New South Wales Supreme Court CITATION : Lyreco Pty Ltd v Schoolworks Australia Pty Ltd [2006] NSWSC 1184 HEARING DATE(S) : 17 October 2006 JUDGMENT DATE : 20 October 2006 JURISDICTION : Equity JUDGMENT OF : Hamilton J DECISION : Interlocutory injunctions granted to restrain breaches of restrictive provisions in contracts of employment. CATCHWORDS : TRADE AND COMMERCE [28] - Trade and commerce generally - Restraint of trade - Restraint by agreement - Enforcement of agreement - Remedies for breach of agreement - Right to injunction - Interlocutory injunction - Whether injunction may be granted to restrain use of confidential information, solicitation of employees and employment by competitor. Barrett v Ecco Personnel Pty Ltd NSWCA 24 November 1998 unreported Cactus Imaging Pty Limited v Glenn Peters [2006] NSWSC 717 CASES CITED : Corporate Express Australia Ltd v Swift-McNair [1998] NSWSC 593 John Fairfax Publications Pty Limited v Birt [2006] NSWSC 995 Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 Koops Martin v Dean Reeves [2006] NSWSC 449 Lyreco Pty Limited (P) PARTIES : Schoolworks Australia Pty Limited (D1) John David Ayres (D2) Glenn Fabian (D3) FILE NUMBER(S) : SC 5179/06 COUNSEL : J R Clarke (P) B J Sharpe (Ds) SOLICITORS : Eakin McCaffery Cox (P) Ward Legal (Ds) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION HAMILTON J FRIDAY, 20 OCTOBER 2006 5179/06 LYRECO PTY LIMITED v SCHOOLWORKS AUSTRALIA PTY LIMITED & ORS JUDGMENT 1 HIS HONOUR: The plaintiff is in the business of distribution of office supplies to businesses in all States and Territories of Australia. The products supplied by the plaintiff include stationery, paper, photocopier cartridges, pads and foodstuffs. One part of the plaintiff's business is the supply and distribution of office supplies to schools, especially throughout Victoria. The plaintiff, through its Education Division, supplies products to approximately 1,200 schools on a regular basis and, of those 1,200, the plaintiff supplied approximately 540 schools with "back to school" supplies for the current 2006 school year. Many of the schools supplied are in the Melbourne metropolitan area. 2 The second and third defendants are former senior employees of the plaintiff. The second defendant was employed in the position of Product Manager and had the primary day to day responsibility for dealing with the plaintiff's suppliers throughout Australia. By one month's notice he terminated his employment with the plaintiff on 23 June 2006. The third defendant was employed in the position of Sales Manager - Education and was responsible for the overall day to day management of the plaintiff's Education Division and a team of eight sales representatives. By one month's notice he also terminated his employment with the plaintiff on 23 June 2006. 3 The plaintiff's evidence demonstrates, and there was no serious contest, that: 1 The second and third defendants incorporated the first defendant on 9 May 2006, prior to each of them resigning his employment with the plaintiff. Instructions were given for the incorporation on 26 April 2006. 2 The second and third defendants own, operate and control the first defendant; they are the only shareholders and directors. 3 The first defendant has employed seven of the eight former sales representatives of the plaintiff's Education Division, who formerly reported direct to the third defendant. 4 Those seven employees were each restricted by their contracts of employment with the plaintiff from working in a competing business after termination of their employment with the plaintiff. 5 The first defendant, through its sales representatives, has solicited and enticed, or attempted to solicit or entice, customers of the plaintiff away from the plaintiff to be customers of the first defendant. 6 The first defendant is conducting a business in direct competition with the business of the plaintiff, and in respect of the same goods and services the supply of which is part of the plaintiff's business. 4 The second defendant was made subject to restraints in his employment contract. Those included restraints against the use of confidential information (clause 27). "Confidential information" was defined in wide terms which included "business-sensitive information". He was also subject (see clause 30.1) to restraints during a six month period after the termination of his employment from within Australia carrying on or otherwise being concerned with or interested in any business which is in competition with the plaintiff and which is concerned with the business of office supplies and consumables. He was likewise restrained from employing or engaging any person who has been an employee of the plaintiff during the second defendant's employment who may be likely to be in possession of confidential information relating to the plaintiff's business. 