Ecolab Pty Limited v Stephen Garland

Interlocutory injunctions 4On an application such as this for an interlocutory injunction, the test is whether the plaintiff has established a sufficiently seriously arguable case for a final injunction to justify the grant of interlocutory relief, having regard to the balance of convenience. Stating the test that way emphasises: firstly, that the plaintiff bears the onus of making out a case for interlocutory relief; secondly, that before one comes to the balance of convenience there must be a serious question to be tried; and, thirdly, that the two limbs of the question are interrelated - in that the strength of the plaintiff's case on the claim for final relief may be relevant to what is required to tip the balance of convenience one way or the other, and vice versa, the preponderance of the balance of convenience may be relevant to the strength of the case required to make out a sufficiently serious question to be tried - as the High Court has explained in Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57, [65]-[72]. 5Moreover, the strength of the plaintiff's case for final relief assumes additional significance where the outcome of the interlocutory application will effectively determine the claim for final relief [ Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533, 535-536; Australian Broadcasting Corporation v O'Neill , [72]]. While an expedited final hearing of this matter might well be had prior to 20 May 2012, when the 12-month restraint period will otherwise expire, it is almost inevitable that a substantial period of the restraint will have expired before any final hearing. Accordingly, the outcome of this application will determine, in a practical sense, and, to a large extent, the final result of the case, and it is, therefore, necessary and appropriate to evaluate the strength of the case for final relief. 6It is sometimes said, in this context, that as well as establishing a serious case for final relief and a preponderance of the balance of convenience, an applicant for an interlocutory injunction must establish that damages are an insufficient remedy. However, in the ordinary context - as distinct from, for example, an asset preservation order - the first limb (that is, whether there is a seriously arguable case for a final injunction) itself involves two elements: first, whether there is a viable cause of action for relief, and secondly whether, having regard to relevant discretionary considerations, an injunction as distinct from damages would be the appropriate relief. Those discretionary considerations include the sufficiency of damages as a remedy, but also such other discretionary considerations as are relevant to the granting or withholding of final injunctive relief.

Serious question to be tried? 7I turn first to consider whether there is a seriously arguable claim for final injunctive relief. The relief claimed in the Amended Summons is based on the post-termination restraints. An affidavit, served only the evening before the hearing, appears to establish that, at a time when Mr Garland may well have expected that his employment would be terminated (indeed, on the morning of the day when he was made redundant), he sent (and then deleted) from his laptop computer to his personal email address distributor contacts and price lists for machines and spare parts which prima facie fall within the contractual definition of confidential information. However, no relief in terms of the confidentiality obligation was claimed in the Amended Summons, and no application was made for leave to add such a claim. Given the late service of the supporting evidence, which in the truncated interlocutory hearing the defendant had no realistic opportunity to answer, it would have been inappropriate to grant leave to raise it at that stage; that is not to say that such an amendment could not be made prior to any final hearing. Accordingly, this hearing is concerned only with the post-termination restraints.

Actual or apprehended breach of restraint? 8The first question is whether there is sufficient evidence of actual or apprehended breach. In his employment agreement with Ecolab, Mr Garland acknowledged that Ecolab had invested a substantial amount of time and effort to develop its business relationships with its clients and agreed ("the non-compete covenant"): To protect Ecolab's goodwill, you agree that you will not (directly or indirectly) for the restraint period [defined as 12 months, but cascading to 9, 6, 3 and 1 months] be engaged or involved in any business or activity ("other business") which involves the provision of the products or services [defined as the products and services that Ecolab and Cleantec produces, sells or distributes in the period of 12 months before termination of the employment] or similar products and services to any Ecolab client and with whom Mr Garland had had direct dealings in the period of 12 months before termination within the restraint area [defined as Australia, but cascading to Queensland, Brisbane, and a 15km radius from Ecolab's Darra premises], without the prior written consent of Ecolab Senior Vice President Pacific (unless the client purchased products and services from the other business at least two months prior to the termination of your employment). 