Where an employee leaves to compete against the employer there are four possible causes of action the employer could seek to rely upon. Firstly, the employer might point to a restrictive covenant and seek to enforce that. Secondly, the employer might seek to rely on a confidentiality clause in the contract of employment. Thirdly, the employer might argue that the former employee is using trade secrets learnt during the course of employment. Fourthly, the employer might seek to argue that the employee has interfered with intellectual property rights be it copyright, design, trade marks or patents.
Restrictive covenants are “covenants in employment contracts that restrict or deter an employee from freely exercising his trade, profession or calling”. They can take many different forms. A non-solicitation clause would prevent the employee from soliciting work from customers of the employer for a period after the termination. A non-poaching clause would prevent an employee employing other employees of the employer for a period after the termination. A non-compete clause would require the employee not to work in a competing business for a period after termination. The latter is the most restrictive and therefore more difficult to pass through the Courts.
No matter what the type of restrictive covenant, it is for the party asserting the clause to prove it is reasonable in terms of time, space and subject matter.
The courts have a number of occasions amended the restrictive covenant to a be more limited in time, space or subject matter. In Lennon v. Doran (Unreported High Court (Carroll J.) 20th February 2001) the court imposed a definition of territory in a share purchase agreement as an area in which the business was being carried out at the time of the share transfer. The court reduced the non-compete term from 2 years to 1 year.
The courts seem quite willing to enforce a non-solicitation clause for a period of 6 months to 12 months. In Net Affinity v. Conaghan and Revemac Ltd. 2011 ELR 11 the first defendant left the plaintiff company to join the second defendant which were companies providing hotel booking websites. The court refused to enforce a 12 month non complete clause contained in the contract of employment but the court did grant an injunction in the form of a non-solicitation clause (an order preventing the defendant from soliciting, approaching or dealing with any existing clients of the plaintiff for a period of 12 months) against the first and second defendants even though same was not provided for in the contract.
In AIB v. Diamond (Unreported Clarke J High Court 14th of October 2011) the first six defendants (hereinafter the personal defendants) were former employees of the plaintiff companies who established the seventh, eighth and ninth defendant companies (hereinafter the corporate defendants) to work in competition with the plaintiff companies. There was no restrictive covenants in the personal defendants contract of employment. IT specialists for the plaintiffs had uncovered emails and attachments which some of the defendants had taken from the plaintiffs. It was alleged that on one date a significant download of information from the defendant server regarding 17 clients was made onto a USB stick. Further, a document were prepared setting out in detail the status of each customer with the plaintiffs.
The plaintiff sought various interlocutory injunctions restraining the defendant’s activity pending the hearing of the action. Two personal defendants had given undertakings to the Court prior to the hearing of the introductory injunction. The court made orders against the other personal defendants, with the exception of one defendant Mr Walsh, on the basis there was no evidence to establish a strong argument case against him.
The court made the following orders restraining some personal defendants and the corporate defendants in the period 20/9/11 to 20/3/12 from:-
“A.Soliciting customers of AIB as of August, 2010, such customers to be set out in a schedule to the order;
B. Concluding business with the same customers in any case where there has already been solicitation of the customer concerned;
C. Using confidential information to be defined with much greater precision in a schedule to be attached to the order with the terms of that schedule to be the subject of further submissions having regard to the analysis set out earlier in this judgment; and
D. Returning confidential information by reference to the same or alternative schedule to be likewise the subject of further debate.”
The court was careful not to make an order precluding the concluding of contracts with clients where there had been no solicitation. The court refused to make an order preventing solicitation of employees and said that insofar as it was done when the personal defendants were still employees of the plaintiffs, that damage that was done and could not be undone.
