Wallis Nominees (Computing) Pty Ltd v Matthew William Pickett
[2012] VSC 82
•14 March 2012
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
LIST E
No. of S CI 2012 00518
BETWEEN
| WALLIS NOMINEES (COMPUTING) PTY LTD | Plaintiff |
| v | |
| MATTHEW WILLIAM PICKETT | Defendant |
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JUDGE: | SIFRIS J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 27, 28 February 2012 | |
DATE OF JUDGMENT: | 14 March 2012 | |
CASE MAY BE CITED AS: | Wallis Nominees (Computing) Pty Ltd v Matthew William Pickett | |
MEDIUM NEUTRAL CITATION: | [2012] VSC 82 | |
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CONTRACT – Restraint of trade – Construction of restraint clause.
CONTRACT – Restraint of trade – Employer and employee – Protection of customer connection and staff stability – Whether amenable to protection by restraint clause – Clause void.
RESTRAINT OF TRADE – Whether clause exceeds what is reasonable for protection of plaintiff’s legitimate interests – Restriction excessive both in scope and duration.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr R Strong | Gadens Lawyers |
| For the Defendant | Ms C Currie | Holding Redlich |
HIS HONOUR:
A. Introduction
The plaintiff, Wallis Nominees (Computing) Pty Ltd (‘DWS’), seeks a permanent injunction against the defendant, Matthew William Pickett, a former employee of DWS, restraining Pickett from working at DWS’ former client, Grocon Pty Ltd (‘Grocon’).
DWS’ application is based on clause 24(b) of an Employment Agreement between DWS and Pickett dated 29 May 2007 (the ‘Employment Agreement’), which provides that Pickett may not provide certain services to certain clients of DWS within a period of 12 months after he leaves DWS. The scope of both the services and clients covered by the clause is subject to dispute.
Counsel for Pickett contended that clause 24(b) is void and unenforceable as it is a covenant in restraint of trade that does more than is reasonably necessary to protect a legitimate interest of DWS and that DWS has not demonstrated that there was a legitimate interest being protected by the clause. In the alternative, counsel submitted that if the clause was valid, the services Pickett proposes to provide to Grocon are sufficiently different to those covered by the clause and accordingly there is no breach.
Counsel for DWS contended that there is a legitimate interest being protected by the clause, namely, customer connection, that the clause does no more than is reasonably necessary to protect that interest and that by providing certain services to Grocon, Pickett was in breach of the clause.
For the reasons set out below, I find that DWS has not rebutted the presumption that clause 24(b), as a covenant in restraint of trade, is void. DWS has not identified a legitimate interest that requires protection by the clause, and in any event the clause goes further than is reasonably necessary to protect any such interest.
B. Background
DWS is the subsidiary of a public company, DWS Ltd, and is engaged in the business of providing software consultancy services including, among other services, business analytics and information management consultancy services, managed services, software application systems development and on-going support and maintenance of software. DWS typically provides these services via its employees who are contracted out to its clients as consultants in various information technology roles.
Pickett started working at DWS on 9 July 2007 pursuant to the Employment Agreement. Clause 24 of the Employment Agreement provides that:
The Employee agrees that he or she will not do any of the following for a period of 12 months after his or her employment with DWS ends:
…
(b) provide services or accept any request to provide services (being services normally provided to DWS clients in the general course of DWS’ methods of business and range of services) to any client to DWS to whom the Employee provided specific services whilst in the employ of DWS or in addition any client to which the Employee had cause to be in contact with during the normal course of Employees provision of services to DWS Clients. Clients are defined as and limited to: any organisation or part of an organisation such as specific project, division, section or such to which the actual services were performed.
…
During his employment at DWS, Pickett worked at several clients of DWS providing various information technology services to them for varying lengths of time as set by the relevant client in consultation with DWS and Pickett.
I. Position as at 29 May 2007
There is very little evidence of the identity of the clients of DWS, the services provided by DWS and the business model of DWS as at the date of execution of the Employment Agreement, namely, 29 May 2007. Counsel for Pickett contended that this was fatal to the application. Much time was spent on the issue of breach.
In my opinion there is sufficient evidence from which it is proper and reasonable to infer that the business model and manner of operation of DWS was substantially or sufficiently the same in May 2007 to that outlined in the template DWS PowerPoint presentation prepared at a later point in time, and adjusted, varied and updated from time to time as required. I refer in particular to the fact that DWS was established in Melbourne in 1991 and to the evidence of Lachlan Armstrong, the Chief Finance Officer and Company Secretary of the DWS Group, particularly in relation to the PowerPoint template and its description of the services provided by DWS and the manner of delivery thereof.
