What is a Restraint of Trade Clause?

A restraint of trade clause is a clause which is included in an agreement typically to stop someone from competing or using confidential information.

When is a Restraint of Trade Clause used?

Restraint of trade clauses are used in various situations:

• in the case of a franchise relationship, the exiting franchisee may be restrained from
   
  • competing with the franchisor for the purpose of protecting the franchisor’s goodwill,
  • using the confidential information, trade secrets and trade connections of the franchisor.
    
• in the case of the sale of a business, the vendor may be restrained from competing with the purchaser for the purpose of protecting goodwill acquired by the purchaser.
  
• in the case of an employment relationship, an employee may be restrained from using the confidential information, trade secrets and trade connections of the employer.
  
  

When will a Restraint of Trade Clause be enforced by a Court?

A Court will consider

• how reasonable the restraint is (does it protect only what it is attempting to protect). If a restraint of trade clause is drafted too widely, or if there is another way to protect the interests of the party seeking to enforce the restraint of trade clause, the clause may not be enforceable,
• the interests of the parties to the agreement, and
• the interests of the public.
  
  

EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd & Ors [2009] QSC 227

In this case the franchise agreement was terminated after the franchisee had operated the franchise business for a year and a half. The franchisee (using a different corporate entity), immediately commenced operating a similar business from the same premises. The franchisor sought to enforce the restraint of trade clause in the franchise agreement.

The restraint of trade clause:

• provided that the franchisee would be restrained from operating a similar business for 6 months after the termination of the franchise agreement within a radius of 5 km from the franchise business premises, and 1km from any other EzyDVD store.
• stated that the purpose of the restraint was to protect the confidential information and intellectual property provided by the franchisor to the franchisee during the course of the franchised business.

The franchise agreement also contained provisions dealing with the confidentiality of the franchisor’s information and the protection of the franchisor’s intellectual property on termination of the franchise agreement. The franchisee had complied with these provisions.

The Court found that it was not reasonable for the franchisor to enforce the restraint of trade provisions given that:

• the restraint provisions identified that the purpose of the restraint was to protect the franchisor’s confidential information and intellectual property, and
• the franchisee had already complied with the provisions contained in the franchise agreement dealing with the confidentiality of the franchisor’s information and the protection of the franchisor’s intellectual property.

The case highlights the need to draft restraint of trade clauses carefully taking into account the individual circumstances of each case.

Disclaimer

The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.