scope in respect of the customers solicitation of whom is prohibited, and as to its duration;

· Is the restraint on solicitation of employees enforceable, and no more than reasonable for protection of Cactus’ legitimate interest? Mr Peters contends that it does not protect a legitimate interest of the employer and is therefore unenforceable, and that it is unreasonable in scope as to the employees covered and as to duration, and that in any event there is no evidence of any threat that he will not abide by it.

The Grand Format Printing Business

4 Grand format printing describes the printing of images on material greater than 6 metres x 3 metres in size, ranging up to 7,000 square metres. Cactus produces advertising banners that will fit on outdoor advertising billboards of 6 metres x 3 metres, 12 metres x 3 metres, or even larger “spectaculars” (for areas such as the sides of office buildings).

5 When Cactus was established in Sydney in about late 1995, MMT had a virtual monopoly in the industry in Australia. By 1998, Cactus matched and began to exceed MMT’s market share, and there are now three major competitors in the industry in Australia: Cactus, MMT and Omnigraphics Australia Pty Limited, with Cactus now claiming in excess of 60% of the market. While there are other businesses that also provide grand format digital printing, they do not have the capacity to offer serious competition to Cactus, MMT or Omni.

The Employment

6 Mr Peters was employed under a contract dated 27 April 1999, commencing on 24 May 1999, initially as Regional Sales Manager, based in Sydney, on a starting salary of $50,000 per annum plus superannuation and a car allowance of $10,000 per annum. The contract provided for an initial probation period of twelve months, and annual reviews of performance and remuneration. In the first year it was terminable on one week’s notice, thereafter until the third year on two weeks’ notice, thereafter until the fifth year on three weeks’ notice, and after five years on four weeks’ notice. Cactus paid the removal expenses for Mr Peters and his family from Auckland to Sydney, and agreed to provide accommodation for him for a month after his arrival in Sydney.

7 Clause 7 of the Employment Contract, entitled “Confidentiality”, provided as follows:

7.1 The employee acknowledges that the employee’s salary is strictly confidential between the employee and the company and must not be disclosed either directly or indirectly) to any other employee.
7.2 The employee acknowledges that all information which the employee may receive arising out of, or in the course of employment by the company, other than such information as is already in the public domain (“the confidential information”) is confidential information of the company.
7.3 The employee shall not directly or indirectly disclose any of the confidential information to any other party, otherwise than as may be necessary to carry out the employee’s employment by the company, or as may be required by the law.
7.4 Any documents, computer discs, or other means of recording information on which any of the confidential information is recorded shall not be copied or removed by the employee from the business premises of the company without express consent of the company, and shall immediately be returned to the company upon termination of the employment.

8 Clause 9, entitled “Protection of Goodwill”, provided as follows:

9.1 The employee will not directly or indirectly and whether solely or jointly or as director, manager, agent or servant of any person or corporation, do any of the following acts at anytime during the course of employment and for 12 months thereafter:
9.1.1 Carry on or be engaged or interested in any business of a nature of the company’s business, within New South Wales;
9.1.2 Canvas, solicit or endeavour to entice away from the employer any person who or which at any time during the preceding 12 months were or are clients or customers of the employer or in the habit of dealing with the employer;
9.1.3 Solicit, interfere with or endeavour to entice away any employee, consultant or contractor of the employer; or
9.1.4 Counsel, procure or otherwise assist any person to do any of the acts referred to in clauses 9.1.2 or 9.1.3
9.2 The employee hereby undertakes that the employee will not, after the termination of the employment relationship, represent himself or herself as being in any way connected with, interested in or associated with the business of the employer.
9.3 The employee hereby undertakes that upon the termination of the employment relationship the employee will immediately deliver up to the employer all property belonging to the employer which may be in his or her possession.

9 In 2003, Mr Peters was promoted to New South Wales Sales Manager, on a package of $65,000, plus a car allowance and superannuation.

Restraints of Trade

10 Although at common law a restraint of trade is contrary to public policy and void unless it is justified by the special circumstances of the particular case (for which purpose it is sufficient justification that the restriction is reasonable having regard to the interests of the parties concerned and in reference to the interests of the public, so that while affording adequate protection to the party in whose favour it is imposed, it is not injurious to the public) [Nordenfelt v Maxim Nordenfelt Guns & Ammunition [1894] AC 535, 565; Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 706, 707; Lindner v Murdock’s Garage (1950) 83 CLR 628, 653], in New South Wales a restraint is valid to the extent to which it is not against public policy, even if not in severable terms [Restraints of Trade Act, 1976 (NSW) s 4(1); Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449, [26]-[27]]. The effect of the Restraints of Trade Act is that, in New South Wales, one approaches this type of case by determining, first, whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed; secondly, whether the restraint in its application to that breach is against public policy; and thirdly, if it is not, then in its application to the alleged infringing conduct, the restraint is valid unless the court makes an order under Restraints of Trade Act, s 4(3) [Orton v Melman [1981] 1 NSWLR 583; Woolworths Limited v Olson [2004] NSWCA 372, [42]]. That is because the effect of the Restraints of Trade Act, s 4(1), is to require that, for the purpose of determining the validity of a restraint, attention be focussed on the actual or apprehended breach, rather than on imaginary or potential breaches.

11 While the same general principle applies in all cases of restraint of trade, a stricter and less favourable view is taken in respect of covenants in restraint of trade between employer and employee than in commercial agreements for sale of goodwill [Nordenfelt, 566; Mason v Provident Clothing & Supply Co Limited [1913] AC 724, 731, 738; Herbert Morris Ltd v Saxelby; Geraghty v Minter (1979) 142 CLR 177, 185; Woolworths Limited v Olson, [38]; J D Heydon, The Restraint of Trade Doctrine, 2nd Ed, pp68-69]. An employer is not entitled to be protected against mere competition, and the legitimate interests of an employer which may be the subject of protection by covenant are in the nature of proprietary interests [Vandervell Products Ltd v McLeod [1956] RPC 185, 192; Tank Lining Corp v Dunlop Industrial Pty Ltd (1982) 140 DLR (3d) 659, 664], including the employer’s trade secrets and confidential information, and the employer’s goodwill including customer connection. In this case, Cactus seeks to support the restraint on solicitation of customers on the basis of protection of both its confidential information and its customer connection.

