Kearney v Crepaldi - [2006] NSWSC 23

No judgment structure available for this case.

CITATION: Kearney v Crepaldi & Ors [2006] NSWSC 23

HEARING DATE(S): 5 & 6/01/2006

JUDGMENT DATE :
10 February 2006

JURISDICTION: EQUITY

JUDGMENT OF: McDougall J

EX TEMPORE JUDGMENT DATE: 01/19/2006

DECISION: Refer paras 111-112.

CATCHWORDS: RESTRAINT OF TRADE - Application for interlocutory injunctive relief - where decision to grant injunction will determine substance of the matter - where serious question - where employer delayed enforcement of restraints - whether restraint on competition is reasonably necessary to prevent disclosure of confidential information or exploitation of former client relationships - where restraints on solicitation of employees and clients are broad and damages are an adequate remedy - whether restraint on solicitation is based on confidential knowledge gained during employment.

LEGISLATION CITED: Restraints of Trade Act 1976

CASES CITED: Attorney-General of Australia v Adelaide Steamship Co [1913] AC 781, 797
Aussie Home Loans v X Inc Services (2005) NSWSC 285
Dawnay Day & Co Ltd v De Braconier d'Alphen [1998] ICR 1068
Hartleys Ltd v Martin [2002] VSC 301
Herbert Morris Ltd v Saxelby [1916] 1 AC 688
Hanover Insurance Brokers Ltd v Schapiro [1994] IRLR 82
Ingham v ABC Contract Services (UKCA, unreported, 12/12/93)
Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533
Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1958] 2 All ER 65
Lindner v Murdoch's Garage (1950) 83 CLR 628
Littlewoods Organisations Ltd v Harris [1977] 1 WLR 1472
Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705
North Western Salt Co. Ltd v Electrolytic Alkali Co Ltd [1914] AC 461, 470

PARTIES: A.T. Kearney Australia Pty Limited Plaintiff
Joseph Ronald Crepaldi First defendant
Christopher Paxton Second defendant
Crescendo Partners Pty Limited Third defendant

FILE NUMBER(S): SC 6534/05

COUNSEL: Mr M S White - Plaintiff
Mr R M Goot SC with Mr J Harris - Defendants

SOLICITORS: Baker & McKenzie - Plaintiff
Clayton Utz - Defendants

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

McDOUGALL J

FRIDAY, 10 FEBRUARY 2006

6534/2005 A.T. KEARNEY AUSTRALIA PTY LTD v JOSEPH RONALD CREPALDI & ORS.

JUDGMENT

1 HIS HONOUR: The plaintiff (Kearney Australia) carries on the business of management consulting. The first defendant (Mr Crepaldi) was employed by Kearney Australia from February 1997 to 26 October 2005: for the last two and a half years of that period, as managing director. The second defendant (Mr Paxton) was employed by Kearney Australia from October 2000 to 3 November 2005: for the last sixteen months of that period, as a “vice-president”. The third defendant (Crescendo) is a company formed and controlled by Mr Crepaldi. It carries on the business of management consulting, and in that business employs (among others) Messrs Crepaldi and Paxton.

2 Kearney Australia claims that Messrs Crepaldi and Paxton have breached terms of various agreements made between them and it by:

3 Further, in Mr Crepaldi’s case, Kearney Australia claims that, as managing director, he owed it fiduciary duties (this was not, and could hardly be, disputed); and that a number of the matters referred to in the previous paragraph amounted, in his case, to breach of those fiduciary duties.

4 Kearney Australia seeks interlocutory injunctive relief to prevent the continuance of those alleged infringements of its rights. I heard that application on 5 and 6 January 2006. Because of the urgency and the importance of the issues to the parties, I took the course of giving brief oral reasons, to be supplemented by detailed reasons, on 11 January 2006. As a result of the conclusions to which I had come, I made orders on that day dismissing the claims for interlocutory relief and relieving the defendants of undertakings given by them to the Court. These are my detailed reasons for the making of those orders.

Background

5 Kearney is a subsidiary of A T Kearney Inc (Kearney Inc), an American corporation. Kearney Inc has subsidiaries in many parts of the globe. Kearney Inc and its subsidiaries (the Kearney Group) carry on management consulting business in many countries. I infer that each subsidiary assists the other, both by passing on opportunities to obtain work and by assisting in the performance of work, where possible. However, it appears that the business of Kearney Australia from time to time requires the performance of management consulting work in many countries. Where this is so, and where there is a member of the Kearney Group in that other country, the work will often be done by employees of, and charges for the work will often be rendered by that member.

6 There are a number of international management consulting organisations, substantially similar to the Kearney Group, that perform management consulting work internationally and in Australia. Further, in Australia, there are what have been described as “boutique” organisations (Crescendo is one example) that perform such work. It is likely that competition for work is intense, and that clients are fickle. Mr Crepaldi said, without contradiction (Kearney Australia filed an affidavit in reply to his and other affidavits filed for the defendants) that in the management consultancy industry, the long-term relationships between service providers and clients that exist in other sectors such as the legal and accounting professions are absent; that management consultants “operate on a project by project basis”; that “clients frequently change [management] consultants from project to project”; and that projects are “generally contracted or awarded…following a competitive process involving proposals from several consultants.”

7 Kearney Inc is a subsidiary of another American corporation, Electronic Data Systems Corporation (EDS). EDS is divesting itself of its shareholding in Kearney Inc. A number of senior employees of Kearney Inc, or the Kearney Group, are seeking to effect a management buy-out (MBO) of the interest of EDS in Kearney Inc. Messrs Crepaldi and Paxton were offered an opportunity to participate in this process but, for reasons that I shall describe later, declined to do so.

Relevant contractual obligations: Mr Crepaldi

8 Kearney Australia relied upon an Employment Agreement made on 11 January 1999 between it and Mr Crepaldi; on an “Equity Related Agreement” made on 15 May 2004 between EDS and Mr Crepaldi; on a Deed made between it and Mr Crepaldi on about 26 October 2005 (both the date of making and the “Effective Date” of the Deed are unclear); and on an “Independent Contractor Agreement” made between it and Crescendo on 26 October 2005. This last document includes in Schedule 2

9 To the extent that they are relevant, clauses 6, 7 and 8 of the Employment Agreement provide as follows:

Disclosure or Use of Confidential Information

Non-Solicitation/No-Hire.

a. Hiring, attempting to hire or assisting any other person in hiring or attempting to hire, or inducing to leave the employ of A.T. Kearney or EDS, any employee or officer of A.T. Kearney or EDS, any person who was an EDS or A.T. Kearney employee or officer within the six-month period prior to the Employment Termination Date, or any contractor of A.T. Kearney or EDS who performed services for A.T. Kearney or EDS in the six-month period prior to the Employment Termination Date;

b. Soliciting the business of either: (i) any EDS or A.T. Kearney client to whom Employee rendered services during the 12-month period prior to the Employment Termination Date (a “Specific Client”); or (ii) any person or entity whose business Employee (on behalf of EDS, A.T. Kearney or otherwise) solicited by multiple contacts during the six-month period prior to the Employment Termination Date (a “Specific Contract”); or

c. Any activity for any Specific Client or Specific Contact which is the same as or similar to those activities Employee performed for such Specific Client during the three-year period prior to the Employment Termination Date, or proposed to perform for such Specific Contact during the one-year period prior to the Employment Termination Date.

…

Development of Methodologies

10 The reference to the “Company” is by virtue of clause 2.c a reference to Kearney Australia; and the reference in clause 6 to “Confidential Information” is to be read by reference to the definition of that expression in clause 2.d.

