Comparing employee non-compete arrangements in Australian and US companies. 23 September Association of Corporate Counsel

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1 Association of Corporate Counsel NATIONAL WEBINAR : SUPPLEMENTAL MATERIALS Comparing employee non-compete arrangements in Australian and US companies 23 September 2015

2 Disclaimer: This presentation about the law on any subject and in any country is intended only to provide a general outline. It is not intended to be comprehensive nor does it constitute legal advice. You should seek legal or other professional advice before relying on or taking other action based on information contained in this presentation or in the accompanying supplemental materials. Page 1 of 9

3 SUPPLEMENTAL MATERIALS Comparing employee non-compete arrangements in Australian and US companies Samples of usual and customary clauses in Australian employment contracts (or separate restraint agreements entered into in relation to employment): Sample 1 Non-compete and Non-solicitation 1. Restriction After Termination 1.1 You must not after the date of termination of your employment: (iii) either directly or indirectly: (B) (C) for a period of: (B) (C) hold any material interest, (including, but not limited, to a position as a director, officeholder, shareholder, employee, agent, principal, partner, debenture holder, trustee, the holder of any security or in any other capacity) in any firm, company or other entity which is in competition with the Employer's business; canvass or solicit any person who is or which has been a client, contact or customer of the Employer and with whom you dealt or had contact with; solicit or entice away or seek to entice away from the Employer any person who was within a 12 month period prior to the date of termination of your employment employed by the Employer, to be engaged or employed for any business in which you are employed or are a principal; six (6) months after the date of termination; three (3) months after the date of termination; one (1) month after the date of termination; in the geographical area of: (B) (C) Melbourne; within 20km of Melbourne; within 50km of Melbourne. 1.2 This clause is to be construed and take effect as if it consisted of a number of separate provisions which are the result of combining each type of conduct referred to in sub-clause 1.1 with each of the time periods referred to in sub-clause 1.1 and each of the geographical areas referred to in sub-clause 1.1(iii). If any of those separate provisions is unenforceable, illegal or void for any reason, that provision shall be severed. Severance will not affect the validity or enforceability of any of the other separate provisions. 1.3 You acknowledge and agree that the restraints imposed upon you under this clause are fair and reasonable for the protection of the goodwill of the Employer s business. Page 2 of 9

4 Sample 2 Non-compete and Non-solicitation (slightly different overall approach, including prohibition on accepting any approach from a client) 2. Protection of Business 2.1 You agree that when your employment ends, you will not either as a sole practitioner, partner, manager, employee, director or with any other entity in which you may at any time have any interest do any of the following: (iii) (iv) Directly or indirectly approach, canvas, solicit or endeavour to entice away from the Company any person, firm or company who or which were clients of the Company with whom you had dealt or otherwise had contact with in the course of an during the last 12 months of your employment with the Company (the Clients). Accept any approach or proposal whether direct or indirect from any Clients whereby you are to perform or provide services to Clients in competition to the Company. Directly or indirectly approach, solicit, canvas or encourage any person who was known by you to be an employee of the Company at the date of termination of your employment, to terminate their employment with the Company, excluding any employee performing a secretarial, clerical or similar minor support role. Counsel, procure or assist any person, firm or corporate to do any of the acts referred to in sub-clauses (a), (b) and (c). 2.2 The restraints in sub-clause 2.1 shall apply for the Restraint Period and in the Restraint Area. (iii) Restraint Period means, from the date of termination of your employment: (B) 6 months or, if held to be invalid; 3 months. Restraint Area means: (B) Victoria, or if held to be invalid; Metropolitan Melbourne. In any dispute over the application of this clause, priority shall be given to the Restraint Period over the Restraint Area. 2.3 You agree that each of the restraint obligations imposed by this clause in its extent (duration, geographical area and restrained activity), are reasonable having regard to the interests of each party to this Deed, and extends no further than is reasonably necessary. Page 3 of 9