As referred to in paragraph 6, the services provided by DWS are provided by its employees who are contracted out to clients of DWS as consultants. This was the position as at 29 May 2007.
The Employment Agreement and PowerPoint presentation sufficiently set out and deal with what was required by Pickett and how the tripartite arrangement (between DWS, Pickett and client) was to operate. The critical relevant features are that Pickett was to be part of a DWS team. DWS was to provide the services through Pickett. Pickett was responsible to a project leader or manager and his performance was subject to annual review. He was to be based in Melbourne and was required to travel to particular clients. He was required to maintain and promote the professional reputation of DWS and avoid any real or apparent conflict of interest. The PowerPoint presentation emphasises the business model and approach taken by DWS. Critical to the model was the emphasis on a team approach, quality control and governance.
It is clear that the duration and size of the projects would vary and Pickett would move from client to client as and when required as part of the DWS team.
II. Pickett’s role at Grocon while working for DWS
In January 2011, Grocon approached DWS and asked it to provide certain information technology services. Pickett was determined by DWS to be an appropriate consultant for Grocon. DWS re-assigned him to Grocon from ME Bank, where Pickett had been providing services on behalf of DWS. DWS placed another consultant with ME Bank to replace Pickett.
On 7 February 2011, Pickett began providing services to Grocon on behalf of DWS on a full time basis pursuant to a Masters Services Agreement between DWS and Grocon dated 24 January 2011, but not signed by either party. The services provided pursuant to this arrangement were outlined in a Schedule of Work and included:
a) Providing incident response and housekeeping support to the back office systems;
b) Creating procedural, process and diagram documentation as requested;
c) Creating a Service Catalogue of the back office systems;
d) Providing technical and process support to the ICT Manager;
e) Working with the Network Specialist to manage the LAN and WAN insecurities;
f) Working with the incumbent IT Team in incident and change management processes; and
g) Development of a business case from the Service Management tool.
Pickett also sent an email on 20 January 2012 to DWS’ Business Development Manager, James Parson, setting out the services he had provided to Grocon over the previous 6 months. They included:
a) Providing incident response and housekeeping support to the back office systems;
b) Peer review of application changes within the network;
c) Providing technical and process support to Grocon’s ICT Manager;
d) Assisting the ICT Manager in the assessment of vendor proposals;
e) Working with the Network Specialist to review and improve the network configuration and peer review network configuration changes prior to changes being implemented;
f) Working with the incumbent IT team at Grocon in incident and change management processes; and
g) Managing the ICT fit out for construction site support offices.
Pickett understood his role at Grocon was to “provide the skills required to maintain … legacy systems while … larger changes were planned and implemented”, and as being a support role to Grocon’s IT Manager, Rebecca Brockett. The precise nature of the role evolved as the needs of Grocon changed during the time Pickett worked there and as Grocon implemented infrastructure, outsourcing and information technology changes internally. At the beginning of the assignment, DWS also made it clear to Grocon that if Grocon was not satisfied with the services provided by Pickett another consultant could be provided to replace him.
During his time at Grocon, Pickett also reported back to DWS in relation to the work being done for Grocon, for example on 20 January 2012 via email and in other meetings between Pickett and DWS.
III. The new role at Grocon
In November 2011, Grocon conducted a review of its information technology department and decided to restructure the department and to change Ms Brockett’s role to that of Chief Information Officer. This change also involved creating a new permanent position entitled the “IT Operations Manager” reporting directly to Ms Brockett. Ms Brockett was asked by Elise Loschiavo, who worked in Grocon’s human resources department, to prepare a position description for the new role. Ms Brockett prepared a position description, providing it to Pickett on 5 December 2011 and then to Ms Loschiavo on 6 December 2011.
The position description described the role as being “responsible for managing existing operations and implementing new operations and processes within Grocon; managing expectations across all stakeholder groups; sharing responsibility for project success; the day-to-day management of the IT team, including performance management. … The managing of the procurement of all IT-related purchase; recommending infrastructure improvements; developing, implementing, and ensuring compliance with operational policies and procedures; maintaining computer operations, network and telephone capabilities.” The position description also set out the key attributes of the new role including:
a) It would have three employees reporting to it;
b) Its key accountabilities included “management of the system”, “group IT policies”, “user support” and “personnel”;
c) It would be a customer facing role; and
d) Key external contacts for the role would include vendors, suppliers and contractors.