11 Clause 3 of the Equity Related Agreement relevantly provides as follows:-

Non-Competition and Related Covenants

a. During the time of Employee’s employment with EDS and for a period of 6 months thereafter Employee shall not perform duties as or for a direct competitor of EDS in the geographic region in which Employee provided services to EDS during the 6-month period preceding Employee’s termination (i) which are the same or similar to the duties performed by the Employee at any time during the 12-month period preceding Employee’s termination;…;

b. During the time of Employee’s employment with EDS and for a period of 12 months thereafter Employee shall not perform duties for any current client or Prospective client of EDS with whom Employee interacted during the 6-month period preceding his/her termination; (i) which are the same or similar to the duties performed by the Employee at any time during the 12-month period preceding Employee’s termination;…

c. During the time of Employee’s employment with EDS and for a period of 12 months thereafter Employee shall not participate in the inducement of or otherwise encourage EDS employees, clients, or vendors to currently and/or prospectively breach, modify, or terminate any agreement or relationship they have or had with EDS within the 12-month period prior to the Employee’s termination…;

12 Kearney Australia did not, but the defendants did, refer in submissions to clause 4 of that Agreement and accordingly I set it out so far as is relevant:

Non-Solicitation of EDS employees, clients,. And prospective clients

a. hire, attempt to hire or assist any other person or entity in hiring or attempting to hire any current employee of EDS or any person who was an EDS employee within the 12-month period prior to the termination of Employee’s employment; or

b. solicit, divert, or take away, in competition with EDS, the business or patronage of any current EDS client or any Prospective client with whom the Employee had involvement on behalf of EDS during the 6-month period preceding Employee’s termination. Notwithstanding the foregoing, this restriction shall not apply to any person or entity who is no longer a client or Prospective client at the time of any such solicitation by Employee (this provision 4(b) does not apply to nor restrict Employee’s conduct in any jurisdiction where such provision is unenforceable and/or void as against public policy).

13 Paragraphs 3 and 4 were qualified as follows:-

“In Paragraph 3 of this Agreement if “geographic region” is adjudged by a court of competent jurisdiction to be invalid then substitute “the Australian State or Territory in which the Executive worked immediately prior to the termination of the Executive’s employment with EDS.”

In Paragraphs 3 and 4 of this Agreement, if 12 months is adjudged by a court of competent jurisdiction as being invalid then substitute 9 months and if 9 months is adjudged invalid then substitute 6 months and if 6 months is adjudged invalid then substitute 3 months.”

14 By clause 1.a, “EDS” was defined to mean “Electronic Data Systems Corporation, its direct and indirect subsidiaries, affiliated entities, successors and assigns”; and by clause 1.f, “Prospective Client” meant “any client with which EDS was in active business discussions or negotiations at any time during the 6-month period preceding Employee’s termination.”

15 Kearney Australia said that it was entitled to enforce the relevant promises in the Equity Related Agreement by virtue of clause 4.6 of the Deed made between it and Mr Crepaldi on about 26 October 2005 (the Termination Deed). That Deed, and the Independent Contractor Agreement, were made because Mr Crepaldi after the termination of his employment with Kearney Australia continued to perform, and Crescendo performed, services for Kearney Australia in connection with a particular transaction.

16 Clause 4.6 provides as follows:-

“Employee confirms that, in addition to any direct or indirect obligations he will have as a result of the Contractor Agreement, he will continue to be bound by the post-employment restrictive covenants contained in the Employment Agreement between Employee and A.T. Kearney Australia effective as of 1 January 1999 and the Equity Related Agreement between Employee and EDS dated May 2004. However, A.T. Kearney Australia expressly consents to, and undertakes that it will obtain a waiver by EDS in respect of, Employee engaging in any conduct that would involve Employee in a breach of those covenants, to the extent that engaging in such conduct is necessary for Employee to perform work pursuant to the Contractor Agreement.”

17 By clause 3.1(h) of the Independent Contractor Agreement, Crescendo undertook to cause, among others, Mr Crepaldi “to sign a Consultant’s Undertaking in the form set out in Schedule 2 to this Agreement.”

18 Clause 8 of the Independent Contractor Agreement imposed constraints on Crescendo in respect of the client of Kearney Australia for which the work was being done. Although Kearney Australia referred to the terms of that clause, it is of no real significance:-

“ Restraint
8.1 The Contractor agrees that during the term of this Agreement and for a period of 12 months after the termination of this Agreement for any reason, the Contractor shall not directly or indirectly, without the prior consent of the Company:

(b) engage, solicit or contract with, or attempt to engage, solicit or contract with, any employee or independent contractor of the Company or any other Group Member with whom the Contractor has dealt in the course of performing the Services…

8.2 In the event that the period of restraint after the termination of the Agreement described in Clause 8.1 is held by a Court of competent jurisdiction to be unenforceable:

(a) it shall be reduced to a period of 6 months; or

(b) if the period in 8.2(a) is held by a Court of competent jurisdiction to be unenforceable, it shall be reduced to a period of 3 months.”

19 It appears that Mr Crepaldi has signed the “Consultant’s Undertakings” set out in Schedule 2 to the Independent Contractor Agreement. I have already indicated for whose benefit those undertakings are purportedly given. They include the following “Restrictive Covenants”:

“3.1 While I am working on the A T Kearney Projects and for a period of 12 months after I cease such work for any reason, I will not directly or indirectly, without the prior written consent of A T Kearney:

(a) encourage or persuade or attempt to encourage or persuade any DHL Group member to terminate or restrict its trade or contractual relations with AT Kearney or any Related Corporation of AT Kearney, being trade in or contractual relations relating to any national or intra-national jurisdiction where any DHL Group member has personnel with whom or operations with which I had direct or indirect contact in the course of performing work on the AT Kearney Projects; or

3.2 In the event that the 12 month period of restraint after I cease to work on the AT Kearney Projects is held by a Court of competent jurisdiction to be unenforceable:

(a) it shall be reduced to a period of 6 months; or

Relevant contractual terms: Mr Paxton

20 Kearney Australia relied on a document entitled “Additional Terms of Employment” signed by Mr Paxton on 17 July 2000. Clause 3 dealt with “Non-Solicitation/No-Hire” in the following terms:

“ Non-Solicitation/No/Hire. If Employee’s employment with the Company is terminated for any reason, Employee agrees, for a period of one year following the Employment Termination Date, not to conduct or participate (directly or indirectly, including through one or more affiliates) in:

a. Hiring, attempting to hire or assisting any other person in hiring or attempting to hire, or inducing to leave the employ of A.T. Kearney or EDS, any employee or officer of A.T. Kearney or EDS, any person who was an EDS or A.T. Kearney employee or officer within the six-month period prior to the Employment Termination Date, or any contractor of A.T. Kearney or EDS who performed services for A.. Kearney or EDS in the six-month period prior to the Employment Termination Date;

b. Soliciting the business of either: (i) any EDS or A.T. Kearney client to whom Employee rendered services during the 12-month period prior to the Employment Termination Date (a “Specific Client”); or (ii) any person or entity whose business Employee (on behalf of EDS, A.T. Kearney or otherwise) solicited by multiple contacts during the six-month period prior to the Employment Termination Date (a “Specific Contact”); or

21 Further, when Mr Paxton was promoted to Vice President, he received and signed a letter dated 1 August 2005 from Kearney Australia. Paragraph 7 of that letter repeated (either verbatim or in substance – it does not matter) clause 3 of the Additional Terms of Employment.

22 Although Kearney Australia’s evidence proved other agreements made between it and Mr Paxton, they were not referred to in submissions and I do not propose to refer to them in these reasons.

Kearney Australia’s business

23 Ms Sharon Bennett, the Director, Human Resources of Kearney Australia, described its business (in conjunction with the Kearney Group) as follows in para 3 of her affidavit sworn 22 December 2005.

“Kearney is a subsidiary of A.T. Kearney International, Inc., which is subsidiary of A.T. Kearney, Inc. A.T. Kearney International, Inc. and A.T. Kearney, Inc. are both companies incorporated in the State of Delaware in the United States. A.T. Kearney, Inc, has subsidiaries and branches throughout the world, including in Australia and New Zealand, South East Asia, South Asia, East Asia, North America and Europe. The A.T. Kearney group of companies is a leading management consulting firm that provides management consulting services to businesses and investors in many industries throughout the world by providing research, analysis and advice on the following categories of business activity:

24 It is apparent, and not I think in dispute, that the business of Crescendo includes many of the activities undertaken by Kearney Australia; in particular, what are described as “growth strategies” and “merger strategies”. Ms Bennett said that those two areas of work between them comprised over 70% of Kearney Australia’s “bookings of work for the year to the end of October 2005” (60% and 11% respectively).

