Total RISC Technology Pty Ltd v Cannings

[2010] NSWSC 1124

CITATION:	Total RISC Technology Pty Ltd v Cannings & Anor [2010] NSWSC 1124
HEARING DATE(S):	23 September 2010, 24 September 2010
JUDGMENT DATE :	24 September 2010
JUDGMENT OF:	Bryson AJ at 1
DECISION:	1. I note and accept the undertaking of the first defendant to the Court, altered as I have altered it in red, so as to have permanent effect, as to paragraph 1 in its effect, and set out in a document dated 8 July 2010, identified by Justice Pembroke. 2. I give judgment for the defendant with costs.
CATCHWORDS:	CONTRACT - employment contract - restraint of trade clause - first employer obtained clause preventing engagement for 6 months after termination in "any trade or business which directly competes with [first employer"] - employee classed as International Program Manager resigned and went straight to second employer which conducted competing businesses - observations on enforceability of retraint - on construction of clause, "any trade or business" referred not simply to identity of new employer but to trade or business activity in which employee was engaged - on the facts Managed Services was a separate trade or business from new employer's other businesses and employee was engaged only in that separate trade or business - although the end product was similar, the manners of provision were different in ways which customers were likely to regard as significant - consideration of "direct competition" - on the facts the first employer had not shown that there was direct competition - proceedings dismissed
LEGISLATION CITED:	Not applicable
CASES CITED:	Luminar Lava Ignite Limited v MAMA Group PLC and Anor [2009] CSOH 68 Nike, Inc. v Eugene McCarthy 379 F 3d 576 (9th Cir 2004)
PARTIES:	Total RISC Technology Pty Limited Robert Cannings Interactive Pty Limited
FILE NUMBER(S):	SC 2010/225265
COUNSEL:	P: Mr M J Stevens 1&2D: Mr M Pesman / Ms E Weisske
SOLICITORS:	P: Somerset Ryckmans 1&2D: Norton Rose, Sydney

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BRYSON AJ

Friday 24 September 2010

Robert CANNINGS

JUDGMENT

1 HIS HONOUR: The plaintiff claims remedies against the first defendant, who was formerly employed by the plaintiff and was one of its directors, and against the second defendant, which is his new employer. The remedies are based on restraints in the first defendant Mr Cannings' contract of employment, as renewed in a series of further contracts relating to promotions and salary increases over a number of years.

2 When first employed, Mr Cannings was eighteen years of age, not long from school, and he had some training at school and some later experience in information technology. He was employed as a technical analyst. As well as accepting a letter of employment he entered into several other written agreements, including one entitled "Employee Non-Disclosure and Conflict of Interest Agreement". This agreement included clause 5, entitled "Protection of TRT's goodwill" et cetera and provided in clause 5.2 for the employee not to take part in poaching staff after leaving employment: Clause 5.3 was:

“For a period of six months after termination of employee's employment with TRT, the employee will not alone or together with any other person, whether as principal, agent, director, or indirectly, carry on or be engaged, concerned or interested in or otherwise associated with any trade or business which directly competes with TRT".

3 The remedies claimed in the statement of claim include claim 4, which is based on clause 5.3 and seeks an injunction restraining Mr Cannings from accepting employment, or providing any services to the second defendant, Interactive, who is his new employer, up to and including 20 November 2010. The significance of that date is the expiry of the period of six months referred to.

4 Claim 5 seeks an order restraining Interactive, the second defendant, from employing him. There are also claims for remedies relating to the agreement against poaching staff and misuse of confidential information. Then there are claims for damages against each defendant. At an interlocutory stage Mr Cannings gave to the Court an undertaking without admission, which was intended to be permanent, which restrains him from disclosing confidential information of a number of kinds and from participating in poaching of staff. The plaintiff accepted this as a sufficient remedy and has not put a case before me seeking relief dealing with those subjects. It remains, when I come to dispose of the proceedings, to make an order or note confirming the permanent effect of the undertaking.

5 Notwithstanding that he had little in the way of formal training when he was eighteen, Mr Cannings has had a significantly successful career in information technology, and he has received a number of promotions and salary increases from a very modest start while employed by the plaintiff. He has completed several industry certificates and courses, including one at MIT, Cambridge, Massachusetts, and his career has been one of marked achievement.

6 Mr Cannings joined the plaintiff's staff as a junior probationary employee, initially for three months. In view of the duties which it was contemplated that he would have at the beginning, which were set out in the letter of employment of 20 June 2003, imposition of restraints on competition, having regard to knowledge about the plaintiff's business which could be expected to come his way while performing his primary duties, was probably already reasonable in the interests of the parties. However that may be, the restraint was renewed from time to time when the terms of his employment were renegotiated; this happened several times, significantly when he tendered a resignation in 2006 and withdrew it after some further arrangement, and last in December 2009, when, in a significant renegotiation, he came to be a director of the plaintiff company and to be employed in the classification International Program Manager. On this occasion he confirmed, whether in writing or orally or by e-mail message is not clear, that his employment was to continue under the existing contract terms and conditions, which he confirmed that he had read. In my view, this gave the provisions of clause 5.3 a new context for assessment of enforceability in relation to restraint of trade law; that is, assessment in terms of the circumstances which existed as of December 2009.