Pickett understood that the need for the new position arose as a result of Grocon’s restructure of its internal IT department and Grocon’s moving from requiring just “technical support” to requiring an “IT manager”. Pickett also gave evidence that he hoped the role would involve less technical support and more management work and that the new role would mean he would take “responsibility over the systems that [he] was providing assistance and support to.”
In early December, Ms Loschiavo, approached Pickett to see if he was interested in becoming an employee of Grocon in the newly created position. Ms Loschiavo also informed Ms Brockett that she had spoken to Pickett and that Pickett would speak to Ms Brockett about his intentions. On 7 December 2011, Ms Brockett emailed Pickett notifying him that the proposed salary for the new position was around $150,000 per annum.
Pickett subsequently contacted Ms Brockett and indicated that he was interested in the new position. On 20 December 2011, Grocon, via Ms Brockett, offered the new position to Pickett and he accepted that offer on 23 December 2011. Due to these proceedings and other matters, the proposed restructure has not taken place and Pickett has not yet assumed the role of “IT Operations Manager” at Grocon.
On 13 January 2012, DWS’ Career Manager, Mr Stokes, received a telephone call from Pickett indicating that Pickett would be resigning from DWS and was to be employed directly by Grocon. Mr Stokes informed Pickett that this would be in breach of the Employment Agreement and arranged for Pickett to attend at DWS on 17 January 2012. On the same day, Pickett emailed Mr Stokes tendering his resignation and giving DWS four weeks notice.
Throughout a number of meetings between the parties and Grocon, DWS expressed its view that Pickett would breach the Employment Agreement if he began employment in the new role at Grocon.
IV. Similarity between the old and new roles
A critical issue of contention during the trial, apart from the validity of the restraint, was the extent of similarity between the new role at Grocon and the prior role that Pickett had been engaged in on behalf of DWS. Specifically, there was significant disagreement as to the nature of the services provided or to be provided under each position.
Counsel for DWS submitted that the new role would involve Pickett continuing to provide a substantial amount of the services he had provided to Grocon on behalf of DWS. Counsel for Pickett maintained that most of the services he would provide under the new role were of a substantially different nature, albeit he would continue to provide some of the same services he provided while employed by DWS.
During cross-examination Pickett acknowledged that there were “some similarities” between the description of the new role in the position description and the description of the position he held at DWS as set out in a position description document produced in May 2007. As to the overlap or similarities between the two roles, DWS’ Chief Financial Officer, Mr Armstrong, alleged that Ms Loschiavo stated to him that Pickett’s new role at Grocon would constitute him continuing to do 80% of the services he had provided while being employed by DWS and only 20% new work. Ms Loschiavo denies saying words to that effect, and Ms Brockett, who was at the meeting where the alleged statement was made, was unable to recall this being said. However, Ms Brockett did concede that there was at least a 40% overlap between Pickett’s old and new roles, and Pickett himself conceded during cross-examination that the overlap was around 30%.
Thus at the very least, Pickett’s new role at Grocon would involve him providing to Grocon 30% of the same services that he had provided on behalf of DWS.
C. The issues
Apart from the factual dispute over the nature and similarity of the services provided – matters directed to breach - there are two principal issues that arise in this case.
First, what is the proper construction of clause 24(b) of the Employment Agreement? This issue is a matter of contractual interpretation and involves ascertaining the scope of the clause, in particular in relation to the definition of “services” and “clients”.
Secondly, is clause 24(b) of the Employment Agreement valid and enforceable? This issue largely rests on whether DWS has identified a legitimate interest that it sought to protect via clause 24(b), and, if so, whether the terms of clause 24(b) are no more than is reasonably necessary to protect such an interest.
D. The first issue - the construction of clause 24(b) of the Employment Agreement
The scope of clause 24(b) was the subject of disagreement between the parties. In particular, the parties disagreed as to: (a) the range of ‘services’ covered by the clause; and (b) which clients of DWS the clause purported to prevent Pickett from providing services to for 12 months following him leaving DWS.
