Portal Software v Bodsworth [2005] NSWSC 631 | Case summary

9 When the employment contract was entered into, the defendant was resident in Singapore. He signed it overseas. It was signed for the plaintiff in Hong Kong. The contract describes the employer as the plaintiff, and says that the plaintiff has its principal place of business in Sydney. However, it was the parties' intention that the defendant work for the plaintiff in Melbourne, which he did. He served its client, Telstra. He reported to a superior in Sydney. Prima facie, the proper law of the contract is the law of Victoria. 10 The plaintiff's software could be modified to meet customers' specific needs. The defendant acquired an intimate knowledge of the features and capabilities of the plaintiff's products, which could be of great value to a competitor. 11 On 26 April 2005, the defendant gave notice of resignation to the plaintiff and he advised that he would be going to Amdocs. Amdocs is the name under which a company called Direct Technology Pty Ltd trades. It is a competitor of the plaintiff, and offers similar software to that offered by the plaintiff. 12 In the course of his employment by the plaintiff, the defendant was given access to detailed confidential information about the plaintiff's products. This must have been contemplated at the time the contract of employment was entered into, having regard to the duties which the defendant was to perform. 13 From 29 March to 1 April 2005, the defendant was given training in the plaintiff's latest product offer called "P7." This training included training on how the product could be adopted for use by the plaintiff's customers. During the week of 4 April 2005, the plaintiff attended briefing sessions from development specialists from the United States who described new features and capabilities of Portal software under development. He participated in presentations made to Telstra about those developments. 14 On 21 and 22 April 2005, he attended a sales and technical team meeting at which the plaintiff's employees discussed strategies for meeting the present and projected needs for all of the plaintiff's clients in Australia and Asia, including Telstra. 15 He resigned on the next business day. 16 The defendant had been negotiating with Amdocs since at least March 2005, if not earlier, for the taking up of new employment. He knew that if he disclosed those negotiations to the plaintiff, he would have been required to leave its employment and not participate in any of the meetings which he attended. 17 The plaintiff expects that over the next three to five years, Telstra will spend about $500 million in rationalising its billing process and infrastructure. Telstra has not yet committed to using the plaintiff's products and services in replacing its existing billing system. The plaintiff and Amdocs will be competing for this business. 18 During his employment, the defendant had dealings with many of the executives in Telstra, whom the plaintiff regards as instrumental decision makers with respect to new billing projects. There is evidence that the defendant has disclosed confidential information to Amdocs relating to the plaintiff's plans for the development of P7 software and the areas where changes are needed to meet Telstra's requirements. 19 As a result of the service of a notice to produce, the defendant produced a CD of documents relating to the plaintiff's affairs, which had been copied onto his home computer. Much of it is commercially sensitive information. It includes pricing information, and a commercial proposal from the plaintiff for replacing Vodafone's wholesale billing platform. It includes a letter from Telstra inviting the plaintiff to tender for a certain billing system, setting out the key functionality that Telstra requires. It includes a spreadsheet dealing with software bugs and faults and functionality fixes that Telstra has reported or requested in relation to the plaintiff's billing software. It includes the latest details of the plaintiff's billing software known as P7. It also includes the names, telephone numbers and e-mail addresses of key Telstra contacts, and confidential details of a Telstra plan to decommission a certain billing platform. 20 There was a good deal of other information, which could properly be characterised as trade secrets of the plaintiff, stored on the defendant's home computer. 21 The defendant said that there was an innocent explanation for having transferred this data from the laptop supplied by the plaintiff to him, onto his home computer. He said it was done in order to provide back-up in case his laptop computer crashed. 22 It is not necessary, and it would be inappropriate, to say whether this explanation should be accepted. Suffice it to say that there are grounds for apprehending that the defendant may disclose or make use of the plaintiff's trade secrets in the course of his employment with Amdocs, where he will be working in much the same role as he performed when employed by the plaintiff. He will be providing technical support to Amdocs' commercial sales of billing software to Telstra. 23 The defendant gave four weeks' notice of his resignation. The plaintiff advised him that the last day of his employment would be 24 May 2005, but it did not require him to work from the period of 29 April to 24 May. It reminded him that his contract included a term that he not work for a competitor for six months. 24 The plaintiff has not sought an interlocutory injunction to restrain the defendant from working for Amdocs for six months from the termination of his employment, although that is part of the final relief which it seeks. The plaintiff sought an order, until further order, that the defendant be restrained from visiting or contacting clients of the plaintiff, and it sought an order restraining the defendant from disclosing confidential information. 