Confidential Information

12 An employer has an interest in its confidential information, which it may legitimately protect by a restraint of trade, even if the information is not in the nature of a trade secret such as to attract equitable protection in the absence of any contractual agreement [Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317, 326F, 333G-334E, 341G]. Although Mr Gye, who appeared for Mr Peters, submitted, with reference to Faccenda Chicken Ltd v Fowler [1987] 1 Ch 117 and ANI Corporation Ltd v Celltite Australia Pty Ltd (1990) 19 IPR 506, that only a trade secret or equivalent was capable of protection by a restraint in an employment contract, that is not the law in this State, where the Court of Appeal, has declined to follow Faccenda Chicken in that respect in Wright v Gasweld [see, in particular, per Samuels JA at 340-341].

13 And as Lord Denning said in Littlewoods Organisation Limited v Harris [1977] 1 WLR 1472, 1479, experience has shown that it is unsatisfactory simply to have a covenant against disclosing confidential information, because it is difficult to draw the line between information which is confidential and information which is not, and very difficult to prove a breach when the information is of such a character that an employee can carry it away in his or her head, so that the only practicable solution is to take a covenant from the employee by which he or she undertakes not to work for a trade rival. The permissibility of such restraints for that purpose is well established [Kone Elevators Pty Limited v McNay (1997) ATPR ¶41-564, 43,834; Woolworths Limited v Olson, [38], [67]; Lindner v Murdock’s Garage, 650 (Fullagar J); Portal Software Pty Ltd v Bodsworth [2005] NSWSC 1179, [83]]. Cactus relies on Mr Peters’ alleged possession of its confidential information to support not only the covenant in clause 7 against disclosure of confidential information, but also the covenant in clause 9 against soliciting customers.

14 A plaintiff who seeks to restrain a former employee from using confidential information must be able to identify with specificity, and not merely in global terms, the relevant information [Saltman Engineering Co Limited v Campbell Engineering Co (1948) 65 RPC 203, 215; Corrs Pavey Whiting and Byrne v Collector of Customs (Vic) (1987) 14 FCR 434, 443 (Gummow J); Rosewood Advertising Pty Limited v Hannah Marketing Pty Limited [2000] NSWSC 1034, [8]]. Although those cases were concerned with the circumstances in which, even in the absence of a contract, equity imposes an obligation of confidence, the requirement for specificity is no less where a contractual obligation is sought to be enforced. One reason for this is that an injunction in general terms restraining a former employee from using the employer’s “confidential information”, would inappropriately leave, to an application for contempt, determination of whether particular information was or was not confidential.

15 Although the allegedly confidential information had at first been particularised in rather more extensive terms, ultimately Mr Sirtes, who appeared for Cactus, particularised the allegedly confidential information as follows [as amended in the course of his address]:

1. Any of the Plaintiff’s internal cost and pricing rates for any of its products.
2. The optimal operating speeds of printing equipment used by the Plaintiff.
3. Any functions and details of the production scheduling software of the Plaintiff.
4. Any of the Plaintiff’s pricing costs and rates with the businesses known as Matrix Digital, Brite Solutions Pty Ltd, Print Centre, Selbys, Country Outdoor, Elco Coating, Rice Graphics Industries, Portable Creations, and Complete Banner Supplies.

16 Susanne Joy Jamieson, who is and has since about 2001 been MMT’s New South Wales Sales Manager, gave evidence in the defendant’s case. Like Mr Peters, she is employed by MMT under a contract that includes a confidentiality provision. In cross-examination, she said that she would regard information pertaining to MMT’s printing process, the types of machines MMT uses, MMT’s pricing structure, its client lists, its marketing strategies, and its clients’ opinions of MMT and why they deal with MMT, as covered by the confidentiality provision which binds her. Coming as it does from a person in an equivalent position to that formerly held by Mr Peters at Cactus, this is significant evidence of what such an employee would perceive as being confidential, and it was a realistic assessment: which much of the information she identified might fall short of “trade secret” status, it is information of the type which an employer is nonetheless entitled to protect by covenant [Wright v Gasweld]. Mr Peters gave a similar if less comprehensive catalogue of information of MMT’s which he would regard himself as not at liberty to divulge.

17 Ultimately, Mr Gye, rightly, did not dispute that Cactus’ internal costs and pricing rates for any of its products were confidential. Nor, again rightly, did he dispute that Cactus’ pricing costs and rates with the nine businesses specified in particular 4 above (being customers for which Mr Peters had specific responsibility) were confidential.

18 As to the optimal operating speeds of Cactus’ printing equipment, the minimum and maximum operating speeds are in the public domain. The circumstance that higher quality prints are obtained at lower speeds is but commonsense. But Cactus’ industry experience over the years will have enabled it and its staff to gain knowledge of the particular speeds and settings within that range at which particular products might best or most economically be printed, and that knowledge might well afford those who possess it a commercial advantage - a conclusion which is reinforced by Ms Jamieson’s evidence that she would regard information pertaining to MMT’s printing processes as confidential to her employer. Accordingly, it is at least “know-how” of the quality that can be protected by a confidentiality covenant.

19 As to the functions and details of the production scheduling software used by Cactus, the system was “tailor-made” for Cactus. Although there is no suggestion that Mr Peters is in possession of or could replicate the software, as a user he must have known the functions it performs. It is clear that Cactus attaches importance to the functions performed by its production scheduling software, apparently because of economies and efficiencies that it enables Cactus to achieve. Knowledge of its functions may assist a competitor to design, or have designed, a system which achieves similar economies and efficiencies by performing the same functions. Reduced to its simplest form, a competitor, informed that Cactus’ system performed certain functions, which achieved economies and efficiencies that the competitor did not, might be able to eliminate or reduce the commercial advantage the system gave Cactus, by specifying to a programme writer the functions it desired to replicate. Accordingly, the functions and details of the production scheduling software used by Cactus are at least “know-how” of the quality that can be protected by a confidentiality covenant.

