Taurama Pharmacy Pty Ltd v Sherwen [1990] PGLawRp 599; [1990] PNGLR 127 (23 March 1990)

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TRADE AND COMMERCE - Restraint of trade by agreement - Validity and reasonableness - Employed pharmacist - Restraint on working within 40 km area - Whether reasonable in time and space and in public interest - Nature of profession and services in Papua New Guinea - Restraint unreasonable - Quaere applicability in light of protection of employment rights under Constitution.

EMPLOYMENT LAW - Contract of employment - Restraint of trade by agreement - Validity and reasonableness - Employed pharmacist - Restraint on working within 40 km area - Whether reasonable in time and space and in public interest - Nature of profession and services in Papua New Guinea - Restraint unreasonable - Quaere applicability in light of protection of employment rights under Constitution.

CONSTITUTIONAL LAW - Qualified rights - Freedom of employment - Quaere applicability of restraint of trade clauses in light of.

A contract of employment between a pharmaceutical business and a pharmacist contained a restraint of trade clause in the following terms:

“On ceasing employment with the Company you will not seek employment in business of a pharmaceutical nature either as an adviser, consultant, pharmacist, managing pharmacist, partner or sole owner for a period of three (3) years within a radius of forty (40) kilometres of the company pharmacies. You also shall not divulge information regarding the affairs of the Company and its clients.”

N1>(1) The test of the validity of a restraint of trade clause is whether the restrictions as to time and area are reasonable as between the parties and not injurious to the public interest: this is to be determined by a consideration of the nature and extent of the trade or profession and the employment therein of the party restrained.

Littlewoods Organisation Ltd v Harris [1978] 1 All ER 1026 at 1032, adopted and applied.

N1>(2) The court will enforce such a restraint of trade clause where use is made, not of the skill which the employee may have acquired but of the secrets of the trade or profession which he had no right to reveal to anyone else — matters which to some extent depend on good faith.

N1>(3) Given the nature of the profession of a pharmacist and availability of pharmaceutical services in Papua New Guinea and the general availability of knowledge of the scope of operations within the profession in Papua New Guinea, the restraint of trade clause was not reasonable in time and space as between the parties and was not in the public interest.

Quaere whether restraint of trade clauses are unconstitutional having regard to the employment rights of citizens protected in the Constitution.

These were proceedings in which the plaintiff sought an injunction to restrain an alleged breach of a restraint of trade clause and damages for breach of contract.

AMET J.: I gave judgment in this matter on 4 August 1989 and said I would publish full reasons later. This I now do.

N2>“1. An injunction to restrain the Defendant for a period ending on the 3rd day of November 1991 (ie three (3) years after termination of the agreement) from taking employment in business of a pharmaceutical nature either as an adviser, consultant, pharmacist, managing pharmacist, partner or sole owner within the radius of forty (40) kilometres of the Plaintiff company’s pharmacies.

The plaintiff is a company retailing pharmaceutical products and other related products such as perfumes, toiletries, cosmetics and jewellery. It operates two pharmacies, the Taurama Pharmacy at Taurama and Chapmans Pharmacy at Boroko.

On 6 October 1986, the plaintiff employed the defendant on contract for a period of two (2) years and eight (8) weeks. She was to be employed as a Managing Pharmacist of Taurama Medical Centre Pty Ltd, and appointed to Chapmans Pharmacy, at Boroko initially. The contract was in writing, dated 6 October 1986 and signed by the defendant in acceptance of the terms and conditions contained therein. Clause II provided that:

N2>(b) Perform to the best of your abilities the duties of Manager & Pharmaceutical Chemist & exercise the responsibilities of chemist & manager which from time to time vested in you by the Company through an authorised officer. At all times you will comply with instructions to carry out your duties from the authorised officer.

Your duties include the dispensing of prescriptions, manufacturing of medicinal products, maintaining the dispensary stock & the dispensary in good order & condition, counselling patients, attend to clients at the counter in particular, stock control of ethical & proprietary lines, co-ordinate, & facilitate stock transfers between company pharmacies, train national staff members as efficient shop assistants, merchandisers & dispensers, organise annual stock take & process annual stock take figures of the pharmacies.”

The defendant continued in the employ of the plaintiff until 3 November 1988 when her employment was terminated. The plaintiff chose not to renew her contract of employment. The plaintiff contended that, in breach of the agreement, the defendant had wrongfully obtained employment as Managing Pharmacist with the North Solomons Pharmacies Pty Ltd trading as Erima Pharmacy at Erima in Port Moresby. The plaintiff’s case was that:

“As Managing Pharmacist the defendant acquired a wide ranging and intimate knowledge of the scope of the operations of the plaintiff’s pharmacies including the following:

N2>(a) Retail operations — client list and pricing arrangements on various goods and services.

N2>(b) Wholesale operations — client list, pricing arrangements on various goods and services.

N2>(d) Range of product sources where goods may be obtained exclusively known to the Plaintiff. Information of which is learnt through trial and error over many years.

N2>(e) Various pricing policies — adjustment of prices based on various product sources.

The Defendant’s knowledge of these matters gives her employer the knowledge of the type of market to aim for, the rough size of the market, good and bad credit risks, who to approach, and the prices at which they can enter the market.

The Defendant’s knowledge of the above matters also give her and her new employer an ability to approach existing clients particularly wholesale clients of the Plaintiff with a view to enticing those existing clients away from the Plaintiff.

