Australian Regional Wholesalers v Stafford [2007] NSWSC 572 | Case summary

POST EMPLOYMENT RESTRICTIONS 2.1 The Employee must not, at any time after the termination of the employment: (i) Advertise, publicise or permit the advertising or publicising the fact of his employment by the Company in a manner likely to cause damage to the Company; (ii) Do any act or thing whatsoever which may injure, impair or reduce or be likely to injure, impair or reduce the Company's business, goodwill or reputation or the Company's standing in the eyes of the public. 2.2 The Employee expressly agrees to: (i) not at any time within 6 months after the termination of the employment to attempt personally or by letters, advertisements, or otherwise to obtain customers or clients of the company for him or her self or for any person firm or company engaged in any business which competes with the Company; (ii) not at any time within six (6) months after the termination of the employment for any reason and either on the Employee's own account tor for any other person or for any other firm or company to solicit, interfere with or endeavour to entice away from the Company any person, firm or company who at any time during the employment shall have been a customer or client of the Company; (iii) not at any time within six (6) months after the termination of the employment for any reason and either for the Employee's own account or for any other person or for any other firm or company to solicit, interfere with or endeavour to entice away from the Company any person who at any time during the continuance of the employment shall have been an employee or consultant of the Company; and (iv) not at any time without the written authority of the Company to divulge to any person any information in connection with the Company or any of the businesses or customers of the Company which the Employee may have acquired during or as incidental to the Employee's employment. 2.3 The Employee agrees and acknowledges that the restrains in this Agreement are reasonable and necessary to protect the Company's business and the goodwill of the Company's business. 2.4 Without limiting the operations of any applicable legislation if: (i) Any of the restrictions contained in this clause are judged to be unenforceable by a Court or Tribunal because they go beyond what is reasonable to protect the business of the Company; and (ii) these restrictions would be judged reasonable by that Court or Tribunal if the extent of the restrictions (including, but not limited to, the time periods or geographical areas) were reduced, then these restrictions will be reduced by the minimum amount required by that Court or Tribunal to make them enforceable." 3 In a covering letter Wholesalers confirmed, amongst other things, that cl 1.1(a) did not apply to suppliers or customers and cl 1.2(i) was specified to be for a period of six months. 4 Wholesalers seeks to enforce cl 1.1 and cl 2.2(ii). Electrical Wholesale Businesses 5 John R Turk is a division of Wholesalers. It is a wholesaler of electrical supplies, offering electrical and data goods to electrical contractors and electrical companies including industrial and retail electrical companies. Its products include a diverse range of cables, bakerlite, power points, conduit, light fittings, lamps, tools and ducting. 6 Turk sells approximately 400,000 products. They are grouped into categories such as cable, clipsal and conduit. By far the predominant part of Turk's business is the wholesale/trade part of it. 7 Turk has a number of key competitors including GO Electrical Pty Ltd. GO Electrical publishes a monthly special brochure advertising special prices for specified products. Those products are the same as those sold by Turk. Turk adopts similar marketing methods to those of GO Electrical. It publishes bulletins drawing customers' attention to current specials. Prices published by Turk remain valid for 30 days. 8 Because there is little to distinguish one electrical wholesale business from another, the development and maintenance of customer relationships is an important aspect of any business in the industry. 9 As well as providing bulletins advertising specials to its customers, Turk builds relationships with customers by providing a service in accordance with its motto "service and price". It prepares a discount matrix for each customer. It maintains personal contact with customers on a monthly basis, face to face and by telephone. And it hosts customer and supplier social functions. 10 Customer discount matrices are set up for each individual customer by a branch manager. They specify the allowable discount in relation to particular products. Generally, discounts are applied to categories of product rather than to each individual item within a category. Usually, discounts are reviewed by the branch manager once or twice a year. The customer discount matrices are contained in a software system in Turk's computer system. 11 For large projects, special discounts are negotiated by Turk with a customer, often in competition with other electrical wholesalers. The special discount is justified by the bulk of the prospective order. On a like basis, Turk can command a discount from its suppliers because of the bulk of its prospective order. When Turk makes a final offer with respect to a large project, it is open for acceptance for 30 days. If Turk's offer is successful, that information is fed into the computer system. Those discounts, from supplier and to customer, hold firm for the length of the project. 