9Mr Garland further agreed ("the non-solicit covenant"): You agree that you will not (directly or indirectly) during the restraint period after the termination of your employment for whatever reason, solicit, entice away (or attempt to do any of the foregoing) any client or supplier from Ecolab within the restraint area. 10The agreement also provided that if any of the post-termination prohibitions or restrictions was judged to go beyond what was reasonable in the circumstances and necessary to protect the goodwill of Ecolab's business, but would be judged reasonable and necessary if any activity were deleted or period or area reduced, then they would apply so reduced to the minimum extent necessary. 11Within the period of 12 months prior to termination of Mr Garland's employment on 20 May 2011, Ecolab distributed Windsor products including floor scrubbers, ride-on floor scrubbers, carpet extractors and upright vacuum cleaners, and also Truvox products including backpack vacuums, floor sweeping machines and floor polishers. Ecolab was the sole Australian distributor of Windsor products. Since the termination by Windsor of Ecolab's distributorship on 6 July 2011, from 15 August 2011, Mr Garland's new employer Karcher will be the only entity selling Windsor floor scrubbers, ride-on floor scrubbers, carpet extractors and upright vacuum cleaners in Australia (apart from Ecolab selling its remaining stock valued at approximately $1.19 million). Mr Garland's responsibility as an employee of Karcher includes the sale of 'all Windsor machine, accessory and other Karcher equipment across Australia'. There is evidence that Mr Garland informed Mr Greg Hulbert, the owner of B&G Supplies in New South Wales, a client of Ecolab, that he would be promoting the Windsor Range of floor care products out of Karcher in Melbourne. There is evidence that Mr Garland informed Mr David Ogsten, the owner of Direct Cleaning Supplies, one of Ecolab's top ten service providers, that he was awaiting an employment contract to commence operating with Karcher Floorcare, promoting the Windsor Floorcare Range. Even if those clients had had prior dealings with Karcher, they could not have been purchasers of the Windsor line of equipment, as at least until July 2011 Ecolab was the only Australian distributor of Windsor products. And even if some of Karcher's (and presumably Mr Garland's) customers in the next 12 months have purchased such products from Karcher more than two months prior to 20 May 2011, it is highly improbable that all will have done so, and there is no suggestion on the part of Mr Garland that he will limit his activities to those who have been, and to those who were not previously clients of Karcher. 12The improbability of Karcher's clients to be serviced by Mr Garland all being excluded from the scope of the restraint on the basis that they were not previously clients of Ecolab or had previously dealt with Karcher is heightened by the circumstance that prior to 6 July 2011 Ecolab was Windsor's Australian distributor, whereas from 15 August 2011 it has been replaced by Karcher. In my view, it is at least seriously arguable that Mr Garland is or will be during the restraint period engaged or involved in a business or activity (namely, that of Karcher) that involves the provision of products and services that Ecolab and Cleantec produced, sold or distributed in the 12 months prior to 20 May 2011 (namely, Windsor floor scrubbers, ride-on floor scrubbers, carpet extractors and upright vacuum cleaners) within Australia, including entities that were clients of Ecolab prior to 20 May 2011 and had not purchased such products from Karcher before 20 March 2011, and thus is or will be in breach of the restraint. 13Prior to 21 July 2011, Mr Garland sent a letter dated 18 July 2011 to at least one client of Ecolab, announcing his new role as National Sales Manager of Windsor products at Karcher, and inviting orders. In that letter, addressed not to any particular person or entity, but generically to "... Valued Customer", Mr Garland wrote: As we work through the logistics of integrating the Windsor range into our system; we will endeavour at all time to meet your needs ... In the quest for a smooth integration to the Karcher system, I will deal with all immediate or urgent requests as a priority... 14This letter has the appearance and is in the form of a circular, suitable for distribution to multiple recipients; Mr Garland did not respond to a request to say to whom it had been sent. Other evidence, albeit some of it disputed, raises at least a question to be tried as to Mr Garland's solicitation of other clients of Ecolab. Mr Garland has admittedly, since 20 May 2011, made contact with several service providers who were clients of Ecolab, including Office Max (to whom he made a major sale to as an employee of Ecolab), Ms Jocelyn Ng of Metwood Australia Trading, Mr Jim Wilson of Warwick Australia, and Mr Phil Haig of Cooma Cleaning Supplies. Together with the approaches to Mr Hulbert and Mr Ogsten mentioned above, these establish a seriously arguable case of breach of the non-solicitation covenant. 15In my view, there is a seriously arguable case that Mr Garland is, or will during the restraint period be, in contravention of the non-compete covenant and the non-solicit covenant.

