CFO free to join Cotton On after court rejects two-year restraint

What happened

On 7 December 2015 Nicole Peck signed a contract to become chief financial officer (CFO) of Just Group, the specialty fashion retailer that runs Just Jeans, Jay Jays, Portmans, Dotti, Peter Alexander and the stationery chain Smiggle. Her salary was $450,000 in the first year, plus a $50,000 sign-on fee. She started on 6 January 2016.

For about a month before she resigned, Ms Peck had been negotiating with Cotton On about a CFO-level role, General Manager of Group Finance and Treasury. She accepted on 1 May 2016, gave one month's notice the next day, and told Just Group she would start at Cotton On on 6 June 2016.

Just Group sued on 2 June 2016. Ms Peck promised the court not to start at Cotton On until the case was decided, and Just Group promised to keep paying her the same income.

The restraint in her contract

A post-employment restraint, often called a restraint of trade, is a contract term that limits what you can do after your job ends. Ms Peck's restraint ran for 24 months after she left (or 18 or 12 months if the longer period was invalid), across Australia and New Zealand.

Its first limb barred her from any activity the same as or similar to any part of Just Group's specialty brand and fashion business that she had been involved in or received confidential information about. The second limb barred her from any activity for the companies operating 50 listed brands, a list running from Myer, David Jones, Target, Kmart and Big W to Zara, Uniqlo and T2, the one non-clothing name. Cotton On was number nine.

The contract also said both sides considered the restraints reasonable and that Ms Peck had had the opportunity to obtain independent legal advice. During a six-month probation, Just Group could end her employment on one month's notice.

Why: the legal test

At common law a restraint of trade is presumed to be void. An employer can enforce one only by proving that, at the date of the contract, it protected a legitimate interest, such as confidential information or customer connections, and did no more than was reasonably necessary to protect it. An employer is not entitled to protect itself from competition as such.

The restraint is tested against what it entitles the employer to stop, not only against what the employee actually did. Unlike New South Wales, Victoria has no statute letting a court enforce a too-wide restraint as far as it is reasonable, so the court had to judge the restraint against all 50 brands, not just Cotton On. Western Australia applies the same common law test.

What the Court decided

Justice McDonald accepted that Just Group had a legitimate interest, and found that Ms Peck had in fact been exposed to its confidential information. But the restraint went beyond what was reasonable, and on 17 October 2016 he dismissed Just Group's application.

The first limb would stop Ms Peck working for a similar business even in a role where her knowledge from Just Group would not be relevant. The second limb failed too. Just Group led no evidence about what 46 of the 50 listed businesses did, and Woolworths, which operates Big W, also ran large liquor businesses such as Dan Murphy's and BWS that do not compete with a fashion retailer.

The judge added that a restraint of 12 to 24 months was out of proportion when Just Group could have ended her job on one month's notice during probation, a real possibility on its chief executive's own evidence.

The judge gave considerable weight to the fact that Ms Peck had agreed to the restraints, but neither her negotiated package nor the clause calling them reasonable could validate them. Nor would the court strike out every name except Cotton On: the list was a single covenant, and doing so would be, in the judge's words, "curial disentanglement to salvage a patently unreasonable restraint". He ordered that Ms Peck be released from her promise to the court.

The appeal

Just Group appealed, and the parties' promises were extended until the appeal hearing on 15 December 2016. On 20 December 2016 the Court of Appeal granted Just Group leave to appeal and dismissed the appeal. It read "same as, or similar to" more narrowly than the trial judge, as meaning competing businesses, but held the first limb still went further than Just Group's legitimate interests and could not be rewritten to save it. On the second limb, Just Group had never explained how it chose the 50 businesses or proved they met its criteria. The Court of Appeal did not rule on the probation point, and Ms Peck was free to take up the Cotton On role.

What this means for you

If you are asked to sign a restraint, the label in the contract does not decide whether it can be enforced. A clause that covers every possible competitor, every possible role or a period out of step with your notice period is open to challenge, even if you are senior and well paid.

If you are thinking of moving to a competitor, it is worth getting advice before you resign. Your former employer may still go to court quickly, as Just Group did, and a case like this can keep you out of the new job for months while it is decided.

For employers, the lesson is to draft for the actual role and competitors, and be ready to prove why each is listed.