Russ Australia v Benny

[2006] NSWSC 1118

CITATION:	Russ Australia v Benny [2006] NSWSC 1118
HEARING DATE(S):	18 & 19 October 2006
JUDGMENT DATE :	19 October 2006
JURISDICTION:	Equity
JUDGMENT OF:	Campbell J
EX TEMPORE JUDGMENT DATE:	10/19/2006
DECISION:	One restraint prima facie valid; interlocutory injunction granted.
CATCHWORDS:	RESTRAINT OF TRADE – employer and employee – restrictive covenants going wider than needed for legitimate protection of employer’s interests – no particular threat of breach established – application of Restraints of Trade Act 1976 – construction of covenant against soliciting clients – covenant not to work for a competitor – interests capable of supporting such a covenant – how reasonableness of length of restraint determined – INJUNCTIONS – interlocutory injunctions – where interlocutory hearing will for practical purposes decide the rights of the parties – factors relevant to balance of convenience – TORTS – interference with contractual relations
LEGISLATION CITED:	Restraints of Trade Act 1976
CASES CITED:	Buckley v Tutty (1971) 125 CLR 353 C & S Constructions Pty Limited v Dawson (1991) ATPR 41–148 Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 Curro v Beyond Productions Pty Limited (1993) 30 NSWLR 337 Fightvision Pty Ltd v Onisforou; Tszyu v Fightvision Pty Ltd (1999) 47 NSWLR 473 Hellman Insurance Brokers v Peterson [2003] NSWSC 242 IRAF Pty Limited v Graham [1982] 1 NSWLR 419 John Fairfax Publications Pty Limited v Birt [2006] NSWSC 995 Kolback Securities Pty Limited v Epoch Mining NL (1987) 8 NSWLR 533 Koops Martin Financial Services Pty Limited v Dean Reeves [2006] NSWSC 449 Linwar Securities Pty Limited v Savage [2006] NSWSC 786 Orton v Melmann [1981] 1 NSWLR 583 Stenhouse Australia Ltd v Phillips [1974] AC 391 Wright v Gasweld [1991] 22 NSWLR 317
PARTIES:	Russ Australia Pty Ltd - Plaintiff Sandra Benny - First Defendant Childsmart Pty Limited - Second Defendant
FILE NUMBER(S):	SC 5255/06
COUNSEL:	T Saunders - Plaintiff A Moses - Defendants
SOLICITORS:	Cosoff Cudmore Knox - Plaintiff Morgan Lewis Attorneys - Defendants

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
EQUITY LIST

CAMPBELL J

19 OCTOBER 2006

5255/06 RUSS AUSTRALIA PTY LTD v SANDRA BENNY & ANOR

JUDGMENT – Ex Tempore

1 HIS HONOUR: This is an application to restrain an alleged breach of terms of an employment contract relating to the activities of the employee after the employment had ceased.

2 The plaintiff operates a business that sells giftware products emanating from a United States business called Russ Berrie. The plaintiff describes its product range as including collectable heirloom bears, stuffed animals, photo frames, wedding, anniversary and baby gifts, table top accessories and home decor, and also infant and juvenile products such as teddy bears, piggy banks, bath toys and accessories, feeding utensils and bowls, pacifiers, soft toys, mobiles, nightlights and lamps.

3 The plaintiff sells its products direct to retail customers. The retail customers cover a wide range, including gift stores, pharmacies, card shops, home decor shops, apparel stores, craft stores, garden stores, book stores, stationery stores, hospitals, college and airport gift shops, resort and hotel shops, florists, chain stores, department stores, military post exchanges, charity organisations and internet companies. As well it markets its products to buyer groups, which appear to be organisations in which retailers band together to obtain better prices for the purchase of the product.

4 The plaintiff was incorporated in 1999, and came to operate a business, of distributing these Russ Berrie products in Australia, that had previously been operated by another organisation. The first defendant had worked as a sales representative for that other organisation since about 1994. She took up employment with the plaintiff when the plaintiff was incorporated. She accepted a position as National Sales Manager. In that position she reported to the Managing Director. Her duties and responsibilities in this role included:

(a) responsibility for achieving the company’s sales budget;

(b) managing a sales force of approximately 24 staff;

(c) responsibility for achieving at least one million dollars in personal sales;

(d) responsibility for human resource requirements of sales staff;

(e) the training of sales staff;

(f) promoting and developing sales at show rooms and trade fairs; and

(g) meeting and forming relationships with new and existing customers.

