I’m sure most employers reading this article have at one time or another faced the situation of one of your staff leaving your employ and setting up in competition. This is a subject covered in a recent newsletter from Backhouse-Jones. Please remember the article does not constitute legal advice, it simply provides guidance for you to further investigate. They reported;
‘Must Employees Disclose their Intention to Compete?
In the recent case of MPT Group Ltd v Peel, the Chancery Division have considered whether employees who had left their previous employer and set up a new business, ought to have disclosed their intentions beforehand. This case posed the question whether employees are under a duty to disclose their intention to compete to their existing employer. The Chancery Division have held perhaps not which has surprised some businesses when considering the facts.
The Claimant, MPT Group Limited is a producer and supplier of mattress machinery, equipment and parts to the mattress manufacturing industry. The Defendants were employed in senior positions, one of whom was responsible for business development and maintaining key relationships with the company’s customers and suppliers.
Both employees gave notice of their resignation and their employment ended a month later. Both employees were subject to restrictive covenants that prevented them dealing with customers whom they had personally dealt with for a period of six months. The two employees planned to set up a new company in competition with their employer after their restrictive covenants expired.
Almost immediately after the six month period elapsed, they, together with business associates, incorporated MattressTek Limited, who trade in the design, production and supply and installation of mattress machinery to mattress manufacturers. Thus, in direct competition with MPT. When questioned by their employer (after handing in their resignation) the two employees lied about their intentions insofar as their intention to set up in competition was concerned.
MPT having received news of the new company set up by their ex-employees, sought an injunction based on misuse of confidential information, and also upon breach of the duty to answer questions truthfully. Specifically, in MPT’s Particulars of Claim, one allegation was that they failed to answer questions truthfully as to their future intentions.
There were various points raised in the Particulars of Claim relating to wrongly divulging confidential information to third parties, interfering with MPT’s supply chain and wrongly soliciting and dealing with contracts of MPT’s within the six month period of restraint. The allegation that the employees failed to answer questions truthfully was interesting insofar as the extent of this being a contractual obligation was not clear.
Both employees had indicated their different reasons for departing when asked, neither suggested they were intending to set up in competition, nor go into partnership with one another. The Judge held that whilst there was a general duty to answer questions truthfully, he was “reluctant to hold” that a departing employee is under a contractual obligation to explain his own confidential plans to set up in lawful competition.
The Judge explained that the law prevented unfair competition, holds employees to enforceable restrictive covenants and protects confidential information. Equally, the Judge reminded them that employees must not induce others to breach their own contracts of employment, conspire to cause their employer injury or solicit their colleagues for a new enterprise. It was held that subject to this however, employees are otherwise free to make their own way the world.
This is an interesting case and serves as a reminder to ensure that specific restrictive covenants are in place to protect your business should employees depart. However, being mindful of what those restrictions can legitimately achieve as an employee, particularly a key employee, may not always be transparent regarding their intentions after leaving your business.
This Judgement highlights the importance of determining each case on its own merit and facts. The Court may have reached a different conclusion on this point if the employees were sufficiently senior to owe fiduciary duties to their employer. Whilst this was not considered, it is worth checking whether your contracts are sufficient to address this’.
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