Ross and Ors v. IceTV Pty Ltd [2011] HCATrans 214 (12 August 2011)

Last Updated: 17 August 2011

[2011] HCATrans 214

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S263 of 2010

B e t w e e n -

STUART DUNCAN ROSS

First Applicant

PETER VOGEL

Second Applicant

VOGEL ROSS PTY LTD

Third Applicant

and

ICETV PTY LTD ACN 003 552 216

Respondent

Application for special leave to appeal

FRENCH CJ
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 12 AUGUST 2011, AT 11.42 AM

Copyright in the High Court of Australia

MR I.M. NEIL, SC: If the Court pleases, I appear with my learned friend, MR M.J. HEATH, for the applicants. (instructed by Goldie Corporate Counsel)

MR J.M. IRELAND, QC: If your Honours please, I appear with my learned friend, MR J.S. COOKE, on behalf of the respondent. (instructed by Argyle Lawyers Pty Ltd)

FRENCH CJ: Yes, Mr Neil.

MR NEIL: The principles of The Restraint of Trade Doctrine are well settled and universal, but this case demonstrates that their application is not. The Restraint of Trade Doctrine balances two competing considerations. One is the basal concept of the common law, that the sterilisation of productive labour is antithetical to the public interest. The second interest is the private interest of employers in protecting their confidential information and their customer connections from misuse. This case is an instance of the courts going too far, too far away from the public interest, and too far towards protecting the interests of employers.

In New South Wales the starting point, as the Court of Appeal observed, is the Restraints of Trade Act. That Act provides the framework to consider the questions that arise in this case, but the questions are universal. The Restraints of Trade Act poses two questions. The first question is whether the defendants have contravened the restraints in question according to their proper construction. That question was resolved against us and we do not challenge that conclusion.

The second question which arises only in circumstances such as this case is whether the restraints, when applied to the breach, are contrary to public policy. They will be contrary to public policy if, when applied to that breach, they go further than is necessary to protect the legitimate interests of the employer.

FRENCH CJ: Is your complaint really one about application of principle?

MR NEIL: Yes, but an application which in this case so completely robs the exceptions to the general rule from any content that it tips the balance too far in one direction.

KIEFEL J: Is this not essentially a question of construction of the contract that is in question?

MR NEIL: The uncertainty argument depends on the construction of the clause in question, that is so, your Honour, but the propositions that we are addressing now do not.

KIEFEL J: Reasonableness?

MR NEIL: Yes, and the answers to those questions do not depend on the construction of the covenants.

KIEFEL J: You are speaking in rather general terms about approaches. Where do you say in the Court of Appeal’s judgment that it went wrong?

MR NEIL: Could we answer that question by pointing to the two circumstances that the Court of Appeal, or two considerations that the Court of Appeal and the primary judge found constituted the justification for these covenants? There were two. One was an asserted need to protect the former employer’s, the respondent’s, confidential information, and the other was a need to protect, again an asserted need, to protect its customer connection.

KIEFEL J: It having regard to the small nature of the operation. That was a key factor, was it not?

MR NEIL: In part, yes. Could we focus our answer to your Honour’s question on the breach in question here, that being the proper focus required by the Restraints of Trade Act? The breach here was found to lie in the applicants performing work for a company known as Mobilesoft in the capacity of consultants with the purpose of compiling an application for a grant – that is the so-called clever network application.

That conduct was said to have taken place between 5 October 2006 and 3 July 2007. That was the period after some interlocutory injunctions were discharged and the expiration of a period of 12 months after the termination of the personal applicants employment by IceTV. That was the breach, so that the statutory question became whether these covenants, when applied to that breach, were contrary to public policy. If the respondent could not prove that the restraints conformed with public policy then they were bad and could not be enforced, as they were in this case, by an award of damages calculated by reference to the value of the work that the applicants had performed for Mobilesoft during the period in question.

There were two interests held below which justified the restraints in that regard – confidential information and customer connection. May we turn to them in that order – confidential information first? The relevant finding is at page 43 of the appeal book, paragraph 87, at about line 31. It was found that Mr Vogel and Mr Ross:

had knowledge of matters relevant to pricing and technology –

There is no finding so far as it applies to the conduct in question that goes any higher than that; that is it. The Court of Appeal repeated that finding in the same and similar terms, but that is the finding, it goes no further than that.

