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Competitive advantage?

After their restrictive covenants had expired, two reasonably senior employees lawfully set up a company in competition with their employer. However, shortly after they had resigned, they lied about their intentions.

Is an employee under a duty to disclose their intention to compete after their restrictive covenants has expired?

MPT Group Limited v Messrs Peel, Birtwistle & MattressTek Limited

Mr Peel and Mr Birtwistle were employed by MPT Group Ltd, a leading producer and supplier of mattress machinery, until September 2016. Mr Peel was the company’s Technical Manager, responsible for producing drawings for machinery and Mr Birtwistle was the company’s Technical Sales Manager, responsible for business development and maintaining key relationships with customers and suppliers. Both men handed in their resignations on 4 August 2016 with their employment ending in September 2016.

Mr Peel and Mr Birtwistle were subject to restrictive covenants that prevented soliciting or dealing with customers they had personally dealt with for six months. After the six months elapsed they incorporated MattressTek Limited in direct competition with MPT Group Ltd (MPT), who up until March 2017 had been the only company manufacturing mattress machinery in the UK.

When questioned by MPT as to their intentions when their employment terminated, both men lied stating that they had no desire to go in to the business on their own account and denied going into partnership. Mr Peel said he wanted to spend more time with his child by working as a freelance CAD designer and Mr Birtwistle said he’s been offered a position doing panel wiring.

MPT alleges that both men breached their contracts having:

  • Downloaded, misused and divulged databases of its customers, sales quotations, suppliers, materials, costings and technical drawings to third parties;
  • Solicited each other from MPT for the purpose of incorporating the competing business;
  • Failed to answer questions truthfully about their future intentions;
  • Solicited and dealt with MPT clients during the 6 month period of restraint;
  • Interfered with MPT’s supply chain;
  • Misused confidential information to design machines very similar to MPT’s;
  • Infringed on MPT’s database rights and copyright of its technical drawings;
  • Conspired to use unlawful means to injure MPT;

MPT also alleged that MattressTek Limited had induced Mr Peel and Mr Birtwistle to breach their contracts of employment.

MPT believed that Mr Peel and Mr Birtwistle could not legitimately have reached the stage of marketing machines for sale by March 2017. MPT said that the speed of MattressTek Limited bringing their new machines to market gave rise to an inference that this could only have been achieved by Mr Peel and Mr Birtwistle breaching their contracts and plundering MPT’s designs and other confidential information. MPT said that the timeframe for bringing a new machine to market was 18 months.

Mr Peel and Mr Birtwistle admitted that they had taken data from MPT after their employment had terminated but had not used this extensively (alleging that they checked personal data, a single measurement and the beginnings of a customer database that was never used) and had since destroyed the hard drives. They argued that their machinery had been developed in such a way that would show that they were not copies of any individual machine in MPT’s range.

MPT sought a springboard injunction to prohibit Mr Peel and Mr Birtwistle from soliciting, dealing or contacting its customers and suppliers and an unlimited injunction to protect its confidential information.

Decision

At this interim stage, the High Court held that it was undisputed that Mr Peel and Mr Birtwistle owed a duty of fidelity to their employer and had not answered questions truthfully however, it was reluctant to hold that a departing employee is under a contractual obligation to disclose their own confidential plans to set up in lawful competition. The High Court considered that MPT’s case did not rest solely on the misuse of confidential information but rather on several other breaches however; none took the case any further at this interim stage. Therefore, the question to be tried was the misuse of MPT’s confidential information giving rise to allegations that Mr Peel and Mr Birtwistle (and MattressTek Ltd since its incorporation) conspired and induced breaches of contract to use this confidential information to obtain an unfair and unlawful shortcut in the design and production of competitive machines.

On Mr Peel and Mr Birtwistle’s admission of taking MPT’s confidential information, MPT was granted a limited injunction until trial.

Comment

 Whilst a full trial has not yet taken place in this case, it provides some useful guidance on the duty of fidelity and provides a warning to employers, not to necessarily believe what any departing employee tells them about their future plans. Businesses should take adequate steps to protect their confidential information and make sure definitions of confidential information in contracts of employment are appropriate and not too wide and generic.

Employers should also be wary when drafting restrictive covenants. Where employees are not of a sufficiently senior level to owe fiduciary duties, employers must ensure that the length and intentions of any restrictive covenants are sufficient to protect the business. This can often be a delicate balancing act between acting as a deterrent to any employee and actual ability to enforce.

When drafting restrictive covenants, employers must ensure that they protect a legitimate business interest and are drafted narrowly to protect that interest. Restrictive covenants must be very carefully worded, with consideration to the underlying intention. Any ambiguity in restrictive covenants will also be interpreted against an employer seeking to enforce such restrictions.

If you would like advice in relation to confidential information and restrictive covenants or require advice on any other employment law related matter, please contact Joanne Holborn, Tom Scaife or Caroline Rayner on 01228 552600 or 01524 548494.

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