Linwar Securities Pty Ltd v Christopher Savage

PARTIES : Linwar Securities Pty Ltd - plaintiff Christopher Savage - defendant

COUNSEL : R Goot SC/P Braham - plaintiff R McHugh/J Emmett - defendant

SOLICITORS : Piper Alderman - plaintiff Horton Rhodes - defendant

• IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3960/06 Linwar Securities Pty Ltd v Christopher Savage JUDGMENT 1 His Honour: This is an application by the plaintiff for an interlocutory injunction to restrain the defendant, its employee, from commencing employment or becoming engaged in any other capacity with Goldman Sachs J B Were (Goldman) a competitor. The proceedings came on as a matter of urgency and required prompt determination. That is the reason why these reasons are briefer than they otherwise would have been. 2 Towards the end of submissions on 2 August 2006 the plaintiff stated it would accept an order and undertaking in the following terms (T pp 64, 65): "(1) The defendant be restrained from commencing employment with Goldman until 30 September 2006 which is two months. (2) That the defendant undertake to the court that he will not until 1 February 2007 by his servants or agents, firstly: provide research advice, or any other service to any person or entity which was at 1 August 2006 a client of the plaintiff, with whom he had contact in the course of his employment with the plaintiff. That is he limits this research advice, or any other service to persons other than clients with whom he had dealings whilst he was employed with Linwar, secondly: perform or publish any research whether or not under his name in relation to any ASIC listed company in respect of which he published research in the 12 months ending 30 June 2006 in the course of his employment with the plaintiff". 3 At the same time the defendant, through his counsel, proffered to the court the following undertaking (T p 58): "That he would not until 1 February by himself, his servants or agents, which would necessarily include Goldman, initiate contact in the course of his employment by any means with any client or prospective client, which was not already a client of Goldman Sachs J B Were as at 1 August 2006". Background 4 The plaintiff was established in early 2003. It carries on business as a security dealer primarily servicing the professional investment community. Its principal activities include providing institutional investors, such as superannuation fund managers, with information and advice about ASX-listed companies to assist in making investment decisions; carrying out instructions from institutional investors to purchase or sell such shares on their behalf; the provision of forums (sic) for senior executives of such companies to discuss performance and prospects with institutional investors; and the provision of advice to senior executives of current or proposed ASX-listed companies concerning capital raising activities. 5 Most of the plaintiff's income is earned from fees charged for trading on behalf of institutional investors. Clients are encouraged to effect trades through the plaintiff through the excellence of its published research, and relationships formed with analysts such as the defendant, and research sales employees. The plaintiff also operates a funds management division which invests funds in ASX-listed companies on behalf of institutions. 6 The defendant has been employed by the plaintiff since the commencement of its operations in February 2003. The terms and conditions of the employment contract is disputed. I refer to this question later in these reasons. 7 The defendant's evidence is that in his work he maintains and analyses securities, being small to medium sized companies listed on the ASX. His purpose is to identify companies believed by him to be undervalued or overvalued which provide buying or selling opportunities for the plaintiff's clients. He estimates the fair value of companies by applying a discounted cash flow valuation. He says that the methodology he uses is commonly used by analysts in the market, and that in the process of modelling a company and generating a discounted cash flow valuation he does not use any confidential information acquired through the plaintiff. He says that having made a valuation for a particular company he produces a written research report which includes a summary of information about it and his valuation. He says the report contains no information confidential to the plaintiff. 8 The defendant's role includes marketing his research to the plaintiff's clients which involves explaining buy/sell opportunities to them. He accepted that he himself has no particular clients but deals with clients in co-operation with the plaintiff's dealers or salespeople to whom responsibility is assigned for particular clients. He has no authority to execute buy or sell orders. In the course of his employment the defendant has developed relationships with executives of ASX-listed companies which, amongst other things, afford him a better understanding of a company's performance, strengths and weaknesses. Information gained from executives was useful for the preparation of his reports. 