re-enliven the ancient common law doctrine making illegal restraints of trade that ... competition laws in Part IV of the Trade Practices Act 1974 (Cth) by s 51(2).
Sydney Law School Legal Studies Research Paper No. 10/65 July 2010
Commodifying Sheer Talent: Perverse Developments in the Law’s Enforcement of Restrictive Covenants Joellen Riley This paper can be downloaded without charge from the Social Science Research Network Electronic Library at: http://ssrn.com/abstract=1649877.
Electronic copy available at: http://ssrn.com/abstract=1649877
Published as Chapter 13 in C Arup and W van Caenegem, Intellectual Property Policy Reform: Fostering Innovation and Development, 2009, Edward Elgar, UK.
Abstract: This chapter (prepared initially for a workshop on intellectual property law and innovation held at Bond University in 2007) mounts an argument for why the law on restrictive covenants in employment contracts in Australia should be reviewed, to re-enliven the ancient common law doctrine making illegal restraints of trade that are contrary to the public interest in free movement of workers, and free development of innovative ideas and practices.
Commodifying sheer talent: perverse developments in the law’s enforcement of restrictive covenants Joellen Riley
Introduction
Earlier chapters in this book have examined ways in which law creates and protects certain intellectual property rights, with a view to proposing law reform that would promote innovation. This chapter shares the concern that law should support (and certainly not suppress) human ingenuity and thereby foster economic growth and development, in the broad interest of public welfare. The focus in this chapter, however, is not strictly „intellectual property‟ law, but the law of contract. More particularly, the concern here is with law relating to restrictive covenants in employment and service contracts. The claim in this chapter is not that the law itself needs to be reformed, but that the practice of law should return to the doctrinal purity of the past. This chapter argues that the law concerning the enforceability of restrictive covenants in employment contracts has slipped into serious error. In Australia, the enforcement of restrictive covenants is a matter of private contract law, so disputes are dealt with by the ordinary courts, exercising common law jurisdiction. Restrictive covenants in services and employment contracts are expressly excluded from federal competition laws in Part IV of the Trade Practices Act 1974 (Cth) by s 51(2). There
1 Electronic copy available at: http://ssrn.com/abstract=1649877
are only limited opportunities for review of contracts on the basis that they contain „unfair terms‟ in Australia,1 so by and large, arguments over the enforcement of restrictive covenants are litigated in the Supreme Courts of the States. It is to those courts that the complaints here are addressed. In particular, this chapter argues that, by adopting property terminology in their reasoning about restrictive covenants, some judges have granted former employers property-like rights to control their former employees‟ exercise of talents and skill. An accretion of first instance cases generated by opportunistic and strategic litigation over these covenants has created the risk that the law (or at least, common perceptions of what the law is) will contribute to a sterilisation of creativity, productivity and innovation. This is a travesty. After all, one of the orthodox justifications for the recognition and legal enforcement of intellectual property rights is what might be called the „incentive‟ rationale (Van Caenegem 2006: 8; McKeough et al 2004: 2326). We promote investment in creative and innovative activities by allowing the creator/innovator to claim and exploit an exclusive property (or property-like) right in the fruits of the creative/innovative endeavour. This chapter will not challenge the incentive rationale in any comprehensive way. The narrower concern here is to expose the perverse practical effects that can arise from affording property-like rights to the fruits of certain skills and talents, especially when it is the employer of the skilled worker who is granted the rights (van Caenegem 2007). After this exposure, the chapter reflects on practical measures which may be adopted to ensure that law and legal practice is not allowed to sterilise innovation.
Four complaints
The first task of exposing perversity in some current legal practice involves identifying and explaining four complaints common to a number of recent decisions on restrictive covenants (also commonly called „non-compete covenants‟). The first and most fundamental complaint is that some dangerously flabby concepts of property are emerging because judges are adopting business accounting concepts to expand the concept of property at law. The concept of „goodwill‟, for example, is useful when accountants want to record on a balance sheet some estimation of the past and potential economic value of an enterprise. However goodwill is not a form of property in any legal sense. Goodwill does not confer upon 2 Electronic copy available at: http://ssrn.com/abstract=1649877
any legal person a „right in rem‟, i.e., a right enforceable against the whole world, to ensure that the business keeps its customers. It is nothing more than an accountant‟s estimation of the value of an aspect of business operations. Goodwill becomes a dangerous concept when it is translated into judicial statements to the effect that a stable workforce is also part of a firm‟s goodwill and is therefore an „asset‟ which can be protected from erosion by injunctions restricting people‟s liberty to compete in a labour market. See for example the statement of Brereton J in Cactus Imaging Pty Ltd v Peters (2006: [55]), that „staff connection constitutes part of the intangible benefits which may give a business value over and above the value of the assets employed in it, and thus comprises part of its goodwill‟. The characterisation of „staff connection‟ (in other words, the fruitful relationships between people) as part of the „goodwill‟ of an employer‟s business can hinder productivity and innovation if it leads to granting a former employer an entitlement to prevent workers from taking other employment for a period well beyond the notice period in their contracts of employment. The second complaint is that by framing the rights of employers as propertylike rights, these