5 The “personal sales” came about through the plaintiff being the Account Manager for certain client accounts.

6 In her role in dealing with her own accounts, the first defendant was the first point of contact with the customers, and communicated with them regularly, on average weekly.

7 She also visited the plaintiff’s major customers on a regular basis, even if they were not her own accounts. There are seven trade shows in Australia in which the plaintiff participates each year, and the first defendant attended each of those seven trade shows on behalf of the plaintiff.

8 The terms of employment were governed by a written agreement, entered on 11 January 2004. The clauses relevant to the present argument are:

“ 14. DUTY FOLLOWING TERMINATION
14.1 You shall not, without the prior written consent of the Company for a period of 6 months from the termination of your employment:
(a) directly or indirectly approach, canvass, solicit or endeavour to entice away from the Company any person, firm or company who were clients of the Company with whom you have dealt or otherwise had contact in the course of and during your employment (“Clients”);
(b) accept any approach or proposal, whether direct or indirect, from any Clients whereby you are to perform or to provide services to Clients in competition to the Company;
(c) solicit, interfere with or endeavour to entice away from the Company any employee of the company whether wholly or partly for the benefit of you or any other person or Company;
(d) directly or indirectly carry on (whether alone or in partnership or joint venture with anyone else) or otherwise be concerned with or interested in (whether as trustee, principal, agent, employee, shareholder or in any other capacity) any business which is competitive with the Company and which manufactures, distributes or markets products which are similar to the products of the Company and within the territory you performed your duties on behalf of the Company;
(e) counsel, procure or otherwise assist any person, firm or corporation to do any of the acts referred to above.
14.2 You agree and acknowledge that the duration, extent and application of the respective restrictions contained in clause 14.1 are not greater than is reasonably necessary for the protection of the interests of the Company.
15. CONFIDENTIALITY
15.1 You undertake to the Company that you will not, in any manner directly or indirectly disclose or use any confidential information of any kind, including, without limitation, any formulae, process, method or manufacture, trade secret, record, data or any information concerning the business, affairs or customers of the Company acquired by you in the course of or in consequence of your employment.
15.2 Clause 15.1 will not apply to any information which is generally available to the public other than as a result of the wrongful disclosure by you, or where the information is required to be disclosed by any law.”

9 On 4 July 2006 the first defendant accepted a written offer of employment from the second defendant. That written offer of employment was one under which she became the National Sales Manager - Toys of the second defendant. She was to report to the Managing Director of the second defendant. Her contract with the second defendant included a provision that:

“All Clients and applicants of the Employer remain with the Employer at all times. In the events of termination of your employment, you shall not for a period of six (06) months after the date of termination of employment under this Contract of Employment, canvass, solicit, interfere with, contact or in any way deal with the Employer’s clients or applicants. Neither will you entice away any person, firm nor company who shall at anytime during the continuance of your employment hereunder have been in the habit of being a client or employee of the company.”

10 The first defendant resigned from her employment with the plaintiff on 6 July 2006. When she resigned she told Mr Kondou, the chief financial officer of the plaintiff, that she was going on a long holiday and not taking another position.

11 It was on 14 August 2006 that she began duties for her employment with the second defendant.

12 On 26 September 2006 the plaintiff discovered that she was employed by the second defendant, and these proceedings were begun fairly soon after.