5 The third defendant was made subject to restraints in a document rather curiously titled "deed of release" (clause 2.1). The restraints were for a period of twelve months after resignation and within the Melbourne metropolitan area. They included restraints against In relation to the conduct of a business dealing in goods that are competitive with those provided or sold by the plaintiff, soliciting or canvassing the custom of any person who has been a customer or client "of the employee" during the period of one year preceding the termination of the employment. Enticing away any other employee of the plaintiff. Divulging or using the confidential information or any information which the third defendant may possess in connection with the plaintiff's business. Working for a party that competes in any way with the plaintiff. In that deed of release "confidential information" was defined to include information as to specifications, prices, sales, costs, pricing methods, products, services, customer buying patterns, strategies, plans and staff information. 6 The plaintiff seeks on an interlocutory basis to restrain the second defendant and the third defendant from breaching each of the restraints mentioned above. It seeks on the same basis to restrain the first defendant from carrying on business in competition with the plaintiff using the second defendant, the third defendant or any of the seven sales representatives formerly employed by the plaintiff, or using any confidential information of the plaintiff, or inducing or requiring the second defendant or the third defendant to engage in any of the conduct prohibited by the injunctive orders. This is on the basis that the first defendant has imputed to it the knowledge of the second and third defendants, who are its controllers, and is conducting its business in competition with the plaintiff using the plaintiff's former employees (including the second and third defendants) and with knowledge of the restraints which they are under in relation to the plaintiff or using confidential information of the plaintiff. 7 The evidence shows that the second defendant was centrally involved in the acquisition of goods by the plaintiff for resale throughout Australia, including through the Education Division in Victoria, and that he dealt with the plaintiff's suppliers in that regard. The evidence is that he knew the prices that the plaintiff pays its suppliers for products, which is not publicly known information. The prices are generally negotiated twice yearly in about December and May. He was also familiar with various fees and rebates paid or provided to the plaintiff by its suppliers. This information is used to determine the prices at which the plaintiff sells the products. 8 The evidence shows that the third defendant, in his position as Sales Manager - Education, was responsible for the overall day to day management of the Education Division, including management of the eight sales representatives; setting the yearly sales budget; and participating in the determination of the sales price of goods. He attended a monthly sales managers' meeting at which he reported on the Education Division and received the plaintiff's Group Business Brochure, which included an analysis of actual sales against budget figures, deliveries, customer service, replenishment, average customer order sizes, costs analysis and other financial information. That information is not publicly available or known. In addition to managing the sales representatives, evidence contained in an affidavit which he swore was conceded by the defendants' counsel to indicate that, at least in the northern part of the Melbourne metropolitan area, he himself had direct contact with customers. At least one customer, who has gone to the first defendant from the plaintiff, was said by its representative to have done so by reason of loyalty to the third defendant, as well as to the actual sales representative. It is also suggested in the evidence that, when there were problems, the third defendant on occasions accompanied sales representatives to deal with customers. It would seem that the initial approaches to the plaintiff's customers to become the first defendant's customers were by letters written by the third defendant addressed: "Dear Valued Customer" and were in terms that assumed that the customer addressed was already a customer of the third defendant. 9 The evidence showed that the period from September to December each year was known as the "back to school" period, because this was when orders were placed for the following school year's supplies. Seventy per cent of the business of the Education Division was done during this period as opposed to 30 per cent during the rest of the year. 10 In relation to the seven sales representatives who transferred from the plaintiff to the first defendant, although they gave notice of termination at different times, all those notices expired on 1 September 2006. Their employment with (and it would seem the business of) the first defendant commenced on 4 September 2006. 