The High Court has confirmed that an employee’s duty of fidelity to their employer is not breached when, in response to a direct question, the employee fails to explain their own confidential plans to set up in lawful competition.
All employment contracts are automatically deemed to include certain implied obligations, including an employee’s duty of fidelity towards their employer. When an employee resigns from their employment, it is not uncommon for an employer to ask about their future intentions. This is sensible practice, not least because it may influence how the employer approaches the notice period – that is, whether the employee is required to work their notice or, if the contract allows, paid in lieu of notice or asked to go on garden leave. But if the employee gives a vague or untruthful answer to a question about joining or setting up a competitor business, does that give rise to any legal remedy?
In MPT Group Ltd v. Peel & Ors, Mr Peel and Mr Birtwistle were employed in senior positions by MPT (a producer and supplier of mattress machinery). Mr Peel was the company’s Technical Manager and Mr Birtwistle was the Technical Sales Manager.
Both men gave notice of their resignations on 4 August 2016 and their employment ended on 1 September 2016.
They were both subject to restrictive covenants that prevented them soliciting or dealing with customers with whom they had personally dealt for a period of six months. Almost immediately after the six-month period had elapsed, they set up a new business producing mattress-making machinery, in direct competition with MPT.
MPT argued that Mr Peel and Mr Birtwistle had taken and used confidential technical information in order to produce specialist machinery in direct competition. They could not have legitimately reached the stage of marketing machines for sale in their new business without having breached their restrictive covenants and using MPT’s confidential information. MPT also alleged that both employees had breached their duty to answer questions truthfully as they had failed, when questioned by MPT after handing in their resignation, to disclose their intentions to compete. The pair had denied any intention of going into partnership together.
Although the restrictive covenants had expired, MPT sought an injunction to cancel out the unlawful advantage or head start that Mr Peel and Mr Birtwistle had gained through the misuse of confidential information. This is typically known as ‘springboard relief’ and does not depend on the enforceability of express restrictive covenants. MPT also sought an unlimited injunction to protect its confidential information (including a customer database, sales quotations, suppliers, materials, costings and technical drawings).
High Court decision
Where a party seeks an injunction on an urgent basis, the court will typically consider whether an interim injunction should be granted, pending a full trial of all the issues. It will normally only grant one if it is satisfied that interim relief is ‘just and convenient’.
In this case, MPT applied to the High Court for an interim injunction. At the hearing, Mr Peel and Mr Birtwistle confirmed they had taken information from MPT after their employment terminated. However, they stated that they had disposed of the hard drives onto which they had copied the confidential information and had not misused that information before doing so.
Despite this admission, the High Court refused to grant an interim injunction. It considered that MPT had not shown a sufficiently strong case that Mr Peel’s and Mr Birtwistle’s misuse of its confidential information had contributed to any ongoing unfair advantage.
A limited injunction was, however, granted to prevent use of any of MPT’s confidential information or drawings until trial. This prohibited Mr Peel and Mr Birtwistle from retaining, copying, or using MPT’s technical drawings, customer lists, supplier lists and materials database or manufacturing any machines using this information.
In addition, the judge stated that he was “far from satisfied” that the employees were under a duty to disclose their true intentions to MPT. Even if he were wrong about that, this argument did not assist MPT in obtaining springboard relief. Any unfair advantage arose, if at all, not because Mr Peel and Mr Birtwistle were not candid during an exit interview last August, but because they allegedly misused MPT’s confidential information in designing and producing their own machines.
It is important for employers to be aware that while there is a general implied duty of fidelity and good faith in any employment relationship, this does not extend to a contractual obligation on an employee to explain their own confidential plans.
The law will step in to prevent unfair competition or to hold employees to enforceable restrictive covenants or to protect confidential information, but outside of this a departing employee is not obliged to tell their employer about their next career move.
If Mr Peel and Mr Birtwistle had been directors or otherwise owed fiduciary duties to MPT, the court may well have made a different decision. Directors have a statutory obligation to promote the success of the company and avoid conflicts of interest.
Similarly, a clear and unambiguous express duty to disclose future plans may, in theory, provide some form of legal protection if the employee misleads an employer. In practice, it could be useful in springboard cases, where the employee has a greater unfair head start as a result. Alternatively, the employer would need to be able to demonstrate loss caused by the specific failure to disclose an intention to compete, in any claim for damages.
Finally, it is worth noting that this was only an interim injunction and a full trial may follow, unless the parties agree terms of settlement.