With the recession starting to bite, employment lawyers are warning that there could be a sharp rise in employees stealing confidential information from their ex-employer to get ahead in a new role.
The number of cases heard in the High Court has already seen a huge increase in the past two years, with the number of claims leaping to 23 in 2008 from just three in 2006, according to law firm Reynolds Porter Chamberlain.
The good news for employers is that the courts now appear more willing to enforce restrictive covenants in departing employees contracts and recent cases, including UBS Wealth Management v Vestra Wealth (2008 EWHC 1974 QB), have seen springboard injunctions granted where they would not have been previously. Springboard injunctions are usually only applied when a departing employee takes customer lists and information, but in the UBS case this was extended to include any wrongdoing by the departing employee. See the box below for more information.
This doesn’t mean employers can avoid having watertight contracts though.
“It is a lot safer for employers to have express provisions in place rather than relying on implied rights,” says Simon Henthorn, solicitor-advocate at Reynolds Porter Chamberlain.
The first thing employers should do is ensure restrictive covenants are written into the contracts of staff with access to sensitive and confidential information. These post-termination obligations fit broadly into four categories: non-compete covenants, which prevent employees working for a competitor for a set period after leaving non-solicitation covenants, which seek to stop employees forming agreements with former customers for a set period non-poaching covenants, which seek to prevent the poaching of former colleagues and, lastly, restrictions on the use of confidential information.
Pam Loch, founder of employment law firm Loch Associates, says you must be able to show you have given due thought about who to apply restrictive covenants to.
“The narrower you can make them, the more likely they are to be enforceable,” she says. “You should also check your covenants annually to make sure they are still effective.” Reviewing covenants when employees are promoted or there are changes within the business is also vital. Under TUPE (Transfer of Undertakings (Protection of Employment) Regulations), restrictive covenants do transfer, but only as they originally applied.
Gardening leave provision can also give some protection because any covenants and confidentiality clauses apply during the notice period and you can take disciplinary action, or dismiss the employee, on grounds of gross misconduct if the conditions have been breached. It is also essential that employees sign to say they understand their contractual obligations.
If an employee is leaving to go to or set up a competitor business, or if you notice any strange behaviour, then you may want to investigate. But take care not to breach the employee’s rights or the Data Protection Act.
Henthorn says: “Look out for unusual behaviour, like someone senior spending a lot of time at the photocopier or coming in waving memory sticks.” You might want to check the employee’s e-mail and phone records too – routinely taped telephone calls were used as evidence in the UBS case.
Where wrongdoing is suspected, you can go straight to the courts and seek an injunction or ask the employee for an undertaking that they will stop the damaging action.
Tim Randles, head of employment at Laytons’ Guildford office, says: “You’ll have to demonstrate on the balance of probabilities that there has been misuse, misappropriation, or a clear intention to misappropriate confidential information, so decide what value that is to your company and whether it is actually causing you loss. You’ll also have to decide whether you warn the employee of your intention first. If you have a good, clear contract, it might suit you better to warn the individual – and possibly their new employer – first. You may conclude however that the risks are such that it is better to immediately apply for an injunction.”
When seeking an injunction you will need to submit a claim form with a statement of case, including witness statements. The court will then decide whether to apply an interim injunction, which may put conditions on the way the defendant operates, until the case is heard. The court may decide damages should be awarded as well or instead. If so, the losses incurred are assessed by the claimant, but if there has been a fiduciary breach – which Loch says there usually has been in these cases – you can put the onus on the defendant to show what profits have been made.
Of course, this isn’t just an issue for employers with departing employees. And those hiring new staff should also take care.
Randles says: “Ask them to sign a contract that contains a warranty saying they can come and work for you.” Where there has been a misrepresentation you can then rescind the contract.
“The contract is set aside and the parties are put back into the position in which they were before the contract was made,” adds Randles, “so at least you get the company car back.”
CASE STUDY: UBS and the springboard injunction
Last summer’s UBS Wealth Management v Vestra Wealth case extended the principle of the springboard injunction.
A senior manager at UBS resigned and formed a competitor business at the end of his notice period. He then persuaded 75 other UBS staff to join him.
While the courts usually only apply springboard injunctions where departing employees take confidential information, in this case, the court granted UBS a springboard injunction that prevented departing employees and Vestra from poaching other UBS staff. It also prevented further dealings with any customers the defecting employees had introduced to Vestra.
Vestra argued that the original departing employee who set up the company was free of contractual obligations, but the court decided it was unlikely that whole departments would leave without discussions taking place beforehand. UBS used its routinely taped telephone calls to show these conversations had taken place. After the springboard injunction was granted, the case was settled out of court before the full trial took place.