20 Moreover, Mr Peters was clearly aware of the basis on which Cactus was prepared to quote for jobs, and the terms on which it dealt with its customers. He accepted that he was aware that there were cases in which Cactus had not won jobs because it was not prepared to undercut competitive quotes. At least when he left Cactus, he was necessarily aware of the approach that Cactus would take to winning a particular job, what were its pricing parameters, and how low it might be prepared to quote to win a job. In short, Mr Peters would have been aware of Cactus’ “bottom line”, namely the minimum profit acceptable to it having regard to the cost of production. Such information would be invaluable to a competitor seeking to make inroads into the market share enjoyed by Cactus, and would obviously be jealously guarded by Cactus. Access to it would plainly give a competitor a significant advantage, so long as it remained current.

21 In the course of Mr Peters’ employment by MMT, in which his duty is to win custom, such knowledge would give him, so long as it remains current, a significant advantage in winning work from Cactus. Even if he were entirely well intentioned, there is an ever-present risk that he would unavoidably use such information for the benefit of MMT and to the detriment of Cactus. That would be particularly, although not exclusively, so in respect of existing customers of Cactus, and more particularly those existing customers who had been serviced by Mr Peters. This is evidenced by the approaches he has already made, since joining MMT, to EyeCorp and to Time and Place.

22 As explained above [see [13]], Cactus’ interest in maintaining the confidentiality of such information may justify not only a prohibition on an employee such as Mr Peters using the confidential information (as imposed by clause 7), but also one against working for a competitor (as imposed by clause 9.1.1), at least so long as the information remains current. Although Cactus does not seek to enforce cl 9.1.1 by preventing Mr Peters from being employed by MMT, clause 9.1.2 serves to protect the same interest by (indirectly) preventing use of the confidential information to undermine Cactus’ relationships with its existing customers.

23 Accordingly, clause 9.1.2 protects a legitimate interest of Cactus in the confidentiality of aspects of its operations which afford it a commercial advantage. It remains to consider, however, whether it is reasonable as to duration in the light of the interests it protects, and before resolving that issue it will first be necessary to consider whether it protects any other interest in addition to confidential information.

24 Before leaving the topic of confidentiality, however, there was also an allegation that Mr Peters had admitted to Ms McFarlane, a fellow employee at Cactus, that he had taken a copy of Cactus’ client list (including her clients). Mr Peters denies the allegation, saying that if he said anything to the effect that Ms McFarlane alleges, it was in jest. Mr Peters was not cross-examined on the question, and I am not satisfied to the requisite standard that he did take any client list.

Customer Connection

25 It is plain that an employer’s customer connection is an interest which can support a reasonable restraint of trade [Hitchcock v Coker (1837) 6 Ad & El 438, 454; [1835-42] All ER Rep 452, 456-7 (Tindal CJ); Herbert Morris Ltd v Saxelby, 709; Dewes v Fitch [1920] 2 Ch 159, 181; Coote v Sproule (1929) 29 SR (NSW) 578, 580 (Harvey CJ in Eq); Lindner v Murdock’s Garage, 633-634 (Latham CJ, Webb J agreeing), 650 (Fullagar J), 654 (Kitto J); Koops Martin v Reeves, [29]-[33]]. Such a restraint is legitimate if the employee has become, vis-à-vis the client, the “human face” of the business, namely the person who represents the business to the customer - or, as it was put by Hoover J in Arthur Murray Dance Studios of Cleveland Inc v Witter 105 NE (2d) 685, 706 (Ohio, 1951): “The personal relation between the employee and the customer [is] such as to enable the employee to control the customer’s business” [Twenty-First Australia Inc v Shade (NSWSC, Young J, 31 July 1998, unreported), BC9803667, 12; Koops Martin v Reeves, [34]]. While the employer is not entitled to be protected against mere competition by a former employee, the employer is entitled to be protected against unfair competition based on the use by the employee after termination of employment of the customer connection which the employee has built up during the employment – which, because the employee has in effect represented the employer from the customer’s perspective during the employment, might at least temporarily appear attached to the employee, but in truth belongs to the employer [Koops Martin v Reeves, [30]].

26 Although the evidence establishes that the grand format printing industry is very price-sensitive and significantly price-driven, it is clear that the relationship established by a salesperson with customers is also a significant influence. It was not only the principals of Cactus who asserted this. For example, Mr Peters gave this evidence:-

Q. Is it fair to say that in your judgment the most important aspect of securing a sale from a client is offering the best price?
A. Yes and no. It’s a very price driven market. Over the last few years price has become a factor, especially in the grand format billboard business, so price basically plays a part. But also you have to build a relationship. They have to like you. You may have the cheapest price in town but if the client doesn’t like you he won’t deal with you. It’s as simple as that.

27 And Ms Jamieson, who referred to the personality of the sales representative and knowledge of a specific client’s needs and expectations, gave the following evidence in cross-examination:-

Q. You would accept this proposition, wouldn’t you, that even if it’s a relatively price competitive market, particularly in those circumstances, service and customer relationship are all the more important?
A. Absolutely.

Q. So the focus of your business has got to be extremely client oriented in order to keep clients rather than offering a cheaper product?
A. Yes.

Q. You, I gather, saw some considerable merit or benefit in employing Mr Peters in the services of MMT?
A. Definitely.

…

Q. [Did it] have anything to do with his interpersonal relationship with large clients like EyeCorp which was also an added advantage?
A. [It was an] added advantage but t wasn’t the main reason.

HIS HONOUR: Q. Is it fair to say that the salesperson is the interface between MMT and the client?
A. Yes, definitely.

SIRTES: Q. … [Is it] fair to say in the interaction between media agencies and companies like your own the sales staff is really highly important in that relationship?
A. Not so, we have a different strategy that we go directly to the clients rather than going through the media agency.

Q. Whether or not you are dealing with the media agencies or adopting a different strategy the front end of your operation are, the sales staff are the critical aspect of the operation?
A. Absolutely.

28 Although the customer connection factor is not so significant in this type of case as in cases involving professionals in whom clients personally repose trust and confidence, there is nonetheless a significant customer connection interest capable of supporting a reasonable restraint. Mr Peters was the interface between Cactus and those of its customers with whom he dealt. Mr Peters had direct access to the account managers at the respective clients. Decisions about contracts were made at his level of operations. He necessarily acquired knowledge of Cactus’ clientele, their needs, their idiosyncrasies, their opinions of Cactus and the reasons why they dealt with Cactus. He was the face of Cactus to those customers with whom he dealt.