Crescendo’s business plan

25 A “business plan overview” prepared for Crescendo dated 24 October 2005 (after Messrs Crepaldi and Paxton had given notice of resignation, and two days before the termination of Mr Crepaldi’s employment) stated that “Crescendo will become a one [sic] of the leading organisations in the high value add [sic] consulting market through the offering of:

· Strategic consulting services

· Mergers, acquisitions and divestments

· Business turnaround and performance improvement”.

26 In the same document, Crescendo said that it intended to serve “both large scale corporations and private equity firms as well as, through its flexible fee structure mid-size corporate entities in the Australian and South East Asian market”. The document makes plain the importance of Mr Crepaldi as “Director and Managing Partner”, including by referring in detail to Mr Crepaldi’s “Major achievements d [sic] tenure with” Kearney Australia.

Are there serious questions of fact to be tried?

(1)

Non-competition

27 There was a substantial body of evidence to suggest that Mr Crepaldi has performed, and unless restrained will perform, in the course of his employment by Crescendo, management consultancy duties the same as or similar to those performed by him during the twelve months preceding the termination of his employment by Kearney Australia. The defendants concede that (as a matter of fact only) there is a serious question to be tried on this point, and I so find.

(2) Non-solicitation of employees

28 Again, there was a substantial body of evidence to suggest that, both before and after the termination of their respective employments with Kearney Australia, Messrs Crepaldi and Paxton had identified employees of Kearney Australia who they thought would be suitable for employment by Crescendo, and that they made approaches to those employees seeking to persuade them to leave their employment with Kearney Australia and join Crescendo when, or after, it started operations. Again, the defendants conceded (as a matter of fact only) that there is a serious question to be tried, and again I so find.

29 In a number of cases, the solicitations were successful: the solicited employees left their employment with Kearney Australia and are now employed by Crescendo. In other cases, the targeted employees (to use a somewhat different description) are still employed by Kearney Australia.

30 I should make it quite clear that there is no basis in the evidence for concluding that any of the solicited or targeted employees have been importuned to breach their contracts of employment with Kearney Australia. In other words, there is no basis for concluding that any of the solicited employees who have ceased to be employed by Kearney Australia did so other than by the giving of proper, or agreed, notice; or that Messrs Crepaldi and Paxton would ask any other solicited or targeted employees to do anything other than give the notice required by their respective contracts of employment.

31 Thus, although I have concluded that there is a serious question to be tried that Messrs Crepaldi and Paxton have solicited employees of Kearney Australia to leave their employment and to take employment with Crescendo, there is no basis in the evidence to conclude that there is a serious question to be tried that Messrs Crepaldi or Paxton have sought or will seek to induce any employee of Kearney Australia to breach his or her contract of employment with Kearney Australia.

32 The defendants’ concession to which I have referred under this heading was given only in relation to past solicitation. However, I think, it is appropriate to infer that, unless restrained, Messrs Crepaldi or Paxton may continue to solicit employees (in particular, two persons included in those whom I described as targeted employees) of Kearney Australia to terminate their employment with Kearney Australia and to take up employment with Crescendo. In any event, I think, there is a serious question to be tried as to this, or a reasonable basis to apprehend it. Once again, however, the evidence does not permit me to conclude that there is a serious question to be tried that this would require the employees to do anything other than honour their contracts of employment by giving and serving out the appropriate, or agreed, period of notice.

33 There is no evidence that any employee of Kearney Australia other than Mr Crepaldi was subject to a restraint in respect of future employment should the employment with Kearney Australia cease. Further, in almost all cases (including the most senior level of consultants, namely vice-presidents), the required notice period was one month. The evidence shows that in some cases Kearney Australia requested employees who gave notice to work for longer (for example, to complete a particular project) and that those employees did so; and that, in other cases, Kearney Australia requested the employees to cease working forthwith (and paid out their notice period) and that those employees did so.

34 I add, in this context, that it is clearly open to conclude that Mr Crepaldi (in particular) and Mr Paxton (perhaps to a lesser extent) has detailed knowledge of the abilities and skills of the various employees who have been or are still being solicited or targeted, and that Mr Crepaldi (at least) has detailed knowledge of the conditions of employment of those employees. Thus, I think, it is open to infer that Messrs. Crepaldi and Paxton have been able to target particular employees whom they believe to have particular skills in the attraction or performance (or both) of management consulting work and related or support work, and to offer those people employment packages sufficiently attractive to induce them to consider leaving the employment of Kearney Australia. In other words, I think, it is open to infer that Mr Crepaldi in particular, and to a lesser extent Mr Paxton, have been able to exploit the knowledge gained by them, in the course of their employment by Kearney Australia, of the skills, qualities and other relevant attributes of Kearney Australia employees in deciding whom to solicit or target for employment by Crescendo. It is an open question, whether the restructure to follow completion of the MBO (a process that will involve some redundancies) was also a factor that induced employees to leave Kearney Australia and join Crescendo.

35 Kearney Australia submitted that the defendants “have induced employees [of its] to breach their employment contracts with [it] by providing Crescendo with copies of [Kearney Australia’s] know-how documents”. I am not satisfied, on the evidence, that there is any serious question to be tried that this is so. There is some evidence that some solicited employees contracted with Crescendo on the basis of letters of offer, or employment agreements, that were identical, or suspiciously similar, to their employment agreements with Kearney Australia. It does not follow, and the evidence provides no basis for inferring, that those employees provided copies of those (or other Kearney Australia) documents to Crescendo.

(3) Solicitation of clients

36 Again, there was a substantial body of evidence to suggest that the defendants have solicited, and performed work for, clients of Kearney Australia who were clients (or for whom Kearney Australia performed work) during the relevant periods imposed by the various promises on which Kearney Australia relied. Again, the defendants conceded (as a matter of fact) that there is a serious question to be tried on this point, and again I so find.

37 Further, it was not seriously in dispute (nor could it be, having regard to the nature of Crescendo’s business) that Crescendo unless restrained will continue to solicit, and seek to perform work for, clients falling within that description.

(4) Diverted opportunities

38 There was evidence that opportunities to perform consulting work that had come to Kearney Australia during the period when it employed Messrs Crepaldi and Paxton had been diverted to, and performed by, Crescendo. The defendants did not dispute this. They did, however, submit that the work had come to Crescendo either because Kearney Australia had rejected it (and in one case because Kearney Australia had suggested that the particular client go to Crescendo) or because the client had required one or other, or both, of them to be involved in the performance of the work. In other words, the defendants submitted that there was no wrongful diversion of work: that the diversion of work involved no breach of contractual or fiduciary duty.

39 I conclude that there is a serious question of fact to be tried in relation to diverted opportunities, although more limited than Kearney Australia submitted was the case.

(5) Protected information

40 There was a substantial body of evidence to suggest that Crescendo has used, or adapted, a number of standard form documents of Kearney Australia. These include Kearney Australia’s standard letters of offer of employment and its employee handbook. The evidence of Ms Sharon Bennett, the Director, Human Resources, Asia of Kearney Australia, demonstrates that letters of offer of employment made by Crescendo to prospective employees (including those solicited from the employ of Kearney Australia) are substantially similar to Kearney Australia’s standard form of letter of offer of employment; and that Crescendo’s employee handbook is substantially the same as Kearney Australia’s employee handbook.

41 The defendants did not concede that they had used material developed by Kearney Australia for the purposes of Crescendo’s business. But Ms Bennett’s evidence, which has not been answered as to the documents to which I have referred, would support the inference that they did. There can be little doubt that Kearney Australia expended time and effort in developing the documents to which I have referred, and that if (as seems likely) Crescendo simply took them and used them for its own purposes, it was spared the time and effort of doing likewise.

