Webinar Series: Confidentiality and Restrictive Covenants ...
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37 Offices in 18 Countries Webinar Series: Confidentiality and Restrictive Covenants Around the Globe Australia and Japan 7 March 2013 Dominique Hartfield Anna Elliott Sayaka Kasahara
Transcript of Webinar Series: Confidentiality and Restrictive Covenants ...
37 Offices in 18 Countries
Webinar Series:
Confidentiality and
Restrictive Covenants
Around the Globe
Australia and Japan
7 March 2013
Dominique Hartfield
Anna Elliott
Sayaka Kasahara
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Today’s presenters
Jane Bullen
Partner and today’s moderator
UK
Dominique Hartfield
Senior Associate
Perth, Australia
Anna Elliott
Senior Associate
Sydney, Australia
Sayaka Kasahara
Associate
UK (Japan)
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Australia - overview
• What are the key areas of the law in Australia?
• What types of protection and restraints are available in
Australia?
• How do I make contractual terms stick?
• What other legal options are available, such as the use of
confidentiality clauses/agreements?
• What practical steps and strategies can be implemented to
protect your business?
• What is the impact of social media?
• What are the available remedies in Australia?
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Australia – Key areas of the law
• At common law, restrictive covenants in an employment
context are prima facie void
• However the courts will enforce a restraint so long as it is
not wider than is reasonably necessary to protect an
employer’s legitimate business interests
• Recognised interests include:
Protection of confidential information
Protection of customer relationships
Protection of stable workforce
• Common types of restraint:
Non-compete (i.e. cannot work in the industry)
Non-solicit (e.g. customers)
Non-poaching (e.g. employees)
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Making contractual terms stick…
• In assessing the reasonableness of a restraint the courts
will consider the extent of the activities being restrained,
the geographic area and the time period during which the
restraint operates
• Other assessing factors taken into account arise from the
circumstances at the time the contract was entered into,
the nature of the business and clientele, the employee’s
position and relationship with customers, and any
amounts paid for the restraint
• Limiting the scope of the restrictions will maximise
chances of enforceability
• Use of cascading restraints by employers
• Use of a restraint payment clause
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Australia - key areas of law
• Notice of termination – the use of extended notice periods in
employment agreements
• Garden leave – the use of garden leave provisions to protect the
employer while the employee is still employed
• Liability of employers for inducing a breach of contract
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Australia – case examples
• Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111
• Full Court of Federal Court upheld a 2 year ‘no-competition’ and ‘no-
interest’ restraint
• Employee had received a restraint payment and the period reasonably
accommodated the contractual cycle on which the company operated
• Seven Network (Operations) Ltd 7 ors v James
Warburton (No 2) [2011] NSWSC 386
• Supreme Court of NSW found a non-compete restraint clause contained
in a management equity participation deed was valid and granted an
injunction restraining the employee for a 10-month period within Australia.
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Australia – other legal options
• New South Wales - employers have the benefit of the
Restraints of Trade Act 1976 (NSW)
Stacks Taree v Marshall [2010] NSWSC 34
• Statutory duties - the Corporations Act 2001 (Cth) imposes a
number of duties on directors, officers and (in some cases)
employees, including:
s181 - duty to act in good faith
s182 - must not improperly use position
s183 - must not use information to cause detriment or gain
advantage
• Fiduciary duties and implied terms
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Australia – other legal options
• Law of confidential information – based on:
Contract - express contractual provision
Equity – equitable doctrine of confidence
• Intellectual property:
ownership by agreement
if in the course of employment, employer owns
(no “default” rule for patents)
• Remuneration strategies:
discretionary payments
deferred payments
retention bonuses
other options
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Australia – practical steps and strategies
So an employee has resigned. What do we do?