5 Sample 3 Non-solicitation only 3. Restraint 3.1 For the purpose of protecting the Employer in relation to the goodwill of its business and in consideration of the benefits you derive under your Employment Agreement, you shall not, for a period of (3) months after the date of termination, without first obtaining the Employer's written consent: either directly or indirectly canvass or solicit any person who is or has been a client, customer or supplier of the Employer and with whom you had dealings whilst employed: induce, solicit or entice or attempt to induce, solicit or entice from the Employer, any employee or contractor who was within a twelve (12) month period prior to the date of your termination employed or engaged by the Employer. 3.2 You acknowledge and agree the restraints imposed upon you under this clause are fair and reasonable for the protection of the goodwill of the Employer's business. Page 4 of 9

6 SUPPLEMENTAL MATERIALS Comparing employee non-compete arrangements in New Zealand Samples of usual and customary clauses in New Zealand employment contracts: Sample 1 Non-compete and Non-solicitation 1. Restraint of Trade 1.1 You shall not, at any time, during the term of this agreement or for a period of 3 months after the termination of this agreement for any reason: carry on or be connected, engaged or interested in either directly or indirectly or alone or with any other person or persons and whether as principal, partner, agent, director, shareholder, employee or otherwise in any business which competes or may compete with the business of the Company within the North Island of New Zealand without the express written consent of the Company; directly or indirectly canvass, solicit or attempt to solicit, serve or act for in respect of any work of a nature now undertaken or performed by the Company or by you for the Company or by any other employee of the Company, any person, firm or corporation who or which has been a client, customer or supplier of the Company during the period of 12 months immediately preceding the termination of your employment. You acknowledge that consideration for this restraint is provided by the salary you will receive in the position. The terms of restraint shall continue to be effective and enforceable notwithstanding that this agreement is terminated unlawfully or repudiated or you are dismissed by reason of redundancy or the agreement is terminated by any other action of the Company. The parties agree that section 8(3)(a) of the Contractual Remedies Act is expressly excluded from operation, so you shall not be relieved from complying with the terms of restraint however, and by whoever, this agreement is terminated or cancelled. Sample 2 Non-solicitation and business protection 2. Restraint of Trade 2.1 You shall not, at any time, during the term of this agreement or for a period of 6 months after the termination of this agreement, without the prior written consent of [the Employer], either as a principal or as an employee, agent, director, officer, partner, consultant, contractor or adviser, for your own benefit of for the benefit of any other person directly or indirectly: Until 6 months after termination, canvass, solicit or persuade, or attempt to canvass, solicit or persuade any Person who at any time during the 12 months immediately prior to the termination date, was: A client or prospective client with whom you had worked or had been in contact (other than in a purely personal capacity) in the period of 12 months immediately prior to the termination date; or Page 5 of 9

7 (B) A client or prospective client with whom any employees reporting to you or under your direct control had contact (other than in a purely personal capacity), in the period of 12 months immediately prior to the termination date; to cease doing business with [the Employer] or Group Companies, reduce the amount of business which they would normally do with [the Employer] or Group Companies or place any business with you or with another Person that might otherwise have been placed with [the Employer] or Group Companies. 2.2 Until 6 months after termination, do work for or provide services to any Person who at any time in the period of 12 months immediately prior to the termination date was: A client or prospective client with whom you had worked or had been in contact (other than in a purely personal capacity) in the period of 12 months immediately prior to the termination date; or A client or prospective client with whom any employees reporting to you or under your direct control had contact (other than in a purely personal capacity), in the period of 12 months immediately prior to the termination date. 2.3 In New Zealand where you have performed work for [the Employer] you will not for a period of 6 months after termination of this agreement for any reason, act in any way which may directly or indirectly assist or induce any employee, servant, agent, client, consultant, contractor or sub-contractor of [the Employer] to breach any agreement or contract with [the Employer] or its related corporations or to terminate or not to renew any contract of any sort they may have with [the Employer] or to not renew any contract of any sort they may have with [the Employer] or its related corporations. Page 6 of 9

