What employers can learn from Seven and Ten’s fight for James Warburton

It’s hard to believe that barely three weeks ago, media and public interest in the case of James Warburton, the “defecting” television executive was as high as you are likely to see for any event where seven or eight barristers engage in dry legal argument with a Supreme Court Judge.

Even though Warburton’s immediate future has now been determined by the Court and the publicity has waned, the case contains some valuable lessons for employers who are seeking to protect their confidential information and other business interests and to prevent key executives joining market competitors.

A quick recap of the background: Warburton was employed by Channel Seven as a senior executive and the putative successor to CEO David Leckie. When it became clear that Leckie was not going anywhere any time soon, Ten offered Warburton a job. He signed a contract with Ten and the whole mess wound up in the New South Wales Supreme Court, with Seven arguing that Warburton was prevented by his contract from joining Ten until October 2012, 19 months after signing on.

In the end, Seven succeeded in having Warburton, in the words of the Judge in the case “sidelined” until the end of 2011. But was it really a victory? And what can employers learn from the case?

Gardening leave is okay
The Court reinforced the established legal principle that it is perfectly legitimate for an employer to direct an employee to perform no duties at all, except in very limited categories of cases where the ongoing performance of work is critical to the maintenance of the employee’s trade. As an example, those cases often involve showbiz people, who rely on their image to continue to obtain work.

It was important that the contract of employment did not require Seven to give Warburton any work.

Post employment restraints can be entered into at any time
In this case, the restraints of trade on which Seven’s success was based were contained in a “Management Equity Participation” agreement, which was signed by Warburton prior to him entering his last contract of employment with Seven.

The equity benefits made available to Warburton were powerful consideration for his agreement to restrain himself from future competition.

Restraints do not need to be in an employment contract
The Judge found that the fact that the restraints were contained in the MEP deed and not the employment contract didn’t make them any less enforceable. The restrictions protected the investment of Seven’s owners, encouraged the Seven management group to stay together, and discouraged the devaluation of the business by executives with valuable confidential information and customer connections leaving the business.

This was a sufficient and legitimate financial interest which could be protected by post employment restraints.

Courts will enforce a freely entered restraint which is reasonable
Warburton had argued that the period of the restraint – 12 months – was unreasonable. The court said otherwise. Warburton had taken extensive legal advice and well understood the commercial purposes of the restraint. Furthermore, 12 months was seen as a period during which it could reasonably be anticipated that Warburton’s knowledge of Seven’s business, and confidential information, would remain current.

These considerations are critical for employers considering implementing restraints of trade. There has to be a demonstrable and reasonable interest to protect and the period of the restraint has to be no more than is adequate to achieve that objective.

No double dipping to extend restraint period
Seven had argued that Warburton should see out his contract, until October 2011 and after that, be subjected to the 12 months restraint. Seven was prepared to pay Warburton his full salary and benefits until October 2011, even though they expected he would continue to follow the direction not to perform any work.

This aspect of Seven’s case broke down. The judge said that for the purpose of interpreting the restraint the cessation of Warburton’s employment should be the date he was directed by Seven to leave its premises, not the date that his contract may technically have come to an end.

This shows that the courts will not be prepared to allow employers to attempt to extend the effective period of a restraint by sending an employee on gardening leave, where that would be unreasonable. The Judge decided on the evidence that, by January 2011, Warburton’s knowledge of Seven’s critical confidential information would be out of date and therefore there was no legitimate purpose in restraining him any longer than that. He should not be forced to endure the hardship of not being able to take up his new employment any longer.

Cascade clauses are okay
Employers and employees are often hesitant about the effectiveness of “cascade” clauses and they are sometimes the subject of criticism for excessive complexity. A cascade clause provides for several different combinations of different restraint periods and different geographic areas, to be read as separate covenants. The Courts are then asked to disregard those combinations that it considers unreasonable and enforce what is left over.

The decision in this case followed other recent decisions by endorsing this method of drafting a restraint clause as effective.

Winners and losers – the case, not the show

On Seven’s view of the case, as it was argued, it succeeded in restraining Warburton for about two months after his employment contract would have come to an end: hardly a stunning result.

On the other hand it successfully put Warburton out of the game for the rest of 2011.

The final word is probably best left to the Judge. Usually success in a case such as this would result in the loser paying the winner’s legal costs. In this case Warburton was required to pay 70% of Seven’s costs. In soccer parlance, probably a 2-1 win to Seven.

This article was originally published on SmartCompany.com.au where Peter is a regular contributor.

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