The Western Australian Supreme Court recently required an ex-employee who set up a competing business using confidential information to account to his old employer for the profits he made as a consequence.

The decision highlights the importance of recognising an employee’s role in the business and having them sign appropriate contracts.

What happened?

The employer, Able Tours Pty Ltd (Able Tours), is a small company which designs and manufactures passenger buses. The employee, Mr Mann, was a fitter and welder by trade who had worked his way up in the company to become Operations Manager. There was no written employment agreement between Able Tours and Mr Mann and there was no position description for Mr Mann.

In late 2006, Mr de Bruin, a director of Able Tours, entered into negotiations to supply several buses to a company called Western Xposure. Mr de Bruin, a director of Able Tours, told Mr Mann about those negotiations, which culminated in Able Tours sending a quote to Western Xposure in March 2007. Negotiations continued throughout 2007 but ultimately the quote was never accepted.

In September 2007, Mr Mann resigned from Able Tours and founded a new business. Shortly thereafter, Mr Mann’s business was awarded the contract to build buses for Western Xposure, which it completed by November 2007.

Misuse of confidential information

The court considered that the reason Mr Mann’s new business won the contract was because it could deliver the first bus in six weeks, which was quicker than Able Tours could have done. By reason of his position, Mr Mann was aware of that fact, and used that knowledge to his own advantage.

Nature of Mr Mann’s role in the company

Mr Mann’s role consisted of managing the operations of the business, which meant he was in charge of the workshop and second-in-charge to Mr de Bruin. He would also act as general manager on occasion. Mr de Bruin would consult Mr Mann when potential customers inquired about purchasing buses and Mr Mann would give an estimate of how much time the order would take to complete. This evidence demonstrated Mr de Bruin’s reliance on Mr Mann.

Accordingly, Mr Mann’s position at Able Tours was sufficiently senior to give rise to fiduciary duties. Therefore, Mr Mann had a duty not to use confidential information acquired through his employment to better his own situation.

Was Able Tours’ production capability ‘confidential information’?

Mr Mann claimed that the production capability was simply knowledge acquired in the course of his employment, rather than imparted to him in circumstances of confidentiality. In finding that the production capability was confidential information, the court relied on the following factors:

  • It did not matter that it was not imparted to him – information that was acquired could still be ‘confidential information’, and
  • Even though he had not been told to keep it secret, it was clearly significant to Able Tours.

Outcome

Mr Mann was found liable for breach of his fiduciary duty to Able Tours. Mr Mann’s new company was also liable because it had pursued the contract knowing of the “dishonest and fraudulent” breach.

Both Mr Mann and his new business will be subject to an inquiry and account of profits in relation to the breach (the amount of which will be determined at a further hearing).

Lessons for employers

In this case, Mr Mann had not signed a contract. If there had been a contract with appropriate clauses on confidentiality, then Able Tours may have been able to bring an action for damages for breach of contract, which would have been easier than having to rely on fiduciary duties alone.

Employers can guard against misuse of confidential information by employees through:

  • ensuring that employees with roles of significance and responsibility sign employment contracts. The first step for employers is to identify those employees in the business that the employer relies on or are key to the business
  • including a clause in the employment agreement prohibiting use of confidential information during and after employment, and
  • identifing and defining key procedures and information as ‘confidential information’ in the employment agreement. Employers should consider aspects of the business which may make the business vulnerable (e.g. in the way that production capability made Able Tours vulnerable).