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Business Protection 101

Monday 24th February 2020
Categories —

Business Protection 101

(aka NOT being caught with your pants down)

It’s a familiar story. A business finds itself being ripped-off by an employee with whom it has no written contract, or at least an inadequate set of terms. What if any protection does it have? The answer is less than it would like, but more than it might think.

Written contracts

There is no doubt that a written contract with your employees is important. Indeed, it is a legal requirement, but more than that – it is a practical commercial imperative.

The written contract is the place where the parties record, hopefully with clarity, all of the terms between them which they regard as important. This is especially desirable where the employee is very senior or has access to commercially important information or relationships. In terms of business protection, these will terms will cover such things as confidentiality, intellectual property, non-competition and non-solicitation (of staff, customers, suppliers etc.)

No written contract?

But what protections exist where there is no contract? Naturally, the employer may discipline and dismiss (whether with or without notice) according to normal principles of employment law. Beyond that, however, can the employer restrain the former employee from causing it loss and damage?

In certain circumstances, yes. Whenever there is employment, there is a contract of employment – even if only one which has come to exist through a combination of oral discussions, custom and practice and/or implication. It is the implied and ‘deemed’ features of the relationship which can sometimes come to the aid of an employer which finds that it has been caught with its proverbial ‘pants down’.

Implied protection

At common law, an employee impliedly contracts to render good and faithful service to his employer. This is sometimes described as his duty of ‘fidelity’ or ‘loyalty’.

This is then supplemented by the law of equity. Equity regards the relationship of employer and employee as having a special quality or status, analogous to the fiduciary relationship between a principal and their agent.

Equity also acknowledges and permits the enforcement of confidences: information supplied in confidence to an employee should not normally be disclosed by him to another.

Finally, there are several provisions within the sphere of intellectual property which can also come to bear upon the employer-employee relationship, regardless of whether the parties to that relationship have organised themselves adequately. Thus, an employee who misappropriates his employer’s trade secrets is liable to the business protecting itself via a number of means.

Honesty

Unfortunately for employers, the law does not regard the relationship of employer and employee as one of uberrimae fidei (the utmost good faith) such as would be the case, for example, with a trustee or an insured party as against his insurers. Therefore, the requirement of honesty does not extend to employees being obliged to report on their own misconduct. Such an obligation would require an express contractual term.

However, the employee must be honest in the execution of their duties. Moreover, an employee is unlikely to be able to conceal their misconduct fraudulently because fraud will tend to transcend whatever protection might otherwise exist.

Employees may also be obliged to report on the misconduct of fellow employees. And certainly, an employee in a senior position might – depending on the facts and in particular the degree of trust reposed in them – have a special duty of honesty or even become a fiduciary. In Nottingham University v Fishel [2000] IRLR 471, QBD Elias J. (as he was then) summarised the position as follows:

“…in determining whether a fiduciary relationship arises in the context of an employment relationship, it is necessary to identify with care the particular duties undertaken by the employee, and to ask whether in all the circumstances he has placed himself in a position where he must act solely in the interest of his employer. It is only once those duties have been identified that it is possible to determine whether any fiduciary duty has been breached.”

As can be seen, therefore, a de jure or statutory director of a company will almost always be regarded as a fiduciary in the employment relationship, just as he is pursuant to his corporate relationship.

Secret profits

An employee must not make any secret profits and must account to the employer for any he does make. An extreme example of this was Padden v Arbuthnot Pensions and Investments Ltd [2004] EWCA Civ 582 where the Court of Appeal upheld a High Court ruling that an employee who had defrauded a client was liable to indemnify the employer against claims brought by the client.

Disclosure of information

Similarly the employee must pass on to the employer any information which comes to him on behalf of his employer. The information is deemed to be the property of the employer by virtue of the fact that it is derived in the context of the employment relationship. Having said that, it is obviously much easier if the sort of information the employer is interested in is defined within a written contract.

In addition, the Patents Act 1977 ss 39–42 regulates the ownership of and benefits from a work-related invention as between employer and employee.

In essence, section 39 states that such an invention belongs to the employer provided that it was made in the course of the normal duties of the employee or in the course of duties falling outside those normal duties but specifically assigned to him, and that an invention might reasonably be expected to result from the carrying out of his duties.

Section 40 then provides a right to compensation for the employee if the invention belongs to the employer but ends up providing the employer with an “outstanding benefit”.

Similarly, copyright is also subject to a statutory regime under the Copyright, Designs and Patents Act 1988 s 11 which provides that any work produced by the employee in the course of his employment will, in the absence of any agreement to the contrary, belong to the employer.

Confidential information

There is an implied term in every contract of employment to the effect that an employee will not disclose to third parties trade secrets or confidential information which he acquires by reason of his employment. Moreover, there is an implied undertaking that the employee will not use any information which he has obtained in confidence as a consequence of his employment to the detriment of his employer.

Having said that, there are significant limitations upon the definition of ‘confidential information’ for these purposes. In essence, information in the nature of a trade secret (typically formulae or recipes, production know-how etc.) which is clearly secret and highly important to an employer will be covered and that protection will endure post the termination of the relationship.

Other types of so-called confidential information, however, including pricing, budgets, management accounts, customer details etc. are unlikely to be capable of protection beyond the termination. These would require an express written term if the employer wished to be able to protect them from use or dissemination post-termination.

It is in the context of confidential information that the concept of a “Springboard” injunction – an injunction to prevent an employee from obtaining an unfair head start in a new or different venture by “springboarding” off of their former employer’s confidential information (see below) – is particularly important. Such an injunction can be obtained even within a written contract existing.

