Ex-staff setting up on their own with a rival product is a nightmare for any business
BUSINESSES keen to protect themselves from employees leaving to set up in competition, or work for a rival, should note a recent Court of Appeal judgment. The case concerned salesman Mitchell Tunnard, who came up with an idea for a new f iref ighter’s helmet while working for a company selling protective equipment to the likes of London Fire Brigade.
He got DTI development funding, commissioned concept drawings and discussed the idea with a consultant friend who worked for a competitor. Tunnard then resigned and set up his own company to develop and produce the helmet, with the competitor taking a majority shareholding.
Understandably unhappy, his former employer claimed ownership of Tunnard’s designs and accused him of breaching his fiduciary duty and implied duty of fidelity to the company. The eventual ruling in favour of Tunnard raises questions around how employers can best protect their interests against former staff.
UK law tends to favour employers in issues of intellectual property rights. In certain circumstances, companies are automatically given ownership of such rights.
But, in cases like that of Mitchell Tunnard, where the employee carries out the activities in his or her own time, makes no attempt to involve colleagues and does not misuse confidential information or company property, it can be argued the product was not created during the course of employment.
It is, therefore, a good idea for employers to include express provisions in contracts – particularly for any employee in a creative role – to ensure all possible circumstances are covered. Garden leave is another useful tool. It keeps employees on the payroll, but relieves them of any duties and prevents contact with clients, customers or colleagues. This allows their successor time to establish themselves with customers and reduces the value of any privileged information held.
To be effective, garden leave provisions should be set out in the contract of employment, in conjunction with an express restriction on other business interests during employment. Also, careful thought must be given to the length of leave because the longer it is, the less likely it is to be enforceable.
Similarly, non-compete clauses must be carefully drafted. In Tunnard’s case, his contract required him to “advise on competitor activity”. However, the court felt this was not explicit enough to remove his right to investigate whether any potential venture was viable before deciding whether to leave and follow it up. Restrictions can also cover various other issues, such as non-solicitation of customers or employees and limitations on use of trade secrets or confidential information.
But if the sole purpose is to prevent competition full-stop, and no allowance has been made for “reasonableness”, the covenant will be unenforceable.
What the business does, where it is located and who its competitors are should all be taken into account. By doing so, the covenant can impose strict specific restrictions based on geography and industry sector.
Similarly, the seniority of the employee and the nature of their duties are important. In rejecting the company’s claims in Tunnard's case, the judge took note of the fact he was a middle-ranking senior salesman as opposed to a director or senior manager.
It is impossible to create a fail-safe defence against competition but forethought and careful drafting of contracts of employment can all help.
Content supplied by Jane Fraser, head of the employment pensions and benefits team at Maclay Murray & Spens