If an employee’s access to information, to put the proposition more accurately, is to justify a restriction on their liberty after their employment comes to an end then it is necessary to show at least three things. First, that the information is confidential; second, that the information does not constitute part of the employee’s know-how but is something that emanates from the employer; third, that it is capable of being used to the former employer’s detriment.

The restraints in question, as your Honours will have seen, were what is commonly known as Littlewoods restraints. They were not restraints which were directed to the misuse of confidential information as such. Rather, they were restraints which constrained the liberty of Mr Vogel and Mr Ross to take up or to become involved in, if I can use the expression loosely, competitive employment in circumstances where that employment might entail the use of confidential information.

The principles in Littlewoods are now too well settled to be challenged and we do not do so here, but if an employer is to have the benefit of the more relaxed approach that is reflected in the Littlewoods principle then it must still demonstrate that the employees had access to some information which had the qualities that we have mentioned, namely, that it was confidential - - -

KIEFEL J: You mean access to or knowledge of?

MR NEIL: Access to is the approved test, if it please your Honour – that is, access during the course of their employment.

FRENCH CJ: Mr Neil, is this really all contained in 5(b) of the grounds of appeal? I am looking at the (amended draft) notice of appeal at 125 and 126. As I understand it, the first area is that of simply the question of uncertainty - - -

MR NEIL: Yes, which we have not so far addressed, if it please your Honour.

FRENCH CJ: The 12 months or anything the court thinks is reasonable.

MR NEIL: We wanted to come to that later, if we may.

FRENCH CJ: I am sorry, it just seemed to me that the point you are bringing now rather comes in at the tail end of 5, does it not?

MR NEIL: 4 and 5, we would say, if it please your Honour.

FRENCH CJ: Because it talks about “not clearly and comprehensibly” identifying obligations. Is that an uncertainty question or is that - - -

MR NEIL: It is the question we are now addressing.

FRENCH CJ: 5(a)?

MR NEIL: Yes, but the difficulties to which we point in 5 all vitiate the conclusion that is the subject of 4.

FRENCH CJ: Yes.

MR NEIL: What we are now addressing are grounds 4 and 5 in the application for special leave. If it please your Honours, here no attention was given to any of the requisite questions. No attention was given below to the question of whether the information to which Mr Vogel and Mr Ross had had access was confidential. No attention was given to the question of whether it was part of their - - -

KIEFEL J: Was it raised?

MR NEIL: Yes.

KIEFEL J: In the pleadings?

MR NEIL: Yes, and it was certainly one of the bases on which the trial was conducted and raised below in the Court of Appeal. No attention was given, we should say, in the judgment to the question of whether any information or knowledge that Mr Vogel and Mr Ross had was knowledge that they had acquired during the course of their employment with IceTV – that is, that it emanated from IceTV or was something that they had acquired before that employment commenced.

Your Honours will have seen that that was a question of particular importance here, because Mr Vogel and Mr Ross had not been employed very long by IceTV. IceTV had acquired technology from a failed company called ZapTV. Mr Vogel and Mr Ross had been connected with ZapTV. After IceTV acquired ZapTV’s technology it later employed Mr Vogel and Mr Ross. What it acquired from ZapTV did not, of course, include Mr Vogel and Mr Ross, their engagement was the subject of a separate transaction. Nor was there any attention given in the judgment to the question of whether, whatever information Mr Vogel and Mr Ross had, it could be used to the detriment of IceTV in the context of the conduct which was said to be in breach of the restraints. No attention was given to any of those four critical matters and no finding capable of supporting any conclusion in that regard.

To talk about matters relevant to pricing and technology is not to address any of those four critical points. It might seem as though matters relevant to pricing and technology might be confidential and might be something that could be used to IceTV’s detriment, but that is not necessarily so and it is not something about which an assumption can be made. If there has been an error here it might well be characterised as an instance of the fallacy of labelling a reflexive assumption that anything to which the same label can be attached necessarily has the same qualities.

The books are full of cases in which, for example, matters relevant to pricing have been held upon proper examination not to be confidential and not to be something which is capable of being used to the detriment of a former employer, but rather knowledge of the way in which the business is run, something which, since Littlewoods itself, has been recognised as a matter that cannot legitimately support a restraint. So too technology. Matters relevant to technology may well include matters which are confidential and capable of being used to IceTV’s detriment but not necessarily so. The functions of my - - -

KIEFEL J: These matters certainly do not appear to have been considered. They are not even noted in the appellant’s submissions in the Court of Appeal. How would that have come about that it was entirely overlooked?

