Employees Have Got To Have Faith

It is part of every employee’s fiduciary duties to act in good faith towards their employer

It is a concern to every employer that when a senior member of staff leaves, not only could they go to work for a competitor but they could also orchestrate a “team move” by poaching staff and transferring businesses to their new employer, with devastating consequences for their former employer.

A recent case has highlighted that it is possible to imply terms into a contract of employment which can protect an employer’s business especially when employees are engaged in competitive activity during their employment. It also illustrates the dividing line between preparing to compete, which is usually not a breach of contract and actually competing with an employer which is generally actionable.

Facts

Mr Hall, a biologist, was employed by Thomson Unicomarine Limited (“Unicomarine”) as its operations manager. He was not a director of Unicomarine but he was the most senior employee at their premises in Letchworth and was responsible for Unicomarine’s operations there. Amongst other matters, he was required to report to the Operations Team on a fortnightly basis, the content of which it was determined included matters concerning the operations and business that it was appropriate for his superiors to know. He was also obliged to oversee senior staff in the maintenance of client relationships and to represent the company in a positive light.

He was given a statement of terms and conditions of employment which covered his notice period and provided that employees were required to safeguard the company’s real and intellectual property and not disclose any matter relating to the company to any third party without a director’s consent. There were no post termination restrictions and no specific clause dealing with confidential information.

Mr Hall signed a contract on 6 November with APEM, a competitor of Unicomarine, which provided for his employment to commence in February 2013. He gave notice to terminate his employment with Unicomarine on 27 November 2012. He started to work for APEM on 2 January 2013. Another 17 biologists left Unicomarine and all or some of them started to work for APEM shortly afterwards.

The claim

It was Unicomarine’s case that Mr Hall and APEM acted together to effect a wholesale relocation of Unicomarine’s business to APEM. This included the transfer of a significant number of employees, taking over Unicomarine’s premises in Letchworth, the incorporation of a new company; Unicomarine Limited and the registration of the domain name www.unicomarine.co.uk and www.unicomarineltd.co.uk

Unicomarine brought a claim against Mr Hall for breach of his contractual duty of fidelity and a non-contractual fiduciary duty of loyalty based on his seniority. It was alleged that as a result of these implied duties whilst an employee Mr Hall was under the following obligations:

• Not to compete with Unicomarine
• Not to solicit Unicomarine’s customers or employees
• When he knew of the planned poaching raids on Unicomarine’s staff and clients to immediately reveal them to Unicomarine
• Not to allow competitors to have access to Unicomarine’s premises
• Not to use Unicomarine’s confidential information to compete with it

A further claim was made against Mr Hall, APEM and Unicomarine Limited for passing off in relation to the registration of the domain names and the incorporation of Unicomarine Limited.

Duty of fidelity and fiduciary duties

Every employment contract contains an implied term that an employee will serve their employer with good faith and fidelity (the duty of fidelity). This duty requires an employee to have regard to their employer's interests. It does not require the employee to subjugate their interests to those of the employer.

Traditionally, the duty of fidelity does not extend to an employee disclosing to his employer his own wrongdoing. However, this rule does not apply to an employee's duty to disclose to his employer the misdeeds of other employees, even though such disclosure would alert his employer to his own misdeeds.

The duty of fidelity continues so long as the employment contract is in force.

Some senior employees also owe their employer a fiduciary duty. Fiduciary duties are more onerous and require an employee to act in the interests of their employer. This includes the obligation for an employee to report his own wrongdoing.

Mr Hall’s Admissions

A number of admissions were made in the defence, which revealed that:

• Before he signed the contract with APEM, Mr Hall had
  • told a colleague that he had applied to join APEM and that they had ambitions to grow their Marine team.
  • discussed with APEM the possibility that Unicomarine's staff would be interested in moving with him to APEM, how this could be achieved, and the compatibility of the salaries and grades of Unicomarine and APEM.
• During November and December 2012, Mr Hall informed several Unicomarine employees that he had decided to join APEM and that they were looking to recruit.
   
• During December 2012, he:
  • arranged a meeting at his home for four of his colleagues, with representatives of APEM, to discuss offers of employment that each of the colleagues had received.
  • sent an e-mail to APEM identifying employees of Unicomarine supposedly likely to contact APEM and setting out details of their current salaries to expedite the making of offers to them.
• Mr Hall had not informed Unicomarine about any of these developments.

Summary judgement application

Based on these admissions, Unicomarine applied for summary judgment.

The High Court held that Mr Hall was in breach of his duty of fidelity. The issue of whether Mr Hall owed a fiduciary duty was deferred until the trial.

The court found that as operations manager with overall responsibility for the conduct of the business, Mr Hall was obliged to inform Unicomarine of the existence of a threat to the business or staff. The requirement to report to his superiors on a fortnightly basis could not be discharged without alerting his superiors to the developing threat to the business.

Further Mr Hall plainly acted in breach of his duty of fidelity by formulating a plan with APEM to entice away staff from Unicomarine and then facilitating the implementation of that plan. Mr Hall’s obligation to oversee senior staff in the maintenance of Unicomarine’s client relationships and to present Unicomarine in a positive light to staff implied an obligation to do nothing to disrupt Unicomarine’s relationship with its staff.

Mr Hall was not in breach of his duty by informing other members of staff of his decision to join APEM before he had told Unicomarine, or by telling other employees that he was planning to work for a competitor.

As for the passing off claim, by the time of the hearing APEM had agreed to transfer the domain names to Unicomarine and to dissolve Unicomarine Limited. Although there was no possibility of future passing off or that actual damage had been or would be suffered, a declaration was granted to the effect that the registration of the domain names and incorporation of Unicomarine Limited did constitute actionable passing off given that the four main characteristics of passing off were present. These are:

• a misrepresentation,
• made by a trader in the course of trade,
• to prospective customers of his or ultimate customers of goods or services supplied by him,
• which is calculated to injure the business or goodwill of another.

Comment

The court analysed the terms of Mr Hall’s contract of employment in considering his actions. Although Unicomarine were successful, it does demonstrate the importance of having clear post termination restrictions in contracts of employment. However, even if there are no express restrictions that apply following the termination of employment, in certain circumstances, it may be possible to imply obligations.