Employee ordered to pay $500k in damages for poaching clients
A recent decision of the Federal Court of Australia (the Court) highlights the usefulness of a well drafted restraint clause in an employment contract.
In AEI Insurance Group Pty Ltd v Martin (No 4) [2024] FCA 1110, the Court ordered a former employee of AEI Insurance Group Pty Ltd (AEI), Mr Craig Martin, to pay $500,000 in damages for breaching the restraint clauses in his employment contract by soliciting AEI clients to his new employer.
Facts
AEI, a brokerage firm specialising in heavy vehicle insurance, employed Mr Martin in 2011 to grow its Queensland client base, primarily through maintaining client relationships and providing immediate accident assistance through AEI's 24/7 emergency line. To facilitate this role, AEI provided Martin with a company mobile phone.
On 29 August 2022, Mr Martin unexpectedly resigned. He later informed AEI that he was moving to work for MA Brokers, an insurance broker in direct competition with AEI in the Queensland market. By 1 September 2022, Mr Martin began contacting former clients from a new phone number, including at least one AEI client whom he informed of his updated contact information.
On 8 September 2022, AEI formally requested Mr Martin acknowledge and adhere to the post-employment restraints in his contract, return all AEI property, and delete any AEI client contact information. Despite these requests, by 1 November 2022, AEI received notifications from insurers that multiple AEI clients had signed letters of appointment for a new broker. Although the new broker was not explicitly named, AEI suspected MA Brokers. By 3 November 2022, the total number of AEI clients who had moved to another broker reached 21.
On 8 November 2022, AEI initiated legal proceedings, where the Court issued an interlocutory injunction prohibiting Martin from soliciting AEI clients. Nevertheless, an additional 24 clients transferred to MA Brokers after the injunction. In total, 45 clients departed AEI which resulted in annual revenue loss of $750,000.
Given that Mr Martin’s contract prohibited him from soliciting AEI client’s post-employment and using AEI’s confidential client information for competitive advantage, AEI commenced proceedings against Mr Martin for breaches of the non-solicitation and confidentiality clauses in his employment contract.
Decision
The Court encountered multiple evidentiary challenges in this case, as three mobile phones provided by AEI to Mr Martin had been damaged or destroyed in a variety of incidents, including immersion in saltwater, being run over by a lawn mower, or otherwise having its contents deleted shortly before a Court mandated forensic examination.
These incidents, coupled with Mr Martin’s decision not to provide evidence, led the Court to question his credibility and draw adverse inferences about his actions.
Breach of restraint clause
Although Mr Martin denied any wrongdoing, claiming the contact updates were personal, the Court found substantial evidence suggesting that his actions directly encouraged AEI clients to transfer to MA Brokers. The Court was satisfied that Mr Martin had solicited AEI clients and breached the restraint clause in his employment contract.
Reasonableness of restraint clause
The Court noted employers are not entitled to be protected against mere competition from former employees, who are entitled to use their personal skill and experience in their new employment. However, employers are entitled to protect legitimate business interests. Accordingly, the Court found that a 12-month restraint clause, as in Mr Martin’s contract, was reasonable given typical insurance policy renewal periods and the time required to rebuild client loyalty.
Factors relevant in calculating damages
In calculating the damages to be awarded to AEI, the Court considered the actual loss of income but then made several adjustments, acknowledging that some clients might have followed Mr Martin independently due to personal connections and the impossibility of knowing which clients might have left AEI in any event.
Ultimately, the Court awarded $500,000 in damages to AEI. However, no damages for future losses were awarded, as Mr Martin was free to solicit clients after the end of the restraint period.
Take Home Messages
Although a restraint clause is not always enforceable, this case is a reminder that well-drafted clauses which are reasonable and designed to protect legitimate business interests of an employer can still be valuable to employers. The effectiveness of a restraint clause will depend on a variety of factors including the role of the relevant employee and their influence over customers.
This case also highlighted that direct evidence is not always necessary to establish a breach of a restraint clause. Tampering with evidence can lead to a court drawing highly damaging inferences and making negative findings regarding credibility.
However, the days of the restraint clause may be limited, with the Federal Government strongly suggesting that the use of restraint clauses will be restricted as part of its focus on increasing competition within the market.
Should you have any questions in relation to this article, please contact Lincoln Smith on +61 8 8210 1203 or lsmith@normans.com.au or Annabelle Narayan on +61 8 8210 1292 or anarayan@normans.com.au.