cases are effectively defeating the common law‟s natural defence against anti-competitive conduct. By casting employers‟ claims as legitimate and vested interests in a form of property rather than merely as bald attempts to enforce promises not to compete, these cases circumvent the common law doctrine making illegal restraints of trade. This ancient doctrine derives from a similar commitment to that expressed in the incentive rationale for recognising intellectual property rights: a liberal society ensures the public interest by allowing and encouraging individuals to exploit their productive talents and energies in their own, and hence the broader public interest. The rationale of this doctrine, as expressed by Lord Atkinson in Herbert Morris Ltd v Saxelby (1916: 699), is explained more fully below. Essentially, it is that the sterilisation of productive labour is so antithetical to the public interest, that the courts of law serving the public interest will not enforce any private bargain to restrain trade. Under the common law, such a private bargain is void for illegality, no matter how commercially savvy the parties were who made it: Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001). Thirdly, some of the worst decisions ignore even the doctrine of privity of contract, which holds that only parties to a contract may be burdened by the contract. A restrictive covenant purports to bind strangers to a contract by restricting the labour 3
market choices of persons who were never party to the service contract being enforced. This occurs whenever customers are told they may not deal with a certain ex-employee; whenever existing staff are told they may not accept job offers from a departing colleague; and indeed, whenever a rival enterprise is told that it is not permitted to recruit the services of the worker bound by the covenant. Fourthly, the effect of many of the judicial decisions criticised here is to undermine a fundamental principle, enshrined in the International Labour Organisation‟s Declaration of Fundamental Rights, that „labour is not a commodity‟: ILO (1944); O‟Higgins (1997: 225-234). At the core of the reasoning in these cases is the implicit assumption that the value of labour can be extracted from the labourer and treated as an asset on the employer‟s balance sheet. In reality, this value cannot be captured and used by the employer without the willing participation of the worker. Employers cannot force cooperation. The most they can do (and only with the support of a complicit legal system) is to sterilise the former employee‟s talents for a period, and so protect themselves from free competition for that time. Presently workers in many western industrialised economies are being asked to embrace reduced job security in the interest of more flexible and competitive labour markets. Individual job security is to be sacrificed in the interest of greater overall labour market participation: Collins (1991: 229). The trade-off for workers is supposed to be greater „career‟ security, gained through the promise of improved opportunities to enhance skills, experience and networks in order to navigate successfully from one enterprise to another in a fluid labour market: Stone (2001), (2002), (2004). At a time when this so-called „deregulation‟ of labour markets is creating pressures on job security, it is perverse for the law to legitimate employers‟ tactics to discourage labour market competition by interfering in the mobility of talent from one enterprise to another. The remainder of this chapter interrogates each of these four complaints in turn, before speculating on some strategies to overcome them. In summary, the complaints are that contemporary developments in the law evidence – 1. Inept adoption of accounting language in legal analysis; 2. Corruption of the common law doctrine against illegal restraints of trade; 3. Ignorance of the privity doctrine which protects the liberty of individuals from the imposition of burdens by others; and 4
4. Departure from respect for a fundamental human right, i.e., that people should be free from coercion in respect of their labour.
1.
Inept adoption of accounting-speak
A number of Australian decisions have strayed into error because in the course of reasoning, judges have translated accounting concepts that have been devised for predictive purposes in the discipline of financial business analysis, into legal rights that can be marshalled to constrain the freedoms of others. Accounting is descriptive and predictive but law is coercive. Law‟s power of coercion must be carefully constrained. It is not to be wielded simply because one party can see a self-interested economic advantage in securing a right against others. There are two kinds of cases that require analysis to unpack this argument. First there are the cases which stretch the notion of „confidential information‟ so that what in orthodox legal doctrine was purely a personal right to keep one‟s own secrets has become a way of claiming an exclusive, proprietary-like dominion over the ideas of others. It has long been held that certain kinds of commercially valuable information can be protected as a kind of property by the enterprise generating that information. This is the protection of the „trade secret‟ (by the common or judge-made law, outside of statutory regimes for the protection of patented inventions) by way of enforcement of an equitable duty of confidence. The common law, in its wisdom, has never been prepared to treat any idea – no matter how unique and valuable – as a form of property, subject to the exclusive control of a private owner. A person who wishes to restrict knowledge of an idea must do so by keeping it secret, and by imposing personal obligations of confidence on any person to whom the secret is disclosed. As the High Court of Australia explained in Breen v Williams (1996: 80), „information is not property at all‟. Whether the disclosure of information can be restrained depends upon the circumstances in which the information was acquired. „If it has been acquired in such circumstances that it would be a breach of confidence to disclose it to another, then courts of equity will restrain the recipient from communicating it to another‟: Breen v Williams (1996: 80). Although confidential information is often referred to as the „property‟ of the donor of the information, „in the end the real truth is that it is not property in any normal sense, but equity will restrain its transmission‟: Breen v Williams (1996: 80). 5
