Can the Spring­board prin­ci­ple be applied to restrain a for­mer employee?

In Brief

Employ­ers have strug­gled in the past to find ways of restrain­ing a for­mer employ­ee from set­ting up in com­pe­ti­tion and from solic­it­ing their clients and their good­will in the absence of a ded­i­cat­ed restraint of trade covenant con­tained in the employ­ee’s con­tract of employment.

How­ev­er, a recent deci­sion of the Fed­er­al Court of Aus­tralia in APT Tech­nol­o­gy Pty Ltd v Alade­saye [2014] FCA 966 (5 Sep­tem­ber 2014), seems to have come to the aid of employ­ers in this sit­u­a­tion, by deter­min­ing that the ​“spring­board prin­ci­ple” can apply to for­mer employ­ees in cer­tain circumstances.

The spring­board principle

The spring­board prin­ci­ple was con­sid­ered in the Unit­ed King­dom in a case of Ter­rapin Lim­it­ed v Builder’s Sup­ply Com­pa­ny (Hayes) Lim­it­ed [1967] RPC 375. Briefly stat­ed, in that case the defen­dant man­u­fac­tured pre­fab­ri­cat­ed portable build­ings accord­ing to the design of the plain­tiff. In order to man­u­fac­ture these portable build­ings, the defen­dants had received from the plain­tiff: man­u­fac­tur­ing details, spec­i­fi­ca­tions and tech­ni­cal infor­ma­tion and know-how. After the con­tract end­ed the defen­dant start­ed offer­ing for sale, a pre­fab­ri­cat­ed build­ing which includ­ed many fea­tures of the plain­tiff’s orig­i­nal design, in com­pe­ti­tion with the prod­uct being offered by the plain­tiff. The plain­tiff sued. 

The defen­dant claimed its oblig­a­tion of con­fi­dence was dis­charged by the plain­tiff hav­ing sold build­ings and pub­lished brochures which dis­closed all fea­tures of the build­ing (in oth­er words the con­fi­den­tial infor­ma­tion to which the defen­dants had been sub­ject, could eas­i­ly be ascer­tained by reverse engi­neer­ing and read­ing the mate­r­i­al in the pub­lic domain). 

The tri­al judge, Rox­burgh J, con­sid­ered that it was clear the defen­dants had derived a sig­nif­i­cant advan­tage from the con­fi­den­tial infor­ma­tion pro­vid­ed by the plain­tiff and had used it as a spring­board in order to com­pete with the plain­tiff. As such, it was appro­pri­ate that it now be placed under a spe­cial dis­abil­i­ty in the field of com­pe­ti­tion, in order to ensure that it did not get an unfair start. Accord­ing­ly, an inter­locu­to­ry injunc­tion was grant­ed to restrain the defen­dants in con­nec­tion with their activities.

The spring­board prin­ci­ple appears to have orig­i­nat­ed in the con­text of com­mer­cial trans­ac­tions and to date has had an uncer­tain appli­ca­tion to employ­ment relat­ed mat­ters in Australia.

NATION­AL SUR­GI­CAL PTY LIM­IT­ED V MCPHEE [2010] FCA 972

In Sep­tem­ber 2010, Col­lier J of the Fed­er­al Court, had cause to con­sid­er whether or not the spring­board prin­ci­ple should be applied in the con­text of an appli­ca­tion by Nation­al Sur­gi­cal against its for­mer employ­ee, Mr McPhee, in which it sought, amongst oth­er things, to restrain Mr McPhee from per­form­ing work for Life Health­care and oth­er com­peti­tors with­in Queens­land and north­ern NSW. 

Mr McPhee was the Busi­ness Unit Man­ag­er of Nation­al Sur­gi­cal’s spine unit. Nation­al Sur­gi­cal had engaged Mr McPhee to dis­trib­ute spe­cial­ist sur­gi­cal equip­ment to var­i­ous hos­pi­tals and oth­er med­ical and health organ­i­sa­tions. At no time dur­ing Mr McPhee’s employ­ment had he entered into a writ­ten con­tract of employ­ment. He had how­ev­er, signed a con­fi­den­tial­i­ty con­tract with his employer.

