Restraint of trade: Woolworths Ltd v Olson

CASE ANALYSIS:

Introduction:

Restraint of trade is a contractual term which seeks to restrict the extent of a party to engage in business. ‘Under the common law doctrine of restraint of trade, any undue restriction on a person’s capacity to engage in trade will be treated as invalid, even if the restriction has been freely accepted.’ In Woolworths Ltd v Olson [2004] NSWCA 372, the issue of intellectual property and confidential information were predominant. The ‘validity of post-employment non-competition clauses was examined along with the broadest type of restraint which imposed a commitment not to compete with the employer, or work for a competitor.’ In accordance with Newton, the Court of Appeal distinguished the ‘differences between the consideration of restraints of trade from a common law perspective or from the perspective of the Act.'(2004, para 5)

Facts:

At the applicable time, Mr Olson was an employee at Woolworths and in 2003 became a significant member of a team for a software project, “Project Mercury” to ‘transform the supermarket’s supply chain procedures.’ Newton notes that on 2 July 2004, following employment negotiations with Franklins (one of Woolworths’ key competitors in the supermarket industry), Mr Olson emailed highly confidential and valuable Project Mercury documents to his wife’s computer. On 5 July 2004, Mr Olson gave notice of his resignation to Woolworths, to take effect from 2 August 2004. Two days later, he signed a contract of employment with Franklins (2004, Para 4). Subsequently, Woolworths was informed of these emails and Mr Olson was dismissed on 12 July 2004 for ‘breaching his contractual and fiduciary duties in relation to confidential information.’

According to clause 10 of Mr Olson’s employment contract, Woolworths had the option to confine Mr Olson from being employed or involved in a “competitive business in Australia and New Zealand for a period not exceeding 12 months” in addition to the ‘restraint payment’ to Mr Olson given by Woolworths .

Issue:

The fundamental issue in Woolworths Ltd v Olson [2004] NSWCA 372 was whether a restraint of trade was reasonable and therefore enforceable.

Ratio Decidendi:

The Court of Appeal unanimously overturned Justice Einstein’s conclusion regarding the constraint clause, and ‘granted Woolworths the injunction it sought to enforce the restraint against Mr Olson.’ It was argued that Einstein J had employed the ‘common law restraint of trade principles to clause 10’ without reflecting on the process of section 4 of the Restraints of Trade Act 1976 (NSW) (Act). The Court deduced that the injunction required by Woolworths was in harmony with the clause and not dissimilar to public policy. Crucial aspects included that:

• • ‘the injunction sought to protect Woolworths’ legitimate and properly protectable interests (notably the confidential and valuable Project Mercury information), and
• • the restraint did not prevent Mr Olson from earning a living, given the “restraint payment” to be made to him in respect of the period of the restraint.’

Mr Olson’s argued that the restraint clause was void for uncertainty because Woolworths had discretion as to whether the clause would apply. The Court rejected the argument and noted that many valid contractual clauses were subject to the implementation of the ‘discretion or some further action of the parties, and this clause was no different.’ It was ultimately ordered that Mr Olson be restrained from being connected or ‘concerned’ with any key competitors of Woolworths Ltd within Australia until 12 January 2005.

Critical Analysis:

‘Under the common law, a restraint on an employee is invalid on public policy grounds unless it goes no further than is necessary to protect the legitimate interests of the employer, the employee and the public. In New South Wales, the common law has been modified by the Restraints of Trade Act 1976 (The Act).’ The aim of restraint of trade clauses in the case of commercial contracts is to protect a ‘proprietary interest’ and it only becomes enforceable when it is deemed reasonable. No one is entitled to be sheltered against sheer competition.-

No one is entitled to be protected against mere competition however, a court will enforce a restraint that is reasonable with the intent to protect confidential information.

Essentially, the Court made two momentous remarks about section 4 of the Restraints of Trade Act. ‘First, that its operation is not limited by common law principles concerning the severance from contracts of unreasonable restraints of trade clauses. Second, that the section allows the Court to ignore that a restraint goes beyond what is reasonable, provided the restraint is one that is able to be enforced to an extent that is reasonable.’

