Employment Law | Restraints of Trade and Reasonableness
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February 2022 | Restraints of Trade and Reasonableness
Restraint of trade provisions in employment agreements continue to be a much-debated feature of employment law. The provisions often try to restrict an employee’s freedom from joining a competitor in the region.
The recent storm surrounding political journalist Tova O’Brien’s departure from Discovery to take up a position with MediaWorks as a host on a to-be-launched morning radio show brought the issue into our morning news. While the outcome was not startling for employment lawyers, it is useful to look at the lessons given by the case.
The law
The starting point is that restraints of trade are contrary to public law and not enforceable. To overcome this, employers must establish that they have a legitimate proprietary interest that the restraint protects and that the restraint is no wider than is reasonably necessary to protect that interest. Restraint clauses try to balance the divide between an employer’s ongoing proprietary (commercial) interests and an employee’s freedom to earn a living using their professional skills.
The case
In October last year, Ms O’Brien resigned from her position as political editor with Discovery to take up the morning radio show host position with MediaWorks. Her notice period under her employment agreement was three months, which concluded in late January. Ms O’Brien then intended to commence the new position. Discovery objected. It argued that Ms O’Brien could not start because of a restraint of trade clause in her employment agreement which prohibited her from working for a competitor in any capacity nationally for three months after employment.
Ms O’Brien contended the clause was unenforceable and unreasonable, stressing that the new role was fundamentally different to the one at Discovery. She said the restraints inadequately set out the legitimate proprietary interest Discovery intended to protect and were unreasonably broad. She argued that the roles were sufficiently distinct to ensure there was no issue of competition. Even if proprietary interests existed, they would not be adversely affected by the new role. Ms O’Brien contended that should Discovery be concerned about their confidential information or business relationships there were alternative measures which could adequately protect these interests without restricting her freedom to join MediaWorks.
Discovery argued it had legitimate proprietary interests in confidential information, business relationships and goodwill in part attributable to Ms O’Brien’s reputation in the market as a direct result of her employment with Discovery. The confidential information included editorial priorities and future plans, the identities of confidential sources and team salaries. As such, Ms O’Brien’s actions were in clear breach of her employment obligations that she had agreed to.
The Employment Relations Authority agreed that Discovery had legitimate proprietary interests in confidential information, business relationships and goodwill. The Authority noted that the potential period of restraint available to Discovery under the terms of the employment agreement was six months (three months garden leave in addition to the three month restraint of trade). The Authority has the power to amend restraint of trade provisions to ensure that they are no longer than necessary to protect the proprietary interests established. Accordingly, the clause was modified to a duration of seven weeks. The scope and geographical elements of the restraint were held to be reasonable.
The Authority concluded that while the two employers could be said to be competing only “in the margins”, the wording the parties agreed to in the restraint was clear that any involvement in any capacity was to be restrained. They were competing in the broad sense only, but were nevertheless competing.
Takeaways
Ms O’Brien’s case is the most recent illustration that there is seldom a black and white answer as to what a reasonable restriction on an employee’s freedom may be. It is a reminder of the availability of restraint provisions to protect legitimate commercial interests in certain situations. That said, they need to establish that they are reasonable and necessary to protect those interests. Discovery demonstrated to the Authority that it had proprietary interests in need of protection, and required the restraint to ensure the transition ran smoothly.
Ms O’Brien sought to argue that similar provisions in the relevant market were rarely enforced, but this was shot down at the Authority. It is a strong reminder that contractual agreements are terms that each party agrees to abide by and should not be readily dismissed.
While the restraint was held to be (mostly) enforceable in this case, maybe the problem could have been avoided if Discovery had made it clear what it was intending to protect. As a commercial interest is the foundation for requiring any such restraint, clearly identifying that interest at the outset may save employers and employees time and money down the track.
Ms O’Brien claimed that Discovery’s actions were punitively or acrimoniously motivated. While the Authority held that Discovery’s decision to enforce the restraint was grounded in commercial reality, it was an opportunity to highlight the fundamentality of good faith obligations of an employer in any employment termination.
When an employee resigns, it can be a difficult process for all involved. In Ms O’Brien’s case it involved herself, Discovery and MediaWorks (and no doubt other associated commercial interests that those employers either establishing or trying to maintain).
David Burton/Principal
P: 04 974 4138
Chris Scarrott/Associate
P: 04 974 4175
Calum Cartwright/Associate
E: calum.cartwright@mhlaw.co.nz
P: 04 974 4129
