UK: Employee Competition: 7 Steps To Protect Your Business

Last Updated: 4 February 2013
Article by John Quigley

What if one of your key employees leaves to join or start a competing business? Or worse still, what if a number of your key employees leave as a team? The more senior the employees, the more likely they will have had access to your confidential information and data; this often hands them the ability, should they choose to use it, to misuse your data and confidential information and poach your customers and staff. Such defections can result in huge financial and other losses to your business.

You can vastly improve your position in such situations if you:

  • consider and plan for these risks in advance
  • put in place sensible contractual and other protections and
  • react swiftly and appropriately as soon as an issue emerges.

Here are some suggested steps:

Step 1: Impose contractual protections at start or later by variation

The first step is to put in place proper contractual provisions for key employees before they join, or later by varying their contracts. The following should always be considered as a minimum:

Confidential information: although the law implies certain protection in relation to confidential information and data, it is sensible to include express provisions which will make it easier to threaten and bring legal proceedings.

Reporting obligations: employees can be obliged to report their own wrongdoing and potential defections and wrongdoing by other staff.

Garden leave: there is no implied right to put an employee on garden leave (ie remain an employee but carry out no duties) during the notice period, so an express right to do this should be included.

Post-termination restrictions: the law does not imply any post-termination restrictions so employees are free to compete as soon as their employment has ended. Express post-termination restrictions should be considered to prohibit employees,for example, soliciting or dealing with customers for a fixed period (eg 6 months) after termination. To be enforceable, these covenants must be specific and tailored to your business.

Team move clauses: if team moves are a particular risk, then there are various protective provisions that can be included at the time employment begins.

Step 2: Treat confidential information confidentially

The law has rules about what constitutes "Confidential Information". If for example a client list has been freely available to every employee in a business, from the most junior to the most senior, it may be difficult to convince a court that it was regarded as confidential information.

There are a number of practical steps (such as controlling access) that businesses can take in relation to various types of information in order to demonstrate that it has been treated as confidential.

Step 3: Consider issuing company laptops and mobiles

If employees are issued with company laptops, Blackberrys, iphones, ipads and so on, employees have no need or reason to load confidential information or data onto their personal devices, and the contract should prohibit them from doing so. If telephone numbers used on business cards, websites and so on are owned by the business, employees have no reason to publicise their personal numbers. And crucially, as such equipment and phone numbers are owned by the employer, they can be taken back at any time, especially on termination.

Many businesses, particularly smaller ones, operate a "bring your own device" policy which means that individual employees effectively use their personal mobile phones and laptops for company business. Such a BYOD policy should be very carefully thought through, and documented, as apart from 'employee competition' dangers, there are risks of breaches of Data Protection laws and regulatory breaches.

Step 4: Consider adopting a policy regulating Social Networking

Social networking services such as Linkedin and Twitter allow members to build what is effectively a database of contacts. The ownership of such a database is not always clear, and will of course be subject to the terms and conditions of membership of the relevant network. Generally, an individual Twitter or Linkedin account moves with the individual employee, and for example followers of Tweets about the benefits of your business may soon be receiving Tweets about the benefits of another company.

It is sensible to consider the impact of this on your own business and if necessary to adopt a formal policy dealing with such matters. Some such policies provide that accounts be opened in the name of the business who can then retain the accounts if the employee leaves.

Step 5: Avoid breaching terms of employment contracts

Even if a business has well drafted contracts of employment in place, with clear confidentiality provisions and post-termination restrictions, it can inadvertently lose their protection: there is a rule of law that if an employer commits a serious breach of a contract of employment, the employee has the right to treat himself as discharged from the contract.

Some employees are just waiting for their employer to commit a serious breach of their contracts: they wish to leave to join a competing business but know they are unable to do so because of their post-termination restrictions. They are therefore looking out for, or perhaps trying to provoke, the employer into committing a serious breach of contract which will enable them to treat the contract as ended and walk away free from their contractual obligations.

Step 6: Act swiftly and appropriately when an issue arises

Immediately following the resignation of, or the termination of the contract of an employee who may be a threat, it is important to consider what practical steps can be taken.

This often involves searching for evidence of wrongdoing and, if found, then pursuing a number of possible actions including:

  • consider encouraging employees to stay
  • holding them to their contractual notice periods
  • putting them on garden leave
  • retrieving company mobiles and laptops
  • searching for evidence of misuse of confidential information
  • consolidating relationships with the customers they dealt with reassuring other staff
  • searching for evidence of other breaches of duty during employment
  • reminding employees of any contractual post-termination restrictions

and threatening and ultimately using the Courts when necessary.

Step 7: Use the Courts to enforce your rights when necessary

Legal procedures can be swift and powerful in these situations. But they are also expensive, stressful and time consuming, so are generally only worth pursuing in cases where employee competition poses a serious threat to your business and where the costs are proportionate to the possible damage.

If evidence emerges, either whilst an employee is still employed, or after they have left, that they have misused confidential information or data (eg taken information with them), or are in breach of their legal obligations (eg not to solicit or deal with customers), the business will need to consider what steps are available and what steps should be taken.

Instructing solicitors: your solicitors will need to make an early assessment of the strength of your position and what options are available to you. The benefits of seeking and obtaining Court orders have to be weighed against the risks and of course the costs involved. Speed is usually of the essence in these cases.

Warnings and undertakings: if there is evidence of actionable breaches, the first decision is whether to make an application to the Court without notice to the employee, or whether to warn the employee and give him an opportunity to avoid Court action by, for example, returning data and providing undertakings about future conduct.

Interim injunctions: if matters cannot be resolved through undertakings, then the immediate consideration is whether to apply to Court for an interim order to maintain the status quo pending a full hearing. Interim injunctions are sought at emergency hearings on very short notice (a few days if that), and if granted they can order an employee to immediately cease his wrongdoing (eg misusing your confidential information or data or soliciting or dealing with your customers). If you are successful, your former employee (and perhaps his new employer) will be served with a Court order, with stark warnings of the consequences of breach, coupled with a demand for payment of legal costs.

Speedy trials: if the dispute continues, then the matter is likely to be listed for a full trial within a few months. So instead of the normal fairly lengthy litigation process, everything is compressed into a very short period, which is even more expensive, stressful and time consuming.

Final orders: the objective is to obtain final orders that the employee will comply with his obligations, and that he will pay damages for previous breaches, and that if he was a Director or in a similar senior position that he will account for any profit he made as a result of his wrongdoing and that he will pay the employer's legal costs.

Evidence of wrongdoing

Although evidence of wrongdoing is not always obvious, it is often there to be found. Computer experts can uncover surprising numbers of 'deleted' emails, documents and spreadsheets. Moreover, if Court proceedings begin, at some stage parties and witnesses have to sign witness statements with 'statements of truth' and at some stage give oral evidence under oath.

A Judge arrived at an interesting conclusion on evidence in a recent case. An employee moved to a new company. Immediately afterwards, key customers stopped dealing with the old company and started dealing with a new company. The employee denied soliciting their business. The customers concerned swore affidavits which they filed at Court stating that they had not been solicited. Nevertheless, the Judge disbelieved the employee and the customers and found that effectively the facts spoke for themselves. He awarded the first company the profits they had lost because of the unlawful solicitation which resulted in the customers moving to the new company.

Conclusion

Obviously, you cannot prevent employees leaving to start or join competing businesses, but you can vastly improve your position if you consider and plan for these risks in advance, have in place sensible contractual and other protections as briefly outlined above and act swiftly and appropriately if an issue arises.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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