13 The orders that the plaintiff seeks today are set out in the Amended Notice of Motion:

“6. That until further order the First Defendant be restrained from, by herself her servants and agents:
(a) directly or indirectly approaching, canvassing, soliciting or endeavouring to entice away from the Plaintiff any person, firm or company who were clients of the Plaintiff with whom the First Defendant dealt, or otherwise had contact with, in the course of and during her employment with the Plaintiff (“Clients”);
(b) accepting any approach or proposal, whether direct or indirect, from any Client whereby the First Defendant is to perform work or to provide services to the Client in competition with the Plaintiff;
(c) soliciting, interfering with or endeavouring to entice away from the Plaintiff any employee of the Plaintiff whether wholly or partly for the benefit of the First Defendant or any other person or company;
(d) directly or indirectly carrying on (whether alone or in partnership or joint venture with anyone else) or otherwise be concerned with or interested in (whether as trustee, principal, agent, employee, shareholder or in any other capacity) any business which is competitive with the Plaintiff and which, within the territory that the First Defendant performed her duties on behalf of the Plaintiff, manufactures, distributes or markets products which are similar to the products of the Plaintiff; and
(e) counselling, procuring or otherwise assisting any person, firm or corporation to do sny of the acts described in paragraphs 6(a) to (d) inclusive.
7. That until further order the First Defendant be restrained from, by herself her servants and agents, in any manner directly or indirectly disclosing or using the Plaintiff’s confidential information described in the Schedule, except as required by law.
8. That until further order the Second Defendant be restrained from, by itself its servants and agents, inducing, aiding, abetting or encouraging the First Defendant to breach any of the restraints described in paragraphs 6 and 7.”

14 Order 7 is given content by the Schedule to the Amended Notice of Motion which says -

“1. The prices charged by the Plaintiff to each of its customers.
2. The cost of the Plaintiff of manufacturing or purchasing the products sold by it.
3. The profit margin made by the Plaintiff on the sale of each of its products to its customers.
4. The minimum amount of profit that the Plaintiff will accept on the sale of any particular product.
5. Details of how often and when the Plaintiff changes its prices.
6. Details of the Plaintiff’s marketing and advertising plans and strategies.
7. The requirements of the Plaintiff’s customers, including without limitation their buying patterns, their idiosyncrasies and the reasons why they deal with the Plaintiff.
8. The names, positions, skills and experience of the Plaintiff’s sales staff.
9. Details of the terms and conditions of employment of each of the Plaintiff’s sales staff, including without limitation the remuneration paid to each of them.”

15 In the course of submissions the plaintiff’s counsel said that he no longer pressed the words “or otherwise had contact with” in order 6(a). That change is one which affects the definition of “Clients” and thus it feeds into all the orders which the plaintiff seeks.

16 In these reasons for judgment, I will use the word “Client” in the same sense as the Amended Notice of Motion, after taking that concession of the plaintiff into account. Thus, in this judgment “Client” means “any person, firm or company who were clients of the plaintiff with whom the first defendant dealt, in the course of and during her employment with the plaintiff”.

17 The first defendant has offered some undertakings, namely:

“i. The First Defendant will not until further order by herself, her servants and agents in any manner directly or indirectly disclosing or using the following information which the Plaintiff contends is confidential and which the Plaintiff contends that the First Defendant came into possession of prior to 7 July 2006 whilst she was an employee of the Plaintiff:
a. the prices charged by the Plaintiff to each of its customers;
b. the cost to the Plaintiff of manufacturing or purchasing the products sold by it;
c. the profit margin by the Plaintiff on the sale of each of its products to its customers;
d. the minimum amount of profit that the Plaintiff will accept on the sale of any particular product;
e. details of how often and when the Plaintiff changes its prices;
f. details of the Plaintiff’s marketing and advertising plan and strategy;
g. the requirement of the Plaintiff’s customers, including without limitation their buying patterns, their idiosyncrasies and the reasons why they deal with the Plaintiff; and
h. details of the terms and conditions of employment of each of the Plaintiff’s sales staff including without limitation the remuneration paid to each of them.
ii. The First Defendant will not until 6 January 2007 or until the determination of the proceedings (whichever comes first) directly or indirectly approach, canvass, solicit, or endeavour to entice away from the Plaintiff, Kenny’s Cardiology, Australia Post, Spotlight and the Juvenile Diabetes Research Foundation;
iii. The First Defendant will not until 6 January 2007 or until the determination of the proceedings (whichever comes first) accept any approach or proposal whether direct or indirect from Kenny’s Cardiology, Australia Post, Spotlight and the Juvenile Diabetes Research Foundation whereby she is to perform or to provide services to Kenny’s Cardiology, Australia Post, Spotlight and the Juvenile Diabetes Research Foundation.”.

18 I will refer to Kenny’s Cardiology, Australia Post, Spotlight and the Juvenile Diabetes Research Foundation as “the Four Named Clients”.

