Hannamax Hi-Tech Pty Ltd v. Lynne O'Donnell [2001] NSWSC 634

1 This is an application for an injunction restraining the defendant, pending the final determination of these proceedings, from obtaining or commencing employment with Eyrtel Australia Pty Ltd, or from obtaining employment with any competitor of the plaintiff in the manufacture or distribution of telecommunications logging equipment. 2 An interlocutory injunction is also sought requiring the defendant to terminate forthwith her present employment with Eyrtel. 3 The plaintiff carries on business as a distributor of multi-channel channel digital recording equipment known as "logging" equipment. There is a niche market for that equipment. The market is part of the wider telecommunications industry. 4 According to the evidence so far adduced, the logging equipment market constitutes between 1% and 3% of the overall telecommunications market. The logging equipment market is intensely competitive. 5 The defendant commenced employment with the plaintiff on 9 October 2000. She was engaged as an Account Manager to perform the following duties. She was required to visit potential clients by following leads and giving product presentations. She was required to promote the systems distributed by the plaintiff in order to win sales. She was required to manage the current and future needs and demands of existing clients and to work with an organisation called Channel Partners, who are partners of the plaintiff in the telecommunications industry. 6 Prior to commencing employment with the plaintiff, the defendant had been engaged in the telecommunications industry in Australia in various roles since 1985. It is a fair summary of her experience prior to commencement with the plaintiff that she was employed as sales representative or as sales manager for various companies in Australia, most appointments seeming to last for two or three years. 7 Her experience has been entirely in sales and it does not appear from the evidence that she has any technical qualifications, other than such as may be gleaned from experience in selling products in the telecommunications sector. 8 The defendant on commencing her employment signed a contract of employment with the plaintiff. The contract is dated 27 September 2000. The contract includes terms providing for non-disclosure of confidential information. "Confidential Material" is defined in the agreement in the following terms: "a) Commercial knowledge including but not limited to pricing, marketing strategies, company directions, product road maps and any other non-public information; b) All materials containing proprietary, commercial-in-confidence, sensitive, information of any kind relating to NICE Products in any form including but not limited to books, CDs, diskettes, records, information, data, technology, training materials (including facilitators, guides, outlines and workbooks) of any form and other documents describing or detailing NICE Products other than public sales material …" 9 The contract contains the following provisions: "With respect to Confidential Information, written or oral, disclosed to Lynne by Hannamax, Lynne agrees to the following: a) Not to, at any time, release or in any way make available or furnish either directly or indirectly, to any person, firm, corporation, association or organisation any Confidential Information, or any reports based on Confidential Information. b) To hold the Confidential Information in confidence, and protect it in accordance with the strictest security by which a prudent person would be expected to protect his or her own confidential information relating to the development, manufacture, marketing and sale of such products concerning which he had proprietary rights. c) Not to obtain employment with a competitive logging manufacturer or distributor for at least 1 year following termination of employment with Hannamax."

10 On 29 May 2001, the defendant gave notice to the plaintiff that she intended to take up employment with a direct competitor. The plaintiff required that she leave the plaintiff's employment forthwith. The defendant, accordingly, resigned on that day. 11 On 31 May 2001, the plaintiff sent a letter to the defendant reminding her of the non-disclosure and confidentiality provisions in her contract of employment. The plaintiff's letter included the following paragraphs: "3. We draw your attention to the Non-Disclosure and Confidentiality Agreement (a copy of which will be posted to you) which you agreed to and signed as one of the conditions of being offered employment with Hannamax. The obligations of this Agreement do not cease with your departure, but remain fully in effect. 4. We especially draw your attention to Clause 2(c) which obliges you not to accept employment with any of our competitors for the duration of one year. We note your advice to Jeremy Rabie that you have had discussions with one of Hannamax's main competitors, and that you may accept employment with that company. We therefore hereby place you on notice that should you accept such employment, we will instruct our solicitors to institute proceedings against you on our behalf for breach of contract including personal liability for any loss of profits Hannamax may incur resulting from your breach."