9 The plaintiff asserts that the defendant's reputation amongst institutional investors has been a key factor in its profitability and success. The defendant understands that he has a good reputation as an analyst, and explained that his professional reputation is based primarily on the quality of his published research reports and recommendations. He says that an analyst's reputation is personal rather the product of association with his employer. 10 On 2 May 2003 the initial shareholders of the plaintiff, including the defendant, executed a shareholder agreement which governed their relationship with each other. Relevantly, it included cl 7.6 which provides: "Employment The Corporation will employ each of the Party's Associates on the terms of the agreement contained in Schedule 2". 11 Schedule 2 consisted of a pro-forma letter, entitled "Offer of Employment" (the employment letter) which contained proposed terms of employment with the plaintiff. Clause 6 related to termination. Relevantly, it included: "6.1 You may at any time terminate your employment by giving us one month's notice. 6.2 We may at any time terminate your employment either by giving you one month's notice, or by giving you one month's base remuneration in lieu of notice. 6.3 In the event that either of us gives notice of termination, we reserve the right not to require you to perform any duties during the notice period". 12 Clause 8 thereof sets out post-employment restrictions which, relevantly, are the following: "8.1 For a period of six months after your employment ends, and in order to protect our confidential information (as defined above), you must not: 8.1.1 perform similar work for any competitor; or 8.1.2 assist or be involved with a competitor, in any capacity in which you might be able to use our confidential information to our detriment. 8.2 For a period of six months after your employment ends, you must not have any contact or dealings with any former client of a kind that: 8.2.1 involves any business or services of a kind similar to those conducted or supplied by us; and 8.2.2 might be detrimental to us in any way". 13 The defendant's evidence is that sometime after he signed the shareholders' agreement on 2 May 2003 Mr Christopher Harris, a director and the chief operating officer of the plaintiff, handed him a copy of the employment letter, said it was a copy of an employment agreement, asked him to sign it, and to give it back to him. The defendant says that, until he read it, he was unaware of any post-employment restrictions. The defendant said that he did not sign it or return it to Mr Harris or spoke to him about it. He said that the document he was given was as it appears in Annexure B to his affidavit of 31 July 2006, namely a pro-forma document without the details completed. He did not recall reading cl 7.6 of the shareholders' agreement at the time he signed it. His position was that he did not regard the employment letter as any part of his contract with the plaintiff, and denied an employment contract at all. He says that the only matter relevant to employment which he discussed with officers of the plaintiff was his salary. 14 The defendant denied that Mr Harris gave him an employment letter addressed to him early in April 2006. 15 Mr Harris gave a different version. He said that on about 1 or 2 April 2003 he distributed a personalised copy of the employment letter to each shareholder including the defendant, addressed to each in person. The defendant produced to the court the employment letter addressed to him dated 1 April 2003 (Ex D). 16 By agreement made on 28 April 2005 the defendant and other shareholders in the plaintiff, as vendors, sold to ETRADE Australia Ltd, as purchaser, one half of their shares in the plaintiff (the ETRADE agreement). 17 On the same day the shareholders of the plaintiff made the second shareholders' agreement. Clause 10(a) of Schedule 3 thereof states that Schedule 5 comprised a complete list of the plaintiff's employees as at the date of the agreement. Clause 10(c) stated that, with certain exceptions, the plaintiff was not a party to a written employment or service agreement with an employee. The defendant was not listed in Schedule 5. 18 By letter of 5 July 2006 the defendant gave notice to the plaintiff of his resignation, effective that day. He stated he was giving four weeks notice so that his last day was 2 August, and that he would be starting with his new employer on 3 August 2006. He also informed Mr Harris that he was going to Goldman. 19 The plaintiff responded by letter of 6 July 2006 in which it reminded the defendant of what was said to be his post-employment restrictions set out in cl 8 of the employment contract, and of his obligations concerning confidential information and intellectual property under cll 2 and 7 respectively of that contract. 20 On 7 July 2006 Goldman published an announcement of the defendant's appointment which included the following: "We are pleased to announce that Chris Savage will be joining us in Sydney as an Emerging Company Analyst (anticipated to join us on Thursday 3 August). Chris is currently a highly rated analyst with small cap specialist broker Linwar Securities, having worked at BNP Securities prior to that. Chris will be covering the engineering, support services and information technology sectors within our Emerging Companies team. Likely coverage includes: United Group, Downer EDI, Worley Parsons, Transfield, Coates Hire, Oakton, Reckon, Programmed Maintenance, Caltex and probably the upcoming float of Emeco".

