HR&IR Update | James Warburton restrained until January 2012

12 May 2011

This morning, Justice Pembroke of the New South Wales Supreme Court handed down his decision in what has become known (slightly inaccurately) as the 'Seven vs Ten' case. The case concerned James Warburton – who resigned in March 2011 from Channel Seven to accept the role as Chief Executive Officer of Ten. Mr Warburton had intended to start with Ten in mid July 2011.

However, Seven argued that Mr Warburton could not start before mid October 2012 - effectively an 18 month restriction. Seven relied on a combination of:

  • the termination provisions in Mr Warburton's employment contract, which meant that Mr Warburton's resignation could only take effect in mid October 2011;
  • a 12 month post employment restraint contained in a management share option scheme deed.

Justice Pembroke decided that Mr Warburton should be restrained from joining Ten until 1 January 2012.

He rejected arguments that Seven had released Mr Warburton from the post employment restraint or had repudiated Mr Warburton's contract by asking him to leave the premises and not attend for work. However, Justice Pembroke also took the view that Mr Warburton should only be restrained for 2011 – as Seven would negotiate new terms of trade with its advertisers and agencies for the 2012 calendar year.

Finally, he also concluded that Mr Warburton should pay 70% of Seven's costs.

The Facts

Mr Warburton was the Chief Sales and Digital Officer of the Seven Media Group (SMG). He reported to David Leckie, SMG's CEO – the position Kerry Stokes ultimately offered to Mr Warburton.

Relevantly:

  • Mr Warburton's contract was for an initial three year fixed term expiring on 14 July 2011 - with three months notice of termination being required thereafter. This meant the earliest Mr Warburton (or SMG) could terminate his employment was 14 October 2011;
  • Mr Warburton's contract provided that Seven was not obliged to require him to perform duties (which was important – as Seven ultimately sought to place Mr Warburton on garden leave);
  • Mr Warburton's contract did not contain a post employment restraint. But critically there was a 'non competition' restraint under a separate management share option scheme (Restraint) – the 'Management Equity Participation Scheme'. The Restraint itself was contained in a deed, to which Seven and its investors were a party. The Restraint was cascading and applied for up to 12 months. A cascading restraint has a combination of different time periods and geographic areas – in the hope that if the larger geographic areas and time periods are unenforceable, the smaller areas and shorter time periods will survive. The Restraint had time periods of 12, 6 and 3 months and geographic areas of the world; any country where Seven operated and any state where Seven operated respectively.

From September or October 2010, Seven and Mr Warburton were in discussions about the renewal of his contract and Mr Warburton's desire to become CEO of SMG.

Things came to a head in late February – early March 2011. On Saturday morning, at his home, Mr Stokes offered Mr Warburton the position of Chief Executive Officer of SMG and Mr Warburton accepted 'in principle', subject to Mr Leckie's support. But later that day, Mr Warburton was offered the position of the CEO of Ten.

On the Wednesday following, Mr Warburton made his decision – signing a contract with Ten and resigning from Seven.

Importantly, Mr Warbuton maintained that:

  • Mr Leckie had told him during negotiations that - if Mr Warburton wished to go to Ten - Seven would let him go. According to Mr Warburton, Mr Leckie said

    'If you want to leave to do Ten, no dramas. We will let you go and just get on with it.'
  • when he resigned, that Mr Leckie told him to leave the premises immediately.

The Proceedings

Seven commenced proceedings against James Warburton for (amongst other things) breach of contract and against Ten for interference with contractual relations (although the proceedings against Ten were ultimately discontinued).

The proceedings took some twists and turns, but the essential issues came down to this:

  • was the Restraint unenforceable in its entirety? In particular:
    • was the Restraint void for uncertainty, due its cascading nature?
    • did Seven release Mr Warburton from the Restraint?
    • had the Restraint fallen away because Seven repudiated Mr Warburton's contract by placing him on 'garden leave'?
  • how should the Restraint apply? In particular:
    • was the Restraint period measured from date of termination or the date on which Mr Warburton was placed on garden leave?
    • was the 12 month maximum period of the Restraint reasonable (or was one of the shorter time periods reasonable)?
    • as a discretionary matter, should the Restraint be enforced for its full duration?