12 On 1 June 2001, the plaintiff wrote to the defendant's prospective employer, Eyrtel. That letter drew the attention of Eyrtel to the plaintiff's contract of employment with the defendant and in particular, to the clauses relating to confidential information and to the prohibition against accepting employment with a competitor for a period of twelve months after the defendant's termination of employment with the plaintiff. Notwithstanding the plaintiff's letters to the defendant and to Eyrtel, the defendant commenced employment with Eyrtel on 2 July 2001. 13 On 5 July 2001, the defendant's solicitors wrote to the plaintiff's solicitors proffering an undertaking on behalf of the defendant. The undertaking was proffered in order, so it was said, to protect the plaintiff from exploitation of its goodwill and information confidential to the business. The undertaking was in the following terms: "In order to avoid litigation, and without making any concessions as to the validity of the restraint clause, our client is prepared to enter into an undertaking which will more than protect your client from exploitation of your client's goodwill and information confidential to your client. Our client will not, for a period of 6 months from the date of termination of employment, either on her own account or as an employee of another person or entity, approach or solicit logging business with any existing client of Hannamax or any of the following companies who were identified, during her employment, as potential clients of Hannamax - VicTab, ATO, Ansett Airlines, Honolulu Airport, San Francisco Airport, Philip Morris, Commercial Union Group, MYOB, Plestell and Hutchinson."

14 The undertaking was not satisfactory to the plaintiff and the plaintiff commenced these proceedings on 9 July 2001, by filing the Summons herein. 15 By a Notice of Motion filed contemporaneously with the Summons the plaintiff sought that the matter be placed in the Expedition List, and also sought interlocutory relief in terms of paragraphs 1, 2 and 3 of the Summons. 16 The matter has come on before me today for interlocutory relief. The plaintiff asserts that the defendant is in possession of confidential information relating to its business. It says, accordingly, that the covenant against competition contained in the employment contract ought to be enforced. In this respect, it relies on the well-known passage in the judgment of Lord Denning in Littlewood's Organisation Limited v. Harris [1977] 1 WLR 1472, at 1479. His Lordship said: "It is thus established that an employer can stipulate for protection against having his confidential information passed on to a rival in trade. But experience has shown that it is not satisfactory to have simply a covenant against disclosing confidential information. The reason is because it is so difficult to draw the line between information which is confidential and information which 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. The difficulties are such that the only practicable solution is to take a covenant from a servant by which he is not to go to work for a rival in trade. Such a covenant may well be held to be reasonable if limited to a short period."

17 This passage has been quoted with approval by the New South Wales Court of Appeal in Kone Elevators Pty Ltd v. McNay and Anor (1997) 19 ATPR 41-564, and it has been followed in a number of other decisions of this Court. 18 The plaintiff says that because the defendant has some confidential information it is not practicable to limit the protection to which the plaintiff is entitled by some undertaking or restriction preventing the defendant from disclosing that confidential information to the plaintiff's competitor. The only practicable course is to prevent by injunction the defendant from breaching her covenant not to take employment with a competitor for the prescribed period. 19 The confidential information which the plaintiff asserts is held by the defendant is said to include, but not to be limited to, the matters set out in paragraph 20 of Mr Rabie's affidavit of 9 July 2001. That paragraph describes the confidential information in the possession of the defendant in the following terms: "… product information, trade secrets, know how, market positioning, Channel Partnerships, pricing & client lists and client accounts. The Defendant also received extensive and complete training from both the Plaintiff and NICE personnel. All relevant proprietary and confidential technological and commercial information was revealed to the Defendant in order to enable her to effectively sell for the Plaintiff.