A recent case is unusual in that it was the plaintiff and former employee who brought an injunction restraining the former employer from enforcing the restrictive covenant. In Hernandez v.Vodafone Ireland Ltd 2013 ELR 194 the plaintiff had a restrictive covenant in his contract of employment with the defendant in the form of a six-month non-compete clause. He resigned from the employment and took up employment with a competitor O2. As a result of pressure brought to bear by the defendant on O2, O2 agreed not to commence the employment until May 2013 on the basis that they would not be made a party to the proceedings. The plaintiff succeeded in an interlocutory injunction restraining the defendant from preventing the plaintiff working with a competitor during the 6-month after termination. The plaintiff agreed to be bound by a 6-month non-solicitation clause and a confidentiality clause. The court held that there was a fair issue to be tried as the enforceability of the non-compete clause. The court held that damages were not an adequate remedy even though the loss of the plaintiff would be no more than €20,000 on the basis that the plaintiff needed the income to support his family. The court held that the balance of convenience lay in favour of granting the injunction given the distress caused to him and his family.
In Levinwick Limited v. Hollingsworth (Unreported High Court 4/7/14)the defendant worked at the plaintiff’s pharmacy in Celbridge, Kidlare until March 2013. The defendant commenced employment with another pharmacy in Celbridge in January 2014, which the plaintiff sought to injunct. There was a 2 year non compete clause within 2 miles of the plaintiff pharmacy and a 2 year non solicitation clause.
The court held the non compete clause was too broad. There was no evidence that a particular customer had been solicited by the defendant or even evidence that a customer had moved business. There were other pharmacists working in the pharmacy and, although the defendant was pharmacy manager, she spent a considerable amount of time in the office, not face to face with customers.
In Net Affinity v. Conaghan and Revemac Ltd. 2011 ELR 11 the court granted injunctive relief to prevent the first defendant from breaching her duty of confidentiality to the plaintiff as set out in express terms in her contract of employment which provided inter alia:-
“You may not discuss any information of a confidential nature relating to the company or any associated companies or their business or in respect of which the company owes an obligation of confidence to any third party during or after your employment, except in the proper course of your employment or as required by law…”
In AIB v. Diamond (Unreported Clarke J High Court 14th of October 2011) the court was willing to grant an injunction restraining the use of confidential information in terms of C. and D. above.
The doctrine of trade secrets
In House of Spring Gardens v. Point Blank  1 IR 611 the plaintiff manufactured bullet proof vests. The defendant initially went into a joint venture to sell these and was privy to all design specifications but later started to manufacture the product on its own. The court held the defendant was in breach of the implied term of mutual trust and confidence and in breach of copyright. The court pointed to the relationship between the parties and the skill, time and labour by the plaintiff even though he had obtained it from sources which were public (in the sense that any member of the public with the same skills could obtain it had he acted like the compiler of the information).
In Faccenda Chicken Ltd. v. Fowler  IRLR 69 the respondent was employed as sales manager of the plaintiff, a company which sold chickens. His employment later ended and he then set up his own business of selling chickens from refrigerated vehicles. He took 5 of the 10 van salesmen of the appellant, their supervisor and two office staff. He competed with the appellant and the majority of his customers were former customers of the appellant. None of appellant’s employees had been subject to a restrictive covenant.
The appellant argued that the respondent had broken his contract, in particular the implied duty of good faith and fidelity by using customer lists and pricing information. The court held that the duty of good faith will be broken if an employee makes or copies a list of the customers of the employer for use after his employment ends or deliberately memorises such a list, even though, except in special circumstances, there is no general restriction on an ex-employee canvassing or doing business with customers of his former employer (applied Robb v Green (1895) 2 QB 315 and Wessex Dairies Ltd v Smith (1935) 2 KB 80). The Court held that the implied term continued after the determination of the employment but was more restricted in its scope than during the currency of the contract.
The Court held that the following matters were to be considered in order to determine whether information gained during the currency of the employment could be used after the termination:-
- The nature of the employment.
- The nature of the information itself. Secret processes of manufacture would be protected, but innumerable other pieces of information are capable of being trade secrets, though the secrecy of some information may be only short-lived. The fact that the circulation of certain information is restricted to a limited number of individuals may throw light on the status of the information and its degree of confidentiality.
- Whether the employer impressed on the employee the confidentiality of the information.
- Whether the relevant information can be easily isolated from other information which the employee is free to use or disclose.
The Court held that the pricing information in question was not a trade secret and pointed to the fact that the sales information was necessarily acquired by the employees in order that they could do their work and was known to a variety of employees including van drivers and secretaries.