7 On 20 April 2010, Mr Cannings applied to the second defendant for employment and on 21 April gave the plaintiff notice of his intention to resign. After employment interviews on 28 April and 10 May he accepted a written offer of employment by the second defendant. His employment with the plaintiff ended on 20 May and his employment with the defendant commenced on 8 June. He is still in that employment and wishes to remain in that employment, whereas compliance with an injunction such as is sought in claim 4 would prevent him from remaining in the employment.

8 The allegations in the statement of claim asserting that the second defendant induced breach of his employment contract, and particularly of clause 5.3, have not truly been pressed before me. No evidence was proffered of knowledge of the terms of the restraint by the second defendant at the time of offering him his now employment, and plaintiff's counsel did not, in his closing address, seek to uphold this cause of action alleged against the second defendant; obviously he was correct in not pursuing this.

9 In his new employment Mr Cannings is classified Network and Security Engineer and is spoken of as working in Operational Management. He described what his work is in his affidavit at paragraph 40:

“I work within the Business Solutions Group of Interactive. I, personally, and the Business Solutions Group, generally, provide managed services to customers of Interactive whose IT systems are hosted within one of Interactive's data centres. Interactive does not provide these services to customers whose IT systems reside outside Interactive's data centres (that is, customers who house their own IT systems, or customers whose IT systems are hosted by a third party)".

10 As his affidavit shows (paragraph 42) he disputes that he is in breach of clause 5.3 by working in this way in the second defendant's organisation.

11 Evidence of Mr Charos, a director of the plaintiff, identifies the services in respect of which the plaintiff alleges that there are breaches of clause 5.3. These include paragraph 21(a), "disaster recovery and business continuity services"; and paragraph (b), "third party maintenance for the provision of hardware and operating systems, maintenance of a number of kinds".

12 Mr Cannings does not dispute that these are services in which the two companies are in competition. Indeed his affidavit confirms that they are, and Mr McMahon, the second defendant's Director of Field Services and Acting Director, Business Solutions Group, Delivery, also confirms to the same effect.

13 There is a contest, however, about whether there is competition within clause 5.3, in what Mr Charos speaks of in his clause 21 (c), "Managed services portfolio, including managed services, managed storage and monitoring".

14 Mr McMahon has given evidence, and Mr Cannings' evidence is to the same effect, that Mr Cannings works only in the Business Solutions Group. Mr McMahon contends and supports with reasons in his evidence that, as far as his knowledge extends, the managed services provided by the Business Services Group are not provided by the plaintiff. From the account of the Business Services Group and its activities given by Mr McMahon and Mr Cannings, I find that Business Services Group is an identifiable part of the business organisation of Interactive, with its own management structure and distinct activities and Mr Cannings has worked only in the Business Services Group.

15 Of first importance in disposing of the litigation is the meaning and effect of clause 5.3. I note, first, that it contains what I regard as an obvious typographical error and the word "director" should be read as "directly". With this re-reading, the word "directly" appears twice, which may have some bearing on how it operates.

16 The words used in clause 5.3 have a very wide reach as to the manners of engagement by the employee in the restrained activity. There is no geographic limit to the operation of the restraint. I do not regard this as having any adverse significance, in view of the areas of operation of the businesses of both companies and, indeed, of businesses of such kinds; they can service customers anywhere and these two in fact service customers outside Australia, as well as within Australia. Geographic limits have relatively little meaning in this field of activity.

17 However, the absence of a geographic limit, which has been prominent in case law relating to restraints of trade, could well have moved the person drafting the clause towards adopting limitations elsewhere. In this field it is a great error to claim too much, as must be well-known. The thing which is not to be associated with is "any trade or business which directly competes with TRT". The words "trade or business", are in a different and lower register of precision from other terms in clause 5.3 which refer to persons. I note the words "person", "principal", "agent" and the use of the name "TRT". There is a marked shift of language to the relatively highly general reference to “trade or business”.

18 The person drafting clause 5.3 did not choose to identify that with which there was not to be an association by identifying a person. If the reference was intended to be to an employer, or to a company in competition with the plaintiff, it would have been quite easy to have said so; the temptation could not have been resisted. In my reading, the reference is to a classification of an activity, or activities, not to the identity of an employer.