12 It is often possible for Turk to divine a price offered by a competitor when a customer tells Turk it has to better a specified figure to win the contract. Likewise, a competitor of Turk can divine Turk's offered price. 13 The head office of Turk compiles a preferred supplier book. It is updated each financial year. It identifies suppliers providing the best discounts and rebates. Mr Stafford's employment 14 In April 2005, Mr Stafford was appointed major accounts manager for the Stowe Australia account at Turk's Silverwater branch. The Stowe account was one of Turk's largest and most profitable wholesale electrical contractor accounts. But Stowe did not deal exclusively with Turk and nor did it place its purchases from Turk exclusively through the Silverwater branch. 15 While it was part of his duty as major account manager to set the price and discounts for products sold to Stowe, Mr Stafford generally followed discounts established by previous account managers, only on odd occasions overriding those discounts. He prepared quotes for Stowe projects but sought the approval of the Silverwater branch manager. His face to face dealings with Stowe personnel were confined to three service or project managers who met him at the Silverwater branch. Mr Stafford estimated that he received approximately 20 to 25 telephone calls per day from Stowe staff relating to price inquiries or orders. 16 In carrying out his functions, Mr Stafford had access to the Turk computer system regarding Stowe prices, margins, discounts, projects and accounts. He also had access to various weekly and monthly Turk reports containing financial information concerning the Silverwater branch trading performance. There is no suggestion that Mr Stafford took copies of any of this information with him when he ceased to work for Turk. He said the confidential information was so voluminous that he could not, and did not, commit it to memory. 17 In order to effect an over the counter sale or process an order and issue an invoice, it was necessary for the person concerned to have access to the appropriate customer discount matrix in Turk's computer system. That access was available to all members of Turk's staff at the Silverwater branch carrying out those functions. 18 Mr Stafford raised invoices for products purchased by customers other than Stowe. To do so he had access to customer discount matrices in the computer. 19 Mr Stafford organised a Christmas function for Stowe representatives. But other entertainment was arranged for Stowe representatives at a higher level within Wholesalers' employment hierarchy. 20 In early 2006, Mr Stafford was appointed assistant branch manager at Silverwater. Concerned that he was not learning enough about the administration side of an assistant manager's role, he asked for further training on that aspect. Turk agreed with this proposal and in October 2006, Mr Stafford relinquished his position as major account manager for Stowe. Scott Dunmore was appointed to that position and Mr Stafford trained him. As well, Mr Stafford concentrated on his training in the assistant manager's role. 21 Mr Stafford ceased to have day-to-day contact with Stowe representatives. The changeover took about four to six weeks, a period typical of the turnover of previous major account managers for Stowe. 22 Mr Stafford's employment contract required him to give three months' notice of termination. He did so on 12 February 2007. 23 During his notice period, Mr Stafford was transferred to the Villawood branch of Turk so that he could be supervised and so that he would be separated from the Stowe account information that was located at the Silverwater branch. His personal computer logon to the Stowe account spending detail was deactivated and his mobile phone was repossessed. He had no contact with Stowe unless a Stowe representative telephoned the Villawood branch and he happened to answer the call. 24 Mr Stafford informed Turk that when the three-month notice period expired, he intended to accept an offer of employment by GO Electrical. That involved his training on internal systems for three months and then training to assume the role of branch manager when a new branch was formed. Restraints and undertakings 25 Mr Stafford was not prepared to comply with the six months' restraint in the restrictive covenants in his contract of employment. On 10 May 2007 Bergin J made an order that up to and including the determination of the final hearing of this matter, or until such other order of the court, Mr Stafford be restrained from, directly or indirectly, being engaged or involved in the business of GO Electrical and attempting to obtain for himself or for GO Electrical, or soliciting, interfering with, or endeavouring to entice away from Wholesalers, any person, firm, or company who, at any time during Mr Stafford's employment with Wholesalers, was a customer or client of Wholesalers. 26 Mr Stafford's employment with Wholesalers ceased on 11 May 2007. From 14 May 2007, Wholesalers have paid him the equivalent of a salary of the $65,000.00 per annum, being the salary offered to him by GO Electrical. 