I. The definition of ‘services’ in clause 24(b)
Clause 24(b) prohibits Pickett from providing “services normally provided to DWS [sic] clients in the general course of DWS’ methods of business and range of services”. The parties disagreed in relation to the point in time at which DWS’ services are to be assessed. The parties also disagreed as to the nature of services provided by DWS and whether they encompass the services Pickett is proposing to provide to Grocon in the new role.
Counsel for DWS contended that the clause disallowed Pickett from providing services that DWS normally provides or provided to its clients both at the date the contract was entered into and, at least, up to the date Pickett left DWS. Counsel for DWS argued that this includes a wide range of services and in particular (but not exclusively) the specific services provided by Pickett to Grocon while employed by DWS.
Counsel for Pickett argued that clause 24(b) has to be read as at the time the contract was executed and that the words “services normally provided” refers only to services provided by DWS at the time the contract was entered into, thus excluding any additional or other services provided by DWS after 9 July 2007. Further, it was submitted that there was no evidence relating to the services normally provided by DWS at the relevant time. It was also submitted that services were not restricted to services provided by Pickett but included all services normally provided by DWS whether by Pickett or not, provided Pickett in effect dealt with the client.
The Employment Agreement does not provide a definition of services and does not contain specific language either limiting the definition of services to a specific point in time or requiring the definition to cover services provided after the contract was entered into.
While the validity of restraints of trade must be decided as at the time they are entered into,[1] this is not to say that contractual terms are thereby frozen in time and are unable to reflect agreement between parties as to the future context of their on-going relationship.
[1]Lindner v Murdock’s Garage (1950) 83 CLR 628, 653.
The Employment Agreement relates to the employment of a consultant in the information technology industry, which is an industry that rapidly changes, and by an employee whose skills and abilities are also subject to rapid change and development. The contract itself was also not limited in time. Rather it appears to have been expected to continue on indefinitely. Consequently the expectation of the parties was that there would be a large amount of time between the signing of the Employment Agreement and when clause 24(b) could be applied, as indeed was the case.
Thus at the time the Employment Agreement was executed, I am satisfied that the parties did intend and the restraint was to operate on the basis that the definition of ‘services’ would follow the actual course of the normal business of DWS and thus cover whatever services DWS was actually providing to clients in the normal course of its business at the time the contract was terminated.
To accept the counter-argument would freeze the definition of services to a point in time which may not accord with the actual business undertaken or services provided by either DWS or Pickett throughout the life of the agreement. This is an entirely unrealistic construction of the clause that could possibly render the clause virtually futile in a relatively short period of time.
Thus, the correct construction of clause 24(b) is that it is referring to services normally provided by DWS to its clients up until the date that an employee leaves the employment of DWS. Just as the definition of “client” in the clause is not intended to refer to the clients of DWS at the time the Employment Agreement was signed, there is no difficulty in finding that the parties similarly agreed that the definition of services should have the same flexibility.
II. The definition of ‘client’ in clause 24(b)
Under clause 24(b) of the Employment Agreement, Pickett is restricted from supplying “services” to “clients” of DWS to whom Pickett had “provided specific services whilst in the employ of DWS or in addition any client to which the Employee had cause to be in contact with during the normal course of the Employees provision of services to DWS Clients.”
Clause 24(b) defines “clients” to mean “the organisation or part of an organisation such as a specific project, division, section or such to which the actual services were provided”. Counsel for DWS relied on this definition. He also contended the word “cause” means “occasion” and argued that clause 24(b) only restrains Pickett in relation to clients to whom Pickett actually provided services to or had occasion to come into actual contact with during his time at DWS. The scope of clause 24(b) was thus said to be limited, insofar as it was focused and directed upon the actual connection with clients that Pickett could have developed while at DWS.
Counsel for Pickett, conversely, emphasised the importance of the words “had cause to be in contact with” arguing that that these should be read broadly and resulted in the clause prohibiting ex-employees of DWS from working at a vast range of companies due to their being clients of DWS. Indeed counsel for Pickett suggested that the exact companies that the word ‘client’ covered was unknown to DWS employees and thus they were unable to even know which companies they were prohibited from working at following their time at DWS.
In my view, the definition of client in clause 24(b) limits the clause’s application to only those clients that DWS’ employees either did provide actual services to or had cause, that is demonstrated reason, to be in contact with. The words “cause to be in contact with” are not so broad as to cover all of DWS’ clients or even all of the DWS’ clients that are known to Pickett. Rather, they require that there be an actual or specific reason, that is a “cause”, that Pickett should have been, or was, in contact with a client before prohibiting him from providing services to them in the 12 months following him leaving DWS.
