Senior employees may break common law duties if they set about creating a rival business while still employed, even if they are not company directors, have no written restrictions in their contracts, and are not misusing confidential information.
The recent case of Crowson Fabrics v Rider & Stimson & Concept Textiles concerned two senior employees (but not directors) of a fabric design and production business. They had no written restrictions in their employment contracts at all.
While still employed they had set about creating a rival business; copying company documents (including the worldwide customer database and express costings for raw materials); soliciting their employer's agents in other countries to come and work with them and directing business opportunities to themselves. They resigned and were not put on garden leave because they lied to their employer about what they were each planning to do next. They started to work in a competing business as soon as their notice periods had expired.
When the employer discovered the truth it applied to the High Court claiming breach of fiduciary duty (usually only applicable in the case of a company director), breach of an employee’s common law duty of fidelity to his employer, misuse of confidential information and misuse of a database belonging to the employer.
The High Court decided that one of the employees had been employed for so long and held such a special role or status that (even though he was not a director) he had a fiduciary duty to the company and the other (who did not have the same length of service) had the more ordinary duty of fidelity to his employer. In both cases their actions constituted a breach of the relevant duty. The court found that there had been no breach of confidentiality and accepted that all the documents or information that they had been misusing while still employed were either already in the public domain or formed part of their own individual knowledge and expertise.
However, the court also found that they were in breach of the Copyright and Rights in Database Regulations 1997 (‘the Database Regulations’) in that without consent they had extracted or re-utilised all or a substantial part of the contents of a database belonging to their employer.
Points to note –
The court has not yet decided what would be the best remedy in this case. In such circumstances, it has power to order an injunction preventing the defendants from competing for a fixed period, or order payment for profits lost to the claimant as a result of their behaviour, or compensation measured by reference to what would be a reasonable price for using their employers documents as a shortcut to setting up their own business.
The case is a useful reminder to employers to have up-to-date full written contracts for all senior employees. They should have it spelled out in their contracts that they cannot do anything while employed that would conflict with their employer's interests. They should be bound by an express confidentiality clause, if possible identifying the material which the parties agree is to be classed as confidential. This should be easier to enforce than the common law duty not to misuse confidential information where the judge’s first task (as in this case) has to be to try and identify what that information is. Finally, they should be bound by carefully drafted restrictive covenants to come into effect on termination of their employment and designed to protect the employer’s genuine business interests. We can advise on appropriate wording for such contracts.
However the case also shows that the employer does have other remedies if the defecting employee’s written contract is inadequate or non-existent. The fiduciary duty which binds company directors (and, as in this case, senior employees with a special status) imposes a positive obligation on them not to act so as to place themselves in a position where their interests and those of the company conflict; not to use any information or opportunity available to them by reason of their employment for any purposes other than for furthering the company’s interests; to account to the company for any personal gain made by making use of any such opportunity or information and a duty to disclose any misconduct or breach of contract by themselves or any other employee.
Employers should also note that their rights under the Database Regulations are based on ownership of the database alone. It does not have to be proved that the information contained in it is confidential.