In English law, there is no abstract right to protect businesses from competition from former employees, consultants or anyone else. To guard against competition who have intimate knowledge of a business and access to sensitive material, businesses have the opportunity set in place contractual obligations to maximise the legal means to protect intellectual property rights, confidential information and trade secrets against information theft when hired hands set off for greener pastures.
Businesses spend an inordinate period of time and money establishing client relationships when building businesses and venturing into new markets and technologies. An inevitable part of that process is engaging trusted people to carry out the work required to generate new revenues streams, build new technologies and manage the business. These processes create personal human relationships between members of staff and external suppliers and clients.
As a matter of public policy, courts have always been reluctant to ex-employees and staff from working, so as to unreasonably prevent competition by allowing onerous restrictions on employees when they end their relationship. In the case of consultants, the general law takes an even more relaxed approach.
In the rush to engage skilled staff businesses frequently neglect to safeguard themselves against what might be called unfair competition – establishing relationships and networks on the pocket of the business and then leaving to join or create a competing enterprise. Tensions rise after the employment relationship ends and an employee wishes to use confidential information of their former employer for their own interests even when they compete and conflict with their former employers’.
The courts say that ex-employees are permitted to earn a living without unreasonable or unfair restraint upon competition. After an employment contract ends, the legal relationship descends from one of a fiduciary relationship where employees are not permitted to compete with their employer, even during their spare time, to one where a court is reluctant to intervene.
How then is it that companies may properly protect their intellectual property from the outset? Firstly, receiving an assignment of the intellectual property rights in consultancy or freelance arrangements is key. In the case of employment relationships, intellectual property rights are owned by the employing business by default. More is able to be done to protect the business post contract.
It is one thing to try and protect a business by ensuring that it owns the intellectual rights in creative materials, it is quite another to safeguard itself after the employment relationship has ended.
Looking forward and planning for the post-employment or consultancy relationship requires an appreciation of the nature of the information that is protected both during and after the employment relationship. Information acquired during the employment relationship may fall into two separate categories:
The boundary of the law with respect to these two types of information is this: whether the information in question is fairly considered part of the employee’s stock of knowledge which a person of ordinary honesty and intelligence would recognise as to be the property of their former employer, or it is so confidential that this should not be permitted to be the case. If it is the case of the latter, the information is confidential and protectable. Answered in the negative and the information is characterised as know-how and not protectable, falling into the general knowledge or know-how of the employees’ own trade, and employees may use it.
A court will be more inclined grant relief to an employer on the basis that information is a trade secret where:
Instances of confidential information that have been successfully protected in the courts are:
In the absence of post-contractual restrictions, at best a court will restrict use of sensitive information for a finite period of time when the information has become public.
Importantly business opportunities may also be protected from being taken by ex-employees to the new business. An obvious case is one where a director of a company nurtures a business opportunity during the course of employment, and before the deal is consummated, the director leaves, and takes the opportunity with them. This would amount to a breach of fiduciary duties of the director, which is actionable on the part of the former employer.
Post-Contractual Restrictions - Restrictive Covenants
Restrictive covenants are contractual obligations that are limit employees and consultants (or freelancers) performing named activities after their employment has ended. In the context of consultants, the restrictions may apply during and after their services have ended.
Restrictive covenants between business and their employees and consultants attract a reverse onus when they are relied upon in litigation. That is to say provisions of employment and consultancy contracts that prevent a member of staff performing some task are considered void from the outset, leaving it to the business to prove that the restrictive provisions are reasonable, and go no further than what is necessary to protect the legitimate interests of the business.
Interests that may be restrained by businesses are:
Restrictive covenants are also able to regulate to some extent the activities of the person or company after the event. Again, their must be a nexus between the interest of the company and the activity regulated, and it must not extend too far in order to be enforceable. It depends on the business and their particular interest. In this way, companies are able to expand their protection to a limited extent from employees competing with them after the period ends. Garden leave may also be used to extend the period to some extent.