42 Further, as I have already indicated, I think that it is open to infer – or that there is a serious question to be tried whether – Mr Crepaldi in particular, and perhaps to some extent Mr Paxton, used the knowledge gained by them of the qualifications, experience and skills of employees of Kearney Australia, and the employment terms (as to remuneration and otherwise) of those employees, in deciding whom to solicit for employment by Crescendo – in other words, in deciding whom to poach.

43 Further, there can be little doubt that Messrs Crepaldi and Paxton, and the employees of Kearney Australia whom Crescendo poached, brought with them knowledge of the clients for whom Kearney Australia had performed management consulting work, and of projects on which Kearney Australia had worked (including details of the nature of the project, remuneration and so on). That having been said, and with the exception of some documents to which I refer in para [104] below when returning to the question of diverted opportunities, there is nothing in the evidence to ground a serious question to be tried as to whether or not Messrs Crepaldi and Paxton, or any of the poached employees, brought with them computer or other files or records or documents relating to particular clients, particular projects, or other particular (or for that matter general) aspects of Kearney Australia.

Industry practice

44 Kearney Australia sought to adduce evidence, through Ms Bennett, of the duration of restraint covenants in contracts of employment for senior employees in the management consulting business. I rejected that evidence, on the basis that it was so non-specific as to be useless either as evidence of fact or as opinion evidence (and, in the latter case, because it would not satisfy the test laid down in Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705). In any event, neither that evidence, nor the defendants’ somewhat generalised evidence in reply, seems to me to have any real bearing on the questions for my decision.

45 In this context, the defendants pointed, among other things, to the circumstance that other employees of the plaintiff had left its employment without having equivalent (or similar) restraints enforced. Neither Mr Crepaldi nor Mr Paxton put a case that he had been induced, by treatment afforded to other employees, to believe that the like treatment would be applied to him. The defendants did however submit that it was relevant both to the significance to Kearney Australia of the promise not to solicit employees (ie, to the legitimate interest sought to be protected by that promise) and to the question of balance of convenience.

The Court’s approach to the grant of interlocutory relief.

46 Mr Goot SC, who appeared with Mr Harris of Counsel for the defendants, submitted that for the purposes of this case the way in which the Court should approach the question, whether to grant or refuse interlocutory relief, was that described by McLelland J in Kolback Securities Ltd v Epoch Mining N L (1987) 8 NSWLR 533 at 535-536. His Honour stated the approach as follows, and I can do no better than quote his words (omitting citations):-

“… Where a plaintiff’s entitlement to ultimate relief is uncertain, the Court, in deciding to grant or refuse an interlocutory injunction, must consider what course is best calculated to achieve justice between the parties in the circumstances of the particular case, pending the resolution of the uncertainty, bearing in mind the consequences to the defendant of the grant of an injunction in support of relief to which the plaintiff may ultimately be held not to be entitled, and the consequences to the plaintiff of the refusal of an injunction in support of relief to which the plaintiff may ultimately be held to be entitled:… Where the uncertainty depends in whole or in part on a contested question of fact it is not appropriate for the Court to decide that question on the interlocutory application. Where the uncertainty depends in whole or in part on a contested question of law, it may or may not be appropriate for the Court to decide that question on the interlocutory application, depending on circumstances, eg, whether the question is novel or difficult, or is susceptible of resolution on the present state of the evidence, or whether the urgency of the matter renders it impracticable to give proper consideration to the question:…

Unless the plaintiff shows that there is at least a serious question to be tried which if resolved in its favour would entitle it to final relief, then the requirements of justice as between the parties will dictate that an interlocutory injunction should be refused:…

Apart from this, although normally the Court “does not undertake a preliminary trial, and give or withhold interlocutory relief upon a forecast as to the ultimate result of the case”…, there are some kinds of case in which for the purpose of seeing where lies the balance of convenience (or more specifically “the balance of the risk of doing an injustice”…it is desirable for the Court to evaluate the strength of the plaintiff’s case for final relief:…One class of case to which this applies is where the decision to grant or refuse an interlocutory injunction will in a practical sense determine the substance of the matter in issue:…”

Restraints of trade: the applicable principles

47 The primary position is that a restraint of trade is void. That applies not just to the classical restraint of trade purporting to prevent a person from working for a particular employer, but also to a restraint of the kind presently sought to be enforced. That is because of the public interest in competition. It follows that a person seeking to enforce a restraint of trade must show that the restraint is no wider than is reasonably necessary to protect its legitimate interests. The test immediately directs attention to the nature of the interest that is sought to be protected. This issue was considered by Gillard J in Hartleys Ltd v Martin [2002] VSC 301. At para [91], his Honour stated (in my respectful opinion correctly) that “[i]t is well-recognised that an employer is entitled to impose a restrictive covenant to reasonably protect his business against ex-employees taking customers with them to a business in competition with their former employer.”

48 At para [92] and following, his Honour discussed the decision of the High Court in Lindner v Murdoch’s Garage (1950) 83 CLR 628. In that case Latham CJ who dissented, but whose statement of the principles was endorsed by Webb J (at 647), said at 634:

“ … the covenant in restraint of trade is not a covenant against mere competition but is a covenant directed to securing a reasonable protection of the business interest of the employer, and in the circumstances is not unjust to the employee. The interest which can validly be protected is the trade connection, the goodwill of the business of the employer.”

49 In the same case, Fullagar J at 649 focused on the need to characterise the interest that the employer claimed to have and claimed legitimately to protect. Kitto J at 654 characterised the interest as being:

“… protection for their business connection against the possibility of its being affected by the personal knowledge of and influence over the customers which the appellant might acquire in their employment.”

50 His Honour continued by saying that:

“The knowledge which, because its use may deprive the employer of the business connection which he is entitled to preserve as his own, he may require his employee to abstain from using, is objective knowledge of customers, their peculiarities, their credit and so forth … .”

51 This reflects the approach taken in earlier English cases. Thus, in Herbert Morris Ltd v Saxelby [1916] 1 AC 688, the covenant was against the employee being engaged either as principal, agent or servant or otherwise in the same kind of business as that in which he had been employed. It was in that context that Lord Atkinson, speaking of a case of employer and employee, said that:-

“In all such cases as this, one has to ask oneself what are the interests of the employer that are to be protected, and against what is he entitled to have them protected.

He is undoubtedly entitled to have his interest in his trade secrets protected, such as secret processes of manufacture which may be of vast value. And that protection may be secured by restraining the employee from divulging these secrets or putting them to his own use. He is also entitled not to have his old customers by solicitation or some other means enticed away from him. But freedom from all competition per se apart from both these things, however lucrative it might be to him, he is not entitled to be protected against. He must be prepared to encounter that even at the hands of a former employee.”

52 In a similar vein, Lord Parker said (at 710):-

53 In summary, then, restraints of trade (including both restraints against competition and restraints on solicitation of customers) may be valid where they are reasonably necessary to prevent disclosure of confidential information garnered by the former employee in the course of his or her former employment, or the exploitation of a connection built up by that employee with the former employer’s customers in the course of that employment.

54 There are three other matters to note. The first is that the onus of showing that a contract in restraint of trade is reasonable as between the parties lies on the party alleging that this is so: North Western Salt Co. Ltd v Electrolytic Alkali Co Ltd [1914] AC 461, 470 (Viscount Haldane LC). Secondly, the onus of showing that a contract in restraint of trade is injurious to the public interest likewise lies on the party alleging that this is so: Attorney-General of Australia v Adelaide Steamship Co [1913] AC 781, 797. The third is that the question of the validity of a covenant in restraint of trade (or, for that matter, a covenant against solicitation of employees) is not really a question of law. The principles (at least in the former case) are relatively clear. The application of the principles depends on the terms of the particular covenant and the factual circumstances: see Dawnay Day & Co Ltd v De Braconier d’Alphen[1998] ICR 1068 at 1111-1112 (Evans LJ, with whom Nourse and Ward LJJ agreed).

Restraints on solicitation of employees: the applicable principles.

55 A related – perhaps more accurately overlapping – question arises in respect of covenants by one employer (or, for that matter, by an employee) not to solicit or poach employees of another (or of the employer).

