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Enforceability of Restraint of Trade Clauses

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The former political editor of TV3, Tova O'Brien, recently lost a case in the Employment Relations Authority (ERA) where she tried to challenge the restraints of trade in her employment agreement with her then employer, Discovery. The case has captured a lot of media attention as one might expect with a media party.  O’Brien was supported by MP Helen White, who is campaigning for a change of law to stop employers from imposing such restraints on lower-wage workers.

In October last year, Tova O'Brien resigned from her position with Discovery to become the host of MediaWorks Radio's (MWR) new breakfast radio show launching in January 2022. Discovery argued that O'Brien must comply with the restraints of trade in her employment agreement and therefore could not work for a competitor of Discovery until three months after the end of her employment. O'Brien considered that MWR was not in competition with Discovery and she argued that the restraints of trade were unreasonable, unenforceable and punitive. She sought a determination from the ERA that the restraints of trade are unenforceable. However, the ERA accepted Discovery's evidence, including expert opinion, that Discovery and MWR are competitors in the broad sense, competing for "ears and eyeballs" in the breakfast time slot. It also accepted that Discovery had legitimate proprietary interests to protect – confidential information, business relationships and goodwill. The ERA further considered Discovery's ability to allow O'Brien garden leave and therefore exercised its discretion to modify the duration of the restraint from three months to seven weeks. Accordingly, O'Brien cannot start working in her new role until 14 March 2022. She was also ordered to pay a penalty of $2,000 to Discovery.

Restraints of trade are commonly used in employment agreements. Such clauses put restrictions on the employees during their employment and after the termination of their employment. Examples include:

  • Restricting a former employee from working with former clients for a set period of time.
  • Restricting an employee from working in the same industry for a period of time.
  • Restricting an employee from working a secondary job while still in their primary job.
  • Preventing an employee from working in another job in the same industry within a reasonable distance of their former employer.

The law on restraints of trade is well-established – the starting position is that a restraint of trade is contrary to public law and not enforceable. To overcome this position, the employer must show that it has a legitimate proprietary interest that the restraint protects and that the restraint is no wider than is reasonably necessary to protect that interest.

The determination of whether a restraint is reasonably necessary requires a balancing act between the interests of the employer (for example, trade secrets, confidential information, and goodwill), the interest of the employee (for example, the right to work and to access work) and the interest of the public (for example, the right to access cheaper products or various products by virtue of increased competition). It is also important to realise that reasonableness is assessed at the time the employment agreement was entered into. If a restraint is unreasonable, the ERA has the discretion to modify it to the extent no more than necessary to protect the legitimate proprietary interest.  This was done in the O’Brien case.   If a restraint is reasonable, the ERA may grant an injunction preventing the employee from continuing to breach the restraint, damages and/or penalty for the breach of the employment agreement.

It is often said that the restraints of trade are "not worth the paper they are written on". However, we can see that from the O'Brien case, a well-written restraint can be enforced through each case turns on its specific facts. Therefore, we recommend seeking legal advice before using or agreeing on a restraint of trade provision. Harmans' employment team advises clients on a wide range of employment matters, including the enforceability of restraint of trade clauses. For more information, please feel free to contact our employment team.

 

Harmans employment team: Mary CrimpGraeme Riach and Jennifer Liu.

Published: 10/02/2022

The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.

 

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