John Lewis advises beware the Non-Compete Clause
What is a Non-compete clause?
A non-compete clause is used to prevent a party from using intellectual property, confidential information and their general work knowledge to compete with the business that they have ceased working with.
A non–compete clause is often found in contracts such as employment contracts, franchise agreements, sale of business agreements and contracts where one party has access to intellectual property and confidential information of the other party.
Non-compete Restrictions – Employment Contracts
Many employees are taking the plunge to establish their own business, after working for their employer. Often there will be a ‘non-compete clause’ in the employment agreement, which can specify a number of restrictions on the employee if they decide to establish a business in competition with their current employer.
Although some employees may be inclined to dismiss this as an unreasonable ‘restraint of trade’, there is a significant risk to ignore these types of provisions in your contract of employment.
Often these clauses will include a ‘time‘ restriction, a ‘geographical‘ restriction, as well as ‘non-solicitation‘ and ‘confidentiality‘ clauses.
In relation to a reasonable ‘time‘ restriction, it is not uncommon for an employment agreement to include a 3-12 month period before an employee can directly compete with his previous employer.
The ‘geographical‘ restriction defines a specified geographical areas where the person can conduct their business. Courts will generally apply the test of ‘reasonableness‘; for example, although a 5-10 kilometre ‘geographical’ restriction may be reasonable, having a ‘geographical’ restriction encompassing the entire Melbourne metropolitan area would be unreasonable.
‘Non-solicitation’ clauses are also common restrictions which relate to directly obtaining clients of your former employer to your business clients.
For example, transferring confidential information including the client database file as you depart the office on your last day, and then using this information for your new venture is likely to be a breach of your employment agreement. Similarly, taking ‘trade secrets’ from your former employer would also constitute a breach.
Right to Earn a living – Employment Contracts
It is important to note, that in Australia a non-compete clause is only enforceable if the clause is considered reasonable to protect the legitimate business interests of the party who benefits from the clause.
Importantly, courts will also recognise that employees have the right to earn a living, and cannot be restricted from operating a business purely because it may complete with a previous employer. In Buckley v Tutty (1971) 125 CLR 353, the High Court held that: “unreasonable restraints are unenforceable as it is contrary to public welfare that a person should be unreasonably prevented from earning a living in whichever lawful way he chooses and that the public should be unlawfully deprived of his services”.
If you are thinking about leaving your current employer with the intention to establish your own business, obtaining legal advice to confirm your rights and obligations regarding where you stand on any ‘non-compete’ clause is a worthwhile and modest investment.
Speak to one of our experienced Team at Lindbloms Lawyers today.