what can you do when employees join, or become,
competitors?
An employee is subject to the duty of fidelity, including the
duty not to compete with his or her employer whilst the employment
continues. If the employee is also a director of the company, or in
certain cases holds some particular position of responsibility or
seniority, he or she may well also have a fiduciary duty towards
the employer. A fiduciary owes an obligation of exclusive loyalty
to act in their employer's interests and not their own. When such
an employee resigns having set up to work in competition with their
former employer, can the employer sue them for breach of the duty
of fidelity or a fiduciary duty?
The answer will depend on a detailed
examination of the steps that the employee has taken, and each case
will be different and will turn on its own facts. In one recent
case, the High Court ruled that two former employees had been in
breach of both the duty of fidelity and their fiduciary duty.
A divisional manager, Mr Ranson, set up his own company whilst
employed by Customer Systems Ltd (CS). Although the Court found
that he had been entitled to set up a company and create business
plans while he was employed at CS, it held that he was in breach of
his fiduciary duty, which he owed by virtue of his senior position
in sales, when he sought work for his own company from clients of
CS whilst still employed by CS. The Court stated that he should
have informed CS of those business opportunities.
At the same time CS sued the consultancy
manager, Mr Offland, who had left CS to join Mr Ranson's new
company. The Court ruled that when Mr Offland, whilst his
employment was ongoing, was given confidential information by Mr
Ranson regarding Mr Ranson's intention to compete with CS, he was
not under a duty to inform CS of this information as long as he did
nothing to actually assist Mr Ranson in competing with CS. However,
Mr Offland had gone further than that and had assisted Mr Ranson in
getting work from one of CS's clients whilst still employed by CS.
Because the Court ruled that Mr Offland also owed a fiduciary duty
in these circumstances, he had been under a duty to inform CS of
what he was doing.
Although CS was successful in establishing
breach of fiduciary duty, it could not rely on restrictive
covenants in Mr Offland's contract of employment because they were
drafted too widely and were unenforceable.
Unusually, the judge also awarded costs
against CS for pursuing a claim against a third employee, Mr Edmond
who was just an employee (not a fiduciary). The Court viewed CS's
conduct in bringing high-value claims of little merit against him
as designed to intimidate a young man of limited means. It serves
as a warning to employers to consider carefully the merit of each
claim before proceeding.
In a separate case the High Court refused to
grant an employer's application for an injunction against a former
employee to stop her using confidential information in her new job.
This was partly because the injunction was worded too widely, as
was the confidentiality agreement the employee had signed when she
worked for the employer. Another factor was that the employer had
not told her during her employment that the information was
confidential, and this underlines the need to take steps at the
start of and during employment to protect confidential information.
The chances of a successful injunction are often dependent on
documents drafted and action taken before employment has ended, not
afterwards.
When employees leave to join a competitor or
set up in competition the consequences can be very serious. Our
specialist Employment litigation team in London has a lot of
experience in advising on such matters including bringing and
defending applications for injunctions, as well as drafting and
enforcing restrictive covenants and confidentiality agreements.