20 It will be observed that there is no particularity given to the assertions in that paragraph. There are no details otherwise in the plaintiff's evidence substantiating the broad conclusions which are given as evidence in that paragraph of Mr Rabie's affidavit. 21 However, Mr Coleman, who appears for the plaintiff, points to evidence in the affidavit of the defendant herself which shows that she is in possession of what he says is specific and identifiable confidential information of the plaintiff. He refers to paragraphs 20, 29 and 30 of the defendant's affidavit of 19 July 2001. 22 In paragraph 20, the defendant acknowledges that, although she was not involved in formulating the pricing for particular jobs for clients of the plaintiff, nevertheless she did learn of the end prices determined in that process. She says these prices varied considerably and depended on a wide range of factors. 23 In paragraph 29 of her affidavit the defendant says she did not see any document containing information about discount practices adopted by the plaintiff, but saw prices quoted or charged to clients. She says that the market for telecommunications solutions is highly volatile and competitive; pricing arrangements change on a case by case basis. She says that her present recollection of the prices the plaintiff quoted to the clients would now be of no commercial value. 24 It seems to me that prices quoted by the plaintiff to the clients could not be classified properly as confidential information. The prices are obviously quoted to the clients in such circumstances that the clients are free to give those prices, and particulars of the components thereof, to the plaintiff's competitors in order to obtain a better quote, if possible. 25 It seems to me that pricing information quoted to customers by the plaintiff is not, in itself, of sufficient confidentiality to warrant protection by interlocutory injunction, particularly bearing in mind that such prices, in any event, would now be very probably stale and of no further use, either to the plaintiff or to a competitor. Certainly, there is no evidence of any particular prices quoted to any particular customer of the plaintiff which, if revealed by the defendant to Eyrtel, would severely prejudice the plaintiff's business. 26 It seems to me, therefore, that there is not sufficient evidence of confidential information in the possession of the defendant to warrant protection by the imposition of an injunction going to the disclosure of confidential information. 27 It seems that the defendant is principally a salesperson. It may well be that the plaintiff will suffer by losing the services of an experienced marketing consultant with some short term experience in the logging equipment niche market. It may be that the plaintiff's loss in that respect will be aggravated somewhat by the fact that the defendant's services are now to be made available to a direct competitor. 28 One must then consider whether or not the covenant against competition contained in the defendant's employment contract ought to be enforced pending determination of the proceedings as a whole. 29 It is certainly the case that the defendant has flagrantly breached the covenant against competition. She was certainly aware of its existence at the time that she entered into the contract. She was reminded of its existence shortly before she left the employment of the plaintiff. It was drawn to her attention before she commenced employment with Eyrtel that the plaintiff would seek to enforce that covenant against her if she proceeded with her proposed employment with Eyrtel. 30 That reminder to the defendant and a like reminder to Eyrtel apparently did not deter the defendant from taking the risk of provoking proceedings against her by the plaintiff, nor did it deter Eyrtel from proceeding to employ her. I take that matter very much into account in the exercise of discretion as to the balance of convenience. 31 It is conceded by the defendant that there is a serious question to be tried as to whether or not the covenant against competition is enforceable. It is true, as the defendant submits, that covenants in restraint of competition are prima facie void at common law as a matter of public policy. 32 There is an issue as to whether or not the covenant contained in the defendant's employment contract can be read down and saved in some way by the application of s.4(1) of the Restraints of Trade Act, 1976 . Whether that can be done is a matter which will require determination when the proceedings ultimately come on for final hearing and it is not appropriate now to engage in the debate of that issue. 33 I can say, and it is proper to say, however, that the covenant is in very wide terms and I myself have doubts as to whether it can be saved by the application of s.4(1); that must weigh to some degree in the exercise of discretion. 