Validity of restraint 16The principles which I take to apply to the enforcement of restraints of trade in the context of employment contracts were summarised by me in Cactus Imaging Pty Limited v Peters [2006] NSWSC 717; (2006) 71 NSWLR 9, in the following terms: 10. 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 at 565; Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 706, 707; Lindner v Murdock's Garage (1950) 83 CLR 628 at 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, s 4(1); Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449, at [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 at [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 on the actual or apprehended breach, rather than on imaginary or potential breaches. 11. While the same general principle applies in all cases of restraint of trade, a stricter and less favourable view is taken in respect of covenants in restraint of trade between employer and employee than in commercial agreements for sale of goodwill: Nordenfelt (at 566); Mason v Provident Clothing & Supply Co Limited [1913] AC 724 at 731, 738; Herbert Morris Ltd v Saxelby ; Geraghty v Minter (1979) 142 CLR 177 at 185; Woolworths Limited v Olson (at 38); J D Heydon, The Restraint of Trade Doctrine, 2nd ed (1999) Sydney, Butterworths, at 68-69. An employer is not entitled to be protected against mere competition, and the legitimate interests of an employer which may be the subject of protection by covenant are in the nature of proprietary interests ( Vandervell Products Ltd v McLeod [1956] RPC 185 at 192; Tank Lining Corporation v Dunlop Industrial Ltd (1982) 140 DLR (3d) 659 at 664, including the employer's trade secrets and confidential information, and the employer's goodwill including customer connection. 17The reasonableness of a restraint is to be judged at the time at which the restraint is taken [ Cactus Imaging Pty Ltd v Peters , [37]], and the starting point is what the parties have negotiated, although it cannot be determinative [ Woolworths Ltd v Olson [2004] NSWCA 372; Aussie Home Loans Ltd v X Inc Services Pty Ltd [2005] NSWSC 285, [36]; Cactus Imaging Pty Ltd v Peters , [41]]. 18A restraint will not be valid unless it protects a legitimate interest, and those interests are typically the employer's interest in protecting its confidential information and/or its customer connection. 19The structure of Cleantec's floorcare division was that it sold products to end users primarily through dealers or distributors, sometimes called "service providers". While there were some sales direct to "end users", the service providers were the key customer connection for the business. Cleantec had about 30 service providers to whom it made almost all of its sales. They were "inherited" by Ecolab when it purchased the business. 20Mr Garland was employed, both Campbell Bros and by Ecolab, to build and maintain relationships with service providers. Mr Garland built and maintained relationships with the service providers, and enjoyed a high level of recognition, familiarity and credibility with them. His contact with end users was much less intense. 21Mr Garland was the person on behalf of Campbell Bros, and then Ecolab, who established a relationship with the customers. He did so successfully for Campbells, and even if his opportunities to do so were more limited under Ecolab, those relationships continued with him as the principal point of contact. In my view, it is more than seriously arguable that, as at the date of the contract, Ecolab had a legitimate protectable interest in its customer connection such as to warrant protection by a restraint that precluded Mr Garland from using his personal connection with service providers to attract custom from Ecolab to a new employer. 22Bearing in mind that reasonableness is to be judged at the time at which the contract is made, that Mr Garland's customer connection had been established through his prior employment with Campbells since May 2009 as well as during his contemplated employment with Ecolab, that purchases of such equipment by an individual customer are not likely to be a daily or weekly occurrence but less frequent, and the prima facie position established by the agreement of the parties, it is seriously arguable that a period of 12 months was not an unreasonable one - whether to allow a replacement employee to demonstrate competence, or to permit Mr Garland's personal influence to dissipate. The business, and Mr Garland's representational role in it, extended around Australia, and this, together with the prima facie position established by the agreement of the parties, establishes that it is seriously arguable that the restraint area of Australia was not unreasonable.

