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  • A recent Court of Appeal decision provides guidance on the level of competition sufficient to engage non-competition (or non-compete) restraints where two companies indirectly compete.
  • The Court of Appeal upheld the trial judge’s finding that the plaintiff company had not established that the defendant’s business ‘might pose a real commercial threat’ to, or would ‘seriously compete’ with, the plaintiff’s business such that the non-competition restraints were not engaged.
  • The Court of Appeal indicated that s 4(1) of the Restraints of Trade Act 1976 (NSW) may reverse the onus of proof from the position at common law as to the reasonableness (or unreasonableness) of a restraint on public interest grounds, which may pave the way for future debate.

Section 4(1) of the Restraints of Trade Act 1976 (NSW) (‘Act’) provides that ‘a restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not’. It is well-settled that the correct approach to the application of s 4(1) involves three steps:

  • first, the Court determines whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed;
  • secondly, the Court determines whether the restraint, so far as it applies to that breach, is contrary to public policy;
  • thirdly, if the restraint is not contrary to public policy it will be valid, subject to the defendant having applied for an order under s 4(3) of the Act and the Court finding s 4(3) has been satisfied.

A restraint of trade will not be contrary to public policy where the restraint is no more than is reasonable for the protection of a legitimate interest. A covenantee is not entitled to be protected against mere competition. Legitimate interests that may be protected include trade secrets and confidential information, and goodwill including customer connection. The validity of a restraint of trade is determined at the date of its creation and not its breach.

The DXC Eclipse case

In DXC Eclipse Pty Ltd v Wildsmith [2023] NSWCA 98 (‘DXC Eclipse’), DXC Eclipse Pty Ltd (‘DXC’) acquired a software solutions business called Sable37 by way of a Sales and Purchase Agreement (‘SPA’) with a number of sellers, one of whom was Mr Wildsmith. A non-competition restraint in the SPA provided that Wildsmith would not, in any capacity during the Seller Restraint Period:

  • directly or indirectly carry on a Competing Business in the Restraint Area; or
  • directly or indirectly be concerned with or interested in a Competing Business in the Restraint Area.

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