In Koger Inc. v. O’Donnell (Unrepored High Court (Feeney J.) 8th October 2010) the plaintiff was a software company with a product called NTAS. The software was developed for customers in the fund administration industry. The first three defendants were former employees of the plaintiff and the fourth defendant was a company set up by those employees. The defendants developed a product ManTra after leaving the employment from October 2006 which was released in October 2007.
In relation to the claim that the defendants used trade secrets belonging to the plaintiff the court stated:-
“The plaintiffs have failed to identify the use or misuse of any identifiable trade secrets. No claim is made that the defendants used or applied skill, expertise know-how and general knowledge gained during the course of their employment. Indeed, such a claim could not succeed. There is clear authority for the fact that protection cannot legitimately be claimed in respect of skill, expertise, know-how and general knowledge acquired by an employee as part of his job during the course of his employment, even though it might equip him as a competitor of his employer.”
The court found that the breach of trade secrets claim was dependent on the plaintiff showing that the defendants had an unauthorised copy of the NTAS. Once a finding was made that this was not the case then the court found that the claim for use of trade secrets failed.
The EU Commission has released a draft directive on trade secrets which might lead to a directive which would define trade secrets and provide how they might be enforced.
Whereas generally the owner of the of the copyright is the author, under s. 23.1 of the Copyright and Related Rights Act 2000, if a work is made by an employee in the course of employment then the employee is the owner, unless there is an agreement to the contrary. A similar provision is contained in s.17 Industrial Designs Act 2001. Under the Patents Act 1992, there is no specific provision dealing with this but there may be common law implied terms along these lines. In these types of cases, defences might be raised that the defendant was not an employee or was not acting in the course of employment when creating the artistic work, the design or the invention.
In Net Affinity v. Conaghan and Revemac Ltd. 2011 ELR 11 the defendants agreed to return any confidential information to the plaintiff but would not agree to the other undertakings such as not to work for the second defendant for a period of 12 months. On 17/2/11 the first defendant returned a box of material containing inter-alia a memory stick, which contained files which the court held amounted to intellectual property of the plaintiff if it did not amount to confidential information. The court made a further order prior to the interlocutory hearing for the first defendant to return a second memory stick, a laptop and an external hard drive.
The court adopted a very clear approach as to whether the material on the memory stick constituted intellectual property belonging to the plaintiff and stated:-
“[I]nsofar as [the first defendant] retains documentation which she prepared during the course of employment, even if that documentation of material was created in part by downloading and collating material from the internet, it seems to me that such documentation or material would be the intellectual property of [the plaintiff], her employer.”
In Nautech Services Limited v. CSS Limited  JRC 159 the court in Jersey found there was a breach of copyright. Two employees (the former employees) of the plaintiff company left and joined the defendant, which was in competition with the plaintiff. Both plaintiff and defendant were involved in the business of providing specialist personnel to the maritime industry. The former employees copied a list of such specialist personnel for use by the defendant and this was held to be a breach of copyright. The court stated that the use of linkedin contacts by the former employees after the employment ended, being contacts added while in the employment of the plaintiff, was not a breach of copyright, confidentiality or trade secrets.
Where there is a restrictive covenant in the contract of employment the employer must be sure that the provisions will be enforced by the court before it brings proceedings in the matter. Considerable care must be employed in drafting such covenants.
In order to establish that information constitutes a trade secret, the plaintiff will have to identify the information and satisfy the court that the information satisfies the tests for trade secrets.
The argument that the employee has breached copyright or a confidentiality clause may be successful where there is evidence that the defendant has copied information onto memory sticks or an external hard drive or where documents belonging to the employer had been emailed to the defendant’s email address. As seen in AIB v. Diamond, the plaintiff should be careful in drafting the undertakings it seeks from the defendant to ensure they are not too broad.
In many ways prevention is better than cure. Employers should consider using garden leave or making the vesting of shares conditional on compliance with a restrictive covenant. There may be an advantage in making the restrictive covenant a term of any severance agreement – it might be easier to show consideration in these circumstances.
The content of this article is intended to provide a general guide to the subject matter and is not intended to be a substitute for legal advice. Specialist advice should be sought about your specific circumstances.
Stephen O’Sullivan BL