Thus, in relation to Pickett, the clients that the clause purports to prevent him working at for 12 months after leaving DWS is relatively limited and easily identified. It is limited to those clients he actually provided services to while at DWS, or those clients that it is shown he had cause to be in contact with while at DWS.
III. Conclusion in relation to the construction of the clause
I am satisfied that clause 24(b) purports to operate to prohibit Pickett from providing any of the services normally provided by DWS at the time he finished working there to the clients that Pickett had actual contact with while at DWS or had demonstrated reasons to be in contact with.
E. The second issue – is the clause valid and enforceable?
With the above construction of the clause in mind, the second issue is whether or not the clause, as a covenant in restraint of trade, is valid and enforceable.
The principles applicable to the enforceability of contracts in restraint of trade are not for the most part in dispute. They are well settled:
(a)a contractual provision in restraint of trade is, prima facie void.[2]
(b)The presumption can, however, be rebutted and the restraint justified by the special circumstances of a particular case, if the restriction is reasonable by reference to the interests of the parties.[3]
(c)The validity of the covenant in a contract is to be judged as at the date of the Employment Agreement.[4]
(d)A stricter view is taken of covenants in restraint of trade in employment contracts[5] than those contained in contracts for the sale of a business.[6]
(e)The onus of proving the special circumstances justifying the restraint is on the person seeking to enforce the covenant.[7]
(f)So far as the parties’ interests are concerned, the restraint must impose no more than adequate protection to a party in whose favour it is imposed.[8] If the court is satisfied that the restraint confers greater protection than can be justified, there is no further issue of reasonableness.[9]
(g)The meaning of the restraint clause may be construed by reference to the factual matrix, documentary context and surrounding circumstances.[10]
[2]Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535, 565 (‘Nordenfelt’); Buckley v Tutty (1971) 125 CLR 353, 376.
[3]Nordenfelt [1894] AC 535, 565; Esso Petroleum v Harpers Garage (Stourport) Ltd [1968] A.C. 269, 300.
[4]Lindner v Murdock’s Garage (1950) 83 CLR 628, 653; Amoco Australia Pty Ltd v Rocca Brothers Motor Engineering Co Pty Ltd (1973) 133 CLR 288, 318 (‘Amoco Australia”).
[5]Geraghty v Minter (1979) 142 CLR 177, 185 (Gibbs J).
[6]Mason v Provident Clothing and Supply Co Ltd [1913] AC 724, 738, 739, 746.
[7]Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 715; Amoco Australia (1973) 133 CLR 288, 308, 317.
[8]Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 708.
[9]Amoco Australia (1973) 133 CLR 288, 306.
[10]I F Asia Pacific Pty Ltd v Galbally & Ors [2003] VSC 192, [103] (“I F Asia”).
Counsel for DWS submitted that, as at the date of the Employment Agreement (29 May 2007), DWS had a legitimate interest that required protection. It was submitted that Pickett, as an employee of DWS, would be placed in the offices of clients of DWS as a consultant. In such circumstances, DWS was exposed to the risk that its staff, and in this case Pickett, would or could make use of such opportunities to provide services to those clients other than as an employee of DWS. Thus, it was submitted that the position of DWS required protection, particularly in circumstances where DWS invested time and money in the training and development of its staff, including Pickett.[11]
[11]The evidence in this regard was not sufficient to enable any findings to be made.
It was submitted further that the restraint was confined and did not go further than protecting the legitimate interests of DWS. It was not directed at preventing Pickett from joining a competitive enterprise generally, or himself competing with DWS, but was restricted to circumstances where Pickett was providing services to a client of DWS or had contact with a client in the normal course of his employment with DWS.
Counsel for Pickett submitted that in this case there was no legitimate interest that required protection. Although counsel accepted that an employer’s customer or client connection was capable of protection, counsel argued no such protection was required in this case. It was also submitted that there was no evidence of what the interest was at the time that the agreement was entered into.
It was submitted further that in any event there was no risk that Pickett would be in a position where he had the practical ability to control the connection to the client to such an extent that the client could properly be regarded as his personal asset. He was not the human face of DWS and on the evidence, and given the modus operandi of DWS, the risk of exploitation and appropriation of its client connection, was not a serious risk in the circumstances and consequently not amenable to protection.