A key issue for deter­mi­na­tion was whether the con­fi­den­tial infor­ma­tion to which Mr McPhee had been privy dur­ing his employ­ment could be used as a ​“spring­board” in the sense in which it had been used in the Ter­rapin case, in con­nec­tion with Mr McPhee’s pro­posed new employ­ment with Life Health­care. Mr McPhee argued, amongst oth­er things, that no injunc­tion should be grant­ed restrain­ing him from work­ing with Life Health­care as he was not under any con­trac­tu­al restraint covenant with his for­mer employer. 

In con­sid­er­ing the appli­ca­tion of the spring­board prin­ci­ple, Col­lier J, not­ed the pauci­ty of deci­sions on the appli­ca­tion of this prin­ci­ple where it was sought to be applied to restrain a pre­vi­ous employ­ee from work­ing with a com­peti­tor on the basis of an appre­hend mis­use of con­fi­den­tial infor­ma­tion. Col­lier J ulti­mate­ly declined to grant the inter­locu­to­ry relief sought on a num­ber of grounds. Impor­tant­ly, he not­ed that there was no author­i­ty of which he was aware, where the court had made an order tan­ta­mount to a restraint of trade in rela­tion to an unwrit­ten con­tract of employ­ment in cir­cum­stances derived from the spring­board principle.

APT Tech­nol­o­gy Pty Ltd v Alade­saye [2014] FCA 966

This mat­ter came before Fos­ter J in the Fed­er­al Court who grant­ed an injunc­tion on 5 Sep­tem­ber 2014.

The plain­tiff in this case, APT Tech­nol­o­gy Pty Ltd, car­ried on busi­ness pro­vid­ing mechan­i­cal engi­neer­ing con­sul­tan­cy ser­vices. The defen­dant, Mr Alade­saye had been employed for some 6 years before he was dis­missed on the grounds of con­duct­ing a rival busi­ness in com­pe­ti­tion with APT’s Ade­laide busi­ness. It was not dis­put­ed that the defen­dant had, for over a year, con­duct­ed a rival busi­ness in com­pe­ti­tion with his employ­er’s busi­ness in Ade­laide. It was also not dis­put­ed that he used and dis­closed APT’s con­fi­den­tial infor­ma­tion and had con­tin­ued to do so since ter­mi­na­tion of employment.

APT sought to restrain the defen­dant from deal­ing with its clients whilst the defen­dant did not accept such a restraint was either nec­es­sary or appro­pri­ate. In evi­dence, APT described its busi­ness as one which pro­vid­ed machine con­di­tion mon­i­tor­ing solu­tions, test­ing, engi­neer­ing and improve­ment and analy­sis for clients using high­ly spe­cialised equip­ment. Its data­base includ­ed details of var­i­ous mea­sure­ment points on each item of machin­ery test­ed. A data­base was set up for each client allow­ing for test­ing results and his­tor­i­cal infor­ma­tion to be record­ed which was used to dis­cern changes in machin­ery that went over time. Such infor­ma­tion was very valu­able to APT’s business.

The defen­dan­t’s employ­ment con­tract con­tained var­i­ous express oblig­a­tions reflect­ing his duty of fideli­ty. It also includ­ed an express term requir­ing devo­tion of his full time atten­tion to the per­for­mance of his duties for APT whilst in its employ­ment and not to be involved in any activ­i­ty sim­i­lar to or com­pet­i­tive to that of its employ­er. There was also a detailed con­fi­den­tial­i­ty pro­vi­sion togeth­er with restric­tions on the use of the intel­lec­tu­al prop­er­ty of his employ­er, includ­ing a term spec­i­fy­ing, all inven­tions, improve­ments, designs and cre­ations in the course of employ­ment belonged to his employer.