11 The plaintiff gave the defendants notice to produce various documents. These documents were produced in the first instance to the plaintiff and received by the Court only when the plaintiff tendered them. The copies produced had a large amount of information blacked out. This was said to be because it was commercially sensitive. In one sense this course was irregular. The regular course would have been for the documents to have been produced to the Court in unredacted form and application made for an order that the documents be treated as pro tanto confidential. The course taken was convenient and the plaintiff does not, indeed, complain of the redaction of the documents, but said that it demonstrates the commercial sensitivity in this industry of information such as purchase and sales prices of goods and how those prices are calculated and volumes of business: the defendants certainly regard information of this sort in their own hands relating to their own business as confidential. 12 As to the process of employment by the first defendant of the seven sales representatives, the documents produced by the defendants include a newspaper advertisement for sales representatives, which was anonymous. Each of the seven sales representatives wrote a letter in response to the anonymous advertisement applying for a position. Several of those letters were so addressed or contained other material so as to show knowledge of the identity of the prospective employer. No adequate explanation of the source of that knowledge was given. The second and third defendants and the sales representatives in terms denied that they had been solicited or enticed. That evidence was objected to by reason of its generality and its status as a legal conclusion. On this interlocutory application I admitted the evidence as containing a denial of approach, but made it quite plain that it would be given little weight because of its generality. No other evidence was led as to the process by which the seven sales representatives all came to be employed by the first defendant commencing on the same day. THE LAW 13 The law in this area has been usefully discussed this year by Brereton J in three decisions, Koops Martin v Dean Reeves [2006] NSWSC 449; Cactus Imaging Pty Limited v Glenn Peters [2006] NSWSC 717; and John Fairfax Publications Pty Limited v Birt [2006] NSWSC 995. In Koops Martin his Honour said at [26] - [28]: "26 At common law, a restraint of trade is contrary to public policy and void, unless it is justified by the special circumstances of the particular case, for which purpose it is sufficient justification that the restriction is reasonable having regard to the interests of the parties concerned and in reference to the interests of the public, so that while affording adequate protection to the party in whose favour it is imposed, it is not injurious to the public [ Nordenfelt v Maxim Nordenfelt Guns & Ammunition [1894] AC 535, 565; Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 706, 707; Lindner v Murdoch's Garage (1950) 83 CLR 628, 653]. While the cases refer to 'special circumstances' justifying a restraint, that means no more than the facts of a particular case from which reasonableness can be inferred [J D Heydon, The Restraint of Trade Doctrine, 2nd edn, p29]. If the restraint is not reasonable with reference to the interests of the parties and the public, it is contrary to public policy [ Buckley v Tutty (1971) 125 CLR 353, 376]. The doctrine reconciles two conflicting policies, the first being 'that a man should be free to use his skill and experience to the best advantage and should not be put in the position of a slave', and the second that covenants should be observed and enforced [ Herbert Morris Ltd v Saxelby [1915] 2 Ch 57, 76; Attwood v Lamont [1920] 3 KB 571, 577]. 27 In New South Wales, it is not strictly correct that a restraint is prima facie void; a restraint is valid to the extent to which it is not against public policy, even if not in severable terms [Restraints of Trade Act , s 4(1)]. 28 While the same general principle applies in all cases of restraint of trade, a more rigorous approach is applied to restraints in employment contracts than in contracts for the sale of goodwill [ Nordenfelt , 566; Mason v Provident Clothing & Supply Co Limited [1913] AC 724, 731, 738; Herbert Morris Limited v Saxelby ]. A stricter and less favourable view is taken of covenants in restraint of trade between employer and employee than in commercial agreements [ Geraghty v Minter , 185; Heydon, pp 68-69; Woolworths Limited v Olsen , [38]]. An employer is not entitled to be protected against mere competition; the legitimate interests of an employer which may be the subject of protection by covenant are in the nature of proprietary subject matter [ Vanderwell Products Limited v McLeod , 192; Tank Lining Corporation v Dunlop Industrial Pty Ltd (1982) 140 DLR (3d) 659, 664], including the employer's trade secrets and confidential information, and the employer's goodwill including customer connection. Given the absence in this case of any actual or threatened breach of confidence, and that Koops Martin seeks to enforce the restraint on accepting instructions from those who were its clients apart from any question of confidence, it is customer connection that is relevant here. In that regard, the validity of the restraint depends on two questions: Does Koops Martin have a protectable interest based on customer connection; and If so, is the restraint no more than reasonable for the legitimate protection of that interest." 