NSW Court of Appeal enforces confidential information and restraint of trade covenants against ex-employee

Devine Real Estate, like many professional service businesses, protected their confidential information and their goodwill with contractual provisions.

But will they be enforceable when an employee leaves?

The New South Wales Court of Appeal has provided useful guidance in enforcing these contractual provisions in the decision of Agha v Devine Real Estate Concord Pty Ltd & Ors [2021] NSWCA 29 (9 March 2021) (White JA, Payne JA and McCallum agreeing).

This is my analysis:

What did Roger Agha do?

Mr Agha signed an employment agreement as a salesman with Devine Real Estate in 2008 at the Concord office. The agreement provided for protection of confidential information and contained a post-employment restraint (the clauses are set out below).

Mr Agha was also a director of, and a shareholder in Devine Concord, having sold his real estate business at Concord to Devine Real Estate in 2008. The price was essentially for the purchase of the rent roll. He signed a shareholders agreement which contained similar restraints to those in the employment agreement.

On 8 December 2017, Mr Agha gave notice that he wished to exit the business – to sell his shares in the business and to resign his employment.

Earlier that day, between 8:52 am and 10:23 am a person with the password protected username “Roger Agha” randomly altered either one, two or three digits to telephone contact records of 905 clients of Devine Real Estate. The Court found that Mr Agha was responsible for the sabotage of the client information, even though there was no eye witness or CCTV evidence of Mr Agha sitting at his computer screen at the relevant time.

Note: The sabotage backfired: (a) because it was not effective – when it was discovered, the correct telephone numbers were reinstated; and (b) it was a breach of both the shareholders and the employment agreements.

Before resigning, Mr Agha had arranged for an employee of Devine Concord to forward client contact lists that contained contact details for thousands of clients to his home email. This was another breach of the agreements.

In January 2018, Mr Agha became a sale agent for a competitor, Belle Property Concord.

The provisions for provisions for protection of confidential information and restraint

Devine Real Estate used the Real Estate Employers Federation form of employment contract that included restraints. These are extracts:

“14. Confidential Information

You agree that You will, at all times both during and after your employment with the Employer … keep confidential all Confidential Information …

Confidential Information …. includes

names, addresses (including email addresses), phone numbers and all other contact information of sellers, buyers, prospective sellers and buyers, and property owner (including their employees, contractors and representatives) on whose behalf a property is managed by the Employer;

19. Restraint

You are not to:

solicit, attempt to solicit, or accept any instructions to perform any work from any Client for the Restraint Period;

carry on or be engaged, concerned, interested directly or indirectly … in carrying on any business for a Competitor for the Restraint Period;

solicit, attempt to solicit, entice or encourage any Employer Representative to leave their engagement with the Employer for the Restraint Period;”

The restraint in the Shareholders Agreement operated for a period of 3 years after the sale of shares and within a restraint area around the Concord Office, defined by specified postcodes. Mr Agha was restrained from:

enticing away an employee or regular customer of or supplier to Devine; or
becoming engaged or concerned or interested in any business in competition with Devine.

The primary judge’s findings against Mr Agha (confirmed by the Court of Appeal)

The findings were that Mr Agha was:

whilst still a director and employee of Devine Concord, diverting clients to his proposed new employer, a competitor (Belle Property);
breaching the post-employment restraints in the shareholders’ agreement and his employment agreement whilst acting as a real estate agent for Belle Property;
sending confidential client lists to his personal email address; and
sabotaging Devine Concord’s client contact lists.

The client contact lists

Were the client lists confidential?

The Court said that that the “client contact lists were plainly confidential and not part of Mr Agha’s general know-how. His arranging for the client details to be emailed to his personal email address … demonstrates that fact. … An employee is not entitled to remove lists which are the employer’s property, or to make copies or commit lists to memory (Weldon & Co v Harbinson [2000] NSWSC 272 at [72])”

Were the client lists in the public domain?

The Court said that service in the proceeding of an Affidavit to which the client lists were confidential exhibits did not place them in the public domain. Nor did the tender of those exhibits in open court in circumstances where the judge had made an order that the specified evidence was to be treated as confidential on the court file and not be released without further order from a judge. In any event, Devine Concord could separately use its contractual rights contained in the Employment Agreement to restrain Mr Agha from using or disclosing confidential information.

The shareholders and employment agreements restraints

The Court noted that Mr Agha was in breach of the restraint by finding he had solicited existing clients within the restraint area whilst working for a competitor and by seeking to entice one of Devine Concord’s employees to join the competitor.

The Court found that the restraint was valid - it was reasonable in the interests of the parties and the public “given Mr Agha’s seniority and position as a past shareholder”:

“the employer is entitled to protection against disclosure or use of trade secrets or the use of a connection built up by the employee with the employer’s customers. The restraints in the shareholders’ agreement and the employment agreement are reasonable for the protection of Devine Concord’s trade connection. The protection of the trade connection extends to a covenant against enticement of other employees of Devine Concord from leaving their employment.”

The Court said that the period of 3 years was reasonable. Devine had purchased the goodwill of Mr Agha’s business in 2008 at a value calculated on a multiple of 3.66 of the rent roll annual commission, which “provided a rational connection with the three-year restraint period in the shareholders agreement”.

The Court said that section 4 of the Restraints of Trade Act 1976 (NSW) did not apply because the restraint was not against public policy.

The fact that the employment agreement and shareholders agreement imposed overlapping restraints was “of no moment because there are no relevant inconsistencies”. The more extensive restraint was enforceable.

Conclusion

The Court of Appeal dismissed Mr Agha’s appeal with costs. The undertakings given by Mr Agha not to use or disclose, and to destroy the Confidential Information and against solicitation of clients of Devine Concord in breach of the restraint of trade were continued.

The taking of accounts and assessment of damages and compensation payable by Mr Agha was returned to the primary judge.

Mr Combe, an employee of Devine Concord who also left to join Belle Property, was fortunate not to be bound by the restraint of trade because no copy of his employment agreement could be found and the Court refused to imply the existence of restraints of trade post-employment without an agreement.