It is common ground that the companies referred to were ones which the defendant had covered whilst with the plaintiff. 21 By letter of 7 July 2006 the plaintiff's solicitors wrote to Goldman stating that the plaintiff was bound by post-employment restrictions to the effect of those under cll 8.1 and 8.2 in the employment letter. 22 By letter of 18 July 2006 to the plaintiff the defendant stated that he did not have a written contract of employment and had never signed one. He referred to the fact that he was not listed as an employee in the ETRADE agreement. He denied he was subject to any contractual restraints. He undertook not to use any of the plaintiff's confidential information or intellectual property. 23 By letter of 24 July 2006 the plaintiff's response was as follows: "LINWAR's position is that you are bound by a contract of employment in the terms of the offer of employment annexed to the May 2003 Shareholders Agreement between the shareholders of LINWAR, including yourself. We will be pleased to provide you with a copy of that offer if you have misplaced your original certified copy. Alternatively, if your contention that there are no written terms of your employment is correct (which for the purposes of this letter we expressly do not admit) then your employment is terminable by you only upon your giving reasonable notice of termination. In determining reasonable notice relevant circumstances include the terms of employment to which you and the other shareholders of LINWAR agreed in May 2003, and the nature of your position and functions and the industry in which you are employed. It follows that on any view of the contractual position, you are not entitled to commence employment with Goldman Sachs JB Were on Thursday 3 August 2006 and we intend to vigorously protect our rights in this regard". The principles 24 The approach to be taken by the court in these proceedings is explained in the well-known passage in Kolback Securities v Epoch Mining NL (1987) 8 NSWLR 533 per McLelland, J (pp 535, 536): " … Where a plaintiff's entitlement to ultimate relief is uncertain, the Court, in deciding to grant or refuse an interlocutory injunction, must consider what course is best calculated to achieve justice between the parties in the circumstances of the particular case, pending the resolution of the uncertainty, bearing in mind the consequences to the defendant of the grant of an injunction in support of relief to which the plaintiff may ultimately be held not to be entitled, and the consequences to the plaintiff of the refusal of an injunction in support of relief to which the plaintiff may ultimately be held to be entitled: … Where the uncertainty depends in whole or in part on a contested question of fact it is not appropriate for the Court to decide that question on the interlocutory application. Where the uncertainty depends in whole or in part on a contested question of law, it may or may not be appropriate for the Court to decide that question on the interlocutory application, depending on circumstances, eg, whether the question is novel or difficult, or is susceptible of resolution on the present state of the evidence, or whether the urgency of the matter renders it impracticable to give proper consideration to the question: … If the Court does decide the question of law the uncertainty is to that extent removed. Unless the plaintiff shows that there is at least a serious question to be tried which if resolved in its favour would entitle it to final relief, then the requirements of justice as between the parties will dictate that an interlocutory injunction should be refused.

Apart from this, although normally the Court "does not undertake a preliminary trial, and give or withhold interlocutory relief upon a forecast as to the ultimate result of the case" (Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 at 622), there are some kinds of case in which for the purpose of seeing where lies the balance of convenience (or more specifically "the balance of the risk of doing an injustice" - see per May LJ in Cayne v Global Natural Resources plc [1984] 1 All ER 225 at 237 … it is desirable for the Court to evaluate the strength of the plaintiff's case for final relief … One class of case to which this applies is where the decision to grant or refuse an interlocutory injunction will in a practical sense determine the substance of the matter in issue: … The present is such a case. The substantial matter in issue is whether Epoch should be permitted to proceed with the issue of non-renounceable rights in accordance with the announcement of 13 March 1987. That will be irrevocably determined in a practical sense by the grant or refusal of an interlocutory injunction".

