UK: High Court Takes Tough Stance Against Employees Who Deliberately Misled Their Employer

Last Updated: 8 August 2008
Article by Anthony Fincham and Tom Cloke

In Kynixa Limited v Hynes and others, the High Court ruled that substantial damages will be payable by three key employees who deliberately misled their employer regarding their intended resignations, so breaching their duty to serve the employer with good faith and fidelity (which is an implied term of any contract of employment). Interim injunctive relief was obtained against two of the employees, who were also adjudged to have breached fiduciary duties they owed to Kynixa, and to have contravened restrictive covenants in a shareholders agreement to which they were subject. The damages to be awarded against all three employees for their respective breaches of duty and contract will be assessed in a separate quantum hearing.

Over a six-month period, the employees resigned from Kynixa then commenced working for a subsidiary of one of its competitors. At no stage prior to or after their resignations did they volunteer the fact that they would be working for the competitor, even though, in reality, all three employees had negotiated and signed contracts of employment with their new employer before their respective departures. All three employees had breached their duty of fidelity by "positively misleading" Kynixa with regard to their true intentions.

Two of the employees (who held more senior status within Kynixa than the third) were found to be in breach of their fiduciary duties to act in the best interests of their employer by, for example, reporting any relevant competitor activity or any wrongdoing by employees. In this case, the employees' failure to inform Kynixa of their negotiations with the competitor group represented a breach of those duties.

The two more senior employees also held shares in the company under the terms of a shareholders agreement, which contained restrictive covenants seeking to prevent them from competing with Kynixa, or soliciting its customers and employees. The covenants extended for a period of 12 months following the date on which the employees ceased to be "connected with" Kynixa. Restrictive covenants are prima facie void but will be enforceable if they protect a legitimate business interest and go no further than is necessary to protect that interest. The court held that although the covenants were widely drafted and lasted for the most extensive period that the courts in England and Wales have proved willing to enforce, they were still enforceable against the employees. Relevant facts cited by the court included:

  1. The employees were party to trade secrets which could cause significant harm to Kynixa if disclosed to a competitor, especially since Kynixa was operating within a small market in which such disclosure could be particularly damaging.

  2. Shareholders are seen as having significant bargaining power when entering a shareholders agreement and, in this case, stood to make substantial financial gain from their shares. This served to justify the stringency of the post-termination restrictions.

In a second discrete hearing on relief, the court ordered the two more senior employees to make interim payments of costs (of £250,000 and £100,000 respectively) in relation to the liability hearing while a detailed assessment of the company's costs is undertaken. Kynixa's total costs to date were estimated at just in excess of £1 million.

This case serves as a reminder that restrictions on competitive activity by employees may not be found solely in the express terms of employment contracts – an employee's implied duty of fidelity, fiduciary duties of senior employees and the terms of other agreements (such as shareholders agreements) can all be relevant. Employees who breach such restrictions may be subjected to injunctions and liable for damages.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 07/08/2008.

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