Further to our Restraint of Trade/Non-Compete Clause blog earlier this year, the Federal Court of Australia last month ordered a former account manager to pay $500,000 to his former employer for breaching the confidentiality and restraint clauses under his contract of employment.
To determine if a restraint clause is enforceable, courts typically consider two primary questions:
- Is there a legitimate interest at stake?
- Is the restraint reasonably necessary to protect that legitimate interest?
Background
The employer (applicant) was AEI Insurance Group which is an insurance broker with a focus on heavy vehicle insurance. The employee (respondent) was Mr Craig Martin who was employed by AEI from 26 July 2011 to 2 September 2022. One of Mr Martin’s roles at AEI was to grow the business in Queensland. By 1 June 2020, the Brisbane branch had four full-time employees apart from Mr Martin and a branch income estimated to be $1,320,000 for the year. A significant amount of Mr Martin’s earnings from AEI was driven by commissions of 30% for new business and 5% for renewals.
Mr Martin resigned from his employment in August 2022. He informed a number of contacts of his new telephone number. When AEI became aware of this communication, they wrote to Mr Martin requesting, amongst other things, that he acknowledge and comply with the various post-employment restraints contained in his written employment contract and that he returns all AEI property and delete all AEI client contact details. Shortly after the employment ended, Mr Martin commenced employment with a different insurance broker called MA Brokers.
The Court was satisfied that Mr Martin had destroyed two mobile phones belong to AEI that he had used in his employment with AEI, by immersing one in water and running over the other with a lawnmower. On the balance of probabilities, these steps were undertaken to frustrate AEI’s attempts to obtain information from the mobile telephones.
Between August and November, AEI received 45 notifications from insurers that AEI clients have signed letters of appointment nominating a new unidentified broker which was obvious to AEI that the new broker was MA Brokers. On the balance of probabilities, Mr Martin had solicited each of the clients, either directly or by procuring MA Brokers to solicit the clients. The total income from the 45 clients which moved to MA Brokers was $752,978.07.
- Is there a legitimate interest at stake?
The court stated that although an employer is not entitled to be protected against mere competition by a former employee, the employer is entitled to be protected against unfair competition.
AEI is not entitled to be protected against mere competition from Mr Martin. In particular, Mr Martin is entitled to use to the full his personal skill and experience. However, AEI is entitled to be protected against unfair competition based on the use by Mr Martin after his resignation of aspects of the customer connection which he developed for AEI during his employment. The principal interest that AEI sought to protect was its customer connections. This was a legitimate interest for protection.
- Is the restraint reasonably necessary to protect that legitimate interest?
In assessing the reasonableness of the restraint, the Court found that the restraint was reasonable because of the following factors:
Mr Martin was the face of the Business, it is more likely than not, that customers attached their connection to the business through him rather than the business itself. The restraint was therefore legitimate for this purpose.
The meaning of the clause was clear. It prohibited Mr Martin from soliciting AEI’s clients directly and also by soliciting them through procuring some other person to make the approach for him.
The 12 months restraint period described in the contract was reasonable because insurance books and policies usually have a 12-month duration and so the restraint protected at least one renewal of a client’s policy.
Mr Martin voluntarily agreed to the restraint and expressly acknowledged its reasonableness.
Damages
In assessing damages, the courts put an “upper limit losses” for one year at $617,282 and settled on $500,000, after taking into account that some clients would have learned the manager moved to MA Brokers without being solicited by him, and “the impossibility of knowing which clients might have left in any event or, necessarily, the dates of their policy renewals”.
AEI was not awarded for ongoing or future loses as after the period of 12 months Mr Martin would have been free to solicit AEI’s clients. There was no evidence that AEI employed a person with the quite specific and somewhat unusual set of skills as Mr Martin, or someone who might be equivalently attractive to clients and so an award of future losses would in effect be an award for losses from legitimate competition.
Key Takeaway
Employers should ensure that restraint clauses are clear about the interest(s) being protected, the reasonableness of the length of the protection and be able to evidence damages of any breaches to the interest they protect as employers are not entitled to be protected against mere competition by former employees.
Please contact the BetterHR advise team for any assistance in relation to restraint clauses on 1300 659 563 or visit: Subscribe to BetterHR.
AEI Insurance Group Pty Ltd v Martin (No 4) [2024] FCA 1110 (24 September 2024)
