When competing with a former employer can be an expensive exercise

When competing with a former employer can be an expensive exercise

When competing with a former employer can be an expensive exercise

If you are an employee proposing to set up in competition with your employer, you should not use or take with you records relating to your employer’s business or use any sensitive information such as costs, formulae, processing or financial information taken from your employer. All such information should be obtained from public sources or independently from suppliers.

If you are an employer, you should:

  • remind departing employees of their contractual, general law and statutory obligations and ensure that employees deliver up or destroy all documents (including electronic records) that contain the employer’s confidential information. You should also check departing employees’ emails and company computer files; and
  • impose post-employment restraints on employees to prevent them from developing a business in competition with their former employer for a specified period of time as part of their employment contracts.

In Australia, it is well-settled law that employees owe certain duties to their employer, not least of which is their duty not to disclose or use their employer’s confidential information inappropriately.

In 2011, the Federal Court of Australia considered a number of applications brought by employers against former employees where those employees were alleged to have misused their employers’ confidential information when transitioning from their former employment to their new. These cases demonstrate that employees’ duties are a powerful tool for employers, particularly where the employee can use knowledge confidential to the employer in pursuing competitive activity. The recent cases of Spotless Group Ltd v Blanco Catering Pty Ltd,1 Blackmagic Design Pty Ltd v Overliese2 and RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd3 provide a salutary lesson to employees of the inherent dangers in striking out on their own when in possession of their former employer’s confidential information.

Employees’ obligations to their employer

Employees’ obligations to their employer are grounded in numerous sources of law in Australia. Primarily, employees have a duty of loyalty, fidelity and good faith arising from the employee-employer relationship.4 Employees are also often under express contractual obligations not to disclose or misuse their employer’s confidential information and equitable principles oblige an employee not to misuse confidential information of an employer. Finally, legislation, principally the Corporations Act 2001 (Cth),5 prohibits directors and officers from misusing confidential information for their own benefit.

While these obligations derive from different sources, the content and requirements for making out a breach are fundamentally the same:6 identification of the confidential information and unauthorised use or disclosure. However, the remedies available for breach of these obligations will differ depending on the source of obligation.7

Spotless v Blanco Catering and other recent decisions

The following cases all concerned the misuse of a former employer’s confidential information by employees transitioning to new employment or self-employment.

Spotless v Blanco Catering

In this case, Spotless’ highest ranking manager in South Australia and Western Australia, Mr Paul Reynolds, passed on information acquired during the course of his employment with Spotless to his wife and a company established for the purpose of investing in a third party competitor, information which was ultimately passed on to that competitor, before ceasing his employment with Spotless. That information, including information about how Spotless’ business operated, customer and supplier information, financial models and information concerning Spotless’ bid for new work, was subsequently used in a bid for specific projects in competition with Spotless.

In deciding that Mr Reynolds should be restrained from using that information, the Court made it clear that an employee may use “know-how” acquired during the course of his employment for the benefit of another employer but may not use of confidential information or information which, even though not confidential, was deliberately obtained during employment for use after the employment relationship ceased.8 According to the Court, the information Mr Reynolds acquired and passed on was not “know-how” but was information he used as a starting point for revenue projections ultimately relied upon by the third party competitor in developing its bid in competition with Spotless.

While the Court was satisfied that Spotless did not suffer any loss or damage as a result of Mr Reynolds’ misuse of its information, finding that Spotless would not ultimately have been awarded the tender for which the information was used by Mr Reynolds, it nevertheless fined Mr Reynolds $100,000 in general damages for breach of his duties.

Blackmagic Design Pty Ltd v Overliese

In Blackmagic, it was alleged that two former employees, Mr Overliese and Mr Young, had misused confidential information (the prices paid for parts and Blackmagic’s profit margins) in the process of setting up a business in competition to Blackmagic in breach of contractual and equitable obligations of confidence. Blackmagic also argued that they had developed an idea for a new product during the course of their employment to which Blackmagic was entitled.

At trial, Jessup J found in favour of Blackmagic and ordered that the former employees be permanently restrained from using or disclosing Blackmagic’s confidential information. However, the Court declined to award damages based on the opportunity Blackmagic “lost” in being denied the opportunity to exploit the new product.

On appeal, Blackmagic argued (unsuccessfully) that Jessup J should have ordered a broader injunction restraining the former employees not only from using that information but from producing a product in competition with Blackmagic (on the basis of the employees’ breach of their fiduciary duties, not solely on the basis of their misuse of confidential information).

Interestingly, the appeal Court found that despite the far-reaching nature of employees’ obligations to their employers, those obligations did not include a positive obligation to disclose to their employers ideas for new products which would compete with products sold by their employers. However, the permanent injunctions otherwise stood.

RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd

Similar to Blackmagic, this case concerned allegations by a former employer, RLA, that its former employees and their company, Nexus, had misused RLA’s confidential information (the selection and specification of quantities of particular raw materials, the order of mixing components and equipment settings including timing and speed parameters for the manufacture of adhesives) to speed up the development of a rival product. The Court agreed with RLA, rejecting the former employees’ argument that the information was part of their “stock of knowledge” which they could legitimately draw upon when working with their new business.

The Court ordered Nexus to account to RLA for the profit Nexus made from sales of its adhesive products developed by reference to RLA’s confidential information for a period equal to the period it would have taken Nexus to independently develop that product without reference to that information.

Lessons

These cases demonstrate the likely difficulties employees face when attempting to divine what information they can and cannot legitimately use for the benefit of a new employer or as part of their self-employment activities, and the significant consequences misuse of an employer’s information can have (including awards of damages). Whether information acquired forms part of an employee’s “stock of knowledge” which he or she is entitled to use after employment comes to an end or is an employer’s confidential information is often a difficult distinction to draw. However, specific detailed information relating to the former employer’s specific business activities is likely to be regarded as the “property” of the employer; even if it is publicly available in a general context. It is also apparent that courts are more willing to uphold allegations of misuse of confidential information where a former employee has been covertly and actively planning future activities prior to termination with the intention of using that information for his or her own benefit or the benefit of his or her new employer, as demonstrated by these cases.

This article was first published in the April edition of the Intellectual Property Law Bulletin and is republished here with permission.

Endnotes

  1. (2011) 93 IPR 235.
  2. [2010] FCA 13; [2011] FCAFC 24.
  3. [2011] FCA 423.
  4. See, for example, Mason J’s list of recognised fiduciary relationships in Hospital Products Limited v United States Surgical Corp (1984) 156 CLR 41 at 96-97.
  5. Section 183 of the Corporations Act 2001 (Cth).
  6. Of course, express obligations of confidence may be narrower than the obligations in equity. See for example Woolworths Ltd v Olsen [2004] NSWSC 849.
  7. For example, equitable remedies such as an account of profits, equitable damages, injunctions and delivery up are only available for breach of the equitable obligation. Damages are the principal remedy in an action for breach of the common law contractual duty.
  8. At [27], citing Faccenda Chicken Ltd v Fowler [1987] Ch 117 at 136.