Employee Competition: Recent Cases

INTRODUCTION

1. The topics covered in this paper are considered in detail in the book Employee Competition: Covenants, Confidentiality, and Garden Leave.1 The book examines the law and practice relating to competition by employees, directors, partners and others. This paper examines recent key cases in this area.

   DUTIES2

2. Two recent cases consider the nature and extent of an employee's contractual and fiduciary duties of loyalty. Cook v MSHK Ltd [2009] IRLR 838

3. What can an employee legitimately do to prepare for future competition whilst remaining in his current employment? This question has been considered in a number of cases over the years, some of the more important of which include:

   Balston Ltd v Headline Filters Ltd [1990] FSR 385 (Falconer J); Lancashire Fires Ltd v S A Lyons & Co Ltd [1997] IRLR 113 (CA); CMS Dolphin v Simonet [2001] 2 BCLC 84 (Lawrence Collins J); British Midland Tool Ltd v Midland International Tooling Ltd [2003] 2 BCLC 523 (Hart J); Item Software (UK) Ltd v Fassihi [2005] ICR 450, [2004] IRLR 928 (CA); Shepherds Investments Ltd v Walters[2007] IRLR 110 (Etherton J); Helmet Integrated Systems Ltd v Tunnard [2007] IRLR 126 (CA); Kynixa Ltd v Hynes [2008] EWHC 1495 (QB) (Wyn Williams J); Foster Bryant Surveying Ltd v Bryant [2007] IRLR 425 (CA).

   These recent cases demonstrate, in the words of the editor of the IRLR, "that this has become a fluid area of the law".

4. The issue arose in Cook v MSHK, although the Court of Appeal was not required to consider it in any depth on a summary judgment application.

5. Mr Cook resigned from his senior position at the Ministry of Sound in order to join another record label, Warner Music UK Ltd. In proceedings commenced by MSHK, it was alleged, amongst other things, that Mr Cook failed to inform the claimants that he had a settled intention to compete with them.

6. For Mr Cook, it was argued (para 66) that such a duty was non-existent, reliance being placed on Searle v Celltech [1982] FSR 92; Framlington Group v Anderson [1995] 1 BCLC 475; Saatchi & Saatchi v Saatchi 13 Feb 1995, unrep; and Helmet v Tunnard (above).

7. For MSHK, it was submitted (para 69) that, as a fiduciary, Mr Cook was obliged to ensure that his self-interest and duty to MSHK did not come into conflict; that he was faced with such a conflict as soon as he formed a settled intention to compete with them at Warner; and that he could only resolve it by a prompt resignation: British Midland Tool (above); and Shepherds Investments v Walters (above).

8. For the purpose of the summary judgment application, Rimer LJ (with whom the other members of the Court agreed) assumed (para 70), without deciding, that MSHK was correct that once any so-called "settled intention" to compete was formed, Mr Cook had a duty to disclose it to MSHK; and that any omission to do so was a breach of the implied term of trust and confidence.

9. However, the Court decided that the employer had, in the knowledge of a number of the alleged repudiatory breaches of contract, affirmed the contract by making clear to Mr Cook over a number of weeks that it expected him to work out his notice, without intimating to him that disciplinary proceedings would follow (which they did) and without any express reservation of rights.

10. The judgment of Rimer LJ contains a useful, albeit brief, summary of the principles relevant to affirmation of employment contracts, by reference to Cantor Fitzgerald v Bird [2002] IRLR 867 ("essentially the legal embodiment of the everyday concept of letting bygones be bygones" per McCombe J) and Cox Toner v Crook [1981] IRLR 443. Rimer LJ stated (para 65):

    "an innocent party, faced with a repudiation of the contract by the other contracting party, has an option to affirm the contract and treat it as continuing or to accept the repudiation and treat itself as discharged from further obligations under it. If he affirms it, that affirmation is irrevocable and he cannot thereafter claim to treat the contract as discharged. Mere delay will not amount to affirmation, but if prolonged it may be evidence of an implied affirmation. If the innocent party calls on the guilty one to perform the contract further, he will normally be taken to have affirmed the contract since his conduct is consistent only with the continued existence of the contractual obligation.