25 It is well settled that at common law a restraint of trade is contrary to public policy, and void. It is necessary for an employer seeking to enforce a restraint against an employee working for a competitor to show that the restraint is no wider than is reasonably necessary to protect its legitimate interests. The applicable principles were recently stated by Brereton, J in Koops v Dean Reeves [2006] NSWSC 449 (para 28): "28 While the same general principle applies in all cases of restraint of trade, a more rigorous approach is applied to restraints in employment contracts than in contracts for the sale of goodwill [ Nordenfelt , 566; Mason v Provident Clothing & Supply Co Limited [1913] AC 724, 731, 738; Herbert Morris Limited v Saxelby ]. A stricter and less favourable view is taken of covenants in restraint of trade between employer and employee than in commercial agreements [ Geraghty v Minter , 185; Heydon, pp 68-69; Woolworths Limited v Olsen , [38]]. An employer is not entitled to be protected against mere competition; the legitimate interests of an employer which may be the subject of protection by covenant are in the nature of proprietary subject matter [ Vanderwell Products Limited v McLeod , 192; Tank Lining Corporation v Dunlop Industrial Pty Ltd (1982) 140 DLR (3d) 659, 664], including the employer's trade secrets and confidential information, and the employer's goodwill including customer connection …".

and (para 30): "30 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 …". 26 In this case no actual breach of confidence is alleged, and the threat of same is not strong. In his letter of 18 July 2006 the defendant undertook not to use the plaintiff's confidential information or intellectual property. The validity of the restraint sought by the plaintiff is to be considered with regard to what is said to be its client connections. 27 It follows that as an employer is not entitled to restrain its employee after employment has ceased to protect itself from competition per se, it is necessary to identify the interest for which it seeks protection. (Lindner v Murdoch's Garage (1950) 83 CLR 628, pp 634, 649, 654). In Herbert Morris v Saxelby [1916] 1 AC 688, Lord Parker said (p 710): "… The reason, and the only reason, for upholding such a restraint on the part of an employee is that the employer has some proprietary right, whether in the nature of trade connection or in the nature of trade secrets, for the protection of which such a restraint is - having regard to the duties of the employee - reasonably necessary. Such a restraint has, so far as I know, never been upheld, if directed only to the prevention of competition or against the use of the personal skill and knowledge acquired by the employee in his employer's business." 28 The application of these principles in this case requires consideration of the evidence of the work done by the defendant in the course of his employment with the plaintiff, and whether the restraint claimed goes further than is reasonably necessary for the protection of its interests (cf: Attwood v Lamont [1920] 3 KB 571, p 590). Consideration 29 The plaintiff's primary case is that the defendant is employed under an agreement which incorporates the terms and conditions of the employment letter. It submits that although the defendant did not sign and return the letter of employment said to have been given to him by Mr Harris on or about 1 April 2003, by signing the shareholders' agreement on 2 May 2003 the effect of cl 7.6 thereof is that he agreed to be bound by its terms and conditions and, in particular, those contained in cll 8.1 and 8.2. Furthermore, it was put that his acceptance is to be inferred from his failure thereafter to demur or express disagreement with the employment letter or to suggest that his employment was on any other basis. (Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523, pp 527; 534-535). 30 The defendant accepted that there was a serious question to be tried on this issue. It is neither necessary nor appropriate in these proceedings to attempt to resolve contested factual issues, or issues of credit of witnesses. I therefore say no more about the conflict of evidence on the affidavits and the oral testimony of Mr Harris and the defendant relevant to this issue. 31 The plaintiff's alternative case is that if there was no contract of employment in accordance with the employment letter there is one which is partly oral and partly implied. The oral component relates to salary. The implied component is said to be a condition which requires the defendant to give reasonable notice of termination which, in the circumstances is said to be seven months' notice. Thus it was put that as the defendant had given only one month's notice, he would be in breach of this contract if he commenced employment with Goldman as proposed. It was submitted that because the defendant is a specialist employee the plaintiff is entitled to enforce adherence to the notice requirement having regard to the principles in Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337. It was not contended that this contract contained restraints similar to those in cl 8 of the employment letter. 