Step One
Consider options for notice period
Step Two
Remind employee of restraints and obligations
Step Three
Conduct surveillance and monitor breaches
Step Four
Consider remedies in the event of breach
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Australia – evidence gathering
• IT investigations
Impact of Workplace Surveillance Act 2005 (NSW), Surveillance
Devices Act 1988 (WA)
In-house investigations vs forensic IT expert
Sources of information include
• Work emails (including backups for deleted emails)
• Internet access
• Deleted files
• Link files
• Windows registry records for USB key/portable hard drive use
• Other sources
• Work mobile telephone records
• An informant: persuading a departing employee to stay
• Clients
• Evidence gathering
• Impact of social media
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Australia – available remedies
• Remedies in the event of breach:
Undertakings
Interlocutory injunctions to enforce restraints
(must be timely)
Preliminary discovery
Anton Piller order
Breach of contract
Breach of fiduciary duties and other equitable
claims
Damages / account of profits (review loss and
damage)
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Australia – summary of practical tips
• Restraints (‘enforceable ones’) – identify the
legitimate interest to be protected
• Gardening leave and notice provisions
• Confidential information and intellectual
property
• Strong breach letters and undertakings
• Gather evidence and investigate
• Take any necessary legal action
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Japan – Overview
• What types of protection and restraints are available for the
employer in Japan (during and after employment)?
• Post-employment restrictive covenants – are they
enforceable?
What business interests can a company protect?
For how long can a company restrict an ex-employee from
competing?
Is compensation a necessary element?
• Remedies – what can you do if an ex-employee breaches the
restrictive covenants?
• Making your contract terms stick
• What is the impact of social media?
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Japan – Importance and scope
How is an employee’s ability to compete restricted?
During employment:
Fiduciary duties/duty of fidelity
– Directors: fiduciary duties/ duty of fidelity
-> Express prohibitions to compete under the Companies Act
– Employees: duty of fidelity
-> Implied contractual terms preventing the employee from competing –
the Labour Contract Act
Express contractual terms
Post-employment:
No fiduciary duties/duty of fidelity
Need express agreement with the employee not to compete (“post-
termination restrictive covenants”) – by way of contract, work rules,
declaration, etc.
Other restrictions (during and post-employment):
Act of tort
The Unfair Competition Prevention Act (in relation to trade secrets)
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Japan – Types of restraints available
Types of restraints:
Non-compete
Non-solicit
Non-deal
Non-poaching
Prohibiting the use of confidential information
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Japan – Enforceability: overview
Restrictive Covenants
-legitimate business interest
of the employer
Freedom of Occupation -constitutional right of an
ex-employee
Limitation on what can be
agreed
Key considerations paid by the courts when deciding the enforceability:
1. Is there a clear agreement with the employer and the ex-employee
as to the scope of the restrictions?
2. Is there a legitimate business interest of the employer to protect?
3. What was the position/role of the ex-employee while in employment?
4. What acts of competition are restricted? For how long?
Geographical area of the restrictions?
5. Is there compensation paid to the ex-employee?
6. Public interest?
7. Other circumstances specific to the case?
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Japan – Enforceability: closer look
What do they mean?
1. Clear Agreement.
Have you clearly agreed with the ex-employee the terms of the
restrictions, e.g., what acts are prohibited, for what competitors the
ex-employee is prohibited to work, for how long, etc.?
If not, the courts will render the restrictive covenants void.
2. Legitimate interest of the employer.
What interests of the employer can be protected?
Trade secrets (will be given high level of protection) and other
confidential information (what confidential information will be
protected?).
Trade connections with customers.
Maintaining the stability of the workforce.
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Japan – Enforceability: closer look
3. Position of the ex-employee while in employment.
Was the ex-employee in a position to access the important
information of the company?
Is it reasonably necessary to impose restrictions on an ex-
employee in that position for protection of the company’s
interests?
4. The actual activities restricted, the duration of the
restrictions, and the geographical area of the restrictions.
These must be reasonable and adequate in order
necessary to protect the business interest of the employer.
No established limit of time which the courts consider
reasonable/adequate – it depends on what is considered
reasonable under the circumstances of each case.
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Japan – Enforceability: closer look
5. Compensation.
Monetary compensation paid to the ex-employee for
imposing the restriction?
A very important element although it does not need to be
paid separately / independently under the name of
“compensation” – it can take different forms and different titles,
e.g., a higher salary during employment or as part of the
severance pay.