A word on restraint law

In this regard, it is important to appreciate that at common law, a restraint of trade is void unless an employer can prove that the restraint is no wider than is reasonably necessary to protect the employer's 'legitimate business interests'. Relevant factors include:

  • the nature of the employee's employment;
  • the width of the restraint - that is, the activities restrained;
  • the period of time over which the restraint operates; and
  • the geographic area in which the restraint operates.

There are four main types of recognised 'legitimate business interests':

  • protection of confidential information;
  • protection of customer relationships;
  • protection of a stable workforce (although there is some controversy about this);
  • protection of goodwill in a sale of business.

There are two main types of restraints:

  • non compete restraints – preventing a former employee from working in a specified field;
  • non solicitation restraints – preventing a former employee from soliciting customers, employees and sometimes suppliers.

Non compete restraints are more difficult to enforce.

The common law position is modified in New South Wales. In New South Wales the Courts have a discretion under the Restraints of Trade Act 1976 (NSW) to – in broad and slightly inaccurate terms - 'rewrite' an unenforceable restraint clause to make it reasonable and enforceable.

Outside New South Wales, restraint clauses are essentially 'all or nothing'. If the restraint goes beyond what is reasonable, then (unless the Court can sever the unreasonable words, leaving a functional restraint) the restraint will be completely unenforceable.

This has led employers to use 'cascading' restraints – essentially, a restraint with multiple time periods, geographic areas and restrained activities, drafted in the hope that a Court will enforce at least one combination at the outer edges of the employer's rights.

However, there is a danger that a Court will regard a cascading restraint as being void for uncertainty if there are too many combinations.

Back to the decision. Was the Restraint unenforceable in its entirety?

Justice Pembroke decided:

  • the Restraint was not void for uncertainty – despite its cascading nature. Notwithstanding the multiple combinations, the restraint was not so complex and impenetrable as to be meaningless;
  • Seven did not release Mr Warburton from the Restraint and was not estopped from enforcing it. While Mr Leckie may have said Seven would let Mr Warburton go to Ten, this was not intended to affect the legal rights of Seven and the investors under the deed. Nor did Mr Warburton reasonably understand this to be the case. Finally, Mr Leckie did not represent the investors or other corporate entities within the Seven Group – who enjoyed the benefit of the Restraint.
  • Seven was entitled to place Mr Warburton on 'garden leave' under the contract. When Mr Leckie told Mr Warburton to leave the premises, this is what he was doing. He was not intending to renounce the contract but enforce it. Placing employees on garden leave was customary in the industry and at Seven. A repudiation of contract was not to be lightly inferred.

And how should the Restraint apply?

Justice Pembroke decided:

  • that the Restraint period was measured from the date Mr Warburton was placed on garden leave – not the date of termination. This is an unorthodox interpretation of the words 'ceases to be employed or engaged' – which could have ramifications for the drafting of other restraints.
  • at the time the deed was entered into, the 12 month period of the Restraint was reasonably necessary to protect legitimate interests of Seven and the investors – including:
    • their investment;
    • confidential information to which Mr Warburton had access (such as advertising rates and trading terms enjoyed by advertisers and agency buying groups).

The fact that Mr Warburton had legal advice on the Restraint when he signed the deed, and acknowledged its reasonableness, was also important.

  • however, as a discretionary matter, Mr Warburton should only be 'sidelined for the balance of 2011 but no longer'. In this regard, Justice Pembroke was satisfied that during this time, Seven would negotiate new terms of trade with its advertisers and agencies for the 2012 calendar year and that any other information Mr Warburton was aware of would 'have become inevitably and progressively stale, even obsolete'