    Fish v Dresdner Kleinwort Ltd [2009] IRLR 1035

11. The subject of bankers' bonuses has become highly topical since the onset of the credit crisis and the bailout of banks by governments. In Fish v Dresdner Kleinwort, the court was called on to consider whether fiduciary or contractual duties of loyalty required a senior banker to forego his contractual entitlement to a bonus and severance payment in circumstances where his employer had sustained losses on an unforeseen scale and received government financial support.

12. The claimants were formerly senior employees of Dresdner Kleinwort, the investment banking division of Dresdner Bank. They had acted as members of the executive committee of Dresdner Kleinwort which had delegated to it responsibility for management of the business. In 2008, Commerzbank agreed to buy Dresdner Bank from its parent, Allianz SE.

13. In the summer of 2008, following concern that key employees would leave Dresdner, the claimants received letters which guaranteed specific bonus payments for the 2008 year provided certain conditions were met (which, at the time of the claims, had been met). Later in 2008, compromise agreements were entered into between Dresdner and the claimants which provided for severance payments to be made to the claimants upon the termination of their employment following the acquisition. The bonus and severance payments promised to the claimants totalled €12.6m.

14. However, in early 2009, it transpired that Dresdner Kleinwort had made a loss of €6.47bn in 2008. In addition, Commerzbank was the beneficiary of significant financial support from the German government. Following Commerzbank's acquisition of Dresdner Bank, it was decided that the claimants should not be paid their bonus payments, and that the severance payments should be reduced, in light of the huge financial losses suffered by Dresdner Kleinwort.

15. The claimants sued for these sums, and applied for summary judgment. It was not said on behalf of the defendants that their undertakings to pay the bonuses and severance monies were not supported by consideration. It was not said they were ultra vires. It was not said that the claimants had acted in breach of their contracts by reason of the way in which they fulfilled their management functions.

16. For the defendants, it was said that Dresdner Kleinwort suffered the financial disaster at a time when the claimants were members or acted as members of the executive committee responsible for its management and that the disaster was not appreciated when the payments were agreed. It was said that in these circumstances it was the duty of the claimants to give up what would otherwise be their rights. The primary issue on the applications for summary judgment was whether that defence has any foundation in law.

17. The defence was advanced on the basis of two different, though here connected, sets of legal principles: those relating to the duties of fiduciaries and those relating to the duty of good faith and trust and confidence which is an implied term of the contract of employment. The claimants accepted, for the purpose of the summary judgment applications, that they were fiduciaries.

18. Jack J reviewed the leading authorities. He considered Millett LJ's judgment in Bristol and West Building Society v Mothew [1998] Ch 1, and his statement that the "distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary" (para 26). He reviewed Elias J's decision in Nottingham University v Fishel [2000] IRLR 471, which identified the circumstances in which an employee can owe fiduciary, in addition to contractual, duties (para 29). Jack J drew particular attention to Elias J's citation of the judgment of Mason J in the High Court of Australia in Hospital Products Ltd v United States Surgical Corporation [1984] 156 CLR 41 that the "fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with and conforms to, them." He considered Malik v BCCI [1997] IRLR 462 and Johnson v Unisys Ltd [2001] IRLR 279, in which Lord Steyn described the implied obligation of trust and confidence as "an overarching obligation implied by law as an incident of the contract of employment" (para 34).

19. Jack J accepted that this is a developing and evolving area of law. However, he concluded that the defence had no reasonable prospect of success. Here, the defendants sought to take away the whole of the benefit which they promised. The obligation on the claimants to act in the best interests of the company was not a provision that could be used to cut down the express provisions of the agreement for payment of bonus and severance pay. Its effect was that provided the employee continued to act in the best interests of the company, he would get those monies. It was not that if it ceased to be in the best interests of the company to pay those monies, he would not get them.

    CONFIDENTIAL INFORMATION3

20. One of the difficulties faced by a party bringing a claim of misuse of confidential information lies in the need to persuade a court that the information which it seeks to protect is truly confidential.

21. This can give rise to a number of dilemmas:

    Does the claimant have to disclose documents containing confidential information? What safeguards can be put in place to prevent the further dissemination of disclosed confidential documents? Can the defendant interview the claimant's employees or ex-employees as potential witnesses? If so, are those employees bound by a duty to their employer or...