The confidential information and intellectual property of a business can be among its most valuable assets. It is crucial that these assets are protected.
So what happens when a former employee misappropriates confidential information and copyright works to set up their own competing business?
As the recent case of Verix Pty Ltd (formerly known as PGA Laminating) (Verix) v Williams  FCA 748 (2 July 2021) demonstrates, the Courts take a very serious view when it comes to employees misusing their position for personal gain. However, there are some key steps a business owner can take to ensure that the intellectual property and confidential information of the business is protected from such underhanded tactics, including:
- ensuring you have written contracts with employees and any contractors/consultants that contain comprehensive clauses on confidential information and intellectual property;
- reviewing your agreements with founders/directors who are not employees to ensure they appropriately assign IP to the company, including IP created before the company was incorporated; and
- ensuring access to confidential information is appropriately restricted and adequate security systems are in place.
Read on for more details regarding the Verix decision and its practical applications for employers.
Verix provides film packaging products to manufacturers in the food industry. Mr Williams was employed by Verix from June 2000 to November 2017 as a Business Development Manager. He also held a shareholding in the holding company of Verix.
During the course of his employment, Mr Williams was one of a limited number of people who had extensive access to Verix’s confidential information, which included information about current and potential customers stored on computers, systems, emails, and customer relationship management software.
The Court found that during his employment Mr Williams took steps to develop a new business designed to compete with Verix, with a view to transitioning Verix’s clients after his resignation. Mr Williams did this by exploiting commercially sensitive material obtained in the course of his employment.
In particular, Mr Williams:
- set up an email redirection rule on his Verix email account, which automatically forwarded all of his Verix emails to his personal Gmail account;
- shared Verix customer specifications in order to develop competing quotes for those customers;
- shared product specifications, drawings, pricing and volume information of specific customers of Verix;
- collated a variety of commercially sensitive information relating to Verix’s business, including potential customer leads, pricing information, product specifications, information concerning quotes and tenders, and Verix’s business activity statements and financial statements, all of which he forwarded to his personal Gmail account prior to his resignation from Verix;
- diverted commercial opportunities from Verix to the competing business, including using knowledge of Verix pricing to submit competitive tenders and quotes on behalf of the competing business;
- prior to resigning from Verix, deleted a significant number of emails from his Verix email account and a substantial volume of data from his Verix desktop and the Verix share drive;
- entered Verix’s offices after hours on the day before he resigned and removed physical files; and
- continued to misuse Verix confidential information after his resignation, including obtaining copies of data sheets for specific customers from a Verix sales consultant and using them to prepare data sheets for use in the competing business.
These actions put Mr Williams in direct conflict with his contractual obligations and statutory fiduciary duties as an employee.
Mr Williams did not have a comprehensive written employment contract, which meant the terms of Mr Williams’ employment were partly written, partly oral and partly implied, which complicated matters. However, there were a number of claims brought against Mr Williams, which Verix successfully established:
- breach of employment contract;
- breach of fiduciary duties as an employee, although the Court was not satisfied that the breaches were fraudulent and dishonest;
- breach of statutory duties under sections 182 and 183 of the Corporations Act 2001 (Cth);
- breach of the equitable duty of confidence; and
- copyright infringement.
The Court made the following key findings.
Duties owed by Mr Williams to Verix
By virtue of Mr Williams’ employment at Verix, he held a number of contractual, fiduciary and statutory duties.
Mr Williams had implied contractual duties of fidelity and good faith arising from the employment relationship and underlying fiduciary relationship, as follows:
- to keep all confidential information obtained by him confidential (both during and after his term of employment);
- to maintain trust and confidence and not do anything or appear to destroy or damage such a relationship of trust and confidence; and
- to render faithful and loyal service to Verix and not do anything in conflict between his own interests and his duties to Verix.
The employer-employee relationship is an established category of fiduciary relationship, as a result of which Mr Williams was also under fiduciary duties:
- to not place himself in a position where his interest or his duty to someone else conflicted with his duty, to act in the best interests of Verix; and
- to take advantage of his position as an employee for the benefit of a person other than his employer.
Mr Williams’ owed statutory duties to Verix under s182 and s183 of the Corporations Act:
- not to improperly use his position as an employee to gain an advantage for himself or someone else or to cause detriment to Verix; and
- during and after his employment by Verix, not to improperly use information which he obtained because he was an employee to gain an advantage for himself or someone else or to cause detriment to Verix.
Duty of confidentiality
By taking confidential information, which Mr Williams had accessed during his employment with Verix, Mr Williams breached the equitable duty of confidentiality. Mr Williams contended that he had a right to Verix’s confidential information on the ground that he held an ownership interest in Verix.
Justice Beech held that, even if Mr Williams was a co-owner of Verix (which he was not – he only held a shareholding in the holding company of Verix), he would not have been entitled to use Verix’s confidential information for his own gain without Verix’s permission and to the detriment of Verix.
The Court also found that Verix had taken a number of steps to protect its confidential information by way of protected computer systems, physical paper files stored in filing cabinets, limiting access to certain employees and only authorising access on an “as needs” basis.
As noted above, Mr Williams had forwarded a number of documents to his personal Gmail account. These included:
- weekly activity reports for a particular Verix employee, including Verix costing calculations and CRM records;
- Verix costing calculations;
- Letters from Verix to customers or potential customers; and
- Verix customer specifications.
The act of emailing these documents to himself constituted the unauthorised reproduction of these documents and therefore infringed Verix’s copyright. Mr Williams’ co-ownership in the holding company of Verix did not entitle him to use the copyright works for his own gain.
The Court further held that Mr Williams’ actions were flagrant, making him liable for additional damages.
This article focusses on the actions of Mr Williams, however it is relevant to note that Verix also brought a claim against a Verix contractor, Mr Swanepoel, and his company for aiding and abetting or directly or indirectly being involved or knowingly concerned in Mr Williams’ breaches of his statutory and fiduciary duties as well as the equitable duty of confidence. The Court found in favour of Verix on those claims save in relation to the claim involving knowingly assisting Mr Williams’ breaches of his fiduciary duties.
Employers can take some comfort in the fact that the Courts take a very serious view when it comes to employees misusing their position for their own benefit.
However, there are some key steps you can take to streamline enforcement:
- Employees - ensure that you have written employment contracts with all your employees and that these contain comprehensive clauses on confidential information and intellectual property. If Mr Williams had an adequate written employment contract then this case may have been much more straightforward;
- Contractors - ensure that you have written contracts with any contractors or consultants who are not employees, and that these contain comprehensive clauses on confidential information and intellectual property. This is important because the statutory presumption under section 35(6) of the Copyright Act that the employer is the owner of works made by an employee does not apply to contractors;
- Founders / Directors - review your agreements with any founders or directors who are not employees to ensure they have assigned any IP they may have created before the company was incorporated, and that they are obliged to assign any IP they go on to create on behalf of the business. Even companies with well-drafted employment contracts can forget about founders and directors who are not actually employees; and
- Security - protect any confidential information by ensuring access to confidential information is appropriately restricted to key employees and adequate security systems are implemented to maintain confidentiality.