56 The authorities suggest – perhaps, not surprisingly - that an employer has a legitimate interest in maintaining a stable and trained workforce: see Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1958] 2 All ER 65 at 72, 74-75 (Jenkins LJ, giving the judgment of the Court). However, having stated the existence of this interest, their Lordships pointed out that an employer had no legitimate interest to prevent an employee, upon termination (I interpose lawfully ie. in accordance with the relevant terms of the contract of employment) from taking employment with a compe titor. Jenkins LJ, speaking for the Court, said this 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."

57 However, the subsequent English cases suggest that the interest in protecting a stable workforce may be protected – at least, in the context of a covenant by an employee not, after termination of employment, to poach former fellow employees. The authorities were reviewed by White J in Aussie Home Loans v X Inc Services (2005) NSWSC 285 at [22] – [26]:

Dawnay, Day & Co Ltd v de Braconier d’Alphen

Ingham v ABC Contract Services

Hanover Insurance Brokers Ltd v Schapiro

“The effect of the injunction under paragraph 1(b) of the order would be to prevent the defendants, as employers in the insurance brokerage business in competition with HIB which they are entitled to set up, from poaching employees from HIB. But the difficulties in law in the way of a non-poaching agreement between employers are very clearly explained in the decision of the Court in Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1959] Ch 109. In particular, the employee has the right to work for the employer he wants to work for if that employer is willing to employ him. Moreover, the restriction as drawn would apply to all employees of HIB irrespective of expertise or juniority, and would apply to those who were employees at the time of the solicitation or enticement even if they had only become employees after all the defendants had left HIB’s service. HIB cannot impose a mere covenant against competition on the defendants. That is why a covenant not to canvass persons who had become customers of HIB only after the defendants had ceased to be employees of HIB would be invalid (see Konski v Peet [1915] 1 Ch 530). The same must be the case with employees. I agree with the judge on this and would dismiss the cross-appeal.

There are three strands in this reasoning. First, that a covenant against competition, as such, is not enforceable. Employees are entitled to work for whatever employer wishes to employ them, if they do not breach their employment contracts. Secondly, that the covenant was too wide, because it applied to all employees, however junior. Thirdly, that it was too wide, because it applied to the enticement of employees who had only become employed after the defendants had terminated their own employment. This was a restraint against mere competition. The last two matters indicate that a covenant against poaching employees of a former employer is not necessarily invalid. The employer may be able to demonstrate a legitimate interest against this particular form of competition, but the restraint will be invalid if it goes wider than is necessary to protect such an interest.

Dawnay, Day & Co Ltd v de Braconier d’Alphen,

“I would agree … that an employer’s interest in maintaining a stable, trained workforce is one which he can properly protect within the limits of reasonableness by an undertaking of this sort. But it does not follow that that will always be the case.”

Littlewoods Organisations Ltd v Harris

58 Those authorities thus seem to support the conclusion 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. 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. I do not intend this to be a comprehensive statement of the circumstances in which such a covenant may be upheld; it is, at most a statement that is sufficient for the purposes of the question for my decision.

Analysis: non-competition

59 The claim for relief in respect of competition was pursued only against Mr Crepaldi (prayer 2 of the Amended Notice of Motion). It was based on clause 3.a of the Equity Related Agreement made applicable between Kearney Australia and Mr Crespaldi by cl 4.6 of the Termination Deed.

60 Mr Goot submitted that the relevant provision was void for uncertainty, or alternatively, too wide to be enforceable.

61 The submission as to uncertainty was based on the references to performing “duties as or for a direct competitor of EDS” and “the duties performed by the Employee at any time during the twelve month period preceding Employee’s termination” in cl 3.a. The submission as to excessive width was based on both the duration of the covenant (six months) and its geographic area (“the geographic region in which [Mr Crepaldi] provided services to [the Kearney Group]”).

62 As to the first point: I think that there was sufficient evidence to show that there is a serious question to be tried as to the nature of the services provided by Mr Crepaldi to Kearney Australia in the course of employment, and, accordingly, there is a serious question to be tried as to whether the relevant covenant is sufficiently certain to be enforceable.

63 As to the second point: the Employment Related Agreement itself provides for the reading down of the expression “geographic region” (although it does not seem to do so for the six month period of the restraint, because its only reading down provision relating to temporal restraints is for the restraints of twelve months referred to in clauses 3 and 4). Further, the width of the restraint (as to either or both of duration and geographical extent) could be read down under s 4 of the Restraints of Trade Act 1976. I therefore conclude that there is a serious question to be tried as to the enforceability (in duration and geographical extent) of the restraint having regard both to other provisions of the Employment Related Agreement and to s 4.

64 These conclusions, coupled with what I have said in para [27] above as to the serious question to be tried on the factual issue, mean that Kearney Australia has demonstrated a basis for the grant of interlocutory relief. It is therefore necessary to consider whether, as a matter of discretion, relief ought to be granted. I have concluded that, for a number of reasons, it should not.

65 Mr Crepaldi gave notice of resignation on 26 September 2005. That notice was effective, in accordance with his contract, to terminate his employment on 26 October 2005. On this latter date, Kearney Australia and Crescendo entered into the Independent Contractor Agreement. The purpose of that agreement was to enable Mr Crepaldi, through Crescendo, to perform work for Kearney Australia in relation to a current project. I infer that the work performed by Mr Crepaldi on that project, both prior to 26 October 2005 (for Kearney Australia, as an employee) and thereafter (for Crescendo, as a contractor to Kearney Australia) was essentially similar in nature to that performed by Mr Crepaldi for Kearney Australia during the twelve month period from 26 October 2004 to 26 October 2005.

66 In any event, by 26 October 2005, Kearney Australia knew that:

67 It must have been apparent to Kearney Australia that Mr Crepaldi, or Crescendo, would be a competitor to it, in the business of providing management consulting services, on and from 26 October 2005. Nonetheless, with that understanding, based on the knowledge to which I have referred, Kearney Australia chose to take no step against Mr Crepaldi, in relation to his activities, until 7 December 2005 – by which date, I infer, the project on which Mr Crepaldi through Crescendo had been working for Kearney Australia had been completed.

68 In those circumstances, I think, it would be a travesty of justice to grant Kearney Australia the relief that it now seeks against Mr Crepaldi under cl 3.a of the Equity Related Agreement. Whether it is put as a matter of delay, or unconscionability, or approbation and reprobation, does not seem to me to matter. The simple truth is that Kearney Australia, for its own purposes, availed itself of the services of Mr Crepaldi through Crescendo and only thereafter, having got what it wanted, did it take steps to tell him that he could not perform similar services for other clients.

69 For that reason alone I would refuse this claim for interlocutory relief. There are, however, five other matters that I take into account as fortifying this conclusion.

70 The first is based on Mr Crepaldi’s unchallenged evidence as to the relationship between management consultants and their clients, and the basis on which clients procure management consulting services (see para [6] above. That evidence suggests strongly that Mr Crepaldi has no such relationship with, or has no personal knowledge of or influence over (to borrow the words of Fullagar J in Lindner), the clients of Kearney Australia, built up in the course of his employment by Kearney Australia, as would enable him to lure those clients away.

71 The second is that there is no evidence to suggest that Kearney Australia had some secret or confidential manner of performing its business, or providing its services, that gave it some competitive edge over other management consultants, and to which Mr Crepaldi became privy in the course of his employment.

72 The third is based on Mr Crepaldi’s evidence that, in respect of one alleged diverted opportunity (relating to a client called Uecomm Operations) Mr Crepaldi offered the work to Kearney Australia whilst he was still employed by them; Kearney Australia informed him (through a Ms Blinman) that it would not pursue the opportunity; and Kearney Australia (through Ms Blinman again) recommended to Uecomm that it contact Mr Crepaldi (by then, at Crescendo) to carry out the assignment. This evidence was not denied. (I interpolate that, despite the relatively brief time within which the interlocutory application was prepared for hearing, the defendants filed detailed affidavits responding to Kearney Australia’s claim, and Kearney Australia in turn filed an affidavit (sworn by Ms Bennett) responding to the defendants’ affidavits. In a number of cases, Ms Bennett, either through her own knowledge or on information and belief from sources that she named, challenged particular statements made in affidavits relied upon by the defendants. Where I have said that something was not challenged or denied, I mean that Ms Bennett did not, either directly or on information and belief, respond to it, and did not give any reason – eg, relating to unavailability of the relevant person – why she did not do so.)