19 In light of the undertakings which are offered, the live area of dispute concerns the extent to which the orders that the plaintiff seeks are wider than the undertakings offered. That live area of dispute is:

(1) whether there should be an interlocutory injunction to restrain the first defendant from directly or indirectly disclosing or using the names, positions, skills and experience of the plaintiff’s sales staff.

(2) whether there should be an order against canvassing, soliciting, et cetera any Client, other than the Four Named Clients.

(3) whether there should be an order against the first defendant accepting any approach or proposal whether direct or indirect from any Client, other than the Four Named Clients, whereby the first defendant is to perform work or to provide services to the Clients in competition with the plaintiff.

(4) whether the orders in paragraphs 6(c),(d) and (e) of the Amended Notice of Motion should be made.

20 As the restraints will expire on 6 January 2007 the likelihood is that this interlocutory hearing will for practical purposes decide the rights of the parties. In that situation the Court should evaluate the strength of the plaintiff’s case for final relief for the purposes of seeing where the balance of convenience lies: Kolback Securities Pty Limited v Epoch Mining NL (1987) 8 NSWLR 533.

21 In New South Wales, a restraint of trade is valid to the extent to which it is not against public policy, even if it is not in severable terms: Restraints of Trade Act 1976 section 4(1); Koops Martin Financial Services Pty Limited v Dean Reeves [2006] NSWSC 449 at [26]-[27]; John Fairfax Publications Pty Limited v Birt [2006] NSWSC 995 at [6].

22 In determining whether or not the restraint is against public policy, one considers whether the employer has a legitimate protectable interest, and whether the restraint is no more than is reasonable for the protection of that interest. The validity of the restraint is judged at the time at which the contract is made, by reference to what the restraint entitled or required the parties to do, rather than what they intend to do or have actually done: Curro v Beyond Productions Pty Limited (1993) 30 NSWLR 337 at 344.

23 The onus of establishing that the restraint affords no more protection than is reasonably necessary lies on the parties seeking to support the restraint: Buckley v Tutty (1971) 125 CLR 353 at 377.

Validity of the Restraints

24 The defendants submitted that any adverse effect upon the plaintiff arising from the employment of the first defendant by the second defendant would derive not from her connection with the plaintiff’s Clients but by reason of her own skill. The defendant relied upon the decision of Nicholas J in Linwar Securities Pty Limited v Savage [2006] NSWSC 786, where his Honour said, at [40]:

“My conclusion is that any adverse effect upon the plaintiff which employment as an analyst with Goldman may cause would derive not from his connection with the plaintiff’s clients but by reason of his own skill (cf: Attwood pp 590-591). The following passage from the judgment of Wanstall, J in Aloha is apt (p 447):
“… the preference of tourists for a particular captain, including the respondent, created a personal property in him, not in his employers, and they were no more entitled to restrain him from using his professional reputation in competition than would any theatrical producer be entitled to restrain an actor from appearing for a rival producer after the termination of the contract of employment. To revert to Lord Parker of Waddington in Morris v Saxelby (supra) at p 710 “such a restraint has, so far as I know, never been upheld, if directed only to the prevention of competition or against the use of the personal skill and knowledge acquired by the employee in his employer’s business”.

25 However, Linwar was a case which concerned a securities analyst and researcher. As Nicholas J said at [37]:

“My assessment is that the client relationship/customer connection is essentially incidental to his principal activity as an analyst and researcher. The defendant’s success as such is the product of his own skill and judgment. He has established a high personal reputation in the industry for the quality of his reports which are available to clients. Doubtless this is of benefit to the plaintiff and assists it in competing against other security dealers.”

26 Concerning such an employee one can, with respect, readily understand how Nicholas J reached the conclusion he arrived at, at [40]. The first defendant in the present case is in a very different situation, where, as a sales person her contact with customers is very important. However, the first defendant offers an undertaking not to deal with those customers who were her own personal account customers. Thus one critical question for today concerns whether she had sufficient customer connection with customers of the plaintiff who were Clients, but were not her own personal accounts, to make it reasonable for her to be restrained in the way in which Clause 14.1(a) did.

27 As mentioned earlier, the nature of her connection with those customers was that she attended each of the seven trade shows in which the plaintiff participated each year, and as well she visited the plaintiff’s major clients on a regular basis. One example is that in early to mid 2006 she attended the national sales conference of Kenny’s Cardiology in her capacity as the plaintiff’s representative.