25 The parties agreed on interlocutory orders relating to all of such matters, save whether the defendant should be restrained from visiting or contacting Telstra. The defendant said that his work for Amdocs requires him to deal with Telstra. It is the client to whom he provides services for Amdocs. If he is restrained from dealing with Telstra, it is likely, he says, that he will lose his job. He has two small children who have started school in Melbourne. Given the specialised nature of his skills, if he cannot work for Amdocs, he may be out of employment altogether, or may only be able to find employment overseas. This would be a hardship. 26 As the restraint applies only for six months, a decision on this interlocutory application will, to a substantial extent, finally determine the parties' rights, unless a very urgent final hearing can be arranged. It is therefore necessary to consider not only whether there is a serious question to be tried, but also, when considering the balance of convenience, to assess the strength of the plaintiff's case. (Kolback Securities Limited v Epoch Mining NL (1987) 8 NSWLR 533 at 536.) 27 Were this contract governed by New South Wales law, the issue would be relatively simple. Even if the restraint clauses which the plaintiff seeks to enforce are too wide, the particular breach which the plaintiff seeks to restrain is one to which a restraint against dealing with the plaintiff's clients could undoubtedly validly apply. However, I doubt that the Restraints of Trade Act 1976 (NSW) applies in this case, as the defendant was employed in Victoria under a contract which, prima facie, is governed by Victorian law. 28 The approach in these cases is to consider first what, on its proper construction, is the ambit of the restraint clause. Secondly, to determine if the defendant's conduct is covered by the restraint clause as so construed. If so, thirdly, to determine whether the clause as so construed is valid at common law. If not, fourthly to apply section 4 of the Restraints of Trade Act 1976 (NSW). In this case I doubt that the last step is available. 29 The first and third steps are related, particularly in the context of covenants in restraint of trade in an employment contract. A clause is not to be read in a restrictive manner which the parties did not intend, (their intentions being ascertained objectively), so as to preserve the clause from invalidity. On the other hand, where a clause is ambiguous, it will be interpreted in a way which preserves its validity. It will also be construed by reference to the object sought to be achieved by the parties. Haynes v Doman (1899) 2 Ch 13, 24-25. 30 That will frequently lead to a clause being construed by reference to the business in which the employee is engaged for the employer. (See Butt v Long (1953) 88 CLR 476 at 487 and 490; Home Counties Dairies Ltd v Skilton (1970) 1 All ER 1227 and Heydon, The Restraint of Trade Doctrine, 2 ed, pages 108 to 112.) 31 The clause relied on restrains the defendant for a period of six months within Australia from visiting or contacting the plaintiff's clients, or dealing with anyone who was a client of the plaintiff within twelve months of the defendant's departure date. Two questions of construction arise. First, whether the reference to the plaintiff's clients should be confined to those clients with whom the defendant dealt during his employment. Secondly, whether the prohibition on contacting, visiting or dealing with clients extends to all contacts, visits or dealings for six months after the determination of his employment, or, whether it should be confined to a certain class or type of contacts, visits or dealings. 32 As to the first question, I see no basis for reading down the clause to only those clients with whom the defendant dealt during his employment. In my view it applies to all clients of the plaintiff. 33 However, in relation to the second question, the clause must be construed according to its object of preventing the employer's business being damaged by the activities of the employee after termination of his employment. As in Butt v Long and Home Counties Dairies Ltd v Skilton, the kind of dealings which are prohibited are to be determined by reference to the nature of the business conducted by the employer which the clause was designed to protect. 34 The defendant sought to put what I consider to be an unreasonably wide complexion on the clause so as to demonstrate its unreasonableness. Literally construed, the clause would prevent the plaintiff from having contact with a telecommunications company for the supply of a fixed land line, or a mobile phone, or a personal broadband connection. But that is not a reasonable construction of the clause. In my view, the restraint on contacts, visits and dealings with the plaintiff's clients, applies to contacts, visits or dealings in connection with, or for the purpose of, the provision of software for a client's billing system, or the provision of services in connection with the provision or operation of such software. That is to construe the clause so as to apply to dealings of a kind referable to the nature of the business carried on by the plaintiff. I consider that that approach is consistent with the authorities, and is at least seriously arguable. 35 There is no doubt that the defendant is breaching, and threatens to continue to breach the clauses so construed. Is it seriously arguable that the clause so construed is valid? I think it is. Prima facie the term is void. It is valid only if it goes no further than is reasonably necessary to protect the interests of the plaintiff, and is reasonable in the interests of the public. 