73 Again, I think, it is clearly open to infer that the work done by Mr Crepaldi through Crescendo for Uecomm was work of the kind performed by him for clients of Kearney Australia during his employment by the company. The Uecomm incident demonstrates not only that Kearney Australia was well aware that Mr Crepaldi, through Crescendo, was setting up his own business, but further, that the work to be done by that business would be work of the kind hitherto done by Mr Crepaldi for Kearney Australia. In other words, it corroborates what I have said in para [67] above, as to Kearney Australia’s understanding that Mr Crepaldi was setting up, through Crescendo, in opposition to it. And Kearney Australia, with that understanding, in effect gave its blessing by passing Uecomm onto Crescendo.

74 The fourth matter relates to some inconsistencies in the relevant provisions of the Equity Related Agreement. As I have said, Kearney Australia relied on cls 3.a and 3.b. I leave, for a final hearing, the difficulty of reconciling those two paragraphs (although it may be that, on close analysis, their content and operation may be found to be distinct). Kearney Australia did not rely on cl 4.b. However, as Mr Goot pointed out in submissions, that restraint on competition relates to clients with whom Mr Kearney had “had involvement on behalf of EDS during the six month period preceding” the termination of his employment. By contrast, cl 3.b would prevent Mr Crepaldi from performing duties “for any current client or Prospective client of EDS with whom [he] interacted during the six month period preceding his ….termination.” Leaving aside the problems raised by the words “involvement” and “interacted”, and assuming that they have some (if not complete) corresponding denotation, it is plain that what might be permissible under cl 4.b might be prohibited under cl 3.b. In this context, Kearney Australia’s position in choosing the longer period can hardly be seen to be meritorious, when it had proffered such a confusing agreement to Mr Crepaldi.

75 I note that Mr Goot submitted that those clauses give rise to another problem insofar as they refer to “Prospective” clients. That expression is defined to mean “any client with which EDS was in active business discussions or negotiations at any time during the 6-month preceding Employee’s termination.” Even leaving aside the width of the definition of EDS (something that might be read down under s 4 of the Restraints of Trade Act) it is difficult to see how a restraint of such width could be justified. But the matter was not fully argued before me, and it may be something that could be capable of clarification by further evidence on a final hearing. Further, and once again, if the provision relating to prospective clients is too wide, it may be something that could be resolved (in favour of Kearney Australia) by s 4. Accordingly, I do not take this into account as being dispositive of the question of enforceability of the particular covenants.

76 Finally, in this context, I refer to the MBO. Without going into details, the evidence suggests that there was a difference of opinion, between Kearney Inc on the one hand and a group of vice-presidents led by Mr Crepaldi on the other, as to the capital that participating vice-presidents should be expected to contribute. The difference was very substantial (the amount sought by Kearney Inc was five times the amount offered by the group led by Mr Crepaldi). Further, it appears, there were substantial differences as to the way in which the business, after completion of the MBO, should be restructured.

77 The defendants’ evidence indicated that, on a number of occasions, senior officers of Kearney Inc or of companies within the Kearney Group had indicated that there would be no place within the restructured group (after the MBO) for vice-presidents who had not participated. Although Kearney Australia disputed some of this evidence, and the dispute is not one that I could resolve on an interlocutory hearing, some support for the defendants’ position is to be found in Ms Bennett’s affidavit in reply. At para 4 (where she dealt with this topic) she referred to a document on the Kearney Group’s network which said the following:-

“What happens if an Officer does not want to invest but does not want to resign? Are they ‘severed’ as of December 2005?

If an Officer does not purchase Shares in the Offering, he or she will not be a shareholder of ATK Holdings and will not have the associated voting rights (such as electing the Directors and Managing Officer and voting on important corporate transactions). In addition, an Officer who does not purchase Shares in the Offering will not have any formal leadership roles in ATK Holdings, such as serving as a Director, Managing Officer or business unit head or serving on any committees to be established by the Board of Directors. There may be additional implications and limitations depending on the Officer’s local jurisdiction.”

78 Although that document does not suggest that non-participating vice-presidents would thereby lose their employment, it makes it plain that their role in the restructured group would be very much reduced, in importance (and, no doubt, in corresponding respects) after the restructure. In those circumstances, it is hardly to be wondered that non-participating vice-presidents such as Messrs Crepaldi and Paxton decided to utilise their talents outside the Kearney Group. Whilst I cannot on the present state of the evidence conclude that there is a case of, or suggestive of, constructive dismissal, it is I think plain that Kearney Inc was telling vice-presidents that if they did not participate in the management buy-out on its (rather than their) terms, their role, duties and influence were likely to be reduced significantly after the restructure. In particular, for Mr Crepaldi, the document to which Ms Bennett referred made it plain that he would cease to be managing director of Kearney Australia after the restructure was completed.

79 Taking all those matters into account (except for the “Prospective client” problem referred to in para [75]), and notwithstanding the serious questions to be tried to which I have referred, I do not think that it would best achieve justice between the parties if I were to grant the relief sought by prayer 2 of the Amended Notice of Motion. In this context, I take into account also what I say in para [95] below as to delay.

Analysis: non-solicitation of employees

80 This relief was sought by prayers 3, 4 and 5 of the Amended Notice of Motion. As against Mr Crepaldi, the claim is based on cl 7.a of his Employment Agreement, cl 3.c of the Equity Related Agreement (again, brought into operation by cl 4.6 of the Termination Deed) and cl 3.1(b) of the undertakings apparently given by Mr Crepaldi pursuant to the Independent Contractor Agreement. As against Mr Paxton, the claim for relief is based on clauses 3.b and 3.c of this Employment Agreement and cl 7(b) and (c) of the Appointment Letter.

81 The defendants submitted that the relevant provisions were unenforceable. Firstly, they submitted, such restraints were inherently unenforceable. Secondly, they submitted, they were far too wide in extent.

82 The first submission is, I think, answered by what I have said in para [58] above. In other words, I think there is a serious question to be tried whether such a covenant, taken by an employer from an employee, may be enforceable in circumstances where (as I have found there is a serious question to be tried) the employee, in the course of his employment, will build up such a knowledge of the relationship between the employer and other employees as to enable him to target other employees for solicitation and pitch offers calculated to be attractive to them.

83 However, I think, the second criticism is valid. In this context, I note, the various contractual provisions relied upon encompass all employees (of whatever seniority or juniority, and whatever the duration of their employment by Kearney Australia). They would encompass not only employees current at the time Mr Crepaldi or Mr Paxton ceased employment, but employees who had left Kearney Australia beforehand (indeed, before either of them gave notice of his resignation). Indeed, the clauses would apply not just to former employees (during the relevant period) who had left of their own accord, but also to former employees whose employment for whatever reason (including simply redundancy) Kearney Australia had terminated. In this context, it should be noted that on completion of the MBO, Kearney Australia will terminate the employment of a number of its employees. On its case, the defendants could not offer employment to anyone in that category. I have great difficulty in seeing what relevant interest of Kearney Australia would be protected in those circumstances.

84 To echo the words of the Court in Kores Manufacturing at 73, the effect of the relevant provisions would be that Messrs Crepaldi and Paxton had “placed it out of their power to take into their service any person who had during the preceding [12 months] been in the service of [Kearney Australia] for any period however short, and in any capacity however humble”. In a context where the restraint “would also…be just as much applicable to a person whom [Kearney Australia had dismissed from] [its] service as to a person who had left [its] service of his own accord…[T]he restraint to which the defendants subjected themselves …was grossly in excess of what was adequate to protect that for which [Kearney Australia] required protection from the dangers against which protection was required.”