Fol­low­ing a ​“drop off” in busi­ness in the Ade­laide office, APT under­took an inves­ti­ga­tion in which it was revealed that the defen­dant had effec­tive­ly been pro­vid­ing ser­vices to APT’s clients through a busi­ness he had estab­lished called AVRE. Accord­ing to APT, reports pro­duced by the defen­dant through AVRE were for­mat­ted in almost iden­ti­cal terms to APT’s engi­neer­ing reports. There were also a num­ber of sim­i­lar­i­ties in oth­er aspects of the business. 

In June 2014, the defen­dant was con­front­ed by APT with the infor­ma­tion about his activ­i­ties and accord­ing to APT, con­fessed to oper­at­ing the AVRE busi­ness in com­pe­ti­tion with APT. His employ­ment was imme­di­ate­ly ter­mi­nat­ed. Accord­ing to APT it was appar­ent that from ear­ly 2013 until short­ly after the com­mence­ment of the pro­ceed­ings, that the defen­dant had had in his pos­ses­sion, the fol­low­ing information:

• The iden­ti­ty of APT’s clients and infor­ma­tion rel­e­vant to ser­vices per­formed for them;
• APT’s databases;
• A col­lec­tion of engi­neer­ing and oth­er reports;
• Details of APT’s busi­ness plans and forecasts;
• Knowl­edge of APT’s charges to its clients; and
• Use of var­i­ous equip­ment and asso­ci­at­ed software.

APT tes­ti­fied to the fact that it suf­fered very sub­stan­tial dam­ages and loss­es and that the con­tin­ued use of APT’s con­fi­den­tial infor­ma­tion by the defen­dant would poten­tial­ly cause it irrecov­er­able loss­es. In par­tic­u­lar, it not­ed that the defen­dant had been able to charge clients up to 50% less than what APT charged, due in part to the fact that the defen­dant had lit­tle start up costs for the business.

Fos­ter J con­sid­ered that the con­duct which the defen­dant had admit­ted to con­sti­tut­ed a fla­grant breach of his employ­ment con­tract and a fla­grant breach of var­i­ous duties owed dur­ing the course of his employ­ment. He observed that the defen­dant con­tin­ued to deal active­ly with clients and for­mer clients of APT and also con­tin­ued to use soft­ware used by his for­mer employ­er, although he not­ed the defen­dant now said he would cease to do so. 

Hav­ing con­sid­ered the author­i­ties in rela­tion to the spring­board prin­ci­ple and in par­tic­u­lar var­i­ous com­ments made by Jes­sup J in Wil­son Park­ing Aus­tralia 1992 Pty Ltd v Rush [2008] FCA 1601, Fos­ter J decid­ed that APT was enti­tled to an inter­locu­to­ry non solic­i­ta­tion injunc­tion despite there being no restraint covenant. The restraint peri­od set was for some 5 months (or fur­ther order). Fos­ter J was sat­is­fied that the bal­ance of con­ve­nience and jus­tice favoured the grant­i­ng of the injunc­tion and that APT had legit­i­mate and rea­son­able con­cerns that if the defen­dant was left free to con­tin­ue deal­ing with APT’s exist­ing and for­mer clients pend­ing the final deter­mi­na­tion of the pro­ceed­ings, then it could suf­fer dam­age so severe and irrepara­ble that lit­tle could be done to reverse its impact.

Conclusion

The deci­sion in APT Tech­nol­o­gy Pty Ltd v Alade­saye is now author­i­ty for the propo­si­tion that the spring­board prin­ci­ple (which had its ori­gins in com­mer­cial trans­ac­tions) may be applied in employ­ment sit­u­a­tions in some cir­cum­stances. In par­tic­u­lar, it may inform the grant­i­ng of an injunc­tion to restrain a for­mer employ­ee from solic­it­ing clients of their for­mer employer. 

It needs to be borne in mind that in the case of APT Tech­nol­o­gy Pty Ltd v Alade­saye, the cir­cum­stances were clear cut and the breach by the defen­dant of his oblig­a­tions to his employ­er, were sig­nif­i­cant. It would be dan­ger­ous to assume that in the future, in the absence of a restraint covenant, an injunc­tion to restrain solic­i­ta­tion of clients of a for­mer employ­er will be freely avail­able, how­ev­er, there is now a clear author­i­ty for mak­ing the argument.