The action for breach of confidence is often mistaken as a proprietary claim because the remedies that flow from breach are similar to proprietary remedies for breach of trust: see also Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984: 438). For instance, in cases of breach of confidence, equity may grant an injunction to restrain disclosure of information, or may order that the secret-breaker must account back to the donor for any profit made from the disclosure. Nevertheless, these remedies are personal. They run only against the person who owes the equitable obligation of confidence. They cannot run „in rem‟, against the world. This point is particularly important in the context of the discussion below (in Part 3) of the doctrine of privity of contract. For a long time, the courts have been careful to restrict the expansion of the categories of information that can be protected as genuinely „confidential‟. In Wright v Gasweld Pty Ltd (1991: 334), Kirby P (as he then was) set out strict criteria for identifying confidential information. It needed to be the fruit of considerable skill and effort; it had to be jealously guarded by the employer; employees needed to be informed that the information was confidential; it should be the kind of information which the industry concerned customarily treated as confidential; and it should be disclosed only to high level employees on a „need to know‟ basis. Once information became known to the public it could not be confidential (see also Maggbury v Hafele), and any information that was part of the employee‟s own stock of knowledge and skill could also not be confidential to the employer: see Faccenda Chicken Ltd v Fowler (1987). In recent times, however, information which is much more mundane has been treated as confidential. In Woolworths v Olson (2004), information about the best way to lay out a supermarket to maximise sales was considered to be „confidential‟ information. In John Fairfax Publications Pty Ltd v Birt (2006), strategies for selling media advertising to real estate agents was held to be sufficiently confidential to warrant the grant of an interlocutory injunction preventing a young advertising sales manager from taking up a new job with another publishing house. In earlier times it is arguable that this kind of „information‟ would be regarded as just part of the industry know-how and creative ideas of the employees themselves. It has now joined the category of „confidential‟ information largely because employing enterprises have persuaded courts that this kind of information is commercially valuable and constitutes part of their „goodwill‟. „Goodwill‟ has been used as a 6
rhetorical device to persuade courts that what is really nothing more than an accountant‟s expectation of future value should be treated not only as an accounting „asset‟, but as a form of legal property. The cases on confidential information demonstrate that the strategic planning skills, the general know-how and creative thinking of working people can now be treated as a resource under the control of the employing business enterprise, not only during employment, but afterwards. While the former employer can still (mercifully) not enslave the former employee by requiring continued service, the employer can (with an appropriately drafted covenant in an employment contract) prevent the employee from taking that talent and exploiting it elsewhere for a time. What began in equity as an action to keep one‟s own secrets has evolved into a technique for capturing the intellectual capacities of others. More insidious than the confidential information cases, is a second category of cases, which have held that the personal charisma of a managerial employee who is able to hold together an effective team of workers, has likewise become the property of the employer, so that the employer can restrain the manager from offering alternative employment to the team members. Restraints giving effect to this type of claim have come to be known as „anti-poaching‟ clauses. This term is itself an illustration of the invidious way that concepts of property ownership have slipped into this field. „Poaching‟ connotes the thief who illegitimately hunts on the land of the lord of the manor, stealing the lord‟s livestock. Staff ought never to be treated as livestock. This body of case law owes its existence to reasoning by analogy from the cases about „customer connection‟ (Heydon 1999: 91-101). Former employers have been held to be entitled to enforce covenants whereby departing employees agree not to solicit customers or clients, on the basis that the employer has a legitimate interest in the personal bond and loyalty that customers may develop to the employer‟s staff: see Lindner v Murdoch’s Garage (1950: 633-634). The employer can lay claim to that „customer connection‟ because the employer has funded the good relationship. The employer has provided the resources and the back-up to allow the „front-line‟ employee to develop the relationship with the customer. If the employee moves to another enterprise, there is a period of time during which the customer may be vulnerable to approaches from the familiar former employee with whom they have developed the relationship. 7
An employee who has covenanted not to take advantage of this customer connection can be held to that promise, within limits. The limits are that the former employee can only be restrained from dealing with customers with whom they had personal dealings, and not with all of the customers of the former employer. Also, the restraint will be limited in time, to a period sufficient to allow the employer time to establish new relationships between the customer and continuing staff. It is important, however, that this kind of protection of customer connection is not mistaken as legitimation of a claim that the employer „owns‟ the customers (Riley 2003). It is nonsense to speak of customers as „assets‟ of a business. Customers are autonomous actors, free to deal with whomever they choose. Accountants are accustomed to describing customers‟ propensity to offer repeat business to a firm as „goodwill‟ of the firm, but this term describes nothing more than an estimated value of an expectancy. The customers are, and should be, free to deal with whomever they wish. The only rationale for enforcing a non-solicitation covenant in respect of clients