8 Comparison Table Proposition US AUS NZ Most rules or laws concerning non-compete agreements are found in an examination and analysis of judicial decisions Non-compete agreements are generally enforceable True (although some of the states have enacted statutes dealing with non-compete agreements). Other than in California and North Dakota, the general rule which emerges from a review of the laws of the states is that non-compete agreements are enforceable as long as they are: set forth in writing signed by the employee under relatively fair circumstance; are necessary to protect legitimate interests of the employer and/or the public at large and reasonably related to that interest; are not unduly harmful to the employee; reasonable in time and geographic scope. (there are, however, significant variations among the states and certain types of businesses are subject to specific statutes. Further, there are variations as to whether courts will either reject in full or amend a provision that does not meet the rules of the applicable state). i True (although NSW does have a relevant statute). Restraint of trade clauses pertaining to employment are difficult to enforce in Australian jurisdictions. They are considered to be against public policy and the general rule is that such clauses are void. This will be the case unless it can be shown that the restraint is reasonable in all of the circumstances of the case. Therefore, successful restraints depend largely upon whether the employer has a legitimate protectable interest and if so, whether the restraints are no more than is reasonable to protect those interests. True. The Illegal Contracts Act 1970 is also relevant. Similar position to Australia. Restraint of trade clauses unenforceable unless the employer establishes that the restraint is reasonably necessary to protect a proprietary interest of the employer. Page 7 of 9

9 For a non-complete clause to be properly enforceable, there must have been valid consideration. Non-compete agreements must be in writing in order to be enforceable Generally, Courts are more inclined to enforce nonsolicitation clauses than they are non-compete clauses Courts can vary noncompete clauses. True (some states have refined this True. True. In most cases rule). ii remuneration is sufficient. True. iii True. An employment agreement must be in writing (section 65 Employment Relations Act 2000) but there is no requirement that a written employment agreement contain all relevant terms and conditions. Oral agreements or variations can be enforceable. It would nonetheless be difficult to prove a restraint that was not included in the written agreement, especially as most will have an entire agreement clause. True (although some states insist on a geographical location as a precondition for an enforceable noncompete). iv Courts in most stages (subject to some variations) take the position that they have the power to redraft, or blue pencil provisions of restrictive covenants (i.e. changing the duration of a restraint period from 6 months to 3 months). They do so under the theory that if the parties agreed that there would be some postemployment restrictions, and as long as they acted in good faith, the court should try to put that agreement into True. True. The various state and territory courts, with the exception of NSW, will not rewrite an unclear or unworkable contract but will read down the existing clause usually where the clause is cascading in the form of a list, starting with the broadest possible restraint then providing increasingly narrow alternatives, each standing alone (see sample clauses 1 and 2 above). True. Section 8 Illegal Contracts Act 1970 allows the Employment Relations Authority or the Employment Court to amend or vary an employment agreement. Page 8 of 9

10 effect, even if the contract must be In NSW the courts are modified to comply with state law. v empowered to read down or vary a clause in a manner that at common law would not be permissible. vi The most typical action involving a non-compete clause or agreement is an action by a former employer seeking an injunction barring the employee from working for a competitor or otherwise acting in violation of the agreement. Employers are also free to seek damages if they can show actual loss arising from an employee s breach. An employer which hires an employee who is subject to a non-compete is not automatically liable for breach of the agreement. However if the new employer is placed on notice of the agreement and the claimed breach, it does subject itself to liability if it turns out that the new employee has acted improperly. True. vii True. True True. viii True. True. True. ix True. True to the extent that the new employer can be liable for the continuing actions of the employee after put on notice but will ordinarily not be liable for previous actions of the employee. Page 9 of 9

11 References i Non-Compete Clauses. An International Guide. Ius Laboris, 2010 ii Non-Compete Clauses. An International Guide. Ius Laboris, 2010 iii Non-Compete Clauses. An International Guide. Ius Laboris, 2010 iv Non-Compete Clauses. An International Guide. Ius Laboris, 2010 v Non-Compete Clauses. An International Guide. Ius Laboris, 2010 vi Post-Employment Restraint of Trade, Rob Jackson, The Federation Press, 2014 vii Non-Compete Clauses. An International Guide. Ius Laboris, 2010 viii Non-Compete Clauses. An International Guide. Ius Laboris, 2010 ix Non-Compete Clauses. An International Guide. Ius Laboris, 2010 For more information about the content provided in this document, please contact: Michelle Dawson Partner Accredited Workplace Relations Specialist D: M: E: michelle.dawson@madgwicks.com.au Note: With thanks to Martelli McKegg Lawyers, Auckland, New Zealand for their contribution in relation to New Zealand clauses and laws. Page 10 of 9