Bananaworks update: Member Robinson chucks out third party noncompete claim – by Tristam Price

Ms Shu Wang’s new business IM Distribution Ltd was growing and she and her colleague Ms Hongmei Hu were looking for new employees. They had met Mr Shi and Mr Zhang at a trade expo, found out they were being paid below market rates by their then employer Bananaworks Communications Ltd, and eventually hired them. Simple labour market principles at work.

Bananaworks sued the lot of them as we reported in March.

That was basically a claim against former Bananaworks employees Mr Shi and Mr Zhang for breaching the restraint of trade (noncompete) clauses in their employment agreements, and of particular note, the director and manager of IM Distribution Ltd (IMD) for aiding and abetting those breaches.

All Ms Wang and Ms Hu were doing was offering a competitive salary to marketing communications consultants to entice them to leave their old jobs that didn’t pay particularly well. According to this 10 August Determination they were able to convince ERA Member Eleanor Robinson that they did not know that their new hires were bound by a noncompete, and even if they had known, their salaries were too low to have included a valuable consideration that might have validated a such a clause.

So why did this joinder even see the light of day? Why did Member Robinson allow it in this 26 February Determination?

A couple of relevant details were absent from the 26 February Determination. Firstly, Bananaworks alleged that Mr Shi and Mr Zhang misused its intellectual property with a view to competing unfairly with it, and secondly, when their new bosses found out of these allegations as part of Bananaworks’ statement of problem, they terminated the employment of Mr Shi and Mr Zhang. An application to remove IMD from the Companies register was mentioned as per Paragraphs 16-18:

16. Whilst penalties are sought pursuant to s 134 of the Act against IMD, it is submitted that any penalties imposed against IMD, which is not trading and may not have any money, would be unlikely to be satisfied, and on that basis the interests of justice require that Ms Shi and Ms Wang should be personally joined to the action.

17. BWC submits that Ms Wang was a director of IMD during the relevant period. Although Ms Hu was not expressly a director, it is submitted that by her own evidence she clearly acted in a capacity as Ms Wang’s co-director.

18. It is submitted as well-established that whether a person is a director or not of a limited liability company, that person will nevertheless be liable for his or her actions or inactions if those actions or inactions amount to tortious misconduct. It is submitted that Ms Wang and Ms Hu were: “at least negligent, deliberately obtuse or more likely reckless”.

Managers getting sued for a “reckless” attitude towards other companies’ policies on noncompetes, however unenforceable? That is alarming.

Fortunately Bananaworks’ claim against Ms Wang and Ms Hu was chucked out. There was a finding of some breaches by Mr Shi and Mr Zhang in relation to Bananaworks’ intellectual property which may be the subject of a further investigation meeting next month, although Member Robinson noted that:

158. ...[three companies] are retained clients of BWC and that others named as clients are either retained or were never clients of BWC. If that is the case, it is possible that the loss, if any, would be negligible.

159. If the parties consider that a return to mediation might assist to resolve the outstanding issues, the Authority can facilitate that.

To summarise, two former employees:

  • Were found to have committed some, but not all of the employment agreement breaches alleged. The actual breaches were of no particular benefit to their new employer as Paragraph 158 mentions (in fact they exposed their new employer to legal costs and disruption to their business)

  • Correctly treated their noncompetes unenforceable because of insufficient consideration

  • Were exposed for two years, the length of their noncompete clauses (three or six months is more common but still would have been unenforceable in this case).

Bananaworks’ claims against Ms Wang and Ms Hu were without merit and dismissed accordingly. But the scary thing is that hiring managers generally focus on whether candidates would be a good fit for their company, and not on whether there may be a noncompete clause with their current or previous employer. A precedent was set in the February Determination and now, presumably, hiring managers are supposed to be concerned that the ERA will entertain a claim against them and their own employers for “aiding and abetting” a breach of a noncompete they know nothing about. Great.

And what if a noncompete clause is part of a mediated Record of Settlement, which almost certainly will include a non-disclosure clause as well? That means the candidate is not allowed to tell the hiring manager about their noncompete. That situation could expose the new employer to proceedings brought by the old employer, for aiding and abetting a breach of a clause that has been made secret! That secrecy may cause the ERA Member to issue a non-publication order so that such a claim by the old employer may itself be secret.

To summarise, the ERA have indicated that Bananaworks’ former employees’ breaches of the confidentiality provisions of their employment agreements probably didn’t cause significant loss, and found that their next bosses were not liable for contributing to those breaches. But the February Determination probably sets a precedent paving the way for other employers to attempt to cripple competitors in this way. That is contrary to the public interest for a whole bunch of reasons.

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