The circumstances that will give rise to the protection, by way of a covenant, of an employer’s customer connection have been dealt with in several recent cases. As the cases show, something more than exposure to or interaction with the customer or client by the employee is required. Even a close connection with or persuasive manner with the customer or client may not be sufficient. A strong connection to the client is required. This would include personal or special knowledge (which may include confidential information) of the client and a significant degree of influence. It should be stressed that the risk of exploitation of such knowledge and connection, which the covenant seeks to protect, must be assessed at the date of the agreement.
In Koops Martin Financial Services Pty Ltd v Reeves,[12] Brereton J said:[13]
“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. The employer is entitled to be safeguarded against use after termination by the employer of special knowledge of or influence over customers gained as a result of customer contact during the employment. Thus in Herbert Morris v Saxelby, Lord Parker (at 709) said that a covenant was upheld to protect an employer from, amongst other things, a former employee’s influence over customers. In Dewes v Fitch [1920] 2 Ch 159, Warrington LJ said (at 181) that an employer was entitled to protection against the influence acquired by the employee over the customers or clients. In Coote v Sproule (1929) 29 SR (NSW) 578, Harvey CJ in Eq said that what was entitled to protection was customer connection through a special relationship between employee and customer as a consequence of the employment (at 580):
‘An employer is entitled to hold his employee to an agreement not to injure the former’s business connection by virtue of the special relationship which has existed between the employee and the employer’s customers as a consequence of his employment.’”
[12][2006] NSWSC 449 (“Koops Martin”).
[13]Ibid [30].
In Koops Martin, Brereton J expanded on the nature and characteristics of the relationship between employee and client that would require protection. At [34], his Honour said:
“It is often said that a restraint to protect such an interest will be appropriate if and only if the employee has become, vis-a-vis the client, the ‘human face’ of the business — that is, the person who for the customers, represents the business; or, as it was put by Hoover J in Arthur Murray Dance Studios of Cleveland Inc v Witter 105 NE (2d) 685, 706 (Ohio, 1951): ‘The personal relation between the employee and the customer [is] such as to enable the employee to control the customer’s business’ [Twenty-First Australia Inc v Shade (NSWSC, Young J, 31 July 1998, unreported, BC9803667, 12].”
According to Brereton J, a more robust view is taken where the employer’s role includes extending the customer base.[14] At [44], his Honour said:
“A more robust view is taken where the employee’s role includes obtaining and extending custom for the employer’s business. When an employee’s duty includes to build up the employer’s clientele as well as to deal with existing clients, a wide restraint is more likely to be upheld, because in such circumstances the employer is entitled to protection against the employee taking advantage of the period of service to prepare for later competition [G W Plowman & Sons Ltd v Ash [1964] 1 WLR 568; [1964] 2 All ER 10; Normalec Ltd v Britton [1983] 9 FSR 318 at 324; Dean, The Law of Trade Secrets, 2nd edn, [11.150]. In such a case, the establishment of a customer connection is not merely incidental to the employment, but its purpose. In that context, a covenant is considered reasonable, first, to remove the temptation that by cultivation of the target market during employment, the employee may prepare the ground for its exploitation by himself after the employment ends, rather than for his employer during the employment; and, secondly, to prevent exploitation after termination of the employment by the employee of a connection with the customer which the employer has paid the employee to establish for the employer’s benefit. …”
[14]Ibid [44].
In Cactus Imaging Pty Ltd v Peters,[15] Brereton J upheld a customer connection restraint. In that case, the defendant was State Sales Manager and this placed him in that special category in respect of the New South Wales clientele, even those with whom he did not personally deal.[16]
[15][2006] NSWSC 717 (“Cactus Imaging”).
[16]Ibid [33]. It was submitted that the restraint was too wide because it extended to customers that Mr Peters did not deal with.
In Cactus Imaging, the enforceability of the clause was
“supported, not only by protection of customer connection, but also by protection of confidential information”[17]
[17]Ibid [34].
