Third party noncompete enforcement: New Era IT and Bananaworks wrap-up – by Tristam Price

Two technology companies recently sued not only their former employee but also their new employers. Bananaworks were awarded a total of $16,345 plus costs from two former employees Mr Shi and Mr Zhang, and New Era IT was awarded $15,000 from Mr Hood. Costs are yet to be determined.

These two matters had a lot in common:

  • All employees had restraint of trade clauses in their employment agreements, but none of them were found to be enforceable – due to Shi and Zhang not having been paid a consideration to support that clause, and Hood negotiating his way out of the noncompete at a mediation in the context of downsizing during the 2020 lockdown.

  • The penalties were therefore not for breaching restraint of trade clauses, but for using the companies’ intellectual property to solicit their clients, ie: misuse of confidential information.

  • When deciding the quantum of the penalties, both ERA Members Eleanor Robinson and David Beck factored in the financial position of the former employees.

An interesting aspect of these cases is that both companies also sued their former employees’ new employers and lost. We reported on these matters on 21 March (both Bananaworks and New Era IT) and 28 August (Bananaworks only).

Member Beck was by far the most decisive and probably saved all parties a lot of time and cost (Contrast NZ is New Era IT’s competitor):

[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...

The lesson to companies seeking relief for misuse of confidential information by former employees, is that going after the new employer as well is probably going to be a costly exercise in futility.

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