28 In my view it is not possible to draw a clear distinction between a salesperson having a connection with clients by reason of those clients having been given to her to look after by an employer, and the salesperson’s own personal skills and like ability. That is because the continuing custom of a customer is the combined product of the customer having been given to a particular salesperson to look after, and that salesperson doing a good job in keeping the custom of that customer. Thus, an employee covenant can be valid to the extent to which it protects the employer’s interest in clientele which has been built up or maintained through the friendly nature of the employee: Koops Martin v Dean Reeves [2006] NSWSC 449 at [36]-[43] per Brereton J.

29 There is a strong case for Clause 14.1(a) being valid in so far as the Clients who were the personal accounts of the first defendant are concerned. The justification for a restriction of the type contained in Clause 14.1(a) is stated by Brereton J in John Fairfax Publications Pty Limited v Birt [2006] NSWSC 995 at [30]:

“An employer’s customer connection is plainly 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-seven (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 where the employee is, 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 , 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]].”

30 In the text of Clause 14.1(a) clients “with whom you have dealt” would include clients with whom the dealing was of a passing nature, and not such as to give the first defendant any practical control or influence over those clients. To that extent Clause 14.1(a) goes further than protecting legitimate interests of the employer, and hence it would be invalid at common law. However clients “with whom you have dealt” could also include clients concerning whom the first defendant had considerable reputation and influence.

31 One therefore needs to consider whether Clause 14.1(a) can be read down under the Restraints of Trade Act 1976. To apply that Act one needs to look at the particular breach, and determine whether the application of the restraint to that breach is contrary to public policy: Orton v Melmann [1981] 1 NSWLR 583; IRAF Pty Limited v Graham [1982] 1 NSWLR 419; C & S Constructions Pty Limited v Dawson (1991) ATPR 41–148; Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 at 328.

32 In the present case, there is no proved breach of Clause 14.1(a) (at least in so far as the live area of contention in this case is concerned), and no evidence that any particular breach is contemplated. Thus, the plaintiff has not demonstrated that Clause 14.1(a) can be saved by the application of the Restraints of Trade Act, in any way that is shown to be relevant.

33 Clause 14.1(b) is in some ways the converse of Clause 14.1(a). Clause 14.1(a) has as one of its concerns situations where business is generated with a Client as the result of an initiative of the first defendant, while Clause 14.1(b) is more directed to a situation where business is generated with a Client as a result of an initiative of the Client. In putting it that way, I do not overlook the fact that there is a significant overlap between the two paragraphs, in that soliciting is not dependent upon who made the first contact: Hellman Insurance Brokers v Peterson [2003] NSWSC 242 at [11]-[12].

34 In my view there is a strong case for the validity of Clause 14.1(b) in so far as it relates to approaches or proposals from a Client who was a personal account of the first defendant. However, as with Clause 14.1(a) in so far as it relates to a Client who is merely someone “with whom you have dealt”, it goes wider than is needed for protection of the legitimate interests of the plaintiff, and so is invalid at common law to that extent.

35 Again here, there is no evidence of any particular approach or proposal made or expected by any particular Client, by reference to which the Restraints of Trade Act could be applied. Thus, the plaintiff has not demonstrated that Clause 14.1(b) can be saved by the application of the Restraints of Trade Act, in any way that is shown to be relevant to the present case.

36 The non-solicitation of employees covenants in Clause 14.1(c) on its face extends to solicitation of employees with whom the first defendant had no significant contact. Thus, on its face, it also is wider than is needed to protect the legitimate interest of the plaintiff.

37 When one turns to whether it can be saved under the Restraints of Trade Act, again, there has been no breach, and no evidence of threat of any particular breach. Thus, again, that covenant has not been shown to be one that can be saved under the Restraints of Trade Act, in any way that has been shown to be relevant to the present case.

38 There is an additional reason, which I will mention now, why I am not going to grant an interlocutory injunction to enforce 14.1(c). It is that there is no adequate threat of a breach of Clause 14.1(c) to justify the grant of an injunction. While there is a possibility of breach, that is not shown to be much more than the possibility that there always is that one will breach a contract. The plaintiff submits that I should take into account the first defendant’s dishonest account of her intentions which she gave when she left the plaintiff. While that less than frank account would make one look with care at her assertions, it has now been more than three months since she left, and there is no evidence of employees leaving the plaintiff, or of the first defendant making unsuccessful attempts to lure employees from the plaintiff. This provides a separate reason why I am not persuaded that there is a sufficient basis for a specific injunction against solicitation of employees.