is to prevent the former employee from exploiting the customer‟s temporary vulnerability to the pull of personal loyalty. It is the personal obligation of the former employee not to exploit that vulnerability that is enforced, not some property right in customers. Nevertheless, this accounting language has infiltrated legal reasoning with the result that goodwill is equated with a property right. For example, in Koops Martin v Dean Reeves (2006: [29]) Brereton J stated: „Goodwill, of which customer connection is the essence, is akin to a proprietary interest‟. Later he stated „that customer connection belonged [my emphasis] to the employer‟ (at [52]). In Hartleys Ltd v Martin (2002: [116]), the court described former employees as having taken „part of the plaintiff‟s assets with them in the form of clients‟. Cases which have held that an employer can enforce covenants not to „poach‟ staff rely on an analogy with the customer connection cases. The close personal loyalty of the customer connection is likened to a similar attachment between managers and their teams. Some cases have held that this „team glue‟ (Riley 2005: 18) contributes to maintaining a „stable workforce‟. A stable trained workforce is valuable, hence the employer has a legitimate and protectable interest in preventing departing staff from disturbing that stability by offering jobs to their former colleagues. English authority on this point has been divided. Office Angels Ltd v Rainer-Thomas (1991); Dawnay, Day & Co Ltd & Wilcourt Ltd v De Braconier 8
D’Alphen (1997); TSC Europe (UK) Ltd v Massey (1999) and Alliance Paper Group plc v Prestwich (1996) have allowed the existence of such an interest: see Brooks (2001: [42]-[49]). The English Court of Appeal in Hanover Insurance Brokers Ltd v Schapiro (1994: [16]) however stated most robustly that the fact that a firm depends upon its staff „does not make the staff an asset of the company like apples or pears or other stock in trade‟. Australian case law has tended to follow Dawnay, Day & Co Ltd: see for example Aussie Home Loans v X inc Services (2005); Kearney Australia Pty Ltd v Crepaldi (2006: [58]) and Cactus Imaging v Peters (2006). The trouble with this analogous reasoning is that it has taken a quantum leap. The close relationships between staff are not created by the employer. They are due to the entirely personal charisma and relationship skills of the workers themselves. The employer has been fortunate to have employed them till now, but can lay no claim to perpetual mastery of those personal attributes. So how has this reasoning developed? Again, the inept engagement of accounting speak is to blame. The following extract from Cactus Imaging Pty Ltd v Peters (2006: [55]) illustrates the incremental reasoning which moves from appreciating the economic value of goodwill, to asserting a property-like interest of an employer to restrain the movement of staff: [E]mployees are not property, but, all else being equal, a business with a stable trained workforce will be more attractive to a purchaser and command a higher price than one with a workforce which is unstable, disruptive or poorly trained, just as a loyal and satisfied clientele makes a business more attractive and valuable. In my opinion, staff connection constitutes part of the intangible benefits which may give a business value over and above the value of the assets employed in it, and thus comprises part of its goodwill. It is amenable to protection by a covenant in a manner similar to customer connection, even in the absence of protectable confidences. Everything the judge says about the economic value of a stable workforce is entirely true. From a financial business analysis point of view, a business with good staff relations is likely to be more successful. As Jenkins LJ said in an older English authority on these anti-poaching clauses, Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd (1958: 74), the value of a stable workforce is „an interest which employers are entitled to protect by all legitimate means, as by paying good wages and making their employment attractive.‟ But it is not legitimate to hold that 9
because good staff relations make good business sense, an employer should be granted a legal right to prevent those staff from exercising an entirely free choice of where they will work. The law is not obliged to grant and enforce rights just because businesses would make more money if they had those rights. In summary, the problem in each of these kinds of cases is that the accounting notion of goodwill is used to justify a legal conception of property. In accounting terminology „goodwill‟ is a useful way of identifying the economic value that a business entity is likely to derive in the future, from the fact that it has expended resources on things like research and development, marketing, advertising and customer service. Since future income flows can have a present value it makes sense that estimations of the goodwill in a business should appear on a balance sheet. But this does not mean that the business has a legal property right in any of the components making up the goodwill. The propensity of customers to provide repeat business, for example, is not a property right in a legal sense. No one can force the customers to keep coming. No one can stop the customers from taking their business elsewhere. The value of the goodwill depends on what the law would describe as a „mere expectancy‟ – a hope that an event will happen, but a hope unsupported by any legal entitlement to force that result. A legal property right is very different. A legal property right is a right to claim a certain benefit, to claim it against the whole world, and to have the support of the machinery of the State‟s legal system in enforcing that claim. At this point, some readers may raise an objection. The cases described above all concerned the enforcement of contractual promises made by former employees. Why does it matter whether the employer‟s interest was proprietary or not, when the cases ultimately concerned the enforcement of a personal obligation under a contract? Did the employee in each case not voluntarily surrender their liberty? It matters because such contracts ought not to be enforceable, if they purport to enforce an illegal restraint on trade. This brings us to the second complaint about the development of case law in this area.
2.
Corruption of the doctrine making illegal restraints of trade.
