Restraints of Trade

The Employment Relations Authority’s decision ordering Tova O’Brien to comply with her restraint of trade was a high-profile rebuttal of the commonly held view that a restraint of trade is “not worth the paper it’s written on”.

Restraints of trade – which are clauses that prevent an employee from working for their former employer’s competitors or otherwise competing with their former employer – are inherently anti-competitive.

As a matter of legal policy, restraints of trade are unenforceable unless they can be justified as reasonably necessary to protect the proprietary interests of the employer.

The employer must prove that the restraint is reasonable. The employer must identify the proprietary interests that are protected by the restraint and satisfy the Authority or the Employment Court that the restraint is no wider than necessary to protect those interests.

Relevant factors include the nature of the employee’s role, the employer’s business, the geographical scope of the restraint, and its duration. Reasonableness is assessed from the point in time when the restraint was agreed.

Despite the starting position (that a restraint is unenforceable unless it can be justified), there are many examples of employers successfully enforcing restraints of trade.

Proprietary interests

In O’Brien v Discovery NZ Limited, Discovery identified three categories of ‘proprietary interests’ that were protected by its restraint of trade: confidential information, business relationships, and goodwill.

These three ‘proprietary interests’ have been relied on in previous cases to support restraints of trade.

The Courts have recognised that employers have a proprietary interest in confidential information and that a restraint of trade may be necessary, in addition to confidentiality obligations, to protect against inadvertent disclosure of confidential information.

Similarly, the Courts have recognised the protection of business relationships as a legitimate proprietary interest, especially in industries that operate on established relationships, such as recruiting.

The business relationship relied on by Discovery was Ms O’Brien’s relationship with Newshub’s pollster, Reid Polling. Ms O’Brien “owned” that relationship within Discovery. The Authority considered that this relationship was a proprietary interest even though Ms O’Brien’s new employer, MediaWorks Radio, did not intend to commission polls.

Goodwill is less commonly relied on to support a restraint of trade, but in Ms O’Brien’s case was justified because her profile position at Discovery contributed to her reputation in the New Zealand market.

No wider than is necessary

The most significant factors when considering the reasonableness of a restraint are usually the duration of the restraint and its geographic scope.

It is unusual for a restraint longer than 12 months to be reasonable. The duration of the restraint must be reasonable considering the relevant proprietary interest.

In one case where ‘business relationships’ were identified as a proprietary interest, [1] it was ‘arguable’ that a six-month restraint of trade was reasonable because it reflected a reasonable period for the employer to hire a replacement employee, induct and train them, and have them build a working relationship with the employer’s customers.

In another case, which involved Air New Zealand attempting to restrain the former general manager of Air Nelson, Mr Kerr, from undertaking employment with Jetstar, [2] the reasonableness of the Mr Kerr’s six-month restraint period was considered while also taking into account the six-month gardening leave provision in Mr Kerr’s employment agreement.

In that case, the Employment Court decided that the six-months that Mr Kerr had already spent on gardening leave was sufficient to protect Air New Zealand’s proprietary interests. The Court also noted that, given the confidential information available to Jetstar, it could probably be said that Jetstar knew more about Air New Zealand’s revenue, costs, and profit per route than Mr Kerr.

Modifying an unreasonable restraint

In O’Brien v Discovery NZ Limited, the Authority considered that the three-month restraint of trade in Ms O’Brien’s employment agreement was longer than necessary to protect Discovery’s proprietary interests.

The Authority exercised its discretion, under section 83 of the Contract and Commercial Law Act 2017, to modify the restraint by reducing it from three months to seven weeks.

In competition?

The parties to a restraint of trade might disagree about whether a prospective new employer is ‘in competition’ with the former employer.

Ms O’Brien argued that MediaWorks Radio and Discovery were not in competition because they broadcast on different mediums: TV and radio. Discovery provided expert evidence that Discovery and MediaWorks Radio were competitors “in the broad sense”, because there was a degree of competition between them for “ears and eyeballs” in the breakfast time slot.

In Cherri Global Limited v Milmine, [3] Mr Milmine successfully argued that his proposed new employer, Berry Farms NZ Limited, which grows strawberries, raspberries, blackberries and, to a much lesser extent, blueberries, was not in competition with his former employer, Cherri Global Limited, which grows and exports cherries and had very early stage plans to grow blueberries.

Reform

This high-profile case has prompted calls for reform of the law about restraints of trade. It is an uncomfortable fact that a significant proportion of recent cases in the Authority about restraints of trade have involved workers who are not highly paid, such as hairdressers and beauty therapists.

Conclusion

If the Authority or the Court is satisfied that a restraint of trade is reasonable, it will be enforced. Agreements are made to be kept.

As former Chief Judge Colgan said, in a 2011 Employment Court decision, [4]

“Gone are the days, if they ever existed, when an employee could confidently sign up to a restraint and then breach it in the bold expectation that ‘those things are not worth the paper they are written on.”


1. Spirax Sarco Limited v Hewitt [2021] NZERA 98
2. Air New Zealand v Kerr [2013] NZEmpC 153
3. Cherri Global Limited v Milmine [2020] NZERA 288
4. Green v Transpacific Industries Group (NZ) Limited [2011] NZEmpC 6

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