14 As to the concept of "customer connection", his Honour said in Cactus Imaging at [25]: "25 It is plain that an employer's customer connection is an interest which can support a reasonable restraint of trade [ Hitchcock v Coker (1837) 6 Ad & El 438, 454; [1835-42] All ER Rep 452, 456-7 (Tindal CJ); Herbert Morris Ltd v Saxelby , 709; Dewes v Fitch [1920] 2 Ch 159, 181; Coote v Sproule (1929) 29 SR (NSW) 578, 580 (Harvey CJ in Eq); Lindner v Murdock's Garage , 633-634 (Latham CJ, Webb J agreeing), 650 (Fullagar J), 654 (Kitto J); Koops Martin v Reeves , [29]-[33]]. Such a restraint is legitimate if the employee has become, vis-à-vis the client, the 'human face' of the business, namely the person who represents the business to the customer - or, as it was put by Hoover J in Arthur Murray Dance Studios of Cleveland Inc v Witter 105 NE (2d) 685, 706 (Ohio, 1951): 'The personal relation between the employee and the customer [is] such as to enable the employee to control the customer's business' [ Twenty-First Australia Inc v Shade (NSWSC, Young J, 31 July 1998, unreported), BC9803667, 12; Koops Martin v Reeves , [34]]. While the employer is not entitled to be protected against mere competition by a former employee, the employer is entitled to be protected against unfair competition based on the use by the employee after termination of employment of the customer connection which the employee has built up during the employment – which, because the employee has in effect represented the employer from the customer's perspective during the employment, might at least temporarily appear attached to the employee, but in truth belongs to the employer [ Koops Martin v Reeves , [30]]." I do not take it that, to be the face of the business, a particular employee must be the only person to deal with a particular customer. In my view, the exercise of a measure of control over a customer or customers' business may be sufficient to support the validity of a restraint. 15 The process that should be followed in determining interlocutory injunction applications was set out by McLelland J in Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 535 - 6. It was not submitted that this case was one in which the Court was required to evaluate the strength of the plaintiff's case for final relief. CONCLUSIONS 16 In my view, there is a reasonable case in favour of the proposition that the restraints imposed are reasonable and therefore valid or that they could be saved in relevant ways through the Restraints of Trade Act 1976 ("the RTA"). This interlocutory application was conducted by both sides on the basis that the RTA applied to both the second and the third defendants' contracts of employment. 17 I shall deal first with the case against the third defendant. In my view the plaintiff has established that there is a serious question to be tried as to whether the third defendant is using confidential information of the plaintiff in connection with the business of the first defendant. It is not suggested that either comprehensive lists of schools which were publicly available or the plaintiff's catalogue prices were confidential information. However, it is seriously arguable that information as to the plaintiff's actual customers, actual sales and actual prices, the manner of determination of sale prices and the prices at which the plaintiff bought in the goods supplied, as well as its budget figures, profit margins and other financial information were confidential and useful to and likely to be used in a competing business. This would support a restraint of the use of that confidential information. The confidential information should, however, be precisely defined in the injunction, if granted, rather than left to be determined in a potential contempt application: Cactus Imaging [14]. 18 So far as solicitation or enticement of the employees is concerned, it is true that there is no direct evidence and there are some generalised denials of approach to the seven sales representatives. However, solicitation and enticement may be proved otherwise than by such evidence: Barrett v Ecco Personnel Pty Ltd NSWCA 24 November 1998 unreported. It is interesting that in the produced documents the current salaries of the sales representatives are blacked out as "commercially sensitive". It is significant that seven of the eight sales representatives from the Education Division decamped to the first defendant on the same day (and the eighth considered doing so but desisted). I have referred to some of the features of the letters of application. Otherwise, the defendants' evidence does not condescend to informing the Court of the process by which all seven of those sales representatives travelled down the route by which they simultaneously arrived at the first defendant. In my view, there is a serious question to be tried as to whether or not the sales representatives were solicited or enticed. 