The reason that it is dangerous to recognise that an employer has a „legitimate interest‟, i.e. a legally recognised and supported entitlement, in a stable workforce is that recognition of such an interest undermines an important and very ancient 10
principle of the common law, making illegal restraints of trade (Blake 1960; Heydon 1991). This doctrine is underpinned by faith in the view that the public interest is best served by supporting individuals‟ freedom to engage in productive activities. So in Herbert Morris Ltd v Saxelby (1916: 699), Lord Atkinson said: „The general public suffers with [the worker who is restrained], for it is in the public interest that a man should be free to exercise his skill and experience to the best advantage for the benefit of himself and all those who desire to employ him‟. The doctrine works by ensuring that courts refuse to enforce private contracts purporting to restrict those freedoms. This is an area where the public interest (justified on the basis of sound economic policy) is held to trump private arrangements. We must remember that a contract is nothing more than an agreement enforceable at law. Contracting parties have very little power to enforce their own agreements without the support of law. Nevertheless, if it is not in society‟s interests to support certain private bargains, then society is under no obligation to provide the legal machinery to enforce those contracts. It seems that courts are forgetting this fundamental proposition. The doctrine against restraints is a doctrine asserting that courts must refuse to enforce contracts – even voluntarily entered agreements, made by well-advised parties – if those contracts purport to restrain trade and so defeat the public interest in unhindered economic activity. Too often judicial decisions now contain statements implying that the parties‟ own agreement is sufficient to justify the enforcement of a restraint. For example, in John Fairfax Publications Pty Ltd v Birt (2006: [95]), Brereton J upheld a restraint keeping a young man with a dependent wife and children out of work for three months (in circumstances where hardship was pleaded in the case) on the basis that the young man was the „author of his own misfortune‟. The point of the restraint of trade doctrine is that it applies notwithstanding private agreement, and we don‟t have to find some separate ground (such as unconscionable dealing or inadequate understanding) to set aside the contract. We don‟t even have to find hardship, although individual hardship is another justification for the existence of the doctrine making illegal restraints of trade. The exception to the doctrine making restraints illegal is the proposition that a restraint may be enforced if it goes no further than is reasonably necessary to protect a legitimate interest of the employer. So long as „legitimate interests‟ continue to be confined to those proprietary rights that employers themselves already held, so that 11
the contractual restraint works to prevent a loss of that existing entitlement, then the exception is sound. The problem has arisen because of the practices described above. Some courts have begun to accept that employers have legitimate interests in the skills, ideas, talents and personal charisma of their staff. These things are not property, and even if they were, they should not be taken as belonging to the employer. Even the protection of „confidential information‟ has gone too far. Too many ephemeral things, such as „commercial strategies‟ and „marketing plans‟ generated by the departing employees themselves have been protected as the confidential information of the employer. These things have been held to be too vague to capture in any explicit injunction restraining their use in future employment, so instead (on the basis of the argument in Littlewoods Organisation Ltd v Harris (1977: 1,479), that it is more convenient to just stop an employee from competing than to try to enforce an injunction preventing the use of particular information), courts have been willing to stop the employee from working at all for the duration of the restraint. It seems counter-intuitive that information can be so vague, but still constitute the kind of information that the law will protect as confidential according to the principles laid out in Wright v Gasweld Pty Ltd (1991: 334). In any event, it seems deeply unreasonable that the employee should bear such an extreme cost (i.e., the inability to work in their chosen field for a significant period of time), in the interests of protecting such vague and ephemeral information. In Shakespeare‟s Merchant of Venice, Shylock was forbidden by the court from taking the pound of flesh for which he had contracted, because to do so would rob his victim of vital blood, which was not the subject of the bargain. Our present law turns this on its head. The employee is made to surrender up their life-blood – the very liberty to work and use their own know-how, skills and talents to the full – in order to render to the employer a mere pound of so-called confidential information. This is particularly unreasonable when the employer‟s claim is not to genuinely confidential information, but to certain attributes of human talent, such as the employee‟s ingenuity and personal charisma. And it is doubly so, when the employer‟s claim affects not only the employee giving the original covenant, but others who were strangers to the initial bargain. This brings us to the third complaint.
3.