19 To show breach it must be shown that there has been engagement in a trade which directly competes with the plaintiff, or that there has been engagement in a business which directly competes with the plaintiff. It is not enough to show association with a company which competes; that is to say, it is not the claim of clause 5.3 to restrain being engaged, in the wide or scattershot ways of engagement referred to, in the activities of a competing company. Such a reading would, for example, prevent employment in a completely different field, chauffeur or lift driver, and it is unlikely that the person drafting clause 5.3 with care would have extended the scattershot mood of earlier words to all classes of the activities of a competing employer.

20 So it is necessary for me to examine and come to findings on the identification of the trade or business in which it should be found that Mr Cannings is engaged and whether that trade or business directly competes with the plaintiff. This is important because some of the distinct activities of Interactive do compete; concededly so, those in Mr Charos' 21(a) and 21(b). I accept that Mr Cannings is not engaged in those. His evidence and that of Mr McMahon, which were not challenged in this respect, show how his activities are limited to those in Mr Charos' 21(c). The evidence of both clearly shows how the Business Solutions Group is a distinct part of Interactive's activities.

21 In my finding the Business Services Group and the provision of managed services is the trade or business which is relevant to the operation of clause 5.3. The activities of Interactive (or the company itself) as a whole is not the trade or business which is to be examined and classified. If it were, the case would, in practical terms, be over. It cannot be disputed and it was conceded that there is direct competition with respect to Mr Charos' classification 21(a) and 21(b). No other view could be available on the evidence.

22 I turn to address what can be referred to and what qualification is brought about by the use of the word "directly" in the phrase, "which directly competes with TRT". It is not enough that the trade or business competes. There is to be a further evaluation of the manner of competing. The word “directly” sharpens the focus and avoids too wide an operation, which would be dangerous for validity. There is to be an evaluation of the competition for its characterisation as direct. This is not a precise expression with any well established meaning. Restraint of trade law is directed to what is, for practical purposes, an endlessly varied array of particular restraint of trade clauses; and this is a besetting difficulty for the application of earlier decisions; there are no standard clauses. I myself have not encountered the expression "directly competes" in such a clause.

23 Plaintiff's counsel referred to two decisions in which somewhat similar expressions appear. One decision is Luminar Lava Ignite Limited v MAMA Group PLC and Anor; a decision of Lord Glennie in the Outer House of the Court of Session [2009] CSOH 68. The litigation related to a restraint of trade in operation between two discotheques in close proximity to one another in an Edinburgh suburb. Lord Glennie was of the view that the law of Scotland was not relevantly different to that of England and addressed a clause 2.1, which restrained late night entertainment "in direct competition on a like for like basis with the discotheque business of Luminar as carried on at [Lava Ignite] as at 1 March 2008".

24 I would respectfully say that his Lordship's treatment of the operation of this clause [17-22] illustrates the indefinite nature of the subject and the need to refer with care to the facts of the instant case before making a conclusion about whether they fit within this contractual provision. His Lordship did point out at [19] that the clause should be read as a whole and observed to the effect that particular words are not to be taken into isolation.

25 Counsel also referred me to a decision of the United States Court of Appeals for the Ninth Circuit, 9 August 2004, Nike Inc v Eugene McCarthy, an appellate decision in application of the law of the State of Oregon, which does not appear to be significantly different from the restraint law in effect here, except for a local statute on which decision turned.

26 In that case there was a restraint of an employee of Nike post-employment on being engaged in "any other business which directly competes with Nike...". This phrase has a striking resonance with the present case, but it is hardly surprising that when the employee went to work for Reebok the issues debated did not include any real attention to whether there was direct competition.

27 I thank counsel for these references, but they remit me to the need to apply the contract provision before me to the facts before me, without being greatly assisted by earlier judicial exposition of such an expression.

28 It is necessary then to address what the plaintiff does and what the second defendant does in providing managed services. Mr Charos dealt with this subject in his affidavit, principally by comparing material published by the second defendant on its website with a description, written as it happens by Mr Cannings when in that employment, of what the plaintiff does.

29 In cross-examination Mr McMahon was taken through the activities and his evidence was taken on extents to which the described activities correspond and on the differences. Simply on this basis of comparison, there is not a high degree of product differentiation in the services, except in a respect which I will deal with in the manner of providing the services.

30 Mr McMahon's evidence shows to these effects. Managed services, as defined by the second defendant, is management and running of the systems within the second defendant's data centres, of which they own five. The second defendant owns the data centres, manages and runs them on a daily basis. The second defendant is the de facto IT system for a group of customers who run applications and operating systems in their business from the second defendant's centres. The customers get access to where their own computer systems are running within the data centre, and in some cases the second defendant owns the systems also. The computer where the customers are running their businesses is physically located where the second defendant can look after and manage it, so that the customer can use it as if it were located wherever the customer happened to be.