39 Counsel for the defendant recognised that the critical point forensically in the case was whether 14.1(d) is valid.

40 The plaintiff submits that Clause 14.1(d) is no more than is needed to protect the legitimate interests of the plaintiff concerning three different subject matters: its customer connection; its confidential information; and its work force. All three of those subject matters are ones concerning which an employer has an interest which it may legitimately protect by a contractual restraint on an employee’s activities after cessation of employment: John Fairfax Publications v Birt [2006] NSWSC 995 at [28], [30], [32].

41 In the present case, by reason of her role as National Sales Manager, the first defendant had access to information concerning each of the topics listed in the Schedule to the Amended Notice of Motion. Whether or not those matters count as trade secrets, they are the sort of information that the first defendant obtained by virtue of her position, and which could be of significant use to a competitor. In particular, while the names and positions of the plaintiff’s sales staff are probably not confidential, in themselves, the combination of information which the first defendant had concerning names, positions, skills and experience of the plaintiff’s sales staff was the sort of compilation of information that an employer has a legitimate interest in protecting. In my view, each of the topics listed in the Schedule is a type of information that an employer has a legitimate interest in protecting.

42 By virtue of her activities with her own account customers, and customers of the first defendant who were not her own account customers, the first defendant had a practical power to influence at least some of those customers. And by virtue of her supervision of the sales force, she was in a position to have influence over other employees of the plaintiff.

43 In John Fairfax Publications v Birt [2006] NSWSC 995 at [36] Brereton J said:

“The second limb of clause 11 is also supported by confidential information. 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 a restraint 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]].”

44 The reasoning so far in this judgment has demonstrated that in a similar fashion there can be practical difficulties in an employer seeking to protect itself against activities of a former employee which encroach on its legitimate interests by obtaining a specific covenant against solicitation of customers, or solicitation of employees. As well, it is often difficult for a former employer to know, or to be able to establish, that a breach of such a covenant has occurred. These practical difficulties provide another reason, beyond protection of confidential information, why, sometimes, the only way that an employer can be confident that it can legitimately protect its interests is by taking the covenant whereby the employee agrees not to work for a trade rival for a specified period.

45 In my view, a covenant for an employee like the first defendant not to be an employee of a business which is competitive with the employer, and which manufactures, distributes or markets products which are similar to the products of the employer within the geographical area within which the first defendant performs her duties, is a type of covenant which reasonably protects legitimate interests of the plaintiff. In reaching that conclusion I take into account the responsible position she had in the plaintiff, as well as the three bases identified at [40] above.

46 The defendant submitted that the six-month restraint imposed by Clause 14.1(d) was too long. The reasonableness of the length of the restraint needs to be evaluated taking into account all three of the types of interest which support the covenant.

47 The plaintiff submitted that an important factor in deciding the reasonableness of a restraint which is justified by customer connection is how long it would take a reasonably competent replacement employee to show his or her effectiveness and establish a rapport with customers. The decision about the reasonableness of a restraint is a broad and commonsense one, that the judge arrives at after informing himself or herself as fully as is possible of the facts and circumstances relating to the employer’s business, the nature of the employer’s interest to be protected, and the likely effect on it of the conduct that the restraint in question prohibits: Stenhouse Australia Ltd v Phillips [1974] AC 391 at 402. Even so, I accept that the factor that the plaintiff points to can play an important part in the ultimate decision about the reasonableness of the restraint. The second defendant describes the first defendant, in an e-mail sent to certain customers on 16 August 2006, as someone who “has immense experience and business contacts, in both the gift and toy markets in Australia and New Zealand”. Such a person is not likely to be readily replaced, in the customer’s eyes. Indeed, the plaintiff has not yet been able to find a replacement for the first defendant. The evidence shows that, in the particular industry in which the plaintiff and second defendant operate, marketing plans are formulated many months ahead. For example, on 14 September 2006 the first defendant emailed a client contact she has at Australia Post concerning the Christmas catalogue of Australia Post for 2007. When the industry works on comparatively long lead times for product ordering, that would suggest it would take longer for a replacement employee to establish themselves than would be the case in an industry with shorter lead times.

