What/whose knowledge? Restraints of trade and concepts of knowledge.

• Jurisdiction: Australia
• Author: Arup, Christopher
• Date: 01 August 2012

[Where are the courts currently drawing the lines, between the employer's confidential information and connections with customers and the employee's own explicit, tacit and personal knowledge, when they are asked to enforce restraints of trade? As part of the new social economy, we see a temporal contradiction--between the desire for immediate control and the value of sharing knowledge. This article examines the concepts of knowledge the courts are using to distinguish claims and to fashion remedies. The assessment supports the primacy of this approach and recommends ways the courts should continue to refine and administer their concepts.]

CONTENTS I Introduction A The Interest in Restraints B Decision-Making Principles C The Role of Time II Concepts of Knowledge A Explicit, Tacit and Personal Knowledge B Production Knowledge C Customer Knowledge III Production Knowledge in the Decisions A The Employer's Explicit Production Knowledge B The Employee's Explicit, Tacit and Personal Knowledge C The Reach of the Restraint D Remedies and the Role of Time IV Customer Knowledge in the Decisions A The Employer's Explicit Customer Knowledge B The Employee's Explicit, Tacit and Personal Knowledge C The Reach of the Restraint D Remedies and the Role of Time V Conclusions VI Appendix I INTRODUCTION

A The Interest in Restraints

Australian law has long permitted employers to apply restraints of trade to their employees. Such restraints prevent the employee from working in competition with the employer, for a nominated period of time and within a particular geographic region, after the employee has left the employment. A common statement of principles will suggest that restraints are a strictly limited exception to a judicial policy of free trade. (1) Nonetheless, the restraints enter periods of intensity, such as in Australia now, and mutate with changes around them in economic value and social relations. Field work the author is undertaking with colleagues indicates that they are becoming more common as terms of employment contracts and in some jurisdictions they are being enforced vigorously with injunctions. (2) The decisions to enforce have serious impacts on the parties and they also have implications for the productive use of 'cognitive or non-material labour' in the new knowledge economies.

Decisions about restraints involve many considerations. One court in the United States described the law there as 'sea-vast and vacillating, overlapping and bewildering [from which one] can fish out of it any kind of strange support for anything, if he lives so long.' (3) This article endeavours to apply discipline to the law by making the focus the concepts of knowledge the courts are pursuing when they distinguish the employer's claims to confidential information and customer connection from the explicit, tacit and personal knowledge the employee remains free to use. (4) The endeavour has two goals.

The first is an old-fashioned legal interest in the decisions the courts are making. We know definition is important if the parties are to regulate their own relations and avoid costly disputes. These disputes end in the state supreme courts. While they are an interesting mixture of intellectual property and labour law, they tend to have a conceptual and practical life of their own. The second is a socio-legal interest in the shape decisions about restraints give to economic value and social relations. Restraints are a key point at which the law defines capital and labour. The original employer has legitimate claims to intellectual and social capital, but there are also benefits to be gained from the free circulation of labour (or human capital if you will) in network economies and the social accumulation of knowledge.

The study proceeds first by clearing the ground of other principles by which the courts might decide the enforceability of restraints. It then enlists concepts of knowledge from the social sciences to act as measures of the discrimination with which the courts distinguish between the parties' claims. The research investigates how the courts are discriminating by reading the decisions in the New South Wales and Victorian jurisdictions in the last decade. These decisions number over 100 and the rate appears to be increasing. (5) The reading of these decisions is aided by the judgments in the appeal courts and the long legacy of the common law which is accessible in the scholarly work in this field. (6) Within that framework, it goes a step further, finding patterns of decision-making in the recent cases, some of them interlocutory proceedings, some of them trials. The decisions are marshalled around the concepts of knowledge. (7) It is empirical research, building up rather than down, but it is a necessary approach if the law is to be accurately assessed. The method is consistent with a trend in intellectual property and labour law research, which might be regarded as part of a new legal realism. (8) It is supported by the approach the courts say they should take to restraints. So the analysis cannot be content with a statement of principles, it needs to see what the courts are actually deciding. In Stacks/Taree Pty Ltd v Marshall [No 2], McDougall J made the point that:

There can of course be a problem with excessive reliance on decided cases. The question of validity of a covenant in restraint of trade (including, in this, a covenant against solicitation of the covenantee's customers or clients) is not really a question of law. Decided cases state the relevant principles, and may prove useful, indeed valuable, guidance as to their application in particular factual circumstances. But the validity of a covenant in restraint of trade is to be assessed having regard to the terms of the particular covenant and the facts of the particular case. (9) B Decision-Making Principles

Some practitioners might protest that the decisions are not at their core about concepts of knowledge. My contention is that other principles play a part but they are subordinated to these concepts. In this regard, it is first necessary to say that the courts do not follow the principle of freedom of contract as the basis for enforcing restraints. It is true that the restraints originate in contracts--contracts can be regarded as the legal technology for producing restraints. (10) The courts hear argument that restraints should not be enforced because the parties have not observed the principles of contract formation and performance. In principle, restraints might be unenforceable if the making of the contract is vitiated by some factor (such as misrepresentation, duress or unconscionability), or the employer has repudiated the contract or terminated it in some other way. (11)

Yet the converse is not the case. Some courts do definitely warm to an argument that the parties have bargained for the restraint and that their contract should be upheld. (12) This gives weight to the conclusion that the restraint is reasonable, all else being equal. However, it remains the case that the fact of the contract is not enough. (13) Freedom of contract has strong supporters, but the courts do not simply regard the restraint as a kind of tariff that the labour market can bear at a particular moment, or as a private and autonomous deal between two commercial parties, so that the salary pays for the restraint. (14) Rightly so, the validity of the restraint must be assessed on grounds of public policy.

Equally so, however, it should be appreciated that the courts do not hold restraints invalid because they place a restriction on competition. (15) The decisions show that the courts are prepared to restrict the employee's freedom to work and use knowledge if it is necessary to protect the employer's legitimate business interests. (16) The question is which interests are 'legitimate'. The analysis finds that the courts use concepts of knowledge to decide the limits of the employer's legitimate interests. This is a principled approach but one that would benefit from further refinement. It is true the courts do not simply insist that confidential information or customer connection is the employer's property--to be protected as of right--though it is of concern that occasionally such language does surface. (17) At the same time, the courts have not developed an investment theory to determine which knowledge is the employer's to restrain.

The courts do show interest in the investment employers have made in the explicit knowledge they claim as their own knowledge. Such investment is a factor that may be taken into account when determining the confidentiality of information (see below Part IIIC). Nonetheless, the courts have not adopted an investment theory which would justify the restraint of the other explicit knowledge the employee carries away with her, or the employee's tacit and personal knowledge. Unlike the United States law, the employer's investment in the education and training and the other human capital development of the employee is not ground for a restraint. (18) Nor should it be. For, once this approach is adopted, it is necessary to think about the effect on the investment of the employee. Katherine Stone argues, now that employers do not provide job security, that employees expect to be able to take away with them the benefits of their human capital development with the employer. (19) Otherwise, they will be reluctant to invest. Furthermore, it is most likely that the employee will have acquired knowledge in other ways and it will be arguable how much is the result of this employer's education and training. Moreover, there is a strong current body of research that the economy gains overall if restraints are not overly enforceable. (20) The accumulated gains from employee mobility and transfer of knowledge exceed any losses to the particular employer. This research has been taken up in the commentary on the law. (21)

This paper is not...