Views & Opinions

Are restraints of trade anti-competitive?

7 April 2015

Are restraints of trade anti-competitive?

Late last year, the Supreme Court of Tasmania (in Bulk Frozen Foods Pty Ltd v Excell [2014] TASSC 58) upheld a restraint of trade which imposed on the Defendant a total of 8,190 separate non-compete covenants. On one argument, this decision is yet another that demonstrates the anti-competitive nature of restraints of trade. However, this argument needs to be balanced against the need for employers to prevent employees using information and knowledge gained during the course of employment when those employees leave the organisation.

Contrary to the argument that restraints of trade are anti-competitive, the Tasmanian decision demonstrates the need for employers to frame restraints as more than mere fetters on competition in order to have them upheld.

Non-compete restraints will not be upheld unless they protect a “legitimate interest” of the employer. An employer’s “legitimate interests” are those it has in, for example, its confidential information, customer connections and goodwill.

Restraints that cannot be said to reasonably protect one of these interests will not be enforced. Further, Courts have repeatedly emphasised that non-compete clauses are only enforceable if they do no more than is necessary to protect the employer’s legitimate interests. This means close attention is paid to the scope of the restraint in terms of:

  • prohibited activities;
  • time; and
  • geography.

A restraint will be unenforceable to the extent that it goes beyond what is necessary in these respects.

The appropriate scope of a restraint is always dependent on the nature of the employment concerned. For example, in general terms:

  • executive employees with access to highly confidential information may usually be restrained for longer than non-executive employees; and
  • employees who act as the “human face” of an organisation may generally be subject to more restrictive non-solicitation restraints.

Lessons for employers

Courts have recognised that, in some instances, non-compete restraints, going above and beyond traditional non-solicitation and confidential information restraints, are reasonable means by which an employer is entitled to protect its legitimate interests. However, in order to have such restraints enforced, it is imperative that they are framed properly so as to avoid falling foul of the rule that restraints must not be merely anti-competitive.

Posted in Investigations & Dispute Resolutions and tagged .
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