27 Prior to the hearing before Bergin J, Mr Stafford offered the following undertakings: "(i) an undertaking for a period of three months from 14 May 2007 not to solicit, interfere with or endeavour to entice away from J R Turk any customer of J R Turk; and (ii) an undertaking for a period of three months from 14 May 2007 not to contact any of the major clients, and, if contacted by a major client during that period, to decline to conduct business personally on behalf of GO Electrical with the major client, and to bring such contact to an end as soon as reasonable courtesy permits." 28 Mr Stafford renewed his offer of undertakings in those terms before me. Analysis 29 The principles involved in considering cases of restraint have been thoroughly analysed by Brereton J in Portal Software v Bodsworth [2005] NSWSC 1179, Koops Martin v Dean Reeves [2006] NSWSC 449, Cactus Imaging Pty Ltd v Glenn Peters [2006] NSWSC 717 and in John Fairfax Publications Pty Ltd v Birt [2006] NSWSC 995. I gratefully adopt his Honour's analysis of the authorities in John Fairfax at [6]: "Although at common law a restraint of trade is contrary to public policy and void unless it is justified by the special circumstances of the particular case (for which purpose it is sufficient justification that the restriction is reasonable having regard to the interests of the parties concerned and in reference to the interests of the public, so that while affording adequate protection to the party in whose favour it is imposed, it is not injurious to the public) [ Nordenfelt v Maxim Nordenfelt Guns & Ammunition [1894] AC 535, 565; Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 706, 707; Lindner v Murdock's Garage (1950) 83 CLR 628, 653], in New South Wales a restraint is valid to the extent to which it is not against public policy, even if not in severable terms [ Restraints of Trade Act , 1976 (NSW) s 4(1); Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449, [26]-[27]]. The effect of the Restraints of Trade Act is that, in New South Wales, one approaches this type of case by determining, first, whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed; secondly, whether the restraint in its application to that breach is against public policy; and thirdly, if it is not, then in its application to the alleged infringing conduct, the restraint is valid unless the court makes an order under Restraints of Trade Act , s 4(3) [ Orton v Melman [1981] 1 NSWLR 583; Woolworths Limited v Olson [2004] NSWCA 372, [42]]. That is because the effect of the Restraints of Trade Act , s 4(1), is to require that, for the purpose of determining the validity of a restraint, attention be focussed (sic) on the actual or apprehended breach, rather than on imaginary or potential breaches." 30 The first issue, then, is whether upon the proper construction of the restrictive covenants, the alleged breaches contravene them, leaving to one side public policy considerations. 31 Two alleged breaches are relied upon: Mr Stafford's intention to commence employment with GO Electrical if the injunction by which he is bound is vacated and, secondly, Mr Stafford's alleged attempt to obtain customers or clients of Turk for GO Electrical. 32 As to the latter, I am not satisfied that the evidence establishes any breach of the non-solicitation provision in cl 2.2(ii). There was no evidence that Mr Stafford had, or intended to, solicit, interfere with, or endeavor to entice away from Turk any entity that was, at any time during his employment with Turk, a customer or client of Turk. Furthermore, Mr Stafford has given an undertaking not to do so, at least for a period of three months after the termination of his employment with Turk. 33 As to the former, Mr Stafford's intended employment with GO Electrical would be in breach of the non-competition provision in cl in cl 1.1 at the least, because Mr Stafford would, without the prior written consent of Wholesalers, within six months after the termination of his employment, directly or indirectly, personally as an employee, be engaged in, a business or undertaking that competes with Turk's business. 34 The second question is whether the non-competition clause, in its application to that breach, is against public policy. In this context, two questions arise: does the employer have a legitimate interest to be protected and is the restraint no more than reasonable for that protection? (John Fairfax at [26]). 35 The validity of the restraint is to be tested at the time of entering into the contract and by reference to what the restraint required Mr Stafford to do rather than what he intended to do or has actually done (Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 at 344). 36 An employer has an interest in its confidential information that it may legitimately protect (Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 at 326). So, too, an employer's customer connection is an interest it may protect (Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 709). The issue is whether the non-competition clause is no more than reasonable for the protection of those interests. 37 In written submissions, Wholesalers argued that the non-solicitation clause was the reasonable requirement for protection of its customer connection. In oral submissions, however, counsel for Wholesalers put that the non-competition clause was reasonable protection not only for Turk's confidential information but also for its customer connection. 