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The extent to which employees can prepare to compete
against their employer is determined by the duty of fidelity, which
is implicit in all employment agreements.
A recent United Kingdom appellate decision, Ranson v
Customer Systems1, signals a more nuanced approach
to this duty than has been taken here to date – one that
could see the New Zealand courts condoning preparatory behaviour
that would, until now, have been considered
illegitimate.
This Brief Counsel compares Ranson with the
current New Zealand approach to preparatory competitive conduct,
and suggests how to draft employment agreements to prevent your
employees from engaging in conduct adverse to your business
interests.
Ranson
Mr Ranson was employed as a software developer in 2001 by
Customer Systems, an IT consultancy firm. He moved up the ranks and
was ultimately appointed divisional manager - a sales/managerial
role. His original employment agreement was not amended to reflect
this promotion. Neither did it contain any material restrictions on
what Ranson could do after he ceased working at Customer Systems.
In 2009, Ranson resigned.
Before and during his notice period, Ranson met with two clients
of Customer Systems with an eye to securing contracts for his
planned software company - which would be in direct competition
with Customer Systems.
At issue was whether these meetings breached Ranson's duties
to Customer Systems.
By defining Ranson's duty of fidelity with reference to his
employment agreement, the Court found that there was no breach
because:
one client fell outside the limited "patch" of client
organisations for which Ranson had responsibility, and that client
had initiated the meeting, and
Ranson's dealings with the other client did not affect a
business opportunity being pursued with that client by Customer
Systems.
The New Zealand context
Schilling v Kidd Garret
Ltd2
The facts were similar to Ranson but the Court of
Appeal found the employee in breach of his duty of fidelity.
Schilling negotiated an exclusive sales agreement between Kidd
Garret and Husqvarna (a chainsaw manufacturer) then, while still
employed by Kidd Garret, formed a competing company and, during his
notice period with Kidd Garret, persuaded Husqvarna to transfer the
sales agreement to his company.
Morris v Interchem
Agencies3
The Court of Appeal held an employee in breach of his duty of
fidelity for failing to inform his employer of a client's
concerns with the employer's service and for then accepting
work from that client in an individual capacity.
A factual dispute surrounded whether the disgruntled client
solicited the employee or vice versa. But the Court held that it
made no difference – an employee solicited by their
employer's client has a duty to reject that solicitation and to
report it to their employer. Morris was subsequently
affirmed and applied by the Employment Court in Waikanae
Holdings (Gisbourne) Ltd v Smith,4 on broadly
similar facts.
This reporting requirement does not extend to requiring
employees to disclose in advance their, or a fellow employee's,
intention to simply resign and compete with their
employer.5
Protecting your business against adverse preparatory
conduct
Although these cases show that the New Zealand courts have
defined the duty of fidelity more generally than was the case in
Ranson, imposing more rigorous requirements on employee
preparatory conduct, Ranson may influence the approach
applied here in the future.
In light of this, it is important to ensure that employment
agreements:
require employees to act faithfully and in the best interests
of the company, including by passing on all relevant business
information and potential opportunities, and
are updated to reflect employee promotions, and any associated
widening of expectations attaching to employee.
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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