Restraints of Trade are Enforceable

15 February 2022

Ms O’Brien resigned from her role as TV3’s political editor in November to join MediaWorks Radio (MWR) as the host of its rebranded breakfast radio show (Discovery NZ Limited acquired TV3 from Media Works in December 2020).

Discovery sought to enforce the terms of Ms O’Brien’s employment agreement which restricted her post employment activities. These terms included, restraining her from working for a competitor for three months, as well as restraints on non-dealing and non-solicitation for six months. Ms O’Brien challenged the actions of Discovery and sought a declaration from the Authority that the restraints were unenforceable, or in the alternative, she sought modification of their terms.

Discovery also claimed that Ms O’Brien’s conduct during her notice period breached the conflict-of-interest clause of her employment agreement and the implied duty of fidelity. Discovery sought a finding of breach and an award of a penalty over Ms O’Brien’s participation in a commercial for the new programme.

Background

Ms O’Brien joined Media Works in 2007. In 2018 she was appointed to the role of political editor and signed a new employment agreement. Ms O’Brien sought independent legal advice in respect of these new terms which included the following clause in the letter of offer:

Post-Employment Obligations

You agree that you occupy a key role. Therefore, in the event your employment terminates, you will be subject to restraints on the terms set out in the Employment Policies. In your case, the restraint periods and geographical area are:

Non-competition: 3 months
Geographical area for Non-Competition: National Level
Non-Solicitation and Non-Dealing: 6 months.

The following clause was included in the Terms of Employment:

MediaWorks does not want to prevent you from obtaining alternative employment should you wish to leave. However, we naturally wish to protect our business relationships and our confidential information. For that reason, certain restrictions on your activities following the termination of your employment with us may be set in your appointment letter.

If in your employment letter it is agreed that you hold a key position, unless you first obtain the written consent of Media Works to waive or reduce any restraint, you agree that during your notice period and for the term specified in your appointment letter, (however that occurs), you will not:

Be directly or indirectly involved in any capacity (whether as an employee, contractor, consultant, partner, trustee, principal, agent, shareholder, director, self-employed person or otherwise) in any business or activity in competition with MediaWorks in the Geographical Area specified in your appointment letter (Non Competition), or
Directly or indirectly solicit, canvass, procure or attempt to entice any person or entity which within the 12 month period prior to the termination of your employment, was a client, supplier to or employee of MediaWorks, to change the nature of their relationship with us or assist any person, form or corporate to do any of the same (Non-Solicitation), or
Directly or indirectly deal with any person or entity which, within the 12month period prior to the termination of your employment, was a client or supplier of MediaWorks or assist any person, form or corporate to do any of the same (Non-Dealing).

Note that obligations concerning protection of confidential information continue after the end of the restraint period.

Ms O’Brien was required to give three months’ notice of her resignation and her employment agreement provided that on receiving notice, Discovery may elect to pay her in lieu and not require her to work out all or part of the notice. Discovery could also elect to require her to stay home on full pay during the notice or direct her to take alternative duties on the same terms and conditions while working out the notice period.

Finally, Ms O’Brien’s terms of employment also included a Conflict of Interest clause. This provided that during her employment she should be careful to avoid situations which might compromise her integrity or otherwise lead to conflicts of interest. The clause stated that while employed by MediaWorks, Ms O’Brien must not own, operate or otherwise be involved in any business that was in competition with MediaWorks. The clause encouraged her to discuss any possible conflict with her manager before any such arrangement was entered into.

Prior to accepting the new employment terms in 2018, Ms O’Brien sought independent legal advice and her then lawyer raised concerns that the restraints could be seen as overreaching, punishing Ms O’Brien as opposed to protecting MediaWorks. She sought assurances that the clauses would not be employed in a punitive way. Ms O’Brien met with Mr Crawford of Discovery who advised it was not his intention to use the non-compete restraint punitively, however, they did not discuss or define what this meant. Ms O’Brien told the Authority she understood this to mean the clause would not be used to punish her for resigning and unfairly restrict her from continuing in her chosen career. The email correspondence before the Authority supported Ms O’Brien had sought clarification regarding the offer from Mr Crawford as a result of her legal advice and this had been provided by him.