Ignorance of privity 12
Whenever an anti-poaching covenant is enforced (whether it concerns customers or colleagues), it affects not only the person who signed the original employment contract, but also all the people with whom they are now barred from doing business. Some cases have given a very loose definition to the notion of solicitation, so that it captures circumstances where the recruit makes the initial contact with the person restrained: see for example Ecco Personnel Pty Ltd v Barrett (1998). This means that the enforcement of the anti-poaching covenant limits the freedom of the people who would like to move with the departing manager. They were not party to the agreement, so why should their liberties be restricted in any way by that agreement? To allow such a result is to ignore the doctrine of privity. Undergraduate law courses perhaps focus too much on the aspect of the privity doctrine that precludes non-parties from enforcing the terms of a contract, even when the contract purported to confer a benefit upon that non-party. We often gloss over the other face of privity – the aspect that ensures we cannot have a burden thrust upon us without our own agreement. We cannot be made the victims of the bargains of others. This seems to have been completely forgotten in some of the case law enforcing anti-poaching clauses. The reports of these cases, often heard as urgent interim injunction applications, rarely record any evidence being taken from the workers who are to be prevented from accepting employment with the departing contract-breaker. See for example Hartleys Ltd v Martin (2002), where a personal assistant, Ms Briggs, was prevented from taking up a position with the two stockbrokers whom she had assisted, when they left to work with a rival firm. Ms Briggs had already given one month‟s notice to her employer, but was effectively prevented from taking up her new employment when the Martin brothers were injuncted from offering her employment. The report of this decision is completely silent about what Ms Briggs was required to do for the three months in which she was prevented from taking up the new job offer. There is no record of her being asked to give evidence in the case. Was she obliged to suffer three months unemployment? Was she effectively forced to return to her post at Hartley‟s? Either result is contrary to orthodox doctrine. No injunction ought to have been given which would force her to perform a contract against her will: Lumley v Wagner (1852); Meagher, Heydon and Leeming (2002: [21-220]). Neither should her ability to earn a living been sterilised (even if it was her own covenant being enforced): see Page One Records Ltd v Britton (1967). 13
What, too, of the interests of the rival broking firm? Why should their ability to engage staff be limited by an arrangement made between others? Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd (1958: 54) refused to enforce a voluntary agreement not to recruit from the members of another‟s staff. How then can more recent cases enforce such restrictions when they were not even voluntarily assumed? See for example IceTV v Duncan Ross and Ors (2007), which tells the story of two innovators in the media technology field who were been exiled from this fastmoving marketplace, on the basis of a former employer‟s claim that they should not be allowed to work for Mobilesoft, a company which had been a „prospective‟ (but not an actual) client of the former employer (Riley 2008). The employees were prevented from accepting an offer of employment initiated by Mobilesoft. On what basis was it at all reasonable to restrict Mobilesoft‟s options for recruitment, when it had never even become a client of the plaintiff firm? Injunctions given in these circumstances clearly stifle free competition in labour markets, to the disadvantage not only of the workers affected, but of the market as a whole. This is a particularly obnoxious result when parties‟ choices are limited by an order to enforce an agreement to which they were complete strangers. This concern leads us to the fourth and final complaint. The privity doctrine is a private law doctrine which, in many respects, supports a fundamental human right to liberty.
4.
Human rights dimension
These contemporary developments in the enforcement of restrictive covenants infringe a fundamental principle of international labour law that labour is not to be commodified. There are many meanings to this principle. At the most basic level, people are not to be enslaved and sold, but the principle is more subtle than that. People‟s work is an intrinsic part of their identity. Work is not to be treated as if it is just like any other saleable commodity, to be priced and traded according to the dictates of bloodless economic rationalism. Any legal development that countenances the separation of labour from the labourer is to be resisted, because it leads down a very slippery slope towards the alienation of human beings from their own work. We must remember that the result of many of these cases is to take workers out of the labour market for a period. If there is any meaningful „right to work‟, it 14
must at least sound in an entitlement to pursue one‟s chosen occupation by exploiting one‟s own skills and talents. Certainly, a restraint is legitimate if the worker purports to steal the fruits of others‟ labours – but it should not be legitimate to restrain their engagement in productive work from harnessing their own unique talents and their general know-how. Our legal imagination has taken us too far and into dangerous territory. Intellectual property law has been successful in capturing the fruits of labour and converting them into ownable, tradeable commodities. Examples are copyright works, patentable inventions, and trademarks. Through the progress of laws protecting what we call intellectual property rights we have learned to regard the products of certain kinds of creative labour as property. By making these things proprietary, we permit owners to exclude other users from their benefits. Commodifying the fruits of labour may be justifiable, but commodifying labour itself is a dangerous incursion into human liberty. The contemporary practice of law in enforcing certain restrictive covenants in employment contracts has stepped into that perilous territory.
Practical measures
It is not enough to complain of the weaknesses of our laws and the ways in which they have developed and are enforced. This book has promised to deliver useful ideas for law reform. Fortunately, in the field of the enforcement of restrictive covenants, there are some relatively straightforward reforms which may quickly address the complaints outlined above. First, we should recognise that many of the decisions in this field are made at an interlocutory stage. Employers seek urgent injunctions, on the basis that the time necessary to prepare for a full hearing will exceed the period of the restraint. If the employee is not restrained in the meantime, the employer will be left only to a claim for damages, because the period of the restraint will have expired by the time of hearing. In any other kind of case, the plaintiff would have to establish that damages were an inadequate remedy to succeed in claiming an injunction on this basis. However cases about the enforcement of negative covenants are treated differently on the basis of the doctrine in Lumley v Wagner (1852): see Spry (1990: 561ff). (This was the case of the opera singer who was held to a promise not to sing in rival 15