38 Clause 1.2(iv) of Mr Stafford's contract of employment recites that the non-competition clause is reasonable to protect the investment of Wholesalers in the goodwill of the business. No mention is made of confidential information. Mr Stafford's employment contract contained a separate provision requiring him not to disclose, use, copy or remove confidential information except in specified circumstances both during and after his employment. It was submitted that at the time the restrictive covenants were entered into, the parties did not consider Wholesalers' confidential information justified the non-competition clause. I reject that submission. Wholesalers' investment in the goodwill of its business is sufficiently broad a concept to include protection of its confidential information and protection of its customer connection. The fact that the employment contract elsewhere embargoed Mr Stafford from misuse of confidential information does not preclude its inclusion as a basis for the non-competition clause. It is worth remembering that the restrictive covenants were not original provisions of Mr Stafford's employment contract. They were inserted by way of variation when this issue was addressed with respect to key personnel. 39 The non-competition clause prohibits Mr Stafford from any involvement in a competing business. It prevents Mr Stafford from acting as a storeman or a driver for a competing electrical wholesaler in which capacity, it was submitted, he would have no ability to exploit any of Wholesalers' confidential information. 40 It has been held that a non-competition covenant is a proper restraint directed towards legitimate protection of a former employer's confidential information. In Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472 at 1479, Lord Denning MR said that experience shows that it is not satisfactory to have simply a covenant against disclosing confidential information because it is so difficult to draw the line between information that is confidential and information that is not and it is very difficult to prove a breach when the information is of such a character that a servant can carry it away in his head. (See, too, Woolworths Ltd v Mark Konrad Olson [2004] NSWCA 372 at [66] - [68]). 41 I am not prepared to find that the non-competition clause in Mr Stafford's contract of employment was more than adequate protection on the ground that it was not confined to future employment in positions of influence over confidential information. An employee of any description might be prepared to provide his new employer with confidential information taken away from his former employer. 42 The non-competition clause has no geographical limitation. It prevents Mr Stafford being employed in any business or undertaking of a like or similar kind to that of Turk anywhere in the world. In my view, such a restriction is more than necessary to provide adequate protection to Wholesalers and a provision limiting competitors to Australia was more appropriate. 43 It was submitted on behalf of Mr Stafford that the information in question was not confidential because once prices were set they ceased to be so and once Wholesalers was accepted as the supplier to a project there was no longer any need for secrecy with respect to the discounts that had been negotiated. 44 I reject that submission. As Young CJ in Eq observed in Landmark Underwriting Agency Pty Ltd v Kilborn [2006] NSWSC 1108 at [60] the modern concept of confidential information includes information that is the key to a profitable business and is material amassed so that a competitive business can be run. 45 With respect to day-to-day customers with discounts entered in a customer matrix for different products, it would advance a competing electrical wholesaler's business if it was privy to that information. It is likewise with discounts negotiated on projects. The evidence was that Wholesalers might offer the same discounts applicable to one project as a tender for the provision of electrical goods on another project. Again, a competing tenderer would be greatly advantaged if it obtained that information. 46 It was similarly put that the information in question was not understood by the parties to be sensitive to the restrainor's business or goodwill. The evidence does not support that conclusion. True it is that the information was readily available to Turk's staff, all of whom had access to the discount matrices to establish the price to be included in an invoice on sale of electrical goods. But that knowledge was confined to Turk and jealously guarded so far as outsiders were concerned. 47 It was also submitted that the confidential information was not amenable to being deployed by Mr Stafford in a competing business because, without a copy of the information, it was not such as could be recalled by Mr Stafford. 48 As I have said, Turk sold some 400,000 products. There were approximately 30,000 customer matrices containing different discounts for different product groups in Turk's computer system. Mr Stafford said he could not recall any of these details and those details changed from time to time. And he ceased to be the major account manager for Stowe in October 2006 and his last contact, other than the coincidental answering of a telephone call from a Stowe employee, was with a Mr Steele in February 2007. 