48 Turning to the other types of interest which support the covenant, the types of information identified in the Schedule to the Amended Notice of Motion are not the types of information which are likely to all, or nearly all, become stale before six months has expired. Nor is the prospect of the first defendant being able to exercise influence over staff of the plaintiff the sort of thing which is likely to atrophy before six months have expired.

49 Further, the very fact that the first defendant agreed to a six-month restriction is in itself some evidence that it is a reasonable restriction: Stenhouse Australia Ltd v Phillips [1974] AC 391 at 401. The fact that she has agreed to another six month restriction, in her very recently negotiated contract with the second defendant, provides further support. In all these circumstances, in my view, the six-month period of the restraint is not too long.

Breach of the Restraint?

50 I now turn to whether there has been a breach of the restraint. In light of the findings so far, the only relevant question to consider concerning Clause 14.1 is whether there is a serious question to be tried that there has been a breach of Clause 14.1(d).

51 In the course of submissions, counsel for the defendants accepted that it is arguable that the plaintiff and the defendant are competitors for the purpose of Clause 14.1(d). That concession was in my view appropriately made. They are both in the business of wholesaling toys and gift items. While there are numerous significant differences between individual items in their product ranges and there are some types of product that one sells but the other does not, a retailer would, it appears on the present evidence, have a real choice between whether to purchase products from the second defendant or from the plaintiff. As the plaintiff and the second defendant are wholesalers, the sort of competition that Clause 14.1(d) is concerned with is competition for space on retailers’ shelves or websites, not just whether their products compete for the custom of the ultimate retail purchasers.

52 As well, the evidence about the first defendant’s activities since joining the second defendant supports the view that the two companies are competitive. On the second day of her employment with the second defendant, she contacted a person with whom she had previously dealt with at Australia Post, trying to set up a meeting. She met that person in the showroom of the second defendant, in which the whole range of the second defendant’s products were displayed. One of the products in which the plaintiff has a significant line of business is plush toys. The Australia Post lady, seeing some the second defendant’s products that were in the show room, enquired whether the second defendant could do a plush catalogue. The first defendant replied that “we are not ready to do it yet”.

53 I take into account that affidavits were read from executives of two organisations, each of which is a customer of both the plaintiff and the second defendant. Each of those executives expressed the view that the two companies did not compete. No reasons were given for that view, hence I regard them as of negligible weight.

54 In all these circumstances, in my view there is not only a serious question to be tried about whether there has been a breach of Clause 14.1(d), there appears on the present evidence to be a fairly strong case for there having been a breach. There is no doubt that the first defendant is employed by the second defendant, and no issue was raised about the territory to which the clause extended. When the business of the second defendant seems to be competitive with that of the plaintiff, and when the second defendant distributes and markets products which are similar to the products of the plaintiff (even though not identical) that suffices.

Balance of Convenience

55 I turn now to balance of convenience. The effects of the granting of an injunction would be to prevent the first defendant from acting as an employee of the second defendant prior to 6 January 2007. She has regular financial commitments for rent and car lease payments, of a little less than $2,000 a month, which she would have difficulty in meeting if she were not to have a salary. She gives evidence that:

“In the event that I am restrained from continuing in my current role with Childsmart, I have not received any guarantee from Childsmart that it would continue to hold my position open until the expiry of the restraint period.”

56 Mr Berman, the Managing Director of the second defendant, has also sworn an affidavit. He says nothing about whether the second defendant would hold the first defendant’s position open until after the expiry of the restraint period, if the injunction were to be granted. This is a circumstance in which it is legitimate to infer that anything he might have said on that topic would not have assisted the defendants’ case: Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418-9.

57 The first defendant has been responsible for the intended launch by the second defendant of a brand of products called Brio. Mr Berman gives evidence that:

“Childsmart intends to launch the Brio brand in the Australian market for Christmas 2006. Childsmart has spent approximately $500,000 on this launch including advertising, salaries and consultants. As Miss Benny is responsible for the launch, if she was retrained from being employed by Childsmart, such a restraint would result in Childsmart being unable to launch the Brio brand prior to Christmas. This would have a serious impact on Childsmart’s financial position, and would result in Childsmart breaching a contractual commitment to Brio, to launch the brand in Australia prior to Christmas.”