establishments for the duration of her contract.) On this basis courts are persuaded to grant injunctions without a full hearing of the merits of the case, so long as there is a serious question to be tried and the balance of convenience favours granting the injunction. While ever this balance of convenience is weighted in favour of the employer seeking the injunction, there is a serious risk of injustice to the worker, and sterilisation of innovation and productivity. If the injunction is granted, there is rarely any call for a final hearing. The interim injunction will have achieved the employer‟s objective of keeping the worker out of the marketplace for a sufficient period to ruin the worker‟s prospects of offering any effective competition. In IceTV v Duncan Ross and Ors (2007), (described above) an injunction was granted to prevent an inventor and a business manager from taking up employment offers in the media technology industry, notwithstanding that the former employer had itself dismissed the two innovators. It was in financial straits and was not in a position to engage their services any longer. The sheer injustice of enforcing a restraint when the employer had no use for the labour itself is breathtaking. A year later, these men were still unemployed. It is unlikely that this result could have occurred if the courts in New South Wales were to adopt the approach taken by the Supreme Court of New York in Jacobi Tool & Die Manufacturing Inc and Jacobi v Mondi and Ors (2007: 3): „A party seeking the drastic remedy that a preliminary injunction confers must establish a clear legal right to that relief under the law and upon undisputed facts set forth in the record [citations omitted]. To prevail on a motion for preliminary injunction relief, the movant must clearly demonstrate a likelihood of success on the merits, the prospect of irreparable harm or injury if the relief is withheld and that a balance of the equities favours the movant‟s position.‟ Unfortunately, the contrary approach has been taken in New South Wales in recent times. As an extreme example, take the statement of Brereton J in the Supreme Court of New South Wales, in Otis Elevator Co Pty Ltd v Nolan (2007: [30]): „I am of the view that the mere fact that the injury to the plaintiff is slight or non-existent is insufficient to justify declining an injunction on discretionary grounds; so also is the mere fact that enforcement of the injunction would occasion considerable hardship to the defendant‟. Otis Elevator Co involved a claim that a brand new recruit, who had attended no more than an initial orientation seminar giving by the employer, should be prevented from 16
changing his mind promptly and taking up an alternative offer of employment in the industry. Fortunately, Mr Nolan succeeded in demonstrating to the court that he had acquired absolutely no valuable information about the employer‟s operations at this training session. Otherwise, the harsh approach taken by the judge may have rendered him unemployed for six months following this abortive job-start with Otis. Statements such as the one cited above (from Otis) embolden employers in seeking to enforce restraints. According to this formula, they do not have to demonstrate any injury at all from breach of the covenant. How can an interest be sufficiently „legitimate‟ to warrant the protection of the exception to the doctrine of illegal restraint of trade, if the plaintiff cannot demonstrate that the interest has a value? It would be far better if Australian courts adopted the New York approach in Jacobi. (For a general explanation of the United States approach to these kinds of cases, see Hogan (2006).) If an employer knew that to succeed in obtaining an injunction they must prove serious and irreparable harm, fewer of these claims may be brought. Presently, the balance is tipped in favour of the employer plaintiff, who needs only to demonstrate the existence of a restrictive covenant, and steps taken by the departing employee that may breach it, to succeed in thwarting the employee‟s liberty to work in the industry. A second practical step for reducing the harm caused by these developments would be to reinvigorate proper understanding of the common law doctrine making illegal restraints of trade. Employers should be required to demonstrate that an employee is taking away something more than the employee‟s own accumulated skill, experience and personal attributes before the employer is entitled to establish a „legitimate‟ interest sufficient to support enforcement of a restrictive covenant. The law should return to the concept of a genuine „trade secret‟, and resist the present trend towards allowing any emphemeral business plan or marketing strategy to constitute sufficiently „confidential‟ information to justify restrictions on labour market movements. Judges in particular should be wary of arguments purporting to bootstrap accounting concepts, like „goodwill‟, into legal property claims.
Conclusions
There will be critics of these views, who would prefer to focus on the employing business‟ side of this competition of interests. They will argue that businesses will 17
not invest resources in marketing strategies, customer relationships and personnel development if they cannot protect that investment from competition. This is a spurious argument. If no-one has the benefit of legal rights preventing the departure of their best staff, then everyone will have to continue to invest more to keep ahead of the game. Silicon Valley developed a software industry without the benefit of copyright protection in computer programs, and in a labour market where employment was „at will‟. Business and industry can thrive without legal protection from competition. Some may also complain that this argument strains at gnats. The enforcement of these contractual restraints only affects seriously high flyers, doesn‟t it? Not any more. These kinds of clauses are appearing in the contracts of sales people and a whole range of knowledge workers. This is not just a matter concerning Chief Executive Officers. It has the potential to seriously impact markets for skilled labour. It may also be argued that these restraints do little harm because they are enforced for a limited period, not forever. Even three months is too long to keep a person out of productive work, especially in a labour market with skill shortages. However we are seeing longer and longer periods being enforced. It is not uncommon now to see restraints claimed for six months or a whole year. The risk is that a long restraint may dampen the enthusiasm of a new employer to make the offer of a job. An employee faced with the prospect of remaining out of the labour market in his or her field of expertise for many months may behave more conservatively in investigating more productive uses of their talents. It is also deeply unfair that a practice of demanding long restraints in employment contracts, and in vigorously pursuing them, has developed in an environment of greater job insecurity for employees. We must also remember that some of these restraints have been enforced in circumstances where the former employer terminated the employment: see IceTV v Duncan Ross (2007). So for reasons of market efficiency, and of fairness to employees, the law in this field needs careful revision, and a return to the more robust pro-competition doctrines of the past. The optimization of creative endeavour requires a freely competitive labour market (van Caenegem (2007: 278). Laws which restrain the mobility of workers also restrict creativity and innovation.