19 So far as an injunction restraining altogether employment by a competitor is concerned, the existence of a serious question to be tried as to the use of confidential information is sufficient to justify such a restraint within the terms laid down in Cactus Imaging. But I should also add that I find that there is a serious question to be tried as to whether the third defendant was the face, or at least a face, of the company in dealing with customers. The evidence in this regard is referred to in [8] above. 20 I turn to the second defendant. So far as the second defendant is concerned, it was put that the material about suppliers' prices, fees and rebates was so voluminous and so detailed that it could not be accepted that the second defendant really remembered it. I do not find this argument convincing. I conclude that there is certainly a serious question to be tried as to which of that information the second defendant retained and what use is being made of it. It was further submitted that any such material that was remembered was out of date and useless, and could not found injunctive relief in relation to confidential information: see the decision of Young J (as his Honour then was) in Corporate Express Australia Ltd v Swift-McNair [1998] NSWSC 593. There is force in the submission that such information does not have a long currency. But the Chief Judge was dealing with a situation years down the track. On the evidence, the relevant prices in this case were set in May for the back to school campaign commencing in September and currently under way. I do not find the submission convincing in these circumstances. Once again, the relevant confidential information needs proper definition, if I make a relevant order. 21 So far as the solicitation or enticing of employees is concerned, the second defendant was not the supervisor of the relevant employees. He was and is, however, a controller of the first defendant, which has taken the decision to employ them. In my view, there is a serious question to be tried as to whether or not he was involved in their solicitation or enticement. 22 Finally, so far as a restraint against working for a competitor is concerned, the conclusion I have come to concerning confidential information possessed by him is sufficient to justify such a restraint against the second defendant. 23 As to the first defendant, if injunctive relief be granted against the second and third defendants, as the first defendant is owned and controlled by the second and third defendants, it is knowingly involved in their breaches of restraint and should itself be restrained as sought by the plaintiff: see [6] above. 24 Any restraints granted will have to be appropriately limited as to time. 25 Bearing in mind the profound damage likely to be done to the business of the plaintiff's Education Division in the current back to school period and the difficulty of assessing the plaintiff's damages if it is left to its remedy in damages, I am satisfied that damages would not be an adequate remedy. 26 As to the balance of convenience, the plaintiff in effect faces the prospect of losing the whole or a substantial portion of the business of its Education Division, if there be no restraint. The defendants put a case of the hardship of 15 employees of the first defendant, including the second and third defendants, the seven sales representatives who formerly worked for the plaintiff and six other employees, the nature of whose work and whose provenance is unstated. It is alleged that the business of the first defendant will be closed down; 15 people will lose their employment; and they will not be able to obtain other employment. There are three things to be said about this contention. 27 The first is the sparseness of the evidence concerning it, which typifies so much of the defendants' evidence. There are bald statements that all of these people will be dismissed and unemployed. No detail is given as to the extent of the first defendant's business or to what extent it involves competition with the plaintiff. There is no convincing evidence that the dismissals would be necessary. If in fact employees lose their jobs, there is no cogent evidence to indicate that they could not be employed by employers other than the first defendant to do work other than their present work. The evidence of hardship is thin and unconvincing. 28 The second thing to be said is that, insofar as the second and third defendants and the seven sales representatives suffer misfortune if restraints be granted, they are in a real way the authors of their own misfortune. They have all chosen to go and work in a business undoubtedly competing with the business of the plaintiff while under contractual restraints, apparently under the faith that those restraints would not be enforced: see John Fairfax at [49]. 29 Thirdly, their loss would in any event be more easily assessed under the undertaking as to damages necessarily to be given if injunctive relief be granted than would the damage to be suffered by the plaintiff were it to be left to its remedy in damages. 30 In my view the balance of convenience favours the plaintiff. 31 In the result, I propose to grant interlocutory relief along the lines indicated in these reasons. Short minutes should be brought in accordingly. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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