29 Moreover, Mr Peters was not just a salesman with responsibility for specified accounts, but ultimately became the New South Wales sales manager. In that position he acquired knowledge, or the means of knowledge, of all the New South Wales clientele, their needs and idiosyncrasies. He was involved, on a daily basis, with such leading customers of Cactus as Network Outdoor, Saatchi & Saatchi, and EyeCorp. From his appointment as State Sales Manager in 2003, he ran weekly sales meetings, customarily on Mondays, during which discussions in relation to sales related issues, including new clients, budgets and sales performance took place.

30 Mr Gye points out that during his last year with Cactus, while Mr Peters obtained a total of 380 contracts from 125 clients, 39 percent (or 149) of them were with 83 percent of the clients, with 68 clients each giving only one contract to Cactus via Mr Peters, 27 clients giving two contracts to Mr Peters, nine giving three contracts each through Mr Peters, Saatchi giving 50 and EyeCorp 25. Mr Gye submits that it would not be reasonable to prevent Mr Peters from dealing with, at the very least, the 104 clients who dealt with him not more than three times in the year preceding his departure. However, it is not apparent why Cactus is any less entitled to protect its connection with low volume customers than it is with high volume customers. Mr Peters was as much the face of Cactus to the low volume customers as he was to those who placed business more frequently. Cactus is as much entitled to protect its trade connection with those who deal with it only once or twice a year as with those who deal with it every week.

31 Mr Gye further submits that it would be unreasonable to prevent Mr Peters from dealing with EyeCorp, nine months now having passed since he left Cactus, given that EyeCorp does not have an exclusive relationship with the plaintiff. Once again, it is not apparent why the circumstance that EyeCorp deals with other printers as well as Cactus makes any difference to the entitlement of Cactus to protect its connection, albeit non-exclusive, with EyeCorp. Indeed, where there is not a “preferred supplier” or equivalent arrangement, as Cactus apparently has with some agencies, the need for protection of the connection may be, if anything, greater.

Scope of restraint – customers

32 Were the restraint in cl 9.1.2 supported solely by customer connection, it would be prima facie excessive insofar as it prohibited solicitation of customers other than those with whom Mr Peters dealt, and in particular those who had become customers only since he had left Cactus [Coote v Sproule, 580; Harlow Property Consultants Pty Limited v Byford [2005] NSWSC 658, [30]; Konski v Peet [1915] 1 Ch 530, 539; Smith v Ryngiel [1988] 1 QdR 179, 186].

33 However, such a restraint may be reasonable, notwithstanding that it extends beyond customers with whom the employee has personal contact, in particular where, despite the absence of personal contact, the employee may have acquired influence over or special knowledge of the clientele as a result of the seniority of his or her position, or where the employee’s role includes obtaining and extending custom for the employer’s business [Stenhouse Australia Limited v Phillips [1974] AC 391; Guildford Motor Company v Horne [1933] 1 Ch 935; G W Plowman & Sons Limited v Ash [1964] 1 WLR 568; [1964] 2 All ER 10; Business Seating (Renovations) Ltd v Broad [1989] ICR 729, 733; Normalec Limited v Britton [1983] 9 FSR 318, 324; Dean, The Law of Trade Secrets, 2nd edn, [11.150]; Koops Martin v Reeves, [44]]. Mr Peters’ position as State Sales Manager places him in that category in respect of the New South Wales clientele, even those with whom he did not personally deal.

34 Moreover, cl 9.1.2 is supported, not only by protection of customer connection, but also by protection of confidential information. Protection of confidential information could have supported a restraint on employment by a competitor at all, such as is imposed by clause 9.1.1, although Cactus does not seek to enforce it. Clause 9.1.2 can therefore legitimately, in aid of protection of Cactus’ confidential information, prohibit solicitation of the existing clientele of Cactus, whether Mr Peters dealt with them or not. That is because his knowledge of pricing parameters and market strategies would advantage him, in the employ of a competitor of Cactus, in soliciting any customer of Cactus, whether or not he had previously personally serviced that customer.

Duration of restraint

35 In this case, the restraint is expressed to operate during, and for twelve months after, Mr Peters’ employment by Cactus, and prohibits solicitation of persons who were at any time during the preceding twelve months customers of Cactus. Although the parties appear to have proceeded on the basis that that is a reference to twelve months preceding termination of employment, in my opinion it refers to twelve months preceding the date of the hypothetical solicitation. Thus it is now only those who were customers of Cactus in the last three months of Mr Peters’ employment, and those who have been customers since, who are covered by that restraint. For the reasons explained above, given that one of the interests which cl 9.1.2 protects is Cactus’ confidential pricing parameters and marketing strategies, in this particular case it is not unreasonable that solicitation of those who have become customers since Mr Peters left Cactus be prohibited.

36 In this case it is necessary to consider the duration of the restraint bearing in mind that it is supported by both protection of customer connection and protection of confidential information. Generally, the test of reasonableness for the duration of a non-solicitation covenant, when it is supported by customer connection, is what is a reasonable time during which the employer is entitled to be protected against solicitation, which in turn depends on how long it would take a reasonably competent replacement employee to show his or her effectiveness and establish a rapport with customers [Stenhouse v Phillips; Daly Smith Corporation (Australia) Pty Limited v Cray Personnel Pty Limited (NSWSC, Young J, 14 April 1997, unreported)]. A related, albeit subsidiary, consideration is how long might the hold of the former employee over the clientele be expected to last before weakening [Koops Martin v Reeves, [88]]. But where protection of confidential information is involved, considerations such as how long the information is likely to remain current and of commercial advantage will also be relevant.

37 The reasonableness of a restraint must be judged at the time when the contract was made, but that does not mean that at that time the parties must disregard prospective future developments, including the prospect of promotion as an ordinary incident of employment. When this contract was made, Mr Peters was not employed as Cactus’ New South Wales State Sales Manager, but Regional Sales Manager. He was employed on a salary of $50,000, initially on a probationary basis and terminable during the first year on one week’s notice and up to three years on two weeks’ notice. Even after five years service, his employment was to be terminable on four weeks’ notice. However, it was foreseeable that he might be promoted to positions of greater responsibility, and the next step up the ladder from Regional Sales manager would presumably be State Sales Manager. That he would be promoted to such a role was within contemplation when he was originally employed: promotion is an ordinary incident of employment. Alternatively, the parties should be taken to have implicitly renewed the covenant at the time of his promotion: it is unthinkable that, if asked, either would have disputed that the restraint would continue to apply, having regard to Mr Peters’ new and greater responsibilities and remuneration.