32 I am unpersuaded that the plaintiff has established that there is a serious question to be tried as to the existence of the alternative contract of employment, and breach of it by the defendant. I find no evidentiary support for the implication of a term which requires the defendant to give seven months' notice of termination as reasonable notice. The correspondence between the parties following the defendant's letter of 5 July 2006 shows that the only contract relied upon by the plaintiff was one according to the employment letter which required one month's notice of termination. In their letter of 24 July 2006 the plaintiff's solicitors stated that this was the plaintiff's position, but said that, as an alternative, the plaintiff contended that the defendant's employment was terminable by him only upon him giving reasonable notice of termination. However, no period was specified. It is difficult to see that, having regard to the apparent acceptance by the parties of a requirement of one month's notice, a longer period was either contemplated, or would be shown to be reasonable. It may be accepted that the plaintiff has an arguable case, but on the present evidence it is insufficient to justify the interlocutory injunction now sought. 33 As there is a serious question to be tried as to the existence of a contract which includes the restraints, it is necessary to consider their validity. My understanding was that the plaintiff, although not abandoning the point, accepted that its case to enforce the restraint under cl 8.1 to protect its confidential information was weak. The evidence does not establish actual or threatened use of the plaintiff's confidential information by the defendant if he is employed by Goldman. It strongly points the other way. In the circumstances there is no basis for interlocutory relief based on the application of cl 8.1, irrespective of its validity which is an issue which is unnecessary to decide at this stage. 34 I turn now to the claim for relief to protect the plaintiff's interest based on customer connection, and whether the restraint under cl 8.2 is no more than reasonable for the legitimate protection of that interest. I proceed on the basis that the defendant has given the undertaking to the court as recorded in para 3 above. 35 The plaintiff submitted that the evidence showed a connection between the defendant and its clients. There was no real dispute as to the nature and extent of the connection, some details of which are set out in paras 4 to 8 above. In summary, the defendant was in contact with the client institutions which traded through the plaintiff. He spoke to their representatives from time to time to explain his research reports, thereby assisting them in making investment decisions. He met them on social occasions, and on occasions conducted by the plaintiff to discuss the performance of companies the subject of his analyses and reports. The plaintiff emphasised that the defendant's relationship with clients was such that they would be encouraged by him to trade through the plaintiff, and thus his relationship was a valuable marketing resource for it. 36 In my opinion the present evidence falls short of establishing that the defendant's relationship with the clients gives rise to a protectable interest or that the order sought is no wider than that which is reasonably necessary to protect the plaintiff's legitimate interests having regard to the undertaking given. 37 My assessment is that the client relationship/customer connection is essentially incidental to his principal activity as an analyst and researcher. The defendant's success as such is the product of his own skill and judgment. He has established a high personal reputation in the industry for the quality of his reports which are available to clients. Doubtless this is of benefit to the plaintiff and assists it in competing against other security dealers. 38 The evidence does not show that he has personal knowledge of, or influence over, some or any clients gained in his employment which he might use to the detriment of the plaintiff if he goes to Goldman. The evidence, so far, is that for the purposes of trading the clients' relationship is with the plaintiff's dealers or salespeople, and that the defendant has no particular clients, and no authority to execute their orders. 39 In my opinion the defendant is a specialist similar to the skilled tailor in Attwood, and the ship's captain in Aloha Shangri-La Atlas Cruises Pty Ltd v Gaven [1970] Qd R 438. As in those cases, the evidence strongly indicates that it is the defendant's skill and knowledge, and the high quality of his reports, which are likely to be attractive to clients. These have established his professional reputation from which the plaintiff has benefited. It is reasonable to conclude that it is probable that these considerations would lead a client to seek his services if he went to Goldman, rather than any special relationship attributable to his employment with the plaintiff. 40 My conclusion is that any adverse effect upon the plaintiff which employment as an analyst with Goldman may cause would derive not from his connection with the plaintiff's clients but by reason of his own skill (cf: Attwood pp 590-591). The following passage from the judgment of Wanstall, J in Aloha is apt (p 447): "… the preference of tourists for a particular captain, including the respondent, created a personal property in him, not in his employers, and they were no more entitled to restrain him from using his professional reputation in competition than would any theatrical producer be entitled to restrain an actor from appearing for a rival producer after the termination of the contract of employment. To revert to Lord Parker of Waddington in Morris v Saxelby (supra) at p 710 "such a restraint has, so far as I know, never been upheld, if directed only to the prevention of competition or against the use of the personal skill and knowledge acquired by the employee in his employer's business".