MR NEIL: There was certainly a submission that they did not have any confidential information.

KIEFEL J: That was it?

MR NEIL: Yes. They did, of course, represent themselves in the Court of Appeal. We would concede that, as his Honour Justice Sackville observed, there were a large number of grounds of appeal, elements of which, we would submit, take up the points that we are raising. It was certainly submitted that the restraints were not justified and could not be supported.

KIEFEL J: That is quite a different question.

MR NEIL: It is the ultimate question to which we are now directing ourselves. The second justification for the restraints was said to be IceTV’s customer connection. In that regard, the findings were that Mr Ross and Mr Vogel had developed relations with Mobilesoft. That finding is to be found at page 43 of the application book, again in paragraph 87 at about point 32 and 33. The Court of Appeal repeated that finding but substituted the word “relationships” or “relations”, a difference which was, in our submission, not material.

The evidence did not rise any higher than those findings. It was that Mr Ross and Mr Vogel had had two meetings with Mobilesoft during the course of their employment with a view to securing Mobilesoft’s business for IceTV. Those two meetings had been unsuccessful. There were two pieces of unanswered email correspondence after that. That is the sum total of the connection between Mr Ross and Mr Vogel on the one hand and Mobilesoft on the other during the course of their employment with IceTV.

We have accepted, as your Honours have seen in our written submissions, that in some cases an employer’s connection with a prospective customer might be capable of supporting a restriction on their liberty after employment. Prospective customers were included in the list of protectable interests in Stenhouse v Phillips, for example. That was a stockbrokers case where the evidence was that the stockbroker in question had, while engaged on his employer’s business, devoted considerable efforts to wooing prospective customers and finding out about them in the course of so doing.

That being so, whatever relationship Mr Vogel and Mr Ross may have made with Mobilesoft, in the course of the two meetings it was the sole content of their association with Mobilesoft. It is not a relationship which is capable of legitimately supporting a restraint on their liberty after that employment came to an end. It is not enough that an employee have a relationship or to have formed relations with a customer or prospective customer. There must be more. What is needed is a further element of that relationship. It must involve - - -

FRENCH CJ: Or a sliding scale of judgment there, might there not?

MR NEIL: There may be, but this is a very clear case because, while there is a sliding scale, this case is off it altogether. It is a very clear case, we say. So far as confidential information is concerned, it is not a case that involves an assessment of whether any of the information to which Mr Ross and Mr Vogel had access was confidential because there was no finding that it was.

So far as customer connection is concerned, it is not really a case of evaluating where that relationship falls on the sliding scale because there was no finding that the relationship involved the additional element that is necessary and, on the evidence, there could be no such finding. The additional element that is necessary is some degree of special knowledge or influence over the customer.

The reason why customer connection is a legitimate basis for a restraint in an appropriate case is that in those appropriate cases the employer has funded or allowed the employee to form a personal connection with the actual or prospective customer to which personal connection the employer may be vulnerable after the employment has come to an end. A mere passing contact is never going to be enough to justify a restraint. It is still a lesser restraint that operates for 12 months after the employment comes to an end.

Sometimes the cases use concepts such as the personification or the human face – the employee must have become the personification of the employer or the human face of the employer – but those sorts of labels really do no more than describe the mischief to which the exception is directed, and that mischief is in the special vulnerability that an employer has to a personal connection involving a degree of special knowledge or influence. Now, in this case there was no such funding.

FRENCH CJ: I think your time is up, Mr Neil. Do you want to say something briefly on the question of uncertainty?

MR NEIL: Very quickly, if it please your Honours. That is grounds 2 and 3 of the application. We accept that it involves, in the first instance, a question of construction and we do not contend that the question of construction alone would warrant a grant of special leave. There are policy considerations to which we pointed in writing that attend that question of construction however it is resolved against us. They are the questions which, in our submission, justify a grant of special leave.

The strength of those arguments in that regard is enhanced, we submit, by the propositions that we have put in connection with grounds 4 and 5 where we submit the exceptions have, in this case, overwhelmed the rule because they are given no real content and the balance of competing interests has been disturbed. If that is right then the grant of special leave in that case would provide this Court with a vehicle to restore the balance and an appropriate vehicle to do so because of the clarity with which the questions arise. There is simply nothing to support these restraints.