49 Mr Stafford was not challenged on his evidence that he took no copies of the confidential information with him, his contact with the information was considerably reduced when Mr Dunmore took over his role with respect to Stowe and he was quarantined from it when he was moved to the Villawood branch. 50 The non-competition clause does not differentiate between employees in a position to exploit confidential information and those who could not by reason of the nature of that information without access to the Turk computer system or to information downloaded from it. In its failure to take account of an employee in the position of Mr Stafford, I am of the view that the non-competition clause was in excess of that required to provide adequate protection for Wholesalers' confidential information. 51 It was submitted that there was no need to cross-examine Mr Stafford as to his assertions because: "One does not waste one's time questioning the individual about what they can or cannot remember in respect of the matter. That is not how these matters are dealt with by way of ascertaining whether or not the restraint is valid or able to be enforced. The question is whether the person had access to confidential information. Who cares whether they get into the witness box and say they can't remember. That does nothing to take away the enforceability of the restraint." 52 I reject that submission. At common law, a restraint of trade is contrary to public policy and void unless it can be shown to be reasonable in the circumstances (Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 565). It is reasonable in the circumstances to protect an employer's confidential information by a non-competition clause if the confidential information is of a type that can be exploited by a former employee. If confidential information cannot be carried away in the head of an employee and thus exploited, the non-competition clause that applies to those circumstances is not, in my view, reasonable in the circumstances and the restraint is, at common law, contrary to public policy and void. 53 Reference was made to Portal Software v Bodsworth at [56]-[57] where Brereton J concluded that he was unpersuaded that the employee had disclosed or misused confidential information or that he would intentionally do so. But his Honour went on to say that there was an ever-present risk that in his present employment, the former employee would be placed in a position where, however well-intentioned, he might unavoidably use such information for the benefit of his new employer and to the detriment of his former employer. But that is not the issue in these proceedings. Here, the very nature of the voluminous confidential information in question should have alerted Wholesalers at the time Mr Stafford's contract of employment was varied to include the restrictive covenants, that the non-competition clause, applicable to circumstances where an employee did not take copies of the confidential information and hence could not exploit it, was excessive and unreasonable in the circumstances. 54 It follows that I do not regard the non-competition clause in Mr Stafford's employment contract as a reasonable protection of Turk's confidential information. 55 I do not regard the fact that Mr Stafford agreed to the restrictive covenants, apparently on an equal footing with Wholesalers, nor the fact that he is being paid by Wholesalers what he would have earned at GO Electrical as militating against my conclusion. While they are matters to be taken into account, they are outweighed by the above considerations. 56 I am also of the view that the period of the restraint is, in the circumstances, excessive. It follows a three-month period of notice of termination, effectively prohibiting an employee from competing, directly or indirectly, with Wholesalers for a period of nine months. In that period it is likely that the confidential information as to price and discount rates will have changed. In those circumstances, I am of the view that an appropriate period for the non-competition clause is three months where an employee is obliged to give Wholesalers three months' notice of termination of employment. 57 Wholesalers also sought to justify the non-competition clause as an appropriate protection of its customer connection. 58 If an employee's contact with a customer of his employer places the employee in a position of influence over the customer, the employer is entitled after termination of the employment to protection against the employee's use of that influence over the customer (Herbert Morris at 709). But in order to justify a non-solicitation restraint, the employee must have such a degree of influence over the customer as to virtually control its business. As Young J said in Twenty First Australia Inc v Shade, NSWSC, unreported, 31 July 1998 at 12: "The doctrine of customer connection requires the employee to be in a class where the customers regard the employee as the face of the employer's business. As Hoover J put it 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 as a personal asset'." 