41 My view is that the purpose for the restraint sought to be enforced by the plaintiff is the prevention of the competition which it might face if the defendant becomes employed by Goldman as an analyst and researcher, as proposed. Support for this view is found, inter alia, from Mr Harris' affidavit of 27 July 2006 (paras 48 and 49) in which he refers to the rankings by institutional clients of market analysts and the relevance of those rankings in determining where they will place their business. He said that the defendant is one of the key individuals whose performance for ranking purposes is taken into account by institutions in ranking the plaintiff, and that if he joined Goldman the likely result would be a decrease in the plaintiff's ranking and an increase in the ranking of Goldman. 42 I am not persuaded that the plaintiff has established that there is a serious question to be tried that the restraint is reasonable. In other words, I do not think that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief. (Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148, per Mason, ACJ, p 153). Accordingly, the plaintiff's claim for interlocutory injunctive relief should be refused. 43 Had it been necessary to decide, I would also hold that the balance of convenience favours refusal of the injunction. The effect of an order as sought would be to sideline the defendant from the employment of his special skills and reputation for, relatively, a long time. He said that if he worked in a full-time position other than as an analyst for six months he would not have time to learn of new developments in the emerging companies sector, which would negatively affect his skill and expertise as an analyst in that sector in the future. The upshot is that it is likely that he would be denied the opportunity to perform his skills before the relevant public which includes, at least, institutional investors and security dealers. As in Curro (pp 342, 343) he has a special interest in keeping his name and talents before the relevant public. Denial of the opportunity is likely to be detrimental, and result in hardship to him. 44 On the other hand, it may be accepted that if no order is made, the plaintiff will suffer some inconvenience. That inconvenience involves logistical difficulties in re-allocating stocks covered by the defendant, and making arrangements for a replacement analyst, and allowing time for that person to develop relationships with clients and companies as the defendant did. 45 However, it appears that the replacement process is already underway. The defendant deposed that since he gave notice other analysts employed by the plaintiff have taken over his telecommunications and engineering stocks. As the defendant was not involved as a dealer or salesman, the income-generating activities of the plaintiff will not be disrupted. The impression I gained is that the inconvenience caused if an order is refused would be soon overcome in the ordinary course of the plaintiff's operation. It is outweighed by the detriment which the defendant would suffer if the injunction was granted. Conclusion 46 (1) It is noted that the defendant, through his counsel, undertakes to the court: "That he would not until 1 February by himself, his servants or agents, which would necessarily include Goldman, initiate contact in the course of his employment by any means with any client or prospective client, which was not already a client of Goldman Sachs J B Were as at 1 August 2006".

(2) The claim for injunctive relief in the notice of motion filed 27 July 2006 is dismissed.

(3) Order that the plaintiff pay the defendant's costs.

(4) These proceedings be stood over to the registrar's list for further directions 9.30am, 14 August 2006. **********

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