34 Another matter requiring consideration is that Order 2 of the Summons is, in effect, a mandatory injunction. It requires the defendant to terminate her contract of employment with Eyrtel immediately. That raises, in an acute way, the issue of where the balance of convenience lies. 35 The exercise of determining where the balance of convenience lies, of course, requires that one weigh the risk of loss and damage to the plaintiff's business if the injunctions are not granted, against the hardship which may be occasioned to the defendant if she is required to terminate her employment with her present employer and it is ultimately found that the plaintiff is not entitled to enforce a covenant against competition in the terms contained in her employment contract. 36 The defendant's evidence is that she would suffer considerable financial hardship if she were required to terminate her present employment. Apparently it is a lucrative job; that is no doubt one of the reasons she determined to leave the plaintiff's employment. 37 Ultimately, one has to consider the question in the light of the fact that the defendant is not in the possession of information of a high degree of confidentiality relating to the technical matters of the plaintiff's business. The defendant's value, really, lies in her expertise as a salesperson. 38 It is not demonstrated on the evidence that in the area of sales activity she is presently in the possession of any information, other than information relating to prices previously quoted by the plaintiff to its clients. General assertions to the contrary I can give no weight to without any particularity. 39 The defendant has proffered an undertaking in the terms recorded above in this judgment. That undertaking protects the plaintiff from the defendant seeking to approach the plaintiff's existing clients. No doubt, those existing clients can be identified with particularity from the plaintiff's books and records, so that if an approach is made by the defendant in breach of the undertaking, the appropriate remedy can be invoked. 40 There are additional clients or potential clients identified in the defendant's undertaking which she promises that she will not approach for a specified period. It is said that there may be others in that category who have not yet been particularised. 41 Balancing the weight of the potential damage to the plaintiff's business by breach of the defendant's covenant against competition with the hardship that will be caused to the defendant if she is compelled to resign her present employment, I am of the view that the injunctions should be refused. 42 I reach that conclusion on the basis that an undertaking will be proffered to the Court substantially in the terms contained in the defendant's letter of 5 July 2001. I will hear any argument as to whether the terms of that undertaking should be expanded to afford a more secure protection to the plaintiff. I will hear the parties as to costs. LATER 43 In this matter I delivered judgment earlier today in which I indicated that I was not prepared to grant injunctions in the terms sought by the plaintiff. The essential consideration underlying that conclusion was that the defendant proffered an undertaking to the Court generally in terms of her letter to the plaintiff's solicitors dated 5 July 2001. The parties then retired in order to consider the drafting of such an undertaking. 44 I am now informed that the defendant is not willing to give an undertaking to the Court in terms of her letter of 5 July 2001, unless the plaintiff proffers an undertaking as to damages. 45 The plaintiff is not willing to proffer an undertaking as to damages. Accordingly, it seems that the defendant is not willing to proffer any undertaking to the Court. In the absence of such an undertaking, I am prepared to grant the injunctions sought. 46 Accordingly, I order that the defendant be restrained from commencing employment with Eyrtel Australia Pty Ltd until further order of the Court. 47 I order that the defendant take all steps forthwith to discontinue her employment with Eyrtel Australia Pty Ltd. 48 I order the defendant be restrained until further order of the Court from obtaining employment with any competitor of the plaintiff in the manufacture or distribution of telecommunications logging equipment. LATER 49 After the delivery of my second reasons for judgment in this matter, the defendant proffered an undertaking to the Court in terms handed up to me. In those circumstances, I am prepared to revoke the orders I have just made. 50 I will accept an undertaking from the defendant to the Court in the following terms, which I note: The defendant undertakes to the Court until further order, or until the final determination of these proceedings, that she will not, either on her own account, or as an employee of another person or entity, approach or solicit logging business with any existing clients of the plaintiff, or any of the following companies, namely, Vic Tab, ATO, Ansett Airlines, Honolulu Airport, San Francisco Airport, Phillip Morris, CUG, Fortis, MYOB, Plestell and Vic Roads. 51 The Court notes and accepts that undertaking. 52 This is a case in which I think costs should follow the event. I dismiss the plaintiff's application. The plaintiff will pay the defendant's costs of the application. - o0o -

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