Many executive employment contracts include ‘non-compete‘ clauses. These can take the form of a non-solicitation clause, which prevents you from approaching your current employer’s clients. It can also take the form of a restraint of trade clause, which prevents you competing with your current employer. Ordinarily, these clauses prevent employees from working for, or starting up, a ‘competitor‘ for a period of time after you cease employment. But what exactly is meant by ‘competitor’ in these circumstances?
In SAI Global Property Division Pty Ltd v Jones [2018] NSWSC 438, Slattery J indicated that the word ‘competitor’ can have a ‘narrower meaning’ or a ‘broader meaning’, depending on the circumstances.
The narrow meaning of ‘competitor’
For example, an advertising agency which provides print media advertisement services in magazines is a competitor to an advertising agency which provides print media advertisement services in newspapers. The services that they provide are ‘similar’.
The broader meaning of ‘competitor’
In broader terms, the word ‘competitor’ can extend beyond entities that provide similar services to those who pose a real commercial threat to each other, or whose products or services are ‘substitutes’.
For example, to return to our previous example, an advertising agency which specialises in making YouTube advertisements is a competitor of each of the print media advertisement services. Online advertising through YouTube is a substitute for print media advertising, and poses a commercial threat to print media advertising.
Other meanings
In other areas of the law, courts have considered whether entities are competitors by focusing on the degree of ‘rivalrous behaviour’ between the entities. This definition directs attention to the degree of rivalry between two entities over the same pool of customers.
What this means for employees
Employees who are looking to take the next step in their career should look carefully at whether a new employer or business they are setting up is a competitor. To do so, they need to look at the degree of:
- Similarity between the goods and services provided;
- Similarity between the clients being marketed to; and
- Substitutability between the goods and services provided.
What this means for employers
Employers who want to ensure that the non-compete clauses in their employment contracts are broad enough to capture all of their most significant competitors should define the word ‘competitor’ in a deliberate way in their contracts. A well drafted definition of competitor can extend to entities which:
- Provide similar goods and services;
- Provide goods and services which are reasonable substitutes; and
- Compete over the same ‘pool of clients’.
In industries with few new entrants, it is also a good idea to name specific entities as being competitors.
How can JFM Law help?
JFM Law’s experienced industrial and employment lawyers can help employees and employers with a range of issues concerning restraints of trade and non-compete clauses. Contact JFM Law on (02) 9199 8597 for a no obligation chat. If you would rather get in contact through email, send your question through or by email at wehelp@jfmlaw.com.au.
The information contained in this post is current at the date of editing – 04 April 2024.
