It is not unusual for former directors of companies to set up in
competition against their original companies. When they do so, they
need to watch their step. Former directors may find themselves in a
potential minefield with legal mines at every turn.
A salutary lesson for former directors involved the recent
Federal Court case of TICA Default Tenancy Control Pty Limited
v Datakatch Pty Limited (2016) 120 IPR 98. In this case, the
Applicant was a company which provided information about tenants to
real estate agency clients through a computerised system. Former
directors of the Applicant later set up a similar operation in
competition with the Applicant. The Applicant subsequently
commenced proceedings against the former directors and their
company based on grounds which included copyright infringement,
breach of confidence and breach of fiduciary duty.
The allegations of copyright infringement related to the alleged
reproduction of the source code in the Applicant's computer
program, the schema of the databases and the format of the
stylesheets. The Court found that the allegation of reproduction of
the source code was not sustained because the amount of code copied
was "trivial". The Court also found that there was an
insufficient degree of similarity between the schema and the format
of the Applicant's other copyright works and those of the
Respondent. In reaching its decision the Court referred to evidence
provided by expert witnesses on the similarity of the respective
copyright works. In assessing such similarity it is important to
remember that copyright does not subsist in an 'idea" but
rather in the particular "expression" of that idea.
BREACH OF CONFIDENCE
The Court then focused on the behaviour of the former directors
of the Respondent company. The allegation of breach of confidence
related to the acquisition and use by the former directors of the
user names and passwords in the computerised system of the
Applicant. The Court noted that this material had been made
available to the former directors on a confidential basis when they
were directors of the Applicant. The former directors therefore had
an equitable duty to the Applicant to maintain this
confidentiality. This duty survived the termination of their tenure
as directors of the Applicant. University of Western Australia
v Gray (2009) 179 FCR 346. The former directors were therefore
found to have breached their duty of confidentiality to the
Applicant by acquiring and using the relevant confidential material
BREACH OF FIDUCIARY DUTY
As a corollary to their breach of confidential information, the
former directors were also found to have breached their fiduciary
duty as directors of the Applicant under Sections 182 and 183 of
the Corporations Act 2001 (Cth).
As a general principle, there is no restriction on former
directors or former employees setting up in competition against
their former employer unless there is a competitive restraint
agreement in place. However, in doing so, it is important for those
directors or employees to avoid reproducing substantial parts of
copyright material or disclosing information which they may have
been provided on a confidential basis. This duty of care not to
disclose confidential information places an additional onus on
former directors who must also consider their fiduciary obligations
under the Corporations Act as well as under common law.
The moral of this case is that former directors need to watch
their step. Legal mines may lie hidden around every corner.
Our forensic practice conducts many investigations on many topics, but one recurring theme is the abuse of procurement.
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