Discretion 23The remaining and crucial question, therefore, pertains to the Court's discretion to grant or withhold injunctive relief. All equitable relief is discretionary. That is so even of an injunction to restrain a breach of a negative contractual stipulation, although discretion to decline relief is rarely exercised in that context. Nonetheless, that discretion exists, and the grant of an injunction on a final basis, even in such a case, remains ultimately discretionary. The existence of that discretion has been recognised in the context of applications to enforce restraints of trade: in the first instance decision in Kone Elevators Pty Limited v McNay (NSWSC, Young J, 10 March 1997, unreported), the reversal of which in the Court of Appeal did not affect his Honour's judgment on that point; in Dalysmith Corporation (Aust) Pty Limited v Cray Personnel Pty Limited (NSWSC, Young J, 14 April 1997, unreported, BC9701250); in RBM Plastic Extrusions Pty Ltd v Diaz [2006] NSWSC 1332, at [21]; and in John Fairfax Publications Pty Limited v Birt [2006] NSWSC 995 in which, drawing on Kone v McNay and Dalysmith , I said: Injunctive relief - discretionary considerations 45. Generally speaking, an injunction will be granted to enforce a negative contractual stipulation. In the context of restraints of trade, damages are rarely a sufficient remedy. In this case, as in most, it would be very difficult to prove and quantify the damage that may be suffered, which may accrue of a period of time. In particular, confidential information, once lost, cannot usually be recovered. 46. In exercising the discretion to grant or withhold injunctive relief, the Court has regard to the circumstances at the date of the hearing [ Kone Elevators Pty Ltd v McNay (NSWSC, Young J, 10 March 1997, unreported; reversed, but not on this point, 19 March 1997); Dalysmith Corporation (Aust) Pty Ltd v Cray Personnel Pty Ltd (NSWSC, Young J, 14 April 1997, unreported, BC9701250)]. Thus even where judged as at the date of the contract a restraint is reasonable, the Court may on discretionary grounds withhold injunctive relief if at the date of hearing there is no protectable interest - for example, if despite contemplation at the date of contract that the employee would have access to confidential information, that did not eventuate. However, it is to be born in mind that restraints of the type contained in the second limb of clause 11 are sought and given because it is recognised that it may be difficult to prove with sufficient specificity the possession of confidential information, and courts should be slow to decline as a matter of discretion to enforce such a restraint, once it is found to be valid when created, on the grounds that it is unclear what confidential information if any the employee in fact possesses: it was to provide certainty and avoid the need for detailed proof of possession and apprehended misuse of confidential information that such clauses are upheld as valid. 24Where a restraint, reasonable in the circumstances at the date of the contract, can be seen at the date of the hearing to be excessive having regard to the circumstances as they have eventuated, the court may as a matter of discretion decline to grant injunctive relief [ Otis Elevator Company Pty Limited v John Nolan [2007] NSWSC 593, [17]-[37]; Seven Network (Operations) Limited v Warburton (No 2) [2011] NSWSC 386, [90]]. 25To my mind, it is highly significant that Mr Garland's employment came to an end by involuntary redundancy, after he had declined to accept a reduction in base salary. He was not terminated for cause, nor did he leave voluntarily. It is true that his termination was lawful, in accordance with the terms of the contract; accordingly, the employer is not disentitled from relying on the restraint. Nonetheless, the circumstance that he has been put out of his job by redundancy of his position, when he refused to accept a reduction in his remuneration, is striking. Unlike Mr Birt in Fairfax v Birt , and Mr Nolan in Otis v Nolan , it cannot be said that Mr Garland has been the author of his own misfortune: he did not take his chances through informed agreement to a restraint but then resign to obtain employment of the type forbidden by the restraint, let alone while his employer wanted to retain him; nor did he commit breaches of his obligations such as to warrant termination for cause; rather, he was involuntarily made redundant despite his wish to remain in Ecolab's employment, because he would not accept a reduction in his remuneration. In short, the employer has created the present situation. 26The significance of this is increased by the circumstance that, prior to signing the contract, Mr Garland had received an assurance from Mr Webb - then his supervisor at Cleantec, who was to become his supervisor at Ecolab upon completion of the acquisition - that his future at Ecolab would be "paved with gold". Although it is correct that when this assurance was given, Mr Webb was an employee of Campbell Bros and not yet of Ecolab, the expectation that it generated forms part of the circumstances in which Mr Garland signed the contract, and its subsequent falsification is relevant to the justice of enforcing the restraint by injunction in the circumstances that have eventuated. Due to no fault on his part, his employment with Ecolab lasted for a much shorter period than he had expected when he signed the restraint, in circumstances where his reasonable expectation was that his position was secure, based on assurances given to him by Mr Webb. 27These considerations are still further accentuated by the circumstance that, when provided with the draft employment contract by Ecolab for signature, Mr Garland was also provided with a document entitled "Questions and Answers", said to be intended to provide answers and clarifications to the question received by Ecolab. One question and answer in it was: Does the restraint of trade clause apply if you are made redundant? In general restraint of trade would not apply in the case of redundancy. However for senior management positions there could be a provision, this will be reviewed on a case by case basis. 