85 No doubt recognising the force of this point, Kearney Australia sought on the second day of the hearing, and was granted leave further to amend its Notice of Motion so as to substitute for prayers 3 to 5 the following:-

“Non-solicitation of employees
1. The first defendant by himself, his servants or agents (including the third defendant) be restrained until further order of the Court, from hiring, attempting to hire or inducing to leave the employ of ATK any person or entity who was a consultant (whether as employee or contractor) of ATK in the period 26 April 2005 to 26 October 2005.

2. The second defendant by himself, his servants or agents (including the third defendant) be restrained until further order of the Court, from hiring, attempting to hire or inducing to leave the employ of ATK any person or entity who was a consultant (whether as employee or contractor) of ATK in the period 3 May 2005 to 3 November 2005.

86 In substance, the changes are twofold:

87 This formulation avoids the strange result that on a literal reading of the relevant changes, the defendant could not employ an ex-employee of Kearney Australia who, without any solicitation, approached them, but even in this form, I think that the relief sought is both imprecise and, to the extent that it may be capable of being read as sufficiently precise, too wide. It goes beyond any legitimate need for protection, and the evidence does not suggest (nor did Kearney Australia submit) how it might be read down.

88 As to the first change: there is no real definition in the evidence of “consultant”. The closest that one comes is in Ms Bennett’s first affidavit at para 6, in which she refers to “Kearney’s consulting staff” (not “consultants”) and says that they “are employed in positions with the following titles (arranged in ascending order of experience and authority): Business Analyst, Senior Business Analyst, Associate, Manager, Principal and Vice President”. She notes that “Vice Presidents” are also referred to as “Officers”.

89 If the word “consultants” is intended in encompass all those listed by Ms Bennett in her affidavit, then it is apparent that the restriction would extend from the most junior to the most senior. If the matter is considered in terms of confidential information which those employees might possess, or of the personal knowledge of or influence over clients of Kearney Australia which they might have, there is no basis for thinking that all of them have any such knowledge or influence. In any event, in this context, I refer to what I have said as to Mr Crepaldi’s evidence in para [6] above. Further, in this context, it is necessary to bear in mind that, on the evidence, none of those varieties of consultants are subject to a restraint on post-termination employment; and my finding that there is no basis for thinking that such solicitation as has been undertaken (or will, absent restraint, be undertaken) aims to induce any employee to breach the terms of his or her contract of employment with Kearney Australia.

90 If the matter is looked at in terms of interest in maintaining a stable workforce, then the question becomes one whether that interest alone is sufficient to support a restraint of the kind relied upon. The decision in Kores Manufacturing would suggest that it is not a sufficient interest. The decision of White J in Aussie Home Loans did not refer to it as being a sufficient interest (although I acknowledge that his Honour’s reasons do not exclude that it may be). The decision in Dawnay Day & Co Ltd suggests that it may be. In the circumstances, I think, there is clearly a serious question to be tried on this point.

91 However, and notwithstanding that conclusion, I do not think that it is appropriate to grant the relief sought. There are a number of reasons for this. The first is that, on Mr Crepaldi’s uncontested evidence, some ten employees have left Kearney Australia over and above the four (to date) solicited by him and Mr Paxton to join Crescendo (not including himself and Mr Paxton). This, in the context of the evidence as to the management buy-out, suggests that whatever the normal pattern of stability (or instability) may be, there is a considerable turnover, or flux, in employment at the present moment: at least for Kearney Australia. Further, as I have said, there will be redundancies on completion of the MBO.

92 The second is that, insofar as the damages to Kearney Australia are represented by the cost of obtaining replacement employees (whether through employment agencies or otherwise) those costs are clearly capable of capture, and may form part of any damages awarded. In other words, on this point, I think that damages would be an adequate remedy.

93 Of course, as Ms Bennett said, the loss of employees would make it more difficult for Kearney Australia to obtain and perform work. However, in her second affidavit, when confronted with Mr Crepaldi’s evidence as to loss of employees (other than those taken by Crescendo), to which she had not referred in her first affidavit, she said at para 7 that “the plaintiff is actively seeking to use the employees of other A.T. Kearney entities to make up its staffing shortfall. If the defendants were to entice consulting staff away from the plaintiff, the plaintiff may face difficulties in completing work that it has contracted to undertake.” This evidence is hardly persuasive as to the likelihood of damage through not obtaining or not completing work. It must be read in the context of what Ms Bennett said in para 90 and following of her first affidavit. I have acknowledged that the loss of employees may make it more difficult for Kearney Australia to obtain or complete work. However, to the extent that it cannot obtain, or cannot complete, work, it will no doubt maintain appropriate records. Although the computation of damages might not be an easy matter, it does not seem to me to be so difficult as to lead to the conclusion that, in respect of this aspect of any claim, damages would not be an adequate remedy.

94 The fourth is that the only evidence of remaining employees to be targeted relates to two, whose details and positions are said to be confidential. Although they are senior employees of Kearney Australia, I do not think that there is any basis to conclude that their loss, on due notice, would be sufficient to require a different conclusion to that just expressed. In this context, it must be borne in mind that one should assume that the employees will leave (if they do – and I cannot conclude that they will or are likely to) in accordance with the notice requirements of their respective contract of employment. Presumably, in fixing the notice provision, Kearney Australia had regard, among other things, to the time that it might take to replace them, or to procure, (whether on secondment, through contract or otherwise) someone to perform their duties until a replacement could be found. If the period is insufficient for that purpose, that is hardly something for which the defendants can be blamed; and Kearney Australia’s position is the same, in this respect, regardless of the source of the solicitation or the reason for their departure.

95 The last matter relates to the delay in seeking relief. I have set out some relevant matters in paras [65] to [67] above. In addition, Kearney Australia became aware in November 2005 that a number of (relatively junior) employees were leaving, and conducted “exit interviews” with them. Either through those interviews, or through contact with Crescendo or an associated company, Alexanders, it became aware that they were going to Crescendo. This became clear either in late November or, at the very latest, by 1 December 2005, in an exchange of emails between relevant employees of Kearney Australia and Crescendo. Yet Kearney Australia took no steps to move then or immediately thereafter. It may have been influenced by the consideration that Mr Crepaldi, through Crescendo, was still working on the project that was the subject of the Independent Contractor Agreement (as I have said, it was not until 7 December 2005 that Kearney Australia first made demand on Mr Crepaldi). The application for interlocutory relief was not made until 23 December 2005 – three weeks after Kearney Australia had conclusive knowledge that its employees had gone to Crescendo, and many more weeks after it knew that Crescendo had been set up in competition by Messrs Crepaldi and Paxton. In my view, having regard to the circumstances of the case (including in particular those referred to in paras [65] to [67]), that delay is in itself a sufficient basis for refusing this and the other heads of interlocutory relief sought.

Analysis: non-solicitation of clients

96 This relief was claimed by prayers 6 to 8 of the Amended Notice of Motion. As against Mr Crepaldi, it was based on cls 7.b and 7.c of his Employment Agreement, cl 3.b of the Equity Related Agreement (through the mechanism yet again of cl 4.6 of the Termination Deed and cl 3.1(a) of the Consultant’s Undertakings apparently given by him. As against Mr Paxton, it was based on cls 3.b and 3.c of his Employment Agreement and cls 7(b) and 7(c) of the Appointment Letter.

97 The defendants submitted that the relevant restraints were too wide to be enforceable; and Kearney Australia relied on s 4 of the Restraints of Trade Act (and, as to Mr Crepaldi’s covenants under the Equity Related Agreement, on the reading down provisions to which I have already referred). Further, in this context, the defendants relied (in Mr Crepaldi’s case) on the apparently conflicting requirements of cls 3.b and 3.c and 4.a and 4.b.

98 Whilst the force of the defendants’ criticisms must be recognised, there is I think a serious question to be tried as to whether the restraints could be saved through the operation of the Restraints of Trade Act. Accordingly, on the question of principle, I think that there is a serious question to be tried. However, for the reasons that follow, I do not think that relief should be granted.