In Informax International Pty Ltd and Another v Clarius Group Ltd,[18] Perram J held that the customer connections of a labour hire firm was capable of protection. Whether protection was required depended on whether the employee (or consultant or contractor) had become the face of the firm to the client, and this was to be determined by the nature of the consultancy, the manner of placement and the ongoing tripartite relationship. At [29], his Honour said:
“The mechanical application of such tests should not, however, be permitted to obscure the mischief which the principle is designed to address which is the fact that there are employees whose position is such that they have the practical ability to control the business of their employer’s customers as if those customers were their own. It is against that particular risk that this doctrine is pitched and the various tests articulated in this area are all necessarily hewn to the end of identifying that risk in the case of particular employees. Where the risk is found to exist, however, an employer is entitled to be protected against it. The Restraint of Trade Doctrine quotes (at 122) Hoover J’s statement in Arthur Murray Dance Studios of Cleveland Inc v Witter 105 NE (2d) 685 at 706 (Ohio CP, 1951) that ‘the important thing is that the personal relation between the employee and the customer be such as to enable the employee to control the customer’s business as a personal asset’ which I take to be to much the same effect. That statement has been referred to with approval in a number of decisions of Brereton J in the Supreme Court of New South Wales: Koops Martin Financial Services Pty Ltd v Reeves[2006] NSWSC 449 at [34]; Cactus Imaging Pty Ltd v Peters(2006) 71 NSWLR 9 at [25]; John Fairfax Publications Pty Ltd v Birt[2006] NSWSC 995 at [30]; see also Twenty-First Australia Inc v Shade (unreported, New South Wales Supreme Court, Young J, 31 July 1998) at p 12. In RKR Dance Studios Inc v Makowski, Superior Court, judicial district of Hartford, Docket No CV 084035468 (46 Conn L Rptr 389) (September 12, 2008), Elgo J of the Superior Court of Connecticut described (at p 9) the decision in Arthur Murray as ‘a tour de force exposition on the law of employment noncompete agreements’ (citing M Garrison and J Wendt ‘The Evolving Law of Employee Noncompete Agreements: Recent Trends and an Alternative Policy Approach’ (2008) 45 Am Bus LJ 107 at 124). The same question can be posed a different way by asking, as Brereton J did in Koops Martin at [34], whether the employee (in the extended sense) has become the ‘human face’ of the employer with the client.”
[18][2011] FCA 183.
In my opinion, the nature, context and particular circumstances of the tripartite relationship in this case between DWS, Pickett and the client, as it was proposed to operate, and indeed as it did operate would not place Pickett in that special category that would create a risk of exploitation that required protection by covenant. Accordingly, the restraint clause is void and unenforceable. It is not required for the asserted legitimate interest – client connection – of DWS, as such an interest did not require protection in DWS’ case.
Pickett was not intended to be (and indeed as events unfolded, was not) the human face of DWS, or have the relevant and necessary control over the business of the client. His consultancy position, from time to time, was not intended or contemplated to provide the basis for the development of a special relationship with the client of the kind that would provide the basis or foundation for later competition or exploitation. Pickett’s role did not and was not intended to include obtaining or extending the client base of DWS. He was in an altogether different position to that of Mr Peters in Cactus Imaging[19] or Mr Reeves in Koops Martin.[20]
[19]Mr Peters was State Sales Manager. The seniority of his position enabled him to acquire influence over and special knowledge of the clientele including clients that he had no dealings with. It was part of his role to obtain and extend the custom of his employer.
[20]Mr Reeves “was in every sense the face of the business” (Koops Martin [2006] NSWSC 449, [50]). Clients were seeking his advice and not the firm’s.
In this case, DWS did not, at the time the agreement was entered into (or indeed at any stage), propose to develop goodwill around Pickett or other individual consultants or the services they were to and did provide. Rather, the evidence establishes that DWS at all times promoted and directed its marketing and advertising skills to the enhancement of the goodwill of the DWS name and presence. Where DWS was to provide individual consultants to clients as was contemplated in the case of Pickett and others, it did so with the intention of enhancing its presence and share of work from that client, rather than making or promoting Pickett or other individual consultants as the “human face” of its business. The services that DWS was to provide were and still are project based and the duration of the projects would vary in duration and intensity. Further, it was contemplated that from time to time Pickett and other employees would not only move from completed job to new job, but also, where required, between jobs. The focus was on the deliverables being provided by DWS on the basis of a project manager and team approach and it cannot be said that it was contemplated that an employee of DWS would be regarded as interchangeable with DWS or one and the same or indeed the human face of DWS. A degree of flexibility in relation to the movement of the employee was required. All this was known and contemplated as at the time of the Employment Agreement.
