Stopping Competition By Ex-Employees

An Interesting Case

For many employers it is their worst nightmare. One or more employees leave the company and proceed to set up a competing business. For a senior employee, at least, a well-drawn employment contract will impose restrictions on activities of the employee after leaving the employment. Typically, there might be an express obligation of confidentiality, an obligation not to deal with the company’s clients during a specified period post-termination or (most beneficial from an employer’s point of view) an obligation not to be involved in a competing business within the local area during a limited time after termination.

If the employee’s contract does not include such provisions, the employer’s options are limited. One possibility is to seek to rely on an implied obligation of confidentiality. However, the recent case of Crowson Fabrics Ltd v Rider and Others shows that other weapons may be available to the employer.

Crowson was engaged in the design, production and supply of fabrics for home and commercial furnishing and decoration. Until June 2007, R and S were employed by Crowson. They then left and set up a new fabric company, Concept Textiles Ltd. Crowson alleged that R and S had taken information and documents, including a spreadsheet, various e-mail addresses and Crowson's customer-sales database.

Crowson commenced proceedings against R, S and Concept on a number of grounds:

• Breach of Confidentiality – Crowson claimed that R and S had acted in breach of an implied obligation not to copy or misuse any of Crowson's confidential information. This claim failed on the basis that the relevant information had not been confidential. The Judge accepted the evidence of R and S that all of the information alleged to be confidential was either in the public domain or had become part of their general knowledge.

• Illegitimate Use of Information - Crowson claimed that R and S had breached their implied duty of good faith or the stricter fiduciary duty owed by senior employees. This claim was upheld by the Judge. Regardless of whether or not the information was confidential, its use by R and S before termination of their employment had been illegitimate. The law draws a distinction between an employee merely taking steps preparatory to running a competing business after he has left (which is permitted) and an employee actually being involved in such a business (which is not). Here, the activities of R and S had fallen on the wrong side of the line.

• Breach of Database Right – The Judge also upheld Crowson’s claim that R and S had infringed its database rights by extracting a substantial amount of information from its database, including the customer database.
A number of lessons may be drawn from this case:

• Contracts of employment should be regularly reviewed to ensure that they provide, in relation to post-termination activities, a level of protection appropriate to the seniority of the relevant employee.

• What is or is not confidential information is ultimately a matter for the court. It is not simply a matter of describing or labelling information as confidential. One factor that will carry weight is the manner in which information was handled within an organisation. Was the information treated as confidential and only disclosed to staff on a “need-to-know” basis, or was it common knowledge within the organisation?

• Copyright, database right or other intellectual property rights might provide the employer with a remedy.

• Any well-drawn contract of employment should require the employee, on termination of the employment, to deliver up to the employer all property belonging to the employer together with all documents and computer disks etc. Employers should always consider conducting a proper exit interview where they remind the employee of this obligation and ask them to confirm that they have returned everything they are obliged to return.

If you would like to know more about the Crowson Fabrics case, and the best way to protect your business in relation to the activities of former employees, please contact Nick Crook or Gareth Pobjoy.

Filed: 18/02/2008 09:48:26