99 As I have already noted, the restraints (particularly those imposed on Mr Crepaldi under the Equity Related Agreement) are extremely (or, as the defendants would put it, excessively) wide. That is a matter for final hearing: including the restraints insofar as they refer to “Prospective clients”. However, bearing in mind Mr Crepaldi’s unchallenged evidence referred to in para [6] above, it does not seem to me that there is any basis shown, even at the level required for the grant of interlocutory relief, that the restraints are needed to protect any relevant interest of Kearney Australia. That is so whether the interest is put in terms of confidential information relating to business methods or clients, or the “hold” that Messrs Crepaldi and Paxton may have obtained over clients during the course of their employment. There is no evidence of the former; and Mr Crepaldi’s evidence to which I have referred disposes of the latter.

100 Further, in this context, I rely on the issue of delay, to which I have referred in para [95] above.

Analysis: diverted opportunities

101 The contractual basis for this head of relief (prayer 9 of the Amended Notice of Motion) is the same as that relating to non-solicitation of clients.

102 Although, as I have noted, the defendants conceded that there was a serious question to be tried as to at least some diverted opportunities, their evidence in reply was strong – and in some cases, unanswered. If Kearney Australia’s case is made out at a final hearing then the damages, consisting of the value of the lost opportunities, will no doubt be capable of ready quantification. They will be an adequate remedy. Further, given Mr Crepaldi’s unanswered evidence as to the relationship between management consultants and clients and the way in which the latter procure management consulting services, it is unlikely that there will be any hidden or latent damages incapable of capture through a damages model. For this reason, alone, I would refuse the relief sought.

103 Further, and in reinforcement of the conclusion to which I have come, I rely on the issue of delay, to which I have already referred.

104 I have not overlooked that, under this head, there was some evidence that, during their terms of employment Messrs Crepaldi and Paxton had done, or caused more junior employees of Kearney Australia to do, work on what became assignments undertaken by Crescendo, and for which Crescendo received remuneration. That evidence is among the matters that I have taken into account in deciding that, at the factual level, there is a serious question to be tried. As I foreshadowed in para [43] above, it may also relate to the question, whether Messrs Crepaldi and Paxton took with them confidential information of Kearney Australia when they set up Crescendo. But it does not provide a basis for thinking that damages would not be an adequate remedy: as I have said, the damages would be the loss of the opportunities and, at least prima facie, would be either the fees obtained by Crescendo or the remuneration that Kearney Australia would have obtained had it undertaken the projects in question.

Protected information

105 In support of this relief (prayer 10 of the Amended Notice of Motion) Kearney Australia relied on the general law as to confidential information, trade secrets, intellectual property and the like.

106 Although, as I have said, there is a serious question to be tried as to whether Crescendo (and Messrs Crepaldi and Paxton) used documents such as the KearneyAustralia template Letter of Offer of Employment and the Kearney Australia Employee Handbook, those breaches are in the past. It may be said, that absent restraint, Crescendo will continue to use (for example) the Letter of Offer of Employment apparently based on the Kearney Australia model, but this of itself hardly seems to be a sufficient basis for the grant of injunctive relief. Equally, although it may be said that, absent restraint, Crescendo will continue to use the Employee Handbook, this again of itself is hardly something to warrant the grant of an injunction.

107 I have referred to the absence of any evidence that Kearney Australia has some unique or particular way of obtaining or doing business that gives it some sort of competitive edge, let alone that any of the defendants have knowledge of, or are exploiting for their own purposes, any such matters.

108 Further, in this context, I rely equally, and alternatively, on the question of delay, to which I have already referred.

Other matters

109 There are two other matters that require notice. The first relates to the Court’s approach to the grant of interlocutory relief (see para [46] above). I have given considerable – perhaps more than usual – attention to the underlying merits of the parties’ respective positions, because I think that this is a case where the grant of interlocutory relief would substantially determine the issues between the parties. For example, enforcement of Mr Crepaldi’s Restraint of Trade covenant would sequester him until 26 April 2006; and enforcement of the other covenants would operate until 26 or 27 October or 3 November 2006. Although the parties have indicated that they would seek an expedited hearing in the event that interlocutory relief were granted, and although I would think it likely that expedition would be granted, it is unlikely that the case could be prepared for hearing and heard, and judgment delivered, by the first of those dates. Whilst it is likely that those things would happen before the second or third of those dates, the reality is that the grant of interlocutory relief would mean that the plaintiff would have had the benefit of in one case all, and in the other substantially part of, the restraints that it seeks to enforce, before the Court could give judgment on the final hearing. In those circumstances, clear focus on the merits is required, and that is what I have sought to undertake.

110 The second matter is that, as I indicated in para [3] above, Kearney Australia relied, as against Mr Crepaldi, not only on the various contractual provisions to which I have referred, but also on his fiduciary obligations owed as its (former) managing director. I have not referred specifically to those obligations in my analysis of the various claims for relief. That is because I think that a claim for relief based on those obligations would fail for all the discretionary reasons (except, of course, those relating only to the likelihood of enforcement of particular covenants) that I have referred to in analysing the various claims. Thus, whilst I have not overlooked either the existence or the significance of this aspect of Kearney Australia’s case against Mr Crepaldi, I have not dealt with it separately because, in the result, I do not think that it would require any different answer in respect of any particular claim for relief.

Conclusions

111 It follows that each of the claims for injunctive relief, advanced through the amended (or further amended) Notice of Motion, should be dismissed.

112 The defendants gave undertakings, effectively to hold the status quo, up until the delivery of judgment. The terms of those undertakings were such that the defendants would have been relieved of them at the conclusion of delivery of these reasons. Because of the urgency of this matter, I took the course of delivering brief oral reasons on 11 January 2006, and making orders to give effect to them. Those orders included an order that the defendants be relieved of their undertakings to the Court.

113 I now publish these as my detailed reasons foreshadowed on 11 January 2006.

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Citations

Kearney v Crepaldi [2006] NSWSC 23

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CITATION:	Kearney v Crepaldi & Ors [2006] NSWSC 23
HEARING DATE(S):	5 & 6/01/2006
JUDGMENT DATE :	10 February 2006
JURISDICTION:	EQUITY
JUDGMENT OF:	McDougall J
EX TEMPORE JUDGMENT DATE:	01/19/2006
DECISION:	Refer paras 111-112.
CATCHWORDS:	RESTRAINT OF TRADE - Application for interlocutory injunctive relief - where decision to grant injunction will determine substance of the matter - where serious question - where employer delayed enforcement of restraints - whether restraint on competition is reasonably necessary to prevent disclosure of confidential information or exploitation of former client relationships - where restraints on solicitation of employees and clients are broad and damages are an adequate remedy - whether restraint on solicitation is based on confidential knowledge gained during employment.
LEGISLATION CITED:	Restraints of Trade Act 1976
CASES CITED:	Attorney-General of Australia v Adelaide Steamship Co [1913] AC 781, 797 Aussie Home Loans v X Inc Services (2005) NSWSC 285 Dawnay Day & Co Ltd v De Braconier d'Alphen [1998] ICR 1068 Hartleys Ltd v Martin [2002] VSC 301 Herbert Morris Ltd v Saxelby [1916] 1 AC 688 Hanover Insurance Brokers Ltd v Schapiro [1994] IRLR 82 Ingham v ABC Contract Services (UKCA, unreported, 12/12/93) Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1958] 2 All ER 65 Lindner v Murdoch's Garage (1950) 83 CLR 628 Littlewoods Organisations Ltd v Harris [1977] 1 WLR 1472 Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 North Western Salt Co. Ltd v Electrolytic Alkali Co Ltd [1914] AC 461, 470
PARTIES:	A.T. Kearney Australia Pty Limited Plaintiff Joseph Ronald Crepaldi First defendant Christopher Paxton Second defendant Crescendo Partners Pty Limited Third defendant
FILE NUMBER(S):	SC 6534/05
COUNSEL:	Mr M S White - Plaintiff Mr R M Goot SC with Mr J Harris - Defendants
SOLICITORS:	Baker & McKenzie - Plaintiff Clayton Utz - Defendants