FRENCH CJ: Thank you, Mr Neil. Mr Ireland, we would just like to hear from you in relation to special leave question 1(c), which is really the

question that Mr Neil has spent most of his time addressing. I do not think we need to hear from you on the uncertainty issue.

MR IRELAND: Your Honours, in the first place this matter turned on a question of construction of the clause in the employment agreements. The applicants have overdignified the case and now want to, as we would respectfully suggest, articulate it in a different manner from the written submissions. Their position seems to be encapsulated at application book 134, paragraph 29 when they said:

Restraints of this kind can only be justified by an employer’s interest in protecting itself from competition that misused its trade secrets or confidential information.

That argument seemed to suggest that, absent abuse of confidence, there would not be a foundation for a clause of this type. In the oral submissions this morning I think our learned friends have conceded the position that there might be a proper underpinning of a restraint of this type on reasonable grounds where it was concerned with the protection of goodwill in the sense of customer connection.

FRENCH CJ: That is (c)(ii), I think, in the special leave questions identified at 129.

MR IRELAND: Yes. We would say, your Honour, that was a matter which they failed on the facts at trial and in the Court of Appeal because the customer connection which the courts below accepted was that these people were leaving the organisation in the midst of negotiations with two commercial parties – they were the face of the organisation, if that is the correct analogy – and, therefore, there is no matter of principle here involved. It is rather a revisitation, your Honour said, a matter of degree, as to whether the – what the employee post-termination has done in his or her dealings with the potential customer crosses the line. Both courts below, as a matter of fact, concluded that that had been the case.

There was, as it happened, just to correct the position – something my learned friend said – also a finding at 39, at the top of the page, in the trial judge’s reasons:

I find that Mr Ross provided confidential information to Mobilesoft by sending the New Media Opportunity –

That was something that happened just immediately before he left, but that was part of the context of the connection. There was, in fact, a finding of breach of an obligation of confidence at the end of the employment and followed by conclusions on the facts of the court below which should not be

upset or revisited. On that footing we would say, your Honour, that this really is not an occasion for the intervention of this Court.

FRENCH CJ: Thank you, Mr Ireland. Mr Neil?

MR NEIL: It is not correct to say that the points raised in paragraphs 4 and 5, and particularly 5(c), of the application for special leave turn on a question of construction. The question of construction arose at the first point of inquiry under the Restraints of Trade Act – that is, whether the conduct breached the restraints – and that is not challenged or sought to be challenged on this appeal.

The New Media Opportunity which is referred to at application book 39 was irrelevant. The New Media Opportunity was a document that was sent by Mr Ross after notice had been given but before it had expired. It was a document which, as his Honour the primary judge found on page 39, included information about IceTV’s cash flow requirements. That information and any breach of confidentiality that its provision might have involved had nothing to do with the conduct which was found to be in breach of the restraints. That conduct was work performed after 5 October 2006 in connection with compiling a grant application. The confidential information which, as the primary judge found was the justification for the legitimacy of the restraint as it applied to that conduct, was not information about IceTV’s cash flow requirements but information relevant to pricing and technology – quite different again.

FRENCH CJ: Thank you, Mr Neil. I invite Justice Kiefel to read the disposition.

KIEFEL J: The applicants seek leave to appeal judgments at first instance and on appeal concerning the operation and effect of a non-solicitation clause in their contracts of employment with the respondent. The Court of Appeal held that, on orthodox principles of interpretation, the relevant clause could be read down to overcome uncertainty. Alternatively, section 4(1) of the Restraints of Trade Act 1976 (NSW) permitted that course. So construed, the prohibition was reasonable and the applicants were in breach of it.

The applicants do not suggest that special leave should be granted on the question of construction alone. They seek to raise questions as to the nature of the interests sought to be protected which, however, are not supported by findings of fact in their favour at trial. The proposed appeal would not enjoy sufficient prospects of success to warrant special leave to appeal. I see no reason to doubt the decisions below.

Special leave is refused.

FRENCH CJ: I agree with those reasons for the disposition.

KIEFEL J: That leaves the question of costs.

MR IRELAND: We would ask for an order for costs, your Honours.

FRENCH CJ: Can you resist that, Mr Neil?

MR NEIL: No, your Honour.

FRENCH CJ: Special leave will be refused with costs.

AT 12.12 PM THE MATTER WAS CONCLUDED