Employees prevented from joining a potential competitor
All employees owe a duty of fidelity to their employer, which prevents them from working in a competing business whilst still employed. Usually, the duty is not breached if employees take preparatory steps to set themselves up in competition, provided they are not in active competition. Some senior employees also owe fiduciary duties. Those employees must put the employer's interests ahead of their own, and must report the existence of competitor activity and their own wrongdoing.
In the case of Clear Edge UK Ltd v Elliot, the High Court (HC) granted an injunction to prevent three employees from joining a potential competitor. The employees were responsible for developing and marketing a product range (the Cerafil business) for their employer, Clear Edge. They were senior staff with access to highly confidential information regarding the technical and financial aspects of the Cerafil business and its customers. They handled all aspects of a leading product, a component of which was provided by a supplier, Topsoe. Topsoe had approached Clear Edge to buy the Cerafil business. A few months later, the employees resigned and told Clear Edge that they intended to join Topsoe. The contracts of employment contained confidentiality clauses and post termination restrictions. Clear Edge sought the injunction to prevent the employees from starting work with Topsoe when they discovered that the employees' phones and laptops had been cleaned.
The HC found that the preparations to compete could amount to a breach of the duty of fidelity, as the employees had carried out a co-ordinated departure which they had concealed from Clear Edge. One of the employees had been negotiating on behalf of all three and they had been involved in Topsoe's offer for a management buy out. The HC also found they owed and had potentially breached fiduciary duties to Clear Edge because they were senior staff with access to highly confidential information, which was subject to express restrictions. They had also misused confidential information and there was a threat that they may do so again. The employees had either already given or would give Topsoe and/or themselves an unfair competitive advantage from which they would benefit if they were not restrained. The potential damage to Clear Edge could not be quantified, therefore it was appropriate to grant an injunction preventing the employees from joining the competitor whilst awaiting trial.
This case confirms the importance of confidentiality and non-compete clauses. Clear Edge could have joined Topsoe, the supplier, to the litigation. However, they had a better chance of getting an injunction by excluding Topsoe. This helped them preserve good relations with an important supplier and gave them time to find a replacement whilst the injunction was in place.
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Author: Sandra Martins
Date published: 1st February 2012