59 While Mr Stafford was the major account manager for Stowe, he was not the only employee of Turk who had contact with Stowe representatives. The evidence was that contact was made with Stowe representatives at a higher hierarchical level than that occupied by Mr Stafford. There was no evidence from which it might be inferred that Mr Stafford was able to control Stowe's business. Rather one might infer that Stowe was motivated to place orders with Turk rather than its competitors by Turk's offers of price and discount. The type of business conducted by Turk was dependent more on price and discount than it was in the development of customer connection. Stowe put business to Turk's competitors as well as to it. And the relationship between Stowe and Turk's major account manager for that company was not built up over any great length of time. A changeover between major account managers for Stowe was achieved in about four to six weeks. 60 In my view, Mr Stafford was not the face of Turk so far as Stowe was concerned and he was not in a position to control Stowe's business. The non-solicitation clause is, in my view, an excessive measure and beyond that reasonably necessary to protect Wholesalers' customer connection. 61 If a non-solicitation provision is excessive in the circumstances so, too, is a more onerous non-competition provision. 62 In my view, therefore, Wholesalers has failed to establish the reasonableness of its restrictive covenants. At common law, the restraints would be contrary to public policy and void. 63 The final question is whether the restraints, to any extent, are saved by the operation of the Restraints of Trade Act 1976, s 4(1). It provides that a restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not. 64 Since there has been no breach and no threatened breach of the non-solicitation clause it may not be necessary to consider the operation of the statute. If it were, I am of the view that cl 2.2(ii) should be read down to apply for three months after the termination of employment requiring an employee to give three months' notice of termination. A six-month restraint upon a former employee contacting customers in an industry driven by price and discount rather than customer connection is ample protection against competition. To that extent, I am of the view that the non-solicitation clause is not against public policy. 65 On the other hand, I do not think that the non-competition clause in its application to an employee who does not take away copies of Turk's confidential information upon termination of employment can be saved under the Restraints of Trade Act 1976, s 4(1). Clause 1.1 can be read down to apply for three months and to apply to competing businesses in Australia. But that still leaves the problem that the covenant does not address the problem that Turk's confidential information was incapable of being taken away in the head of an employee. The statutory provision does not, in my view, entitle the court to rewrite a restrictive covenant. 66 In my view, Wholesalers has failed to establish that the non-competition clause is, to some extent, in its application to Mr Stafford, not against public policy. 67 The Restraints of Trade Act 1976, s 4(3) applies on application by a person subject to a restraint where there has been a manifest failure to attempt to make the restraint a reasonable one. The court may, on such terms as it thinks fit, order that the restraint be, as regards its application to the applicant, altogether invalid, or valid to such extent only as the court thinks fit. I need not consider this provision, however, because no application was made under it by Mr Stafford. Conclusion 68 Wholesalers sought a declaration that the restrictive covenants in its contract of employment of Mr Stafford were valid and enforceable. It sought an order that until 11 November 2007, Mr Stafford be restrained from, directly or indirectly, being engaged or involved in the business of GO Electrical and attempting to obtain for himself or for GO Electrical or soliciting, interfering with or endeavouring to entice away from Wholesalers, any person, firm, or company who at any time during Mr Stafford's employment with Wholesalers was a customer or client of Wholesalers. In the alternative, Wholesalers sought damages or an account of profits. 69 Declarations should not be made as a staging post in litigation (McKeown v Cavalier Yachts Pty Ltd (1988) 13 NSWLR 303 at 312). I decline to make the declaration sought. 70 There is no reason, in my view, to provide further protection to Wholesalers beyond the undertakings Mr Stafford has given to the court. For reasons set out above, I am of the view that the non-competition clause is against public policy and there has been no establishment of any breach, or threatened breach, by Mr Stafford of the non-solicitation clause which is not, in my view, against public policy to the extent of its operation for a three-month period. Nor has Wholesalers established an entitlement to the alternative remedies it seeks. 71 The summons is dismissed with costs. I vacate paragraph 4 of the orders made by Bergin J on 10 May 2007.

Australian Regional Wholesalers v Stafford

At a glance

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Before

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Judgment (12 paragraphs)

Parties

Cases Cited (10)

Cited By (4)