“The law on restrictive covenants in employment contracts in Australia should be reviewed, to re-enliven the ancient common law doctrine making illegal restraints of trade that are contrary to the public interest in free movement of workers, and free development of innovative ideas and practices” (University of Sydney Labour Law Professor Joellen Riley) *
Vogel Ross Pty Ltd and its directors, Peter Vogel and Duncan Ross today applied for Special Leave to appeal to the High Court over the restraint of trade lawsuit brought by former employers IceTV Pty Ltd.
Last month, the NSW Court of Appeal upheld the Supreme Court ruling that we (Duncan Ross and Peter Vogel) breached non-compete and non-solicitation contracts when we went to work for Mobilesoft Pty Ltd after being terminated by IceTV in October 2006.
The good news is that the Court of Appeal cleared our names by overturning Supreme Court judge Rein’s previous findings that we had breached our duties as employees and Directors of IceTV, saying “there is a strong argument that the primary Judge’s credit-based findings were flawed, at least insofar as they involved findings that the appellants set out to betray IceTV’s interests… it should be said, in fairness to the appellants, that it would not be safe to rely on the primary Judge’s findings as to the appellants’ motives in their dealings with Mobilesoft prior to their departure from IceTV”.
The bad news is that the Court of Appeal failed to overturn the lower court’s finding that we breached an “anti-solicitation” contract (restraint) by writing a grant application for Mobilesoft. The restraint said we must not work for a competitor to IceTV or solicit the custom of anyone who had entered into discussions with IceTV with a view to becoming a customer.
We presented evidence and arguments that Mobilesoft was not a competitor to IceTV. We also argued that we did not “solicit” in the sense of stealing a customer away, in fact we tried to conclude a deal for Mobilesoft to use IceTV’s EPG in a product they were developing for Video Ezy. We say the Court of Appeal took a much too literal approach to the circumstances of the alleged breach. For example, the Court decided that Mobilesoft was a competitor because it “had the ability to develop an EPG if it chose to do so”, and that writing a grant application was something that “IceTV could have replicated had it been given the opportunity”.
We have asked the High Court to review the judgment. As matters stand, we have been ordered to pay IceTV’s costs and damages. More importantly, the Court of Appeal has set an alarming precedent that the lower courts are required to follow. This could be devastating for other unfortunate ex-employees finding themselves sued by ex-employers.
Restraints of trade
One ground of our application to the High Court is that our case demonstrates that the Courts of NSW are not applying the laws regarding restraint of trade correctly.
In common law, restraints of trade are generally illegal and unenforceable, because they stifle competition, which is against public policy. However, if the ex-employer can show “special circumstances”, such restraints can be enforced in some cases.
In our case, we will argue that The Court of Appeal tried too hard to find reasons why the otherwise illegal restraints should be enforced. In particular, the court read down and severed parts of the restraints to remove uncertainty and narrow their scope before declaring them valid. The Court relied on the NSW Restraints of Trade Act (1976) for this purpose, however we say that the Court did not apply the act correctly. Parliament’s intention was that the restraints should not be validated “in cases where there is a real risk of oppression” but we say that the Courts of NSW are not interpreting the Act this way.
If this faulty process is allowed to stand unchallenged, the law will have moved significantly towards assisting employers to oppress employees
The injustice of our case was so obvious that even at its earliest interlocutory stage, three years ago, it caught the attention of Professor Joellen Riley:
“This case smells very much like the enforcement of a pure ‘non-compete’ covenant. Enforcement of covenants to protect not only existing client relationships and maturing business opportunities but also ‘prospective’ clients, really means the enforcement of
promises not to compete for the development of new business. In the end, that means reducing competition in the marketplace, and it allows firms to sterilise the creative talent of ex-employees for a time. This seems particularly harsh when the firm itself initiated termination of their employment contracts” (Innovation put on Ice, Intellectual property law bulletin vol 20 no 7 January 2008).
More recently, Prof Riley said:
“On what basis was it at all reasonable to restrict Mobilesoft’s options for recruitment, when it had never even become a client of the plaintiff firm? Injunctions given in these circumstances clearly stifle free competition in labour markets, to the disadvantage not only of the workers affected, but of the market as a whole. This is a particularly obnoxious result when parties’ choices are limited by an order to enforce an agreement to which they were complete strangers”.*
Prof Riley also highlights the over-arching human rights dimension to this case:
“These contemporary developments in the enforcement of restrictive covenants infringe a fundamental principle of international labour law that labour is not to be commodified”.
Unless the High Court reverses the decision in our case, the inferior courts will be bound by this precedent, leaving many ex-employees with no way of knowing which post-employment activities might land them in Court.
Peter Vogel, 19th November 2010