Cases: 18
Alliance Paper Group plc v Prestwich [1996] IRLR 25. Aussie Home Loans v X inc Services [2005] NSWSC 285. Breen v Williams (1996) 186 CLR 71. Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717. Dawnay,Day & Co Ltd v de Braconier d’Alphen [1998] ICR 1068. Ecco Personnel Pty Ltd v Barrett [1998] NSWSC 545. Faccenda Chicken Ltd v Fowler [1987] Ch 117. Hanover Insurance Brokers Ltd v Shapiro [1994] IRLR 82. Hartleys Ltd v Martin [2002] VSC 301. Herbert Morris Ltd v Saxelby [1916] AC 688. IceTV v Duncan Ross and Ors [2007] NSWSC 635. Jacobi Tool & Die Manufacturing Inc and Jacobi v Mondi and Ors, 2007 WL 3325854 (NY Supp). John Fairfax Publications Pty Ltd v Birt [2006] NSWSC 995. Kearney Australia Pty Ltd v Crepaldi [2006] NSWSC 23. Kearney Australia Pty Ltd v Crepaldi [2006] NSWSC 23. Koops Martin v Dean Reeves [2006] NSWSC 449. Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1958] 2 All ER 65. Lindner v Murdoch’s Garage (1950) 83 CLR 628. Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1,472. Lumley v Wagner (1852) 42 ER 687. MaggburyPty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181. Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414. Office Angels Ltd v Rainer-Thomas [1991] IRLR 214. Otis Elevator Co Pty Ltd v Nolan [2007] NSWSC 593. TSC Europe (UK) Ltd v Massey [1999] IRLR 22. Woolworths Ltd v Olson [2004] NSWCA 372. Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317.
References: Blake, Harlan M (1960) „Employee Agreements Not to Compete‟, Harvard Law Review Vol 73: 625.
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Brooks, Adrian (2001) „The Limits of Competition: Restraint of Trade in the Context of Employment Contracts‟, University of New South Wales Law Journal, Vol [2001]: 27. Collins, Hugh (1991) „The Meaning of Job Security‟, Industrial Law Journal, Vol 20(4): 227-239. Heydon, J D (1999) The Restraint of Trade Doctrine, 2nd ed, butterworths, Sydney. Hogan, Thomas M (2006) „Uncertainty in the Employment context: Which Types of Restrictive Covenants are Enforceable?‟ St John’s Law Review, Vol 80: 429-454. ILO (1944) International Labor Organisation Declaration of Philadelphia. McKeough J, A Stewart A and Griffith P (2004) Intellectual Property in Australia, 3rd ed, Butterworths, Sydney. Meagher R, Heydon D and Leeming M (2002) Meagher Gummow & Lehane’s Equity Doctrines & Remedies, 4th ed, Lexisnexis Butterworths, Sydney. O‟Higgins, Paul (1997) „ “Labour is not a commodity” – an Irish Contribution to International Labour Law‟ (1997) Industrial Law Journal, Vol 26(3): 225-234. Riley, Joellen (2003) „Who Owns the Customers? A Reflection on Recent Cases on Post Employment Restraint Clauses‟ Commercial law Quarterly, Vol 17(3): 3. Riley, Joellen (2005) „Who Owns Human Capital? A Critical Appraisal of Legal Techniques for Capturing the Value of Work‟, Australian Journal of Labour Law, Vol 18(1): 1. Riley, Joellen (2008) „Innovation put on Ice? How overly jealous intellectual property protection discourages creativity and productivity‟, Australian Intellectual Property Law Bulletin, Vol 20(7): 102. Spry, I C F (1990) The Principles of Equitable Remedies, 4th ed, Law Book Company Ltd, Australia. Stone, Katherine V W (2001) „The New Psychological Contract: Implications of the Changing Workplace for Labor and Employment Law‟, UCLA Law Review, Vol 48: 519. Stone, Katherine V W (2002) „Knowledge at Work: Disputes over the Ownership of Human Capital in the Changing Workplace‟ Connecticut Law Review Vol 34: 721. Stone, Katherine V W (2004) From Widgets to Digits: Employment Regulation for the Changing Workplace, Cambridge University Press, UK, Ch 7. van Caenegem, W (2006) Intellectual Property, 2nd ed, Butterworths, Sydney
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van Caenegem, W (2007) „The Mobility of Creative Individuals, Trade Secrets and Restraints of Trade‟, Murdoch University E Law Journal Vol 14 No 2: 265-279.
Professor of Law, University of New South Wales The New South Wales Industrial Relations Commission exercises a jurisdiction to review contracts under which work is performed in industry in NSW (see Industrial Relations Act 1996 (NSW) ss 105106) however the operation of this jurisdiction was severely curtailed by the Workplace Relations Amendment (Work Choices) Act 2005 (Cth) and Independent Contracts Act 2006 (Cth), which overrode the jurisdiction of State tribunals over any workplace relations matters. Before the enactment of these statutes, some cases involving restrictive covenants were heard by the Commission, and resolved according to a discretion to vary contracts. See for example Haddad v S & T Income Tax Aid Specialists Pty Ltd (1985) 13 IR 16. 1
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