The Court of Appeal came to a conclusion that the restraint required to be imposed was a rightful safeguard of Woolworths’ trade secrets and was not unjust in either its scope or duration, especially given the payment made by Woolworths to Mr Olsen comparable to Mr Olsen’s salary for the period of the restraint. It also held the restraint was not against public policy. According to Clayton Utz’s Collins, the case shows how seriously the courts take intellectual property, with costs being awarded in the Court of Appeal against Olson on an “indemnity” basis.

Nevertheless, one can argue whether the Court would have enforced the restraint without the condition requiring the executive to be paid an amount equal to his ordinary salary during the period of the restraint. ‘It is unlikely that the Court would have enforced the restraint, whether applying the Act or the common law, if the executive did not have highly confidential information which he appeared to intend to use to Woolworths’ detriment (in a future New South Wales case, Woolworths v Banks , the Court found that the employee did not intend to use confidential information to the detriment of Woolworths and dismissed the interim application accordingly).’

Additionally, the legality of a restraint will be based upon whether it transgresses public policy (though under New South Wales law, the issue of public policy transpires after the discovery of a breach of the restraint and is limited to the breach found and not the restraint). It is crucial to note that public policy will be offended if the restraint fails to impartially balance the genuine interests of the employer, employee and the public. Therefore, it was correctly concluded in the case of Woolworth’s v Olsen that it was justifiable to restrain an employee from accepting employment with a competitor to guard confidential information, specifically where Mr Olson had suggested that he anticipated to utilise that information against Woolworths’ interests. More so, he was ‘compensated during the period of the restraint.’ Accordingly, restraint of trade was reasonable and thus enforceable.

Impact:

This decision emphasises employers’ authority to restrain ‘post-employment activities’ of executive staff and highlights the beneficial operation of the Restraints of Trade Act 1986 (NSW) for future commercial implications. To uphold the reasonableness of the restraint, the Court of Appeal placed substantial prominence on the “restraint payment” made to Mr Olson by Woolworths. This insinuates that individual payments to an employee acting as ‘specific consideration for post-employment restrictions will assist the prospects of such a restraint being reasonable and therefore enforceable.’ Furthermore, this case acted as a precedent for future cases, namely Smith v Nomad Modular Building Pty Ltd [2007] WASCA 169, where the Supreme Court of Western Australia ‘upheld an appeal against a decision to grant an injunction to an employer to enforce a post-employment restraint clause. The restraint aimed to prevent the former employee, Mr Smith, from working for a competitor for six months after his employment’

Conclusion:

The ‘underlying principle is that for a restraint clause to be enforceable it must be reasonable’ in all the circumstances. Injunctions for breaches of such clauses may be approved if the employer can prove that they have a ‘legal right which has been infringed, that the breach of that right cannot be adequately compensated by an award of damages and that the balance of convenience favours the granting of the injunction.’ The Majority’s reasoning is expected to elevate commercial assurance in issues regarding the enforceability of restraints of trade.

Reference List:

Creighton. B. and Stewart, A. (2005). Labour Law Fourth edition. Federation Press, Sydney.

Duggal, D and Tumpey, P. (2008), ‘Employee Restraints- why they are so important’, TressCox Lawyers, February, p 1

Fraser, D and Gibson. (2007). Business Law: 3rd Edition. Pearson Education Australia, China.

Kitchener, B.M. 2008. ‘Court upholds finding that employee’s restraint was reasonable’, Human Resources Leader, 22 January, p 1

LAC Lawyers, 2007, Employment Contracts and Restraints of Trade Clauses, LAC Lawyers, Sydney, 7 October 2009, http://www.laclawyers.com.au/document/Employment-Contracts-and-Restraint-of-Trade-Clauses.aspx

Meltz, D.M. (1995). The Common Law Doctrine of Restraint of Trade in Australia. Blackstone Press, Sydney.

Newton, A. 2004. Restraints of trade in New South Wales, Mallesons Stephen Jaques, Sydney, 7 October 2009, http://www.mallesons.com/publications/WER_Update/7701134w.htm

Stewart, A. (2008). Stewart’s Guide to Employment Law. The Federation Press, Sydney, p 239

Wirth, K. 2002. ‘Court refuses to enforce restraint of trade’, Freehills, February 2002, p 1

Case List:

Smith v Nomad Modular Building Pty Ltd [2007] WA

Woolworths v Banks [2007] NSWSC 45SCA 169

Woolworths Ltd v Olson [2004] NSWCA 372