In­tel­lec­tual ar­gu­ments

Ex-staff set­ting up on their own with a ri­val prod­uct is a night­mare for any busi­ness

The Herald Business - - Professional Brief -

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

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