38 As to how long it would take a reasonably competent replacement employee to show his or her effectiveness and establish a rapport with customers, large volume customers such as Saatchi (who dealt with Cactus through Mr Peters on 50 occasions in the year before he left) and EyeCorp (who did so 25 times) must have contact on average weekly or fortnightly with Cactus’ sales representative. The 68 who dealt with Mr Peters only once each in the last year would have contact not more frequently than annually. On average, with a total of 380 contracts over a twelve-month period via 125 clients, there would be approximately three contracts per client per year. Those who dealt with Mr Peters three times a year would have had contact on average every four months. The evidence establishes that advertising campaigns of this type last for only two to three months. For a particular site, therefore, a billboard owner or media agency would likely be ordering a replacement poster every three months or thereabouts.

39 It would take multiple satisfactory transactions for a replacement employee to show his or her effectiveness and establish a rapport with customers. While, with a high volume customer such as Saatchi or EyeCorp, a period of significantly less than twelve months would be ample for that purpose, for the 83 percent of Mr Peters’ clientele who gave not more than three contracts to Cactus through him in his last year – representing 39% of the business he won for Cactus - that would not be so. For such a customer, it might well take the replacement employee a year to prove his or her competence and develop a rapport. And 39% is on any view a significant proportion.

40 From the perspective of protection from misuse of confidential information, there are a number of available indicia as to the period for which the restraint may be reasonable. The evidence is that advertising campaigns nowadays typically run for not longer than two to three months, and at least one of Cactus’ arrangements with a third party – Saatchi & Saatchi – provides for review of print rates “every six months”. Mr Peters says he does not know what Cactus’ prices and pricing parameters are now. But it is a mistake to think that information about pricing parameters and quoting strategies ceases to be relevant just because there is a fluctuation in price. Although it is evident that the industry is price-sensitive, and that prices fluctuate relatively frequently, the evidence of Mr Ferrel, who is responsible for pricing at Cactus, and whose evidence in this respect was uncontradicted and ought to be accepted, is that Cactus’ pricing parameters have not changed for three years. Notwithstanding that prices might fluctuate frequently, pricing parameters and quoting strategies are of a more lasting nature, and knowledge of what they have historically been provides valuable guidance as to what they are likely to be and how they are likely to be structured in the future. In my opinion, when the contract was made or renewed, it was not unreasonable to think that such price sensitive information relating to Cactus might give a competitor a significant advantage for at least up to a year: that is, two cycles of six-monthly reviews, or four standard three-month campaigns.

41 As White J has said in Aussie Home Loans v X Inc Services [2005] NSWSC 285, [36], the reasonableness of the duration of an otherwise justifiable restraint is often difficult to gauge, and where the parties have equal bargaining power it will often be appropriate to regard them as the best judges of what length of period is reasonable - although, as the result of that case itself shows, such considerations are far from conclusive. In this case, the parties freely agreed on the twelve-month restraint. Moreover, Cactus paid Mr Peters’ expenses of relocation to Australia. And although – because it involves the same employer, so that it cannot be said to prove an industry practice – it is of limited weight, it is of some slight significance that Mr Peters’ fellow employee when he was at Cactus, Melanie McFarlane, also has a twelve-month restraint in her contract of employment.

42 In favour of the view that twelve months is not excessive is, first, that that is what the parties agreed; secondly, that at least for lower volume customers, it will probably take that long for a replacement to prove his or her competence and establish a rapport with the customer; thirdly, that insofar as the restraint protects confidential information, it would not have been unreasonable to think that knowledge of Cactus’ pricing parameters and marketing strategies might well afford the employee an unfair advantage for as long as twelve months after separation; and fourthly, albeit slightly, that Ms McFarlane has a similar restraint. Against it is the circumstance that for the customers who provide sixty-one percent of jobs, a shorter - and in some cases, much shorter - period is likely to be sufficient for a replacement to prove himself or herself, particularly having regard to the duration of modern advertising campaigns. But an employer has a legitimate interest in the whole, and not just in 61 percent, of its customer connection, and when that is combined with the interest in protection of confidential information, and in the light of the parties’ agreement, the period of twelve months is reasonable.

The non-recruitment covenant

43 Cactus also seeks to enforce clause 9.1.3, which would prohibit Mr Peters from soliciting or enticing away any employee, consultant or contractor of Cactus for a period of twelve months following the end of his employment. There is controversy as to whether a covenant not to solicit employees is enforceable. This aspect of the case received little attention in the evidence or oral submissions, and accordingly I invited, and received, supplementary written submissions on it.

44 In Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1958] 2 All ER 65, an agreement between two employers in an industry not to employ each other’s former employees was held void, at least in part on the basis that it was contrary to the public interest [see Esso Petroleum Co Ltd v Harper’s Garage (South Port) Ltd [1968] AC 209, per Lord Reid at p300 and per Lord Hodson at p319]. Although acknowledging that an employer had an interest in maintaining a stable and trained workforce, Jenkins LJ, giving the judgment of the Court of Appeal, said that an employer had no legitimate interest in preventing an employee, upon termination, taking employment with a competitor merely because the new employer was a competitor, and that save in exceptional cases involving confidential information, a covenant by an employee not to enter into the employment of a competitor would be void (at 74):-