28Mr Garland says that he took this to mean that it would not apply in his case in the event of redundancy. Such an interpretation, in the absence of legal advice, is not an unreasonable one: his position would not ordinarily be regarded as "senior management". He reasonably assumed that in the event of redundancy the restraint would not be applied. Indeed, consistent with such an assumption, while Ecolab's letter of termination reminded Mr Garland of his confidentiality obligations, it contained no reference to the post-termination restraints. 29Next, there are the changes made to the floor care business during 2011 by Ecolab. I accept that, even if Ecolab were closing down its floor care equipment business, so long as it continued to carry on the business in the meantime there remains an interest in respect of which it is entitled to protection. However, the significance of the customer connection associated with Mr Garland - primarily with service providers - is much reduced by the restructuring that essentially removes the service providers from the model, so as to require end users to deal directly with Ecolab. The class of customer contacts with whom Mr Garland dealt with has effectively been eliminated from the business structure, so that his strongest customer connection is very much diminished in significance. 30Against that, Mr Garland had been able to secure employment, which he was about to commence when he received Karcher's offer, with CHT Textiles, a chemical company that does not deal with floor care equipment, which employment would not have been in contravention of the restraints. While his skills and experience may be less suited to such employment than to his employment with Karcher, it means that the hardship to him of compliance with the restraint would be less than in many of these cases, and it may be inferred that he could, without much difficulty, find alternative non-contravening employment, although somewhat less ideally matched to his skills and experience. 31Despite that factor, the extraordinary combination of his termination being for involuntary redundancy, when he reasonably expected his employment to be secure and that in the (unlikely) event of redundancy the restraints would not apply, with the markedly reduced significance of his customer connection with service providers under the restructure, and the implicit consequence of the redundancy of his position that there is not a perceived need for a replacement employee to establish a similar connection, in the context that four months of the restraint period have already elapsed, persuades me that a court is more likely than not to decline, on discretionary grounds, to grant a final injunction to enforce the non-compete restraint. Accordingly, despite a seriously arguable case that Mr Garland is or will be in contravention of a valid and enforceable restraint, I am unpersuaded that the Court on final hearing would likely give effect to that restraint by granting a final injunction; it is rather more likely that the Court would decline to do so, on discretionary grounds. While there is an arguable case for an injunction, in a case such as the present, the ultimate prospects of success have considerable significance. 32Those considerations have much less weight in respect of the non-solicit restraint. Its enforcement will not prevent Mr Garland from earning a living in the industry and field of his preference. It will do no more than protect such remaining interest as Ecolab has in the customer connection associated with Mr Garland.

Balance of convenience 33In that context, I turn to the balance of convenience. It must be remembered that what is involved in the exercise of weighing the balance of convenience - or perhaps more accurately, the balance of the risk of injustice - is on the one hand the injustice to the defendant if an interlocutory injunction is wrongly granted, and on the other hand the injustice to the plaintiff if an interlocutory injunction is wrongly declined. 34If I wrongly grant an injunction, at least in respect of the non-compete restraint (though not the non-solicit restraint), then Mr Garland will be put out of his present employment. It is probable that, within a relatively short period - say a month or two - he could find alternative employment that would not contravene the restraint, but some hardship will be involved in the meantime. It is not apparent that an injunction in respect of the non- solicit restraint would have major adverse consequences for him. On the other hand, if I wrongly decline to grant an injunction in respect of the non-compete restraint, while he will retain his employment in breach of the restraint, while Ecolab will be deprived of the benefit of that restraint and the potential loss of custom to Karcher, it will retain the benefit of the non-solicit restraint, albeit that proof of solicitation may be more difficult than enforcement of the prophylactic non-compete restraint. 35In those circumstances, given the view that I take of the relative strengths of the cases on the claim for a final injunction - in particular, on the discretion to decline injunctive relief - in respect of the non-compete restraint and non-solicitation restraints, I will make orders restraining Mr Garland, until the hearing, in terms of the non-solicit restraint, but not in terms of the non-compete restraint. Costs of the interlocutory application will be costs in the proceedings.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 15 September 2011