However, an injunction actually preventing an ex-employee from taking up the new employment (known as “barring-out” relief) is not available where the employer’s allegation is merely that there has been a breach of the implied duty of confidentiality. Again, this sort of relief is only available where there is an express written contractual term.

Competition

It may seem odd to talk in terms of non-competition whilst the employment relationship subsists, but the audacity of certain employees knows no bounds. Therefore, the implied duty of fidelity does operate to prevent employees from setting up in competition with their employer or going to work for a rival concern whilst the employment subsists.

However, neither the implied duty of fidelity at common law, nor any doctrine of equity, will operate to restrict competition post-termination. Moreover, there is no general obligation (in the absence of a contractual term or a fiduciary duty) to answer truthfully questions posed by the employer as to possible future competition when about to leave. For these reasons, written post-termination restrictions are extremely important.

Database rights

Databases can be a valuable commercial asset and often time and money will have been invested in their creation and maintenance. The law protects this investment under both the law of copyright (where applicable) and under the Copyright and Rights in Databases Regulations 1997 which introduced the new concept of a “database right”.

A database is defined as “a collection of independent works, data or other materials which are arranged in a systematic or methodical way and are individually accessible by electronic or other means.” This definition will cover both electronic databases and paper-based lists, directories and indexes.

Provided a database exists and there has been “substantial investment” in creating, acquiring and/or maintaining it, the owner of the database (invariably the employer) will be protected against the misappropriation of the database or part of its content by extraction or reuse.

Remedies

So, where there is protection and the employer’s rights have been infringed, what remedies exist? Well, fundamentally there are two.

First, the employer can recover damages for the loss occasioned by the breach. The problem with damages, though, is that often the employee will be a ‘man of straw’ and therefore not adequately able to compensate the employer for the loss or damage it has suffered.

It is in this regard, therefore, that the second type of remedy – the injunction – is all-important. An injunction may restrain the employee from using or benefitting from in his breach, whether by himself or with a third party, or indeed from further breaching the obligations which were owed.

Within injunctions, however, time really is of the essence. The courts will rarely grant an injunction where the damage has already been done. The employer must therefore act swiftly in taking its case to the court and seeking to persuade the court to restrain the employee from causing it any – or any further – loss and damage.

Often, this will be done on an interlocutory basis with the court maintaining the status quo pending, usually, a ‘speedy trial’ of the dispute.

In extreme cases, it may even be possible to obtain the initial injunction on a ‘secret’ i.e. ex parte basis, with the other party then being brought back before the court within a week thereafter to argue the case as to whether the injunction should be maintained, varied or removed.

The injunction to restrain the breach (or further breach) will often be accompanied by other orders designed to prevent the employer from suffering damage and the employee from destroying evidence of their wrongdoing, including orders to provide an affidavit attesting to their activities, contacts with third-parties and dealings with the employer’ property and information; for imaging of their electronic devices; and even for searches of their property.

The most powerful weapon in the employer’s arsenal is possibly the Springboard injunction. In QBE Management Services (UK) Ltd v Dymoke [2012] IRLR 458, QB the court summarised the nature and effect of this device:

“First, where a person has obtained a “head start” as a result of unlawful acts, the Court has the power to grant an injunction which restrains the wrongdoer, so as to deprive him of the fruits of his unlawful acts. This is often known as “springboard” relief;

Second, the purpose of a “springboard” order…is to prevent the defendants from taking unfair advantage of the springboard which [the Judge] considered they must have built up by their misuse of the information”

Third, “springboard” relief is not confined to cases of breach of confidence. It can be granted in relation to breaches of contractual and fiduciary duties…and flows from a wider principle that the court may grant an injunction to deprive a wrongdoer of the unlawful advantage derived from his wrongdoing….

Fourth, “springboard” relief must, however, be sought and obtained at a time when any unlawful advantage is still being enjoyed by the wrongdoer….

Fifth, “springboard” relief should have the aim “simply of restoring the parties to the competitive position they each set out to occupy and would have occupied but for the defendant’s misconduct”. It is not fair and just if it has a much more far-reaching effect than this, such as driving the defendant out of business;

Sixth, “springboard” relief will not be granted where a monetary award would have provided an adequate remedy to the Claimant for the wrong done to it;

Seventh, “springboard” relief is not intended to punish the Defendant for wrongdoing. It is merely to provide fair and just protection for unlawful harm on an interim basis. What is fair and just in any particular circumstances will be measured by (i) the effect of the unlawful acts upon the Claimant; and (ii) the extent to which the Defendant has gained an illegitimate competitive advantage. The seriousness or egregiousness of the particular breach has no bearing on the period for which the injunction should be granted….;

Eighth, the burden is on the Claimant to spell out the precise nature and period of the competitive advantage. An “ephemeral” and “short term” advantage will not be sufficient.”

Summary

In summary, then, the law will provide mechanisms to restrain and address the most serious types of commercially-damaging disloyalty. The absence of a written contract will not be a bar to this relief.

However, where an employer wishes to have protection beyond this bare minimum, it is absolutely essential to make proper contractual provision for it, spelling out in precise and enforceable terms what it is that the employee cannot do.

So, whether you are ‘pants-up’ and simply looking to enforce your rights or ‘pants-down’ and desperately hoping to be able to protect your business nevertheless, give Paladin a call.

Holding your pants up when all around you are losing theirs? That’s the Paladin Way.