Friday 6 April 2012

team poaching

"Team Poaching" and Springboard Relief

The law relating to “team poaching” has come up for consideration in the past few years before the Courts. Typically, in such cases (where employees move en masse to a competitor) Courts are concerned with balancing the freedom of employees to leave employment and set up new ventures with the duty of fidelity owed to employers. Typically, the more senior the employer, the more onerous the duties he owes to his employer. If the employee concerned is also a director, questions of fiduciary duties, the no conflict/no profit rules etc. may also arise. Particularly in cases of team moves, Courts are also concerned to ensure that employees leaving en masse in a planned manner does not result in the new venture getting an unfair competitive lead over the employer. These issues were elaborately discussed at first instance recently in QBE Management v. Dymoke, [2012] EWHC 80 (QB). Justice Haddon-Cave summarized the law in this relation as follows (see para 169 onwards):

“(1) It is indisputable that an employee owes his employer a contractual duty of ‘fidelity’, but how far it extends will depend on the facts of each case (per Lord Green MR in Hivac v Park Royal [1946] Ch 169 at 174).
(2) The more senior the staff the greater the degree of loyalty, fidelity and diligence required (per Openshaw J. in UBS Wealth Management (UK) Ltd v Vestra Wealth LLP [2008] IRLR 965 at paragraph [10]).
(3) The first task of the court is to identify the nature of the employee’s obligations of fidelity and then to decide whether the employee’s activities are in breach (per Moses L.J. in Helmet Integrated Systems v Tunnard [2007] IRLR 126 at paragraph [32]).
(4) The mere fact that activities are described by an employee as ‘preparatory’ to competition does not mean that they are legitimate (per Moses L.J. I Helmet Integrated Systems v. Tunnard [2007] IRLR 126 at paragraph [28]).
(5) It is a breach of the duty of fidelity for an employee to recruit or solicit another employee to act in competition (see British Midland Tool v Midland International Tooling Ltd [2003] 2 BCLC 523).
(6) Attempts by senior employees to solicit more junior staff constitutes particularly serious misconduct (Sybron Corp v. Rochem Ltd [1984] Ch 112).
(7) It is a breach of the duty of fidelity for an employee to misuse confidential information belonging to his employer (see Faccenda Chicken Ltd v Fowler[1987] Ch 117).
(8) The court should ask whether the activities in which the employee is engaged affect his ability to serve his employer faithfully and honestly and to the best of his abilities (see Shepherds Investments Ltd v. Walters [2007] IRLR 110 at paragraph [131]).”

This general discussion of the duty of employees was supplemented by the following propositions, particular to “team moves” or “team poaching” (see para 170 onwards):

“In the context of 'team moves' or 'team poaching', four recent cases provide useful guidance and illustrations of what may constitute illegitimate conduct… In Shepherd Investments Ltd and Anr v Walters & another [2006] EWHC 836 (Ch), Etherton J. held that when former directors and employees set up a competing business, diverting business opportunities and misusing confidential information, they had acted in breach, not only of their fiduciary obligations, but also their implied obligation of fidelity, from the moment that they procured the services of attorneys in the