Electrical company Dyson recently announced it would sue its former chief executive, Max Conze, for “breaching his fiduciary duties” and sharing company secrets. What are employers’ obligations in this area? Susan Doris-Obando from Dentons explains.
Max Conze was appointed to the role in 2011 after a stint running Dyson’s US business, and his period as chief executive coincided with a huge increase in sales of its products.
Executive duties and responsibilities
Executive directors’ specific duties and responsibilities contract clause
However, the company alleges that during this time he failed to “follow lawful and reasonable instructions regarding his conduct and focus of attention” and disclosed confidential product information to third parties, breaching Dyson’s confidentiality rules.
Conze denies the allegations, but what is an employer’s legal standing in cases such as this?
What are fiduciary duties?
It is well-known that all employees, by way of an implied term, owe their employer a duty of good faith and trust and confidence.
However, in addition to this implied duty and the other duties set out in their employment contract, some employees owe much more rigorous duties to their employer – namely, fiduciary duties.
These fiduciary duties, in essence, require the employee to act solely in the interests of their employer and not in their own interests.
It is clear that the employment relationship is not of itself a fiduciary one (a solicitor-client relationship being such a fiduciary relationship).
However, some employees may owe fiduciary duties to their employer, given that they hold a directorship or given the nature of their role and responsibilities.
Who owes fiduciary duties?
Directors: The first category of employees who owe fiduciary duties are employees who are also directors. Their fiduciary duties have been given statutory footing in the Companies Act 2006.
Senior employees: This second category is less clear and is fact-specific – being those for whom the imposition of such duties is warranted due to the nature of the employee’s specific contractual obligations, including the level of seniority and degree of trust and independence.
In most cases, only the most senior employees will owe fiduciary duties. However, more junior employees who are entrusted with company funds or assets may also owe fiduciary duties in relation to any misuse of such funds or assets.
It is possible for part of an employee’s work to give rise to a fiduciary duty, while other parts do not.
What are the relevant fiduciary duties?
The statutory duties of directors under the Companies Act 2006, which align with the previous fiduciary duties, are:
- to act within their powers;
- to promote the success of the company for the benefit of its members as a whole;
- to exercise independent judgment;
- to avoid conflicts of interest;
- not to accept benefits from third parties; and
- to declare an interest in a proposed transaction or arrangement.
The relevant fiduciary duties, owed by employees (who are not directors) for whom the imposition of such duties is warranted due to the nature of their specific contractual obligations (generally the most senior employees of the employer) are:
- to act in the employer’s best interests (to act selflessly and with undivided loyalty) (for example, failing to notify the employer of a competitor’s approach to him/her and fellow employees);
- not to make an unauthorised profit out of his/her trust and to account for the profits made -“the no profit rule” (for example, diverting a business opportunity, known through his/her employment, for his/her personal business interests);
- not to place himself/herself in a position where his/her duty and interest may conflict – “the no conflict rule” (for example, having an undisclosed personal connection with the owner of a trading partner of the employer); and
- to disclose his/her own misconduct -“the disclosure obligation” (for example, failing to disclose to the employer his/her approach to fellow employees to leave employment and join a new competing business venture).
These duties contrast with those of an employee who does not owe fiduciary duties. The employee, who does not owe fiduciary duties, can follow his/her own self-interest except when prevented from doing so by his/her employment contract.
Another notable difference is that in general an employee, who does not owe fiduciary duties, may only be contractually required to report the misconduct of other employees, whereas an employee who owes such fiduciary duties would be required also to report his/her own misconduct.
So, although employees owing fiduciary duties typically have wide discretion in carrying out their duties, such discretion is subject to the above fiduciary duties.
Remedies
In terms of remedies, in addition to traditional routes such as an injunction or seeking damages, employers can pursue the “equitable remedy of an account of profits for breach of a fiduciary duty”.
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This could be, for example, the profits made from a business opportunity gained through the breach itself.
Here, the advantage to the employer of such a remedy is that there is no need to evidence any loss.
