In the recent decision of Blackmagic Design Pty Ltd v Overliese1, the Full Federal Court held that employees do not have a duty to disclose competing ideas to their employer. The Court dismissed an appeal by Blackmagic Design Pty Ltd (‘Blackmagic’) seeking to restrain two of its former employees from producing a product in competition with Blackmagic’s products and seeking equitable compensation for breach by the former employees of their fiduciary duties.
Blackmagic’s claims against its former employees
Blackmagic initially took action against two of its former employees, Overliese and Young, and their company and the wife of Young. The claims against Overliese and Young included:
- Misuse of confidential information
Blackmagic alleged that its former employees were intending to establish a business (to be conducted by the third respondent in the original proceeding) selling a product in competition with Blackmagic, the idea for which they allegedly conceived (but did not develop) while employed by Blackmagic by reference to Blackmagic’s confidential information. - Breach of fiduciary duty
Blackmagic argued that the former employees were under a positive duty to disclose details of their idea conceived during employment for the competing product to Blackmagic whilst employed but failed to do so.
An interlocutory injunction secured by the appellant prevented the former employees from establishing the competing business.
The trial decision: a breach of confidence, but no duty to disclose competing ideas
At trial,2 Jessup J found that the former employees had misused Blackmagic’s confidential information in the process of setting up a business in competition to Blackmagic, and ordered that the former employees be permanently restrained from using Blackmagic’s confidential information. Justice Jessup refused to find that the former employees had breached any fiduciary duties on the basis that fiduciary duties are proscriptive and not prescriptive and, as such, would not impose a positive obligation on employees to disclose to their employer ideas for products which may compete with their employer’s products which they wish to develop themselves.
The Full Court appeal
On appeal, Blackmagic argued that the trial judge should have ordered a broader injunction to prevent Blackmagic’s former employees from producing a product in competition with Blackmagic on the basis that they had diverted a business opportunity from Blackmagic. The Full Court rejected this argument.
In relation to its breach of fiduciary duties claim, Blackmagic argued that the former employees had placed themselves in a position of a conflict of interest and duty and that disclosure of that conflict (which necessarily meant disclosing details of the potentially competing product) was required. While the Full Court found that Overliese had indeed acted in a way that gave rise to a “real sensible possibility of conflict between his interest and his duties”,3 it nevertheless concluded that Overliese did not breach that duty because that duty did not include a positive obligation to disclose the conflict. Rather, Overliese was merely obliged to avoid acting in conflict.
While Young’s contract of employment included a positive obligation to disclose a conflict of interest, the Full Court held that he had not breached that obligation because the trial judge found that he did not have an intention to compete with Blackmagic and therefore no conflict of interest and consequently nothing to disclose.
While Blackmagic was ultimately successful on appeal on the question of how costs should be awarded, the Full Court otherwise dismissed its appeal.
Lessons for employers
- Employees are not under an equitable obligation to disclose ideas which may conflict with their duties as employees to their employer.
- Any positive obligation to disclose competing ideas to an employer should be included as an express term of the employee’s contract of employment, as it will not be held to be part of a general obligation to avoid a conflict of interest. It remains to be seen however whether such an obligation to disclose could not arise by reason of there being an implied contractual duty of good faith owed by employees to employers.
Endnotes
- [2011] FCAFC 24
- [2010] FCA 13
- [2011] FCAFC 24 at [104] per Besanko J