31 By contrast, the plaintiff does not have the physical computer in its own premises. A lot of the managing of systems, which the second defendant does, cannot be done remotely and needs to be done within the managing organisation; the second defendant does this "more or less within our data centre". The service is available 24 hours a day, seven days a week.

32 Mr McMahon also said:

“We manage the customer's environment up to the operating system. The application is usually run by the customer themselves".

He also said:
“What we are doing...is managing their facilities, managing their assets and...accordingly, we manage up to the operating system. The applications of the customer, that is more specialised".

33 Where the customer operates its own specialist software, the second defendant does not maintain that. In Mr McMahon's concept, there were advantages for the customer in having the equipment in the second defendant's own premises under its control.

“One of the aspects of that is if a customer does not have - the IT people doesn't have the skill set to do that, we can manage that on their behalf and they don't need to hire the people. So in many ways, people like Robbie [Cannings] they are defacto IT, they manage the IT systems. Also too, that one of the reasons why we promote this type of service in the marketplace is it is in a secure data centre which has multiple links on it and there is people about 24/7. So there is a security aspect of it too".

34 He also said that the second defendant's business method has implications on customer staff and equipment:

“It means that the customer themselves doesn't need to have a computer room, doesn't need to have a secure area. They can put it in our computer room and there is economies of scale and cost but also, if we are doing certain aspects of the management of that system that means that the customer doesn't have to employ that person so there is a cost aspect of it too".

35 In Mr McMahon's evidence, managed services are only provided where the equipment resides in the second defendant's computer room and in its control.

36 Mr Cannings gave evidence at considerably less length, but generally confirming Mr McMahon's narration. He conceded that there are significant similarities between the work which he does in the second defendant's service to what is provided by TRT in technical tasks; quite similar in some ways. However, he also said:

“One of the key differences is most of the platforms we support are leveraged off infrastructure owned and operated by Interactive".

He went on to explain "cloud computing":
“Cloud computing, which is where a customer has a system, has data that they don't know physically where it resides, it is just out there with a service provider such as Interactive. Interactive has some key platforms that we provide across many customers. So we will have one system that services, say, ten or twenty clients on a shared model with the cloud computing and that is something that can only be provided when all of the systems are physically housed in the same location".

37 In my understanding this refers to economies of scale of which Mr McMahon spoke.

38 In assessing whether a business directly competes with another business, the primary focus, in my understanding, is on the perception of the customer, especially the potential customer, and the influence which the services available from one side or the other have on the customer's decisions about where to place his business.

39 Competition is a matter of degree and involves market definition in a way which can be open to debate, seemingly in some cases endless debate. Elements of competition can be found between products which, on their face and at first consideration, seem quite different. What this clause is about is a business which directly competes with the plaintiff.

40 There is, in fact, no evidence about the influence of the similarities between the services provided by the plaintiff and the second defendant on customer decisions or preferences, or about the influence of the difference, in my appraisal a large difference, constituted by the second defendant's working method, the equipment available to it and the advantages for customers to which Mr McMahon referred.

41 I am satisfied that, according to the perception of the customer, they are real advantages, although it is not hard to suppose a customer who is unsophisticated, indifferent, or prefers to give his energies and attention elsewhere and does no more than plug into the system. Many customers are like that, but most, I think, are significantly aware of the advantages that flow to them from the choice of a particular provider of service.

42 It was for the plaintiff to discharge the onus of proof when alleging breach of clause 5.3 to show, amongst other things, the influence of the difference in the method of providing services on competition. I regard it as clear that the difference is significant. Customers could well regard it as important and there must be customers who are sufficiently aware of their interests to give their attention and be influenced by security, a different array of equipment and staff, and generally a different manner of service delivery. There is sufficient, in my appraisal, to differentiate the two, notwithstanding that there is not a high degree of differentiation in the end product; the manner of delivery and the resources required, in my appraisal, serve to differentiate them.

43 Certainly there is no evidence that customers are indifferent to the differences, and it is very unlikely that they are. There is no evidence of actual customer decisions, or choices in detail or in pattern, nor is there any reference in the evidence at all to relative cost, or the operation and effect of the economies of scale which Mr McMahon said existed, and he was speaking on what appears to me to be a reasonable basis in so doing.

44 My conclusion is that I am not satisfied and do not find that there has been a breach of clause 5.3 by Mr Cannings.

45 There is a claim for damages which, if appropriate, I would have referred for assessment to an Associate Justice. However, given the disposition on the claims which were not pursued when Mr Cannings' undertaking was forthcoming, and given my rejection of claims 4 and 5, this does not require further attention.

46 My orders are:

1. I note and accept the undertaking of the first defendant to the Court, altered as I have altered it in red, so as to have permanent effect, as to paragraph 1 in its effect, and set out in a document dated 8 July 2010, identified by Justice Pembroke.
2. I give judgment for the defendant with costs.

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