The benefits of having contractual rights are:
In the absence of a restrictive covenant, consultants the ordinary law of confidential information apply and they will be able to use any information that has is not considered confidential by the circumstances of the disclosure or were not notified that the information was confidential prior to its disclosure to them. As the default rules of intellectual property have the consultant owning the IP rights, is it a good idea to ensure that these are displaced in their engagement letter or contract, as you never know what future uses you will want to make of the materials created, and it is an uphill battle to rely on implied licenses.
Agreements for employees on secondment should ensure that IP rights are assigned to the intended party, there is authority to say that it is the legal person who pays the salary who owns the IP and not the person with whom they are employed.
With or without restrictive covenants in place against the former employee or the consultant, some intellectual property rights may play in part in limiting the activities of ex-employees and consultants in a measured way. Loosely speaking, IP rights owned by a business will protect against blatant acts of copying in their various forms - intellectual property, including confidential information being the most relevant.
It must said that relying on intellectual property rights to protect against theft of intellectual property rights is a distant second place to having the terms of the post-contractual relationship agreed at the outset.
Claims of passing off the previous employer’s business may be available where there is a suggestion of a connection between the ex-employee’s new business and the former employers. Passing off is a flexible form of protection that relies on the existence of a misrepresentation by a business that suggests that there is some form of connection between the ex-employee’s new business and their former employers, where in fact none exists.
It applies equally to business selling products and to those selling services. Where the employer’s business has the requisite level of goodwill in England a claim may lie against the former employee or consultant. Instances of passing off may be a similarity between competing websites; creation of near identical domain names offering similar services; uses of unregistered trade marks, which may include similar colouring and shapes of distinctive packaging of products; and representations that the product or services are the same as the former employers’.
Trade Marks protect more than just business trading names. Registered trade mark protection of the trade names – i.e. product names and branded names of services - may go some distance towards preserving the distinctiveness of the businesses external appearance to the market, and similar naming of products and services.
Trade Secrets remain one of the exceptions to employees’ knowledge skill and expertise that may not be utilised by them in their new position. It is trite to say that customer lists, manufacturing processes, business information and soliciting the customers of the employer while still employed are actionable. Memorising lists of names is actionable but not recalling names of customers is not. By internally promoting internally the importance of information to the business, an argument is created for use at a later time. Many businesses have adopted email use and internet polices and fraud policies. It may be appropriate for the business, depending on the importance of its know how, to implement an Information Management Policy, set out procedures to deal with and record disclosures of information to third parties
Copyright – Recent case law suggests that claims that the look and feel of computer software has been copied are doomed to failure except in the most narrow circumstances. Courts have persistently refused to enforce copying on an abstract level, as copyright is a qualified monopoly and not provide protection for representations of the same type of object that have not been copied. Similarity in appearance in itself is no guarantee of success in a copyright infringement action where there has been no literal copying.
Similar concepts will apply to other materials that appear to have copied in the abstract sense. The euphuism usually used is that materials were used for inspiration. Assuming that the appropriation of materials is blatant and obvious, injunctions and other relief will be available for a wide range of actions. Indeed, some of these causes of action will apply to instances of industrial espionage depending upon the factual matrix, and the tort of conversion are worthy of consideration in order to provide recourse against theft of information, intellectual property and trade secrets.
Former employees and consultants are well positioned to identify gaps in the market and niches not fulfilled by present products and services. It is difficult to protect against competition in the post employment and consultancy relationships.
The law is unreservedly in favour of competition at the end of relationships and the best protection available is only available for a limited period of time. Use of restrictive provisions that apply after the relationship is ended must be carefully and thoughtfully drafted as overstepping the mark renders the provisions unenforceable. The benefit of the provisions are only available if the employer is not in breach themselves. By shoring up employment and consultancy contracts, and ensuring that future intellectual property is dealt with appropriately reduces the avenues of competition available and creates a buffer period within which the employer may improve their product further.
Obviously, these intellectual property rights have a far broader application than simply between ex-employees, consultants and their former paymasters. Registered intellectual property rights protect particular materials in the form specified by the enabling legislation and unregistered rights of passing off and confidential information are the most flexible of the mix. In the final analysis, the facts of the case must fit a cause of action to obtain relief.