36 An employer is not entitled to be protected from mere competition from an employee. However, he is entitled to protection against disclosure or use of his trade secrets, or the use of a connection built up by the employee with the employer's customers. (Heydon, The Restraint Of Trade Doctrine, 2nd ed, page 66; Lindner v Murdock's Garage (1950) 83 CLR 628 at 633-4, 650). 37 This clause goes beyond restraining the defendant from having dealings with clients with whom the defendant himself dealt during his employment. I doubt that it could be supported on the ground of its being reasonably necessary to protect the employer's goodwill, except for the confidential information about the plaintiff's product and its customers' needs, which it would have been expected that the defendant would acquire during his employment. 38 The plaintiff does not sell a commonplace commodity or service to a large number of customers. It has specialised products which it sells in a small market. Its products are subject to constant revision and adaptation to clients' requirements. The defendant was well placed to understand the advantages and weaknesses of the plaintiff's products, and to take advantage of that knowledge in any dealings with the plaintiff's customers on his own account or for a competitor. He was, in fact, told about the plaintiff's strategies for all of its clients. 39 Prima facie, I consider that the clause against dealings with all of the plaintiff's clients for six months is reasonably necessary to protect the plaintiff's trade secrets. It is well established that trade secrets can be protected by clauses which go wider than merely prohibiting their use or disclosure, such as by restraining an employee from working for a competitor for a reasonable period. (See Littlewoods Organisation Limited v Harris (1978) 1 All ER 1026 at 1033; (1977) 1 WLR 1472 at 1479; Kone Elevators Pty Ltd v McNay (1997) ATPR 41 564; and Woolworths Limited v Mark Conrad Olson [2004] NSWSC 871 at [67]). 40 I see no reason that a clause against non-solicitation cannot similarly be justified by the need to provide reasonable protection to an employer's trade secrets. 41 It is clear that if the restraint on contacts, visits and dealings is construed - as I think it should be - as being limited to such contacts, visits or dealings for the purpose of providing software to the plaintiff's clients for their existing or proposed billing systems, or of providing billing systems for the connection or such operation of software, that the clause goes no further than is necessary to protect the plaintiff's trade secrets and customer connection. 42 The defendant's solicitor referred to a decision in Tyser Reinsurance Brokers Pty Ltd v Cooper, (Young J, 7 December 1998 unreported), where his Honour found that a restraint was void for uncertainty. However, that case turned on the terms of the particular clause and the absence of a definition of a key component of it. It provides no assistance to the present case. 43 For these reasons, I consider there is a serious question to be tried, that the defendant is in breach of the restraint, and that the restraint is valid. The balance of convenience favours the plaintiff. 44 Although the defendant will suffer some hardship from the enforcement of the restraint, he went into his new employment with his eyes open. He received advice that the restraints were unenforceable, and took his chance. He has been well remunerated for his work with the plaintiff. There is no suggestion that he or his family face any identified particular financial hardship. The restraints apply only until 24 November 2005. If the defendant succeeds at the final hearing, he will be entitled to enforce the plaintiff's undertaking as to damages. 45 On the other hand, there is a real threat that the defendant will use the plaintiff's trade secrets in his dealings with Telstra in a way which may jeopardise the plaintiff's attempt to win new contracts of a substantial value. The plaintiff may well be unable to prove any such breach. Even if it could, the scale of damages to which it may be entitled is likely to be well beyond the defendant's capacity to pay. For these reasons, I consider that the injunction which is sought should go, but in a modified form to reflect what I have said as to the proper scope of the restraint clause. 46 Upon the plaintiff, by its counsel, giving the usual undertaking as to damages, I order that the defendant by himself, his servants and agents, be restrained up to and including 24 November 2005, or the final determination of these proceedings, or further order - whichever occurs first - from contacting, visiting or dealing with Telstra Limited or any of its officers, employees or agents for the purpose of providing, or in connection with the provision or proposed provision of software to Telstra Limited for any of its existing or proposed billing systems, or, for the purpose of, or in connection with the provision or proposed provision of services in connection with the provision or operation of such software. 47 The parties will have liberty to apply during the course of today for any modification of the terms of this order which they may consider to be appropriate, which is consistent with these reasons. 48 The costs of the application will be costs in the proceedings. The exhibits may be returned. 49 No party has made or foreshadowed an application for the proceedings to be transferred to Victoria as far as I am aware. I direct that the legal representatives of the parties confer to bring in short minutes of order, with a view to the matter being placed in the expedition list as soon as possible.

Portal Software v Bodsworth

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Judgment (16 paragraphs)

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Legislation Cited (1)

Cases Cited (4)

Cited By (5)