Resignation

On 19 October 2021, Ms O’Brien accepted a role with MWR, to host a new nationally broadcast morning talk back show it was developing. The following day she resigned from her employment with Discovery giving three months’ notice with her final day of employment being 21 January 2022.

Prior to accepting her new role with MWR, she checked with Mr Gurney of MWR that the new show could not harm Discovery and in particular their morning breakfast television programme, ‘The AM Show’. Mr Gurney advised this was not the case because the AM Show was not a radio show and the audience for a breakfast radio show was generally a commuter audience and the new show would be competition with NewsTalk ZB and National Radio. Ms O’Brien did not seek an assurance from Discovery regarding the enforcement of the restraint and said she relied on the assurances she had received from Mr Crawford in 2018.

In her letter of resignation, Ms O’Brien advised Discovery she would be commencing with MWR on 23 January. Ms Bristow of Discovery, advised Ms O’Brien on 26 October that by her calculations, given her three months’ notice period and her non-compete restraint, she would not be able to start with MWR until 21 April 2022. Ms Bristow advised this was because her new role with MWR, would be in competition with Discovery. Ms O’Brien responded advising she had taken legal advice and the non- competition clause was not enforceable as she would not be in competition given her new role was not working as a political reporter and she was not going to another television station. Ms O’Brien was asked to sign undertakings but advised Discovery, following legal advice she had received, the restraints were unenforceable and therefore she would not by signing the undertakings sought.

On 2 November, MWR announced Ms O’Brien would be joining them to host their new breakfast show. Ms O’Brien was quoted in the release saying:

"This is an incredible once in a lifetime opportunity to be part of something new, different and exciting. We’re building something special here and I can’t wait to get on-air”

Ms O’Brien accepted she had approved the quote and told the Authority, that based on what she had seen in the industry, including a quote from talent in such announcements was not unusual.

On 19 November, Ms O’Brien took a day off from Discovery and attended a photography studio to shoot some material for a MWR promotional video. Discovery advised they considered Ms O’Brien’s participation in this video, during a period she was still their employee as a clear breach of her employment obligations including the conflict of interest clause and the duty of fidelity.

Ms O’Brien’s position

Ms O’Brien’s lawyers challenged the enforcement of the restraint on the following basis:

New role with MWR was fundamentally different from her position of political editor at Discovery. The new role covered all news and current affairs, had a different target audience on a different media platform – radio and television. If proprietary interests existed, they would not be adversely affected by the new role and attempting to prohibit Ms O’Brien from working in her chosen field is punitive and in bad faith.
Broadly worked and generic restraint clause. The cause was too general and not tailored to Ms O’Brien’s position.
Non-solicitation and non-dealing. The wording of these clauses is generic and there could be no cause for concern that Ms O’Brien would solicit any client as she did not deal with clients or suppliers.
Punitive enforcement. Discovery was seeking to punitively enforce the clause in an anti-competitive manner.
Breach. Any established breach is minor, and Discovery had suffered no damage. The media release and promotional video were preparatory steps only, such announcements were routine in the market. Any breach by Ms O’Brien was not deliberate.

ERA Determination

The ERA looked at each of the restraint clauses in Ms O’Brien’s employment agreement.

Regarding the ‘non-compete’ restraint, the Authority considered if Discovery had proprietary interests to protect, including any confidential information. Discovery sought to impose the restraint to protect its editorial priorities (how it puts its news together) and future plans, details of confidential sources and team salaries. Ms O’Brien said she was unaware of any confidential information over which Discovery could unreasonably assert a proprietary interest and argued it was unreasonable to restrain her from using her skill and knowledge as a journalist because any risk of breach of confidential information was non-existent or at best, minor.