Apart from the question of trade secrets and confidential information, we have described the matter requiring protection as being the adequacy and stability of the plaintiffs’ and defendants’ respective complements of employees. That, no doubt, is an interest which employers are entitled to protect by all legitimate means, as by paying good wages and making their employment attractive. We have further described the danger against which that interest required protection as being the unimpeded secession of employees of either of the parties to that of the other of them under the inducement of higher wages or better working conditions. But an employer has no legitimate interest in preventing an employee, after leaving his service, from entering the service of a competitor merely on the ground that the new employer is a competitor. The danger of the adequacy and stability of his complement of employees being impaired through employees leaving his service and entering that of a rival is not a danger against which he is entitled to protect himself by exacting from his employees covenants that they will not, after leaving his service, enter the service of any competing concern. If in the present case the plaintiffs had taken a covenant from each of their employees that he would not enter the service of the defendants at any time during the five years next following the termination of his service with the plaintiffs, and the defendants had taken from their employees covenants restraining them in similar terms from entering the employment of the plaintiffs, we should have thought that (save possibly in very exceptional cases involving trade secrets, confidential information and the like) all such covenants would on the face of them be bad as involving a restraint of trade which was unreasonable as between the parties. Here the plaintiffs and the defendants have, as it seems to us, sought to do indirectly that which they could not do directly, by reciprocal undertakings between themselves not to employ each other’s former employees, entered into over the heads of their respective employees, and without their knowledge. It seems to us to be open to question whether an agreement such as that, directed to preventing employees of the parties from doing that which they could not by individual covenants with their respective employers validly bind themselves not to do, should be accorded any greater validity than individual covenants by the employees themselves would possess.

45 Those observations do not address, at least directly, a covenant binding a former employee not to solicit other employees. However, in Hanover Insurance Brokers Limited v Schapiro [1994] IRLR 82, Dillon LJ, with the agreement of Nolan LJ, expressed “a general view … that an employer does not have any sort of proprietary interest in a stable team of staff entitling the employer to impose restrictions on solicitation of staff”. Shortly afterwards, and without reference to that decision, the opposing view emerged in Ingham v ABC Contract Services (UKCA, 12 December 1993, unreported): Leggatt LJ, with whom Russell LJ agreed, said, in respect of a covenant intended to prevent an employee from poaching his employers’ other employees after he had left their employment, that the employers had “a legitimate interest in maintaining a stable, trained workforce in what is acknowledged to be a highly competitive business” which interest they were entitled to protect against solicitation and enticement by the former employee.

46 The issue has been the subject of judicial comment in Hong Kong. The controversy was stated but not resolved by the Court of Appeal of Hong Kong in Kao Lee & Yip v Koo Hoi-Yan [1995] 1 HKLR 248 (at 253):

There may be room for two views about such restraints. One is that they are justifiable; an employer has a legitimate interest in maintaining a stable, trained workforce; this is the view taken, fro example, by Leggatt LJ (with whom Russell LJ agreed), in Ingham v ABC Contract Services (12 November 1993, an unreported decision of the (English) Court of Appeal. The other is that they are unjustifiable; although the goodwill of a business does in a sense depend on its staff, that does not make the staff an asset of the business, like apples and pears or other stock-in-trade: this was the view expressed by Dillon LJ (with whom Nolan LJ agreed), in Hanover Insurance Brokers Limited v Schapiro , 12 August 1993, an (earlier) unreported decision of the (English) Court of Appeal. Whether these views are reconcilable (as to which we express no opinion) we need not pause to consider; because in both those cases the restraint was one against solicitation or enticement of employees, whereas, in our case, it is not. It is a restraint against employment of former employees of the firm under any circumstances. As such, we think it is on any view a naked restraint against legitimate competition; it limits quite unjustifiably the extent to which the person subject to the restraint can legitimately compete in the labour market against those seeking to enforce it against him. We consider an agreement of this nature as contrary to the public interest, as did Lloyd-Jacob J in the case of the agreement under consideration in Kores Manufacturing Co v Kolok [1957] 1 WLR 1012. (This approach to the Kores case was endorsed in Esso Petroleum Co Ltd v Harper’s Garage (South Port) Ltd [1968] AC 209, per Lord Reid at p300 and per Lord Hodson at p319).

We hold accordingly that the employee restraint in our case is unenforceable as being against the public interest, however reasonable it may have been from the point of view of the parties to the 1988 deed. A restraint framed as is the employee restraint in this case goes much further than is necessary to protect the employer against the improper solicitation or enticement of his workforce; it has the effect of preventing any member of the workforce from going to work for a former partner even the absence of any such solicitation or enticement.

47 In BSC Building Materials Supply Co Ltd v Cheung Chi Hung (1998) HKCFI 991, Waung J in the Court of First Instance, on an application for an interlocutory injunction, observed that whether staff connection was a legitimate interest capable of protection by a covenant was a subject of growing interest and controversy, which had been left open by the Court of Appeal in Kao Lee & Yip v Koo Hoi-Yan. His Honour thought it at least arguable that, having regard to the special facts of the case, there was a legitimate interest in relation to staff connection, which required protection. But in Emperor Resorts International Limited v Wong Chi Hang (2004) HKDC 41 – although the covenant does not appear to have extended to solicitation of employees, it being contended that there was an implied term to like effect - Chan J in the District Court was inclined to accept that the law did not regard the staff as an asset of the employer, expressing preference for Hanover Insurance over Ingham (though apparently without reference to the earlier Hong Kong decisions).

48 In Dawnay Day & Co Limited v De Braconier d’Alphen [1997] IRLR 442, Evans LJ, with whom Nourse and Ward LJJ agreed, referred to Hanover and Ingham, and expressed agreement with Leggatt LJ in Ingham that an employer’s interest in maintaining a stabled trained workforce is one which could properly be protected within the limits of reasonableness by covenant, but that that would not always necessarily be so:

The clause can be regarded as objectionable because it restricts not only rights of the former employee to recruit staff for his new business, but also the opportunities of the remaining employees to learn about future employment possibilities for themselves. However, their ability and right to do so through making enquiries of their own, and through advertisements and other channels of communication in the normal way, is not restricted at all. The employer’s need for protection arises because the employee may seek to exploit the knowledge which he has gained of their particular qualifications rates of remuneration and so on which the judge included in his general description of specific confidential information which the managers acquired.

49 In TSC Europe (UK) Ltd v Massey [1999] IRLR 22, it was held that the plaintiffs had an interest in maintaining a stable trained workforce which they could protect within the limits of reasonableness, but that a covenant which extended to all employees (not merely key personnel) and to persons who had become employees since the defendant’s departure was excessive. In SBJ Stephenson Ltd v Mandy [2000] IRLR 233, an injunction enforcing a non-recruitment clause which extended to all employees of the plaintiff was continued; in circumstances where the plaintiff had invested a great deal in training staff, who worked as a close team, Bell J (at 238) expressed “no hesitation in finding that the stability of SBJ’s workforce as a whole was a legitimate interest of SBJ which it was entitled to protect”.

