In an exclusive Q&A session with Legalwise Seminars, Sherridan Cook, Partner at Buddle Findlay, shares some insight into why it is important to be familiar with the legal framework regarding restraints of trade and the protection of confidential information. He will be delving further into this topic at the upcoming webinar on Wednesday, 5 August 2020.
Why has this become such an important area of focus right now?
With COVID-19 making market conditions tight, employers will be more mindful of protecting their businesses from competition. This will include ensuring that confidential information is not misused, and that employees do not attempt to solicit their customers, suppliers or other employees in breach of agreed restraint of trade obligations. The shift towards businesses setting up working from home arrangements may also result in an increased risk of confidential information being exposed to parties outside of the employer’s business.
What are ‘restraint of trade’ clauses and how do they protect employers?
Restraint of trade provisions allow employers to protect their legitimate proprietary interests after the employment relationship has ended, such as trade secrets and customer and supplier relationships. The main types of restraint clauses prevent employees from working for a competitor or trying to entice customers/suppliers or other employees away from their employer. However, they must be reasonable or they will unlawfully stifle competition, which is usually where the debate arises.
Why is it so important for employers to protect confidential information and restrict trade?
A breach of confidentiality or of a restraint of trade can be incredibly damaging to a company’s goodwill and client relationships. In addition, if a business experiences a data breach, it could lose the trust of its existing clients and its reputation could be damaged. These effects can result in a dramatic and immediate impact on the employer’s bottom line, which can sometime be so severe it can lead to the employer’s downfall.
Can you give an example of what can happen if former employees are not restrained and confidential information is misused? What sort of damage could they face?
The case of
Tradies Ladies Ltd v McKay [2019] NZERA 651 demonstrates the consequences that can occur when a restraint clause is breached. In this case, two courier drivers breached the non-competition and non-solicitation clauses in their employment agreements by setting up a business in competition and soliciting key clients. Tradies Ladies alleged that these actions led to a drop in company sales by $22,000 and that the company was considering making two employees redundant as a result. While Tradies Ladies suffered a considerable decline in income, it was able to seek interim restraining orders to prevent further damage.
What makes a good RoT or protection of information clause?
Drafting is key to ensuring a restraint of trade clause is enforceable (and that consideration is paid by the employer for the employee’s agreement). It must only go so far as is reasonably necessary to protect the employer’s legitimate proprietary interests, both in time and geographical coverage. Also, while there is an implied duty of confidentiality in all employment agreements, this narrows considerably on termination, so it is important to define the specific confidential information that the employer wants protected.
In terms of enforcing the process (or filing for injunctive relief) can you provide an example of what can trip people up or slow down the process?
The key is to act quickly, as the period of the restraints will be running and the damage may have already commenced. However, the ex-employee and their new employer will want to slow down the process, and will be reluctant to provide any information that may assist, so being alive to this and not letting the process drift is important. Also gathering evidence of the breaches can take some time, so often employers will want to proceed anyway. But taking time to do so will hold the employer in good stead to force the ex-employee to comply or if court proceedings are filed.
Sherridan Cook specialises in employment, industrial relations and health and safety as well as litigation and dispute resolution.
Sherridan advises a wide range of private and public sector clients across the full ambit of employment and health and safety issues. He has considerable strength in industrial relations and employment related litigation, including confidentiality and restraint of trade disputes.
Sherridan has particular expertise in property and construction disputes, including Construction Contracts Act adjudications, leasehold disputes and rent reviews, as well as contractual, company and intellectual property disputes and judicial review.
Sherridan regularly appears in the Employment Relations Authority, the Employment Court, the High Court and appellate courts, and at arbitrations and mediations.
Sherridan is the consulting editor of the Lexis Nexis publication Health and Safety Law Made Easy, second edition – A comprehensive guide to New Zealand’s health and safety scheme.
Connect with Sherridan via email or LinkedIn 
