October 26, 2022

DXC Eclipse Pty Ltd v Wildsmith (No 2) [2022] NSWSC 1330

8 minutes

"Stop competing with the business you sold me!"

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In 2018, P bought a business from the Ds by buying all shares in the Co, ObjectCo, that operated the business from D1 and D2 for $9.5m: [1], [10]

P is a local subsidiary of a multi-national group that sells and installs business software: [2], [3]

ObjectCo sold and installed similar but more complex, pricier software: [4]

ObjectCo’s business was therefore complimentary to, not competitive with, P’s business: [5], [69]

D1 was ObjectCo’s controlling mind. D2 was D1’s company: [8], [9]

The sale contract prevented D1 and D2 from competing with ObjectCo or poaching staff: [10]

After the sale, P integrated ObjectCo’s business into its own and employed D1 until D1’s resignation in July 2021: [11]

In Dec 2021, D1 returned to the software business using NewCo, almost wholly owned by D2: [13]

D1 also joined the board of NewerCo, which dealt in software potentially complementary to NewCo’s: [14]

P claims the businesses of NewCo and NewerCo are a breach of D1’s and D2’s non-compete restraints: [15]

D1 disagrees and says to the extent there’s competition, it’s legitimate: [15]

Interlocutory injunctions were granted. A final hearing followed: [17] - [20]

D1 agreed not to solicit customers or employees from ObjectCo: [22]

P sought further restraints: restricting D1’s involvement with NewCo and NewerCo, restricting D1’s dealings with suppliers, and extending the prevention on poaching employees: [23] - [25]

The question arises: are the restraints in the contract reasonable enough to be enforceable?: [27]

The background of the software environment and its marketing is (with respect) usefully set out at [34] - [53], [70] - [88]

An expert gave evidence that once a firm chooses software, the complexities involved with ending that relationship formed a “barrier to exit”. Clients are sticky: [86]

D1’s plan was to use NewCo and NewerCo to target the high end of “BC” clients and not the more valuable, more competitive “F&O” space where ObjectCo had operated. The issue was: did the restraints in the sale contract prevent this?: [108], [114]

(In considering the issue of whether the upgraded BC product with add-ins was competitive with F&O, an independent expert said this was “like arguing a ute, plus a trailer competes with a B-Double truck”: [81])

The issue then was: does the restraint apply to BC and, if so, was that reasonable?: [115]

Following extended and (with respect) precise analysis of the terms of the clause, the Court found the non-compete did not apply to BC: [149]

The Court found the business of NewCo was not indirectly competitive with ObjectCo: [158]

The injunction P sought to prevent dealings NewCo might have with the supplier of the software was not reasonable to protect P’s interests as the claimed restraint did not have a sufficient relationship with the goodwill P purchased: [182]

P’s claim for a final injunction was dismissed: [190]

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