6. Public interest.
7. Other considerations.
• The disadvantages to be incurred by the ex-employee.
• Wrongful conduct on the ex-employee’s side.
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Japan – Making contractual terms stick
• The departing employee often starts preparation while still in
employment, e.g., soliciting the customers and poaching colleagues.
Although an employee has an obligation not to compete during
employment this protection is not thorough; it is still recommended to
have express provisions dealing with non-competition / confidentiality
in the employment contract/work rules.
• Make the scope of the post-termination restrictive covenants clear and
limit them to the extent that is reasonable and necessary to protect the
company’s legitimate interests.
• Given the seriousness that the courts place on any compensation
paid, include a compensation clause in the agreement.
• It is common for a Japanese company to include the post-termination
restrictive covenants clauses in the work rules – by the nature of the
document, the clauses can’t avoid becoming general. In order to
maximise the chances of enforceability, you should try to obtain an
individual agreement or declaration from the employee specifically
designed for his/her position.
• Reduction (return of part) of severance pay is easier to be upheld by
the courts than non-payment (return of all) of severance pay.
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Japan – Leading Cases
• Foseco Japan Limited Case – Nara District Court 23.10.1970
• The leading case discussing the enforceability of post-termination
restrictive covenants. The court upheld the 2 year ‘non-competition’
restraint and granted injunction to prevent former employees becoming
and acting as the directors of a competitor.
• Yamada Denki Co., Ltd Case – Tokyo District Court 24.4.2007
• The court upheld the 1 year ‘non-competition’ restraint and ordered a
former area manager to pay back the amount equivalent to half the
severance pay and one-month salary (amounting JPY 1,430,000) as
damages incurred by the company.
• American Life Insurance Company Case – Tokyo District
Court 13.1.2012
• The court rendered void the 2 year ‘non-competition’ restraint which
included non-payment of the severance pay in case of breach,
reasoning that the restrictions are too broad in terms, and ordered the
company to pay full amount of the severance pay (amounting JPY
30,370,000) to a former executive officer (shikkoyaku) .
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Japan – Other legal options
• Act of Tort
• Unfair Competition Prevention Act – Trade secret
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Japan – Practical points
Practical steps to be taken where competitive activity is
suspected/discovered:
• Ascertain relevant facts:
Check the relevant employment contracts, work rules and other
agreements with the ex-employee to find out applicable non-
competition clauses.
Check the position and role of the ex-employee while in employment.
Was he in a position to access the sensitive information of the
company?
Find out if other ex-employees are involved in the competitive activity.
• Evidence gathering:
Speak to employee’s colleagues (/customers)
Check the computer system, including electronic diaries, emails,
internet usage
Telephone / mobile records
Unusual or unexplained behaviour
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Japan - Remedies
Available remedies:
Out of court settlement
Injunctions to enforce restraints
Damages
Non-payment / reduction / return of severance pay
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Japan – Social media
• Impact of social media
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Contact Details
Dominique Hartfield
Senior Associate
Perth, Australia
T: +64 8 9429 7500
Anna Elliott
Senior Associate
Sydney, Australia
T: +64 8 8248 7804
Sayaka Kasahara
Associate London, UK
T: +44 20 7655 1347
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Disclaimer
• The information contained in this presentation is for general
information purposes only and should not be construed as
giving the ground for any action or omission in connection with
the above material.
• This presentation should not be construed as professional
advice on legal or any other matters.
• The examples given in this presentation are described with a
level of detail that does not provide for their implementation
without additional comprehensive review with due regard to
specific relevant facts and circumstances.
• The application of laws and statutes may vary depending on
particular circumstances.
• Squire Sanders does not assume liability for any damage that
may be caused to anyone as a result of any action (or omission)
on the basis of the information contained herein.
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37 Offices in 18 Countries
Webinar Series:
Confidentiality and
Restrictive Covenants
Around the Globe
Australia and Japan
7 March 2013
Dominique Hartfield
Anna Elliott
Sayaka Kasahara