The Defendant’s knowledge of the Plaintiff’s business gives her employer a valued advantage which it would otherwise not have had in Port Moresby.”

It was contended that cl 10 of the agreement is therefore reasonably necessary for the protection of the plaintiff’s business.

In general, a restraint of trade clause by agreement is enforceable if it is reasonable. The onus of proof is upon the party supporting the agreement to show that the restraint goes no further than is reasonably necessary to protect the interest of the covenantee.

In Littlewoods Organisation Ltd v Harris [1978] 1 All ER 1026, Lord Denning MR, at 1032, said that:

“It is clear law that a master cannot protect himself from competition by an ex-servant or his new employer. He cannot stipulate for freedom from competition. But he can protect his trade secrets or his confidential information. That was laid down in Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 704.” [My emphasis.]

The case in which the court interferes for the purpose of protection is where use is made, not of the skill which the man may have acquired but of the secrets of the trade or profession which he had no right to reveal to anyone else — matters which depend to some extent on good faith.

“Whenever such covenants have been upheld it has been on the ground, not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over the customers of his employer, or such an acquaintance with his employer’s trade secrets as would enable him, if competition were allowed, to take advantage of his employer’s trade connection or utilize information confidentially obtained.”

It is thus established that an employer can stipulate for protection against having his confidential information passed on to a rival in trade. But experience has shown that it is not satisfactory to have simply a covenant against disclosing confidential information. The reason is because it is so difficult to draw the line between information which is confidential and information which is not; and it is very difficult to prove a breach when the information is of such a character that a servant can carry it away in his head. The difficulties are such that the only practicable solution is to take a covenant from the servant by which he is not to go to work for a rival in trade.

It is established that the restraint must not be wider than is necessary for the protection of the party seeking to enforce it — the covenantee. The test of the validity of the restraint clause is whether the restrictions are reasonable as between the parties and are not injurious to the public interest.

It might be unreasonable if it is for too long a period relative to the interest being protected; or it might be for too wide or large an area.

The interest of the public might be determined by a consideration of the nature and extent of the trade or profession and the employment therein of the party restrained.

I find that the evidence does not support the claims of the plaintiff. The evidence does not support the claim that the defendant acquired a wide-ranging and intimate knowledge of the scope of the plaintiff’s operations of its pharmacies. The pricing formulas, I am satisfied, are easily ascertainable and generally able to be calculated. Sources of suppliers and manufacturers are of common knowledge in the profession.

I am satisfied on the evidence of Paul Rawson, Manager of Boroko Johnsons Pharmacy, Ronald Holloway, General Manager of Johnsons Pharmacies, Peter Barron, Managing Director of North Solomons Pharmacies and the defendant that the defendant would not have acquired a wide-ranging and intimate knowledge of the scope of operations of the plaintiff in relation to pricing formulas and policies and product sources that were secret and confidential to the plaintiff.

I am satisfied that these matters are easily ascertainable. Other pharmacies, in fact, publish their price lists regularly.

In the end result, in the light of the plaintiff’s interest and the functions and duties the defendant performed (and in this respect I accept her evidence as to what she, in fact, did) I consider that the restraint is not reasonable both in time and space as between the parties and the public interest.

I am of the strong opinion that, given the nature of the profession of a pharmacist and the pharmaceutical services in Papua New Guinea, the restraint is unreasonable in time and space. It is not in the public interest that she be restrained for so long over so large an area.

I consider that the period of three years is far too long for reasonable protection, if protection be necessary. I am not satisfied that any real protection was necessary. It is quite clear to me that the defendant did not acquire any special intimate knowledge of the plaintiff’s practices. She performed functions which were common to other pharmacies, the practice and procedures of which were commonly available and ascertainable.

In relation to intimate knowledge and information as to credit risks of doctor clients, the defendant’s evidence of Dr Jacobi’s records showed that doctors shopped from one pharmacy to another. And, in fact, in the case of Dr Jacobi, he was purchasing more from Erima Pharmacy well before the defendant was employed there. He only had a small account at the plaintiff’s Chapmans Pharmacy. The argument that she might have given her new employer intimate information about some of the plaintiff’s clients such as doctors and wholesale customers loses weight.

There is some goodwill generated by pharmacists, as most other professional services agents, but for the most part customers of large retail outlets such as supermarkets, pharmacists and the like are generally localised to the areas they live in as being the most convenient. Many customers are transient, depending on where they are at given times.

The restraint in terms of space is most unreasonable and in my view totally inappropriate to the availability of such services in Papua New Guinea. It could just as easily have been five to six kilometres and that would have prevented any employment altogether of the defendant in the whole southern region, for there are no pharmacies outside of Port Moresby in the region. Such a large space as 40 kilometres is therefore totally unreasonable and inappropriate to the circumstances of Papua New Guinea. Given the relatively small size of the profession and the availability of this kind of service generally to Papua New Guineans, I do not believe some of the considerations applicable to metropolitan Sydney, Melbourne or Brisbane, as to time and space, are applicable to Papua New Guinea.

Indeed, such restraints might well be unconstitutional and against public policy. I would find some difficulty upholding such restraints as being reasonable against the constitutional rights of a citizen to obtain employment wherever and with whomsoever he chooses.

In the end result I find the restraint unreasonable and final for the defendant. The injunction is discharged forthwith.

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Papua New Guinea Law Reports

Taurama Pharmacy Pty Ltd v Sherwen [1990] PGLawRp 599; [1990] PNGLR 127 (23 March 1990)

Papua New Guinea Law Reports - 1990