50 In this state, Young J (as the Chief Judge then was) enforced a covenant by a former employee not to solicit the employer’s customers, but the enforceability of such a covenant does not seem to have been argued [Ecco Personnel Pty Ltd v Barrett (NSWSC, Young J, 2 September 1996, unreported)]. White J reviewed the authorities in Aussie Home Loans, and concluded that a covenant against poaching employees is not necessarily invalid, and may be justified by reference to confidential information which the ex-employee has about the relations between his former employer and its employees (at [24], [26]). However, in that case the restraint was held excessive and void. The analysis in Aussie Home Loans was cited with approval by McDougall J in Kearney v Crepaldi [2006] NSWSC 23, where His Honour expressed the views that, notwithstanding Kores v Kolok, later English cases suggested that an employer’s interest in maintaining a stable workforce may be protected at least by a covenant by an employee not after termination to poach further employees (at [57]), and that a covenant given by an employee to an employer prohibiting the employee after termination from soliciting former fellow employees to join a new business venture may not be justified simply by the employer’s interest in maintaining a stable trained workforce, but may be justified where the solicitation is based on confidential information which the former employee has concerning the relationship between the other employees and the employer (at [58]):-

In other words, it may be justified where the former employee uses (or may use) confidential knowledge gained in the course of the contract of employment to target particular employees and to pitch the terms of offers of employment to them.

51 However, His Honour added that this was not intended to be a comprehensive statement of the circumstances in which such a covenant may be upheld, but at most a statement sufficient for the purposes of that decision.

52 The cases appear to have accepted that such covenants are within the restraint of trade doctrine. In New South Wales this is doubly important because, unless they are restraints of trade, the Restraints of Trade Act will not be available to save them to the extent that they are not unreasonable. Such a covenant limits or restricts the ability of a trader bound by it to recruit desirable employees. In that way, it affects the entitlement of the covenantor to carry on trade or business in the manner which he or she thinks most desirable in his or her own interests; that is a restraint of trade within the formulation stated in Attorney-General of the Commonwealth of Australia v Adelaide Steamship Company Ltd [1913] AC 781, 793-4 (Lord Parker of Waddington), and in Petrofina (Great Britain) Limited v Martin [1966] Ch 146, 169 (Lord Denning MR), 180 (Diplock LJ). In Kores v Kolok, such arrangements were assumed to be within the doctrine. As Sales has pointed out [“Covenants Restricting Recruitment of Employees and the Doctrine of Restraint of Trade” (1988) 104 LQR 600, 607], a business depends for its profitability and competitivity on three factors: (1) its customers and the proceeds of sales to them; (2) its suppliers and the cost of purchases from them; and (3) its staff, and the cost and value of their labour. Restriction on competition in any of those fields may impact on ultimate profitability. A prohibition on recruiting desirable staff is, therefore, a restraint of trade.

53 The controversy has been whether the employer has an interest in staff connection recognised by law as legitimate for the purpose of supporting a covenant. The weight of authority favours the view that there is such an interest. Traditionally, it has been said that the only reason for supporting a restraint is some proprietary right of the employer, either trade connection or trade secrets [Herbert Morris Ltd v Saxelby, 710 (Lord Parker of Waddington)].

54 The more recent cases have tended to support restraints on recruitment on the basis of protection of confidential information; thus it has been said that an employer may be able to demonstrate a legitimate interest in maintaining a stable trained workforce, at least if the former employee may seek to exploit knowledge gained of the particular qualifications, rates of remuneration and so on pertaining to other employees which is confidential to the employer [Dawnay Day & Co Limited v De Braconier D’Alphen, [45]-[46]; Aussie Home Loans, [24]-[26]; Kearney v Crepaldi, [58]]. Mr Gye submitted that confidential information could not be a sufficient interest to support such a restraint, because it did not permit the inquiry, required by the Faccenda Chicken test, as to whether the relevant information was a trade secret, know-how or trivial, only the first of which was entitled to protection. This submission must be rejected, first because, as has already been explained, the Faccenda Chicken test is not the law in this State; and secondly because a restraint on a former employee carrying on business, which unquestionably may be supported by an interest in protection of confidential information [see [13] above], is open to exactly the same objection.

55 But apart from protection against misuse of confidential information, does an employer have a protectable interest in staff connection – that is, in maintaining a stable trained workforce? The cases denying that there is any such legitimate interest emphasise that an employer does not own the workforce, as if employees were akin to stock-in-trade. That is self-evident, but nor does an employer own the customers, who are also not akin to stock-in-trade; yet a connection with customers is unquestionably amenable to protection by covenant. The employees, along with the suppliers and the customers, make up the three relations upon which the profitability of a business depends. The customers are not property, but their connection with the business adds value to the business and is recognised as deserving of protection in the proprietor’s legitimate interest. Similarly, employees are not property, but, all else being equal, a business with a stable trained workforce will be more attractive to a purchaser and command a higher price than one with a workforce which is unstable, disruptive or poorly trained, just as a loyal and satisfied clientele makes a business more attractive and valuable. In my opinion, staff connection constitutes part of the intangible benefits, which may give a business value over and above the value of the assets employed in it, and thus comprises part of its goodwill. It is amenable to protection by a covenant in a manner similar to customer connection, even in the absence of protectable confidences.

56 In the absence of confidential information, similar considerations inform the reasonableness of such a covenant in respect of its duration as are relevant to the reasonableness of a covenant protecting customer connection: essentially, how long might the hold of the former employee over the other employees be expected to last before weakening. That will be influenced, inter alia, by the seniority of the former employee. There is unlikely to be any influence over employees with whom the former employee did not have contact, except perhaps in the case of senior staff. Another consideration is that it is within the capacity of an employer to ensure the stability of its workforce by offering key staff long term contracts of employment, so that solicitation of staff with such contracts would constitute the tort of inducing breach of contract [cf Lumley v Gye (1853) E&B 216, 118 ER 749]. It is difficult to see why, as a matter of policy, an employer who wishes to maintain flexibility in its labour force by engaging staff on contracts terminable on relatively short notice on either side, should at the same time be entitled to insist on maintaining stability by a covenant of the type in question here.

