Noncompete lottery: One week, two wildly different ERA decisions on third parties – by Tristam Price

Updated: Apr 10

In the week ending 26 February 2021 the ERA made two determinations concerning the enforcement of restraint of trade (noncompete) clauses in the employment agreements of ex employees.

The applicants were New Era IT Ltd and Bananaworks Ltd, and the ERA Members were David Beck and Eleanor Robinson respectively.

New Era IT Ltd

Member Beck declined to grant an injunction against former New Era employees Mr Gourley, Ms Kaye and Mr McGirr, the first to third Respondents. As usual the application for an injunction was considered under urgency and there had been an investigation six working days before the Determination. The factors that led to his decision are not greatly relevent, however, we note that New Era also issued proceedings against a fourth Respondent, Contrast NZ Ltd which is the new employer of Gourley, Kaye and McGirr.

Contrast NZ Ltd were represented by Mr Cowan, and Member Beck’s position on Contrast was:

[57] Mr Cowan for Contrast NZ, advanced a compelling threshold issue as to the lack of jurisdiction of the Authority has to grant any interim injunction against a party not privy to the employment relationship between the first to third Respondents and the Applicant party...

[58] ... I agree with Mr Cowan’s submission. Although s 162 of the Act gives the Authority the power to make certain interlocutory orders including injunctive relief this must, as case law has determined, exclude injunctive relief against a third party not privy to the employment agreement or it has to stem from a matter “arising from or related to the employment relationship”...

[59] I find that no interim orders can be made against the fourth Respondent for lack of jurisdiction as they had an insufficient connection to the employment relationship between New Era and the first to third Respondents.

This is consistent with the ERA’s stated role in resolving disputes between employers and employees (and unions). We assume that even if Member Beck had issued an injunction restraining Gourley, Kaye and McGirr from working for Contrast in competition with their former employer New Era, he still would not have made an order joining Contrast.

We’re not sure if we agree with Member Beck’s interpretation of s 162 on the ERA’s jurisdiction to issue injunctions as the Employment Court can, but it can issue a Compliance Order, which orders employees to comply with the terms of either their employment agreements or mediated settlement agreements. But the effects are similar.

In practice, an HR Advisor who is in the process of shortlisting candidates is unlikely to ask those candidates whether they are subject to post-employment noncompete clauses. Many candidates simply can’t remember, or feel that their noncompetes, if they exist, are unlikely to be enforced. Hiring managers are generally aware of the risk that if their new employee is unlucky enough to be served with a noncompete injunction or Compliance Order, that could be disruptive to their business.

So, nothing to see here, just an ERA process doing what it’s supposed to do.

UPDATE, 10 April: Member Beck declined an application by New Era to:

  1. add (join) a Mr A Hood to its claim, alleging a breach of a mediated Record of Settlement (which Gourley, Kaye and McGirr didn't have)

  2. "consolidate" the action and have it removed to the Employment Court (as we understand an effort to save time and money would have the opposite effect).

This is in relation to a substantive claim by New Era for penalties against former employees for breaching restraint of trade clauses in their employment agreements, notwithstanding the ERA's refusal to grant an injunction or compliance order.

We are impressed with Member Beck's appreciation of competition law in Paragraph 20: "... I am also not persuaded by the suggestion of speculative ongoing losses that the applicant claims that they will incur beyond normal market competition as a reason for urgency." (emphasis added)

Bananaworks Ltd

Now we move on to the Bananaworks matter which we have already reported on. Member Robinson took a completely opposite approach regarding the ERA’s jurisdiction over third parties.

Two women, Ms Wang and Ms Hu, founded IM Distribution Ltd in early 2018. That business, although not placed in liquidation, has ceased trading. Ms Wang was the Director and Ms Hu was a manager; both held shares in the company.

Like Contrast NZ Ltd in the first example, IM Distribution hired two employees Mr Zhang and Mr Shi (who also bought shares). Those new employees had left Bananaworks around the same time, and their employment agreements with Bananaworks contained noncompete clauses.

Like New Era IT Ltd, Bananaworks sued Mr Zhang and Mr Shi for breaching their noncompetes, and their Statement of Problem joined their new employer IM Distribution Ltd. But the noncompete periods had already expired and a Compliance Order would have been impossible, so we assume Bananaworks were only able to seek a penalty from the former employees and their new employer.

Soon after that, perhaps with the disruption caused by Bananaworks being a contributing factor, IM Distribution ceased trading and Bananaworks noticed that the Companies Office public register indicated that IM Distribution Ltd which was the third Respondent was soon to be removed from the register.

At this point, there was nothing in the public domain (MBIE database or that indicated any proceedings brought by Bananaworks; no Determination had been made.

The first Determination dated 26 February was a preliminary one – an application by Bananaworks for a joinder which Member Robinson approved, and this would allow Bananaworks to apply for a penalty against the former director and former manager of the now defunct IM Distribution, presumably to be paid to Bananaworks.

You heard that right: four people lost their jobs because a business simply folded, and now a former competitor turned up to the ERA with its hand out!

The merits of Bananaworks’ claim of aiding and abetting breaches of noncompetes were not considered in this preliminary Determination; its purpose was limited to whether or not Ms Wang and Ms Hu should be joined to the action.

This action does not look like it was brought in good faith to protect a legitimate business interest, but it does look like an attempt by Bananaworks to financially cripple four individuals who are likely to become, or by now already are competitors working for some other company, in order to stifle competition in general. Bananaworks’ claim for penalties will either be the subject of a further Determination, or it will simply walk away from its claim in an effort to limit reputational harm to itself; we’ve seen this happen before and sometimes all it takes is one phone call with a verbal agreement that costs will lie where they fall. Realistically, we don’t expect to hear any more on this matter.

However, Member Robinson seems to have been overly influenced by technicalities and has set a regrettable precedent that third parties are bound by other peoples’ employment agreements. This would overreach even more than finding third parties are bound by mediated settlement agreements (Halse, Simpson; Judicial Review currently underway). The huge difference in the interpretation of the Act by Members Beck and Robinson makes the ERA look like a lottery.

Any lawyer defending a third party against a spurious claim that relies on the Bananaworks joinder precedent can simply refer to Member Beck’s Determination of New Era IT a few days earlier, in which he declined to join the new employer.

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