Discovery also sought to enforce a proprietary interest in a second category, its business relationships. This included ‘Reid Polling’, a relationship Ms O’Brien owned for them. She commissioned polls, set questions, received the polls, edited them and presented the results. Ms O’Brien claimed there was no proprietary interest in the polls as the results were time bound and their relevance had passed. Further she said MWR did not intend to commission polls and a lot of this information was publicly available.

Discovery claimed a proprietary interest of ‘goodwill’, claiming Ms O’Brien was employed in a ‘key role’ and this had contributed to her reputation in the New Zealand market.

The Authority found Discovery did have a proprietary interest in all the areas it claimed, including its business relationships and goodwill which it was entitled to protect.

In assessing the reasonableness of the non-compete restraint that Discovery was seeking to enforce, the Authority considered if the total period of the restraint should include the notice period where the employer has the ability under the employment agreement to put the employee on garden leave. The total period of restraint available to Discovery was six months, (three months garden leave and three months restraint of trade), however Mr Crawford for Discovery said in his evidence this was too long for the type of role Ms O’Brien held.

The Authority considered a number of factors in assessing the reasonableness of the timeframe, including the adjournment of Parliament, the appointment of a replacement for Ms O’Brien and the Christmas New Year shut down. Exercising the ERA’s discretion, the Authority modified the duration of the three months non-compete restraint by five weeks to seven weeks.

The Authority considered the scope of the restraint clear and reasonable. The geographical restraint was also considered reasonable given Ms O’Brien’s national role.

In respect of the other restraints of non-solicitation and non-dealing, the Authority considered the inclusion in the restraint of ‘client’ in respect of Ms O’Brien’s involvement with clients in her role was unclear. Again, exercising discretion, the clauses were amended to remove any reference to ‘client’.

The six months duration of these restraints was also considered and the Authority determined if three months at the point of agreement was all that was then required to protect the proprietary interests from competition then that must be sufficient for non-dealing and non-solicitation. The clauses were found to be wider than was necessary and were shortened to three months to make them reasonable and enforceable.

The ERA then considered if MWR would be in competition with Discovery. Dr Ellis, gave expert evidence on this and specifically if Ms O’Brien’s journalistic functions of her new role would be the same or similar as her existing role with Discovery to the benefit of MWR. Having considered all the evidence, the Authority considered the words in the clause were clear that the departing employee’s involvement in any capacity with any business or activity in competition with Discovery is to be restrained. There was clear evidence that Discovery and MWR are media competitors in the broad sense and the expert opinion evidence that there was a degree of competition between them for “ears and eyeballs” in the breakfast timeslot.

Ms O’Brien raised a number of objections to the reasonableness of the clause including that her successor was capable to establish herself in the slot without the period of restraint, that it was unusual in the industry to enforce such a restraint and Discovery’s actions were punitive, it was an unreasonable encumbrance of the exercise of skill and knowledge and offends against free speech and the NZ Bill of Rights and there was no risk she would disclose any confidential information.

Having considered all the evidence, the Authority found the evidence established that in her role with MWR, Ms O’Brien would be working in competition with Discovery. Compliance orders were therefore made in respect of the modified restraints.

Regarding the claim that Ms O’Brien had breached the conflict of interest term of her employment and the implied duty of fidelity during her employment with Discovery, the Authority considered Ms O’Brien’s objections. However, the Authority also noted Ms O’Brien had approved a quote for inclusion in the media release announcing her appointment to MWR and allowed her image to be videoed for the purposes of the promotional video. The Authority was satisfied there was a prima facie conflict of interest in her involvement in both activities. Ms O’Brien did not discuss her involvement with her manager at Discovery and the Authority found this action to breach the conflict of interest terms of her employment agreement.

The Authority also considered Ms O’Brien’s actions breached her duty of fidelity to Discovery and undermined the parties’ relationship of trust and confidence. Ms Bristow advised she was shocked to see Ms O’Brien involved in MWR’s marketing and brand campaign given she was one of Discovery’s most public and high-profile employees. In the circumstances of this case, the Authority considered a fair penalty for the breaches was $2,000.