57 In this case, the non-recruitment covenant must be evaluated in its whole context, including the dual interests that it protects, and the other restraints which operate in conjunction with it. As Cactus concedes, Mr Peters could have had relevant influence only over the New South Wales sales staff, and to the extent that the restraint would prohibit poaching other staff, it is excessive. As State Sales Manager, Mr Peters gained knowledge about the performance of other sales personnel and was in a position to know their capacities and personalities. Although the evidence does not establish that he knew their terms of employment, nor their remuneration, which might have been confidential, he was, in effect, the team leader of the state sales team, and as such was in a position to gain and exercise influence over other members of the New South Wales sales team. Moreover, the members of his team would have in their possession the same type of confidential information as I have found Mr Peters had in his. The major risk, against which Cactus was entitled to guard, was that upon his departure Mr Peters might seek to use his influence, gained in the course of his employment with Cactus, to arrange the defection of his state sales team to a competitor, thus seriously disrupting Cactus’ operations, and potentially putting into the hands of a competitor the ability to use confidential information of Cactus, to its detriment. Thus the covenant did not only protect staff connection, but also operated in conjunction with the remainder of cl 9.1 to protect Cactus’ confidential information, in particular its pricing parameters and marketing strategies.

58 For reasons already explained, it was not unreasonable to prohibit Mr Peters from soliciting Cactus’ customers for at least twelve months, and although Cactus does not seek to enforce it, it was also not unreasonable him from setting up in competition or working for a competitor for twelve months, in the interest, inter alia, of protection of Cactus’ confidential information. If the non-recruitment covenant were limited to soliciting employees for the purposes of a competing business, a twelve-month restraint on soliciting employees would be consistent with those restraints and not unreasonable; in that respect it is ancillary to the protection of confidential information, as well as protective of staff connection. But if the hypothetical solicitation were for the purpose of a non-competing business, the only relevant interest would be protection of staff connection. Mr Peters’ influence would diminish from the moment his successor was appointed, and progressively weaken thereafter. Any relevant hold of Mr Peters over other employees would have been sufficiently dissipated by not more than six months to make the covenant no longer sustainable, if it depended only on protection of staff connection.

59 Applying the Restraints of Trade Act, s 4(1), the non-recruitment covenant should be treated as enforceable for twelve months, only in respect of New South Wales sales staff, and only in respect of their solicitation for the purpose of engagement in a competing business. Read down in that way, it is supported by Cactus’ legitimate interest in protecting the confidentiality of, in particular, its pricing parameters and marketing strategies, and it operates in tandem with the restraint on solicitation of customers (and on being engaged in a competing business).

60 Mr Gye has submitted, correctly, that there is no evidence of an actual or threatened breach of the non-recruitment covenant. However, Mr Peters’ actual breach of clause 9.1.1, coupled with his opposition to enforcement of clauses 9.1.2 and 9.1.3, and his contention that the restraints are unenforceable, and the absence of any proffer on his part at any stage of any undertaking, provides a sufficient basis for apprehension that, if not restrained, he may breach those clauses, to justify the grant of injunctive relief.

Conclusion

61 Cactus’ internal costs and pricing rates for any of its products are confidential. So are its pricing costs and rates with the nine customers for which Mr Peters had specific responsibility. The optimal operating speeds of Cactus’ printing equipment, and the functions and details of the production scheduling software used by Cactus, are at least “know-how” of the quality that can be protected by a confidentiality covenant.

62 Clause 9.1.2 protects a legitimate interest of Cactus in confidentiality of aspects of its operations, which afford it a commercial advantage, including in particular its pricing parameters and marketing strategies. It also protects a legitimate interest in customer connection. Because cl 9.1.2 is supported, not only by protection of customer connection, but also by protection of confidential information, it can legitimately prohibit solicitation of the existing clientele of Cactus, whether Mr Peters dealt with them or not, and whether or not they were customers prior to Mr Peters’ departure. When Cactus’ legitimate interest in the protection of the whole of its customer connection is combined with its interest in protection of confidential information, and in the light of the parties’ agreement, the period of twelve months is reasonable for the duration of the restraint.

63 A prohibition on recruiting desirable staff is a restraint of trade. Such a restraint may be supported by a legitimate interest in protection of confidential information, and/or in staff connection. In this case, six months would have amply protected staff connection, but twelve months, consistent with cl 9.1.1 and 9.1.2, is reasonable for protection of confidential information. Accordingly, applying the Restraints of Trade Act, the restraint on recruitment should be treated as enforceable for up to twelve months, only in respect of New South Wales sales staff, and only in respect of solicitation for the purpose of engagement in a competing business.

Orders

64 Subject to any submissions as to their form, my orders are:-

1. Order that the Defendant be restrained from, by himself his servants and agents, directly or indirectly disclosing to any other person the Plaintiff’s confidential information described in the Schedule, except as may be required by law.

2. Order that until 28 September 2006, the Defendant be restrained from, by himself his servants and agents:

2.1 canvassing, soliciting or endeavouring to entice away from the Plaintiff any person who or which at any time during the preceding twelve months were or are clients or customers of the Plaintiff or in the habit of dealing with the Plaintiff;
2.2 soliciting or endeavouring to entice away, for the purpose of being engaged within New South Wales in any business of the same nature as the Plaintiff’s business, any person who was as at 28 September 2005 a sales representative of the Plaintiff in New South Wales;
2.3 counselling, procuring or otherwise assisting any person to do any act referred to in paragraph 2.1 or 2.2.


3. Order that the Defendant pay the Plaintiff’s costs.

4. Order that the exhibits be returned at the expiration of 28 days, unless within that time appellate proceedings have been instituted.

Schedule

1. Any of the Plaintiff’s internal cost and pricing rates for any of its products.
2. The optimal operating speeds of printing equipment used by the Plaintiff.
3. Any functions and details of the production scheduling software of the Plaintiff.
4. Any of the Plaintiff’s pricing costs and rates with the businesses known as Matrix Digital, Brite Solutions Pty Ltd, Print Centre, Selbys, Country Outdoor, Elco Coating, Rice Graphics Industries, Portable Creations, and Complete Banner Supplies.

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