58 He does not say that the whole of the $500,000 would be lost if the launch were to be delayed. Counsel for the plaintiff criticises this evidence, saying that Mr Berman gives no reason why nobody else is capable of doing the job. However, Mr Berman was not cross-examined on this assertion, and it is appropriate for me to proceed on this assumption that there is a risk that his prediction would prove correct.

59 Mr Berman knew about the covenants in the first defendant’s employment contract, as the first defendant told him about them at the time she was engaged. He formed the view that employing her would not result in a breach of the restraint. Thus, he was running the risk of his view being wrong.

60 The factor in the plaintiff’s favour concerning the balance of convenience is that if the injunction is not granted, it would have no useful remedy for the breach of contract. Damages are an inadequate remedy in a case like this. I agree with the remarks of Brereton J in Fairfax at [46] that the Court should be slow to decline as a matter of discretion to enforce a restraint such as the present one.

61 The balance of convenience in a case such as the present can involve more than the interests of the parties to the litigation. I would be loathe to encourage a situation where clauses such as Clause 14.1(d) could be breached in the hope that the breach would not be found out and then, if the breach was found out, the parties in breach could rely on practical difficulties he or she would be placed in by not being allowed to continue the breach as a reason for the injunction not being granted, or as a reason why a plaintiff ought to have in practice, protection of its legitimate interests to a lesser extent than the parties had agreed. However, even without taking that factor into account, in my view the balance of convenience favours the granting of an injunction to enforce Clause 14.1(d).

Claim Against Second Defendant

62 The claim against Childsmart is founded on the tort of interference with contractual relations. Before that tort is committed, the defendant must have intentionally induced or procured what he knew would be a breach of the contract. As explained earlier, Mr Berman knew about this clause at the time he engaged the first defendant. However, a bona fide belief reasonably entertained that a particular course of conduct would not be a breach of contract is fatal to any such claim: Fightvision Pty Ltd v Onisforou; Tszyu v Fightvision Pty Ltd (1999) 47 NSWLR 473 at 509, 512. In light of Mr Berman’s evidence I am not satisfied that there is a serious question to be tried about whether that tort has been committed.

63 In those circumstances, I accept the undertakings of the first defendant proffered to the Court by her counsel, in the terms set out earlier in this judgment. I also order, that until 6 January 2007 or until the determination of the proceedings (which ever comes first) the first defendant not act as an employee of the second defendant in Australia.

64 In light of that order having been made, and of the undertakings having been accepted, there is no occasion for any further injunction to restrain any alleged breach of confidential information.

65 I stay the operation of the injunction against acting as an employee until 5pm, Monday, 23 October 2006.

66 I order that until 5pm, Monday, 23 October 2006, the first defendant do nothing by way of initiating or advancing any new business on behalf of the second defendant.

67 I note that the plaintiff by its solicitor gives to the Court the usual undertakings as to damages.

68 I order that the restraints presently in existence be extended to 5pm, Monday, 23 October 2006.

69 These orders may be entered forthwith.

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70 In so far as the plaintiff’s claim against the first defendant has been substantially successful, it is appropriate for the plaintiff to have an order for costs of that claim, but for the costs to be given on the basis which recognises the possibility that at an eventual trial the plaintiff might lose. I order that the costs of the plaintiff as against the first defendant be the plaintiff’s costs in the cause against the first defendant.

71 The second defendant has succeeded. The plaintiff submits that it was prudent to sue the second defendant, and that the evidence which lead to the second defendant’s success was put on quite late. While I accept the factual correctness of those matters that the plaintiff submits, it does not seem to me that it ought affect the outcome. I order that the costs of the second defendant of the application be paid by the plaintiff.

72 I note that the first and second defendants appear by one counsel and solicitor, and that there was no evidence which was relevant to the case of the second defendant alone. Even the evidence about Mr Berman forming the view he did about the applicability of the restraint covenant is evidence which was relevant to the balance of convenience concerning the application against the first defendant. Ultimately, however, the effect of those matters will be a matter for any assessment.

73 I stand the matter into the registrar’s list on Tuesday, 24 October 2006 for further directions.

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