Consistently with this approach and as intended and contemplated, DWS told Grocon that if it was not satisfied with the consultant provided to it, DWS would replace the consultant. Grocon’s dealings with DWS regarding the services it required and the terms on which they would be provide were negotiated, and re-negotiated, with DWS representatives. Pickett did not have, and was not intended to have, any involvement at all in those discussions. Pickett was never placed or intended to be placed in a position where he could exert control over Grocon’s custom “as a personal asset”.[21] Grocon itself determined the restructuring of its IT arrangements; the creation of the new position of IT Operations Manager; and its budgeting and decisions regarding procurement of consultancy services.
[21]Informax International Pty Ltd & Another v Clarius Group Ltd (2011) 192 FCR 210, [29] (citing Arthur Murray Dance Studios of Cleveland Inc v Witter referred to with approval in Koops Martin [2006] NSWSC 449 [34]).
The particular skills or experience that Pickett may have gained in the course of his employment with DWS do not constitute a legitimate business interest that DWS is entitled to protect by way of restraint.[22] DWS cannot enforce the restraint to prevent Pickett from competing or using the human capital he acquired while in the employ of DWS and otherwise to pursue a career at Grocon.
[22]Linder v Murdock’s Garage (1950) 83 CLR 628, 646; Stenhouse Australia Ltd v Phillips [1973] 2 NSWLR 691, 697.
In all of the circumstances, I am of the opinion that the restraint is void and unenforceable.
Although staff stability may be an interest capable of protection by covenant, the interest usually arises out of a need to prevent a departing employee (usually, but not necessarily,[23] with confidential information about other employees) from poaching other staff, as occurred in Cactus Imaging. In this case, the position is best dealt with under the usual employee connection analysis. In any event no such interest is made out on the evidence. In particular the evidence does not establish that it is – and was at the relevant time – difficult to find replacements and that a new consultant was required to work for a number of years before being an effective replacement.
[23]Cactus Imaging [2006] NSWSC 717, [53]-[55].
F. If the clause is enforceable, is it reasonable?
In the circumstances it is unnecessary to determine whether clause 24(b) provides greater protection than is necessary or whether, if the clause was enforceable, there was a breach.
In the event that, contrary to my opinion, DWS does have a legitimate interest that the clause protects, I consider that in view of the construction of the clause referred to in paragraph 48, above, the covenant does provide greater protection than is necessary. Although it does not prevent Pickett from working, or even working for clients of DWS that he had no contact with and further, does not prevent him from working for clients that he did have contact with, such as Grocon, if he does so in a different capacity, it is unreasonable in two respects.
First, I consider that it is unreasonable that Pickett not be permitted to provide services to clients of DWS that he had been in actual contact with but in respect of which no services were provided by him. Such a relationship would not provide an opportunity for a close connection and exploitation of the relationship, the very matters that underpin the need for protection by way of the convent.[24]
[24]For these clients, he would not be “the persona of [DWS]” (Koops Martin [2006] NSWSC 449, [70]). See also I F Asia [2003] VSC 192, [97]-[98].
Secondly, I consider that the duration of the restraint (12 months) is unreasonable. Reasonableness generally depends on the length of time it would take for the employer (DWS) to provide an effective replacement employee who is able to establish a relationship with the client. A different but not unrelated formulation is how long the “hold of the former employee over the clientele [is] expected to last before weakening”.[25]
[25]Koops Martin [2006] NSWSC 449, [88]; Cactus Imaging [2006] NSWSC 717, [56].
In my opinion, in the circumstances and given the nature and particular characteristics of the business of DWS as identified above a period of 12 months is unreasonable. I am not satisfied on the evidence that a period of 12 months is reasonable.
In the event that the covenant is valid and enforceable, and, contrary to my view, affords no more protection than is necessary, I consider that Pickett is in breach thereof by his own admission. The range of overlap between his consulting role and the proposed new employee role was between 30% and 80% (assuming the statement attributed to Ms Loschiavo was made). Ms Brockett, the person best able to make the assessment, said the new role encompassed 40% of the services provided by Pickett in his consulting role. The percentage is high and is sufficient to constitute a breach. In any event, I am satisfied on all of the evidence, including the evidence of Mr Armstrong, that there is a sufficient overlap between the services rendered by Pickett as a consultant and the services to be provided in his new role.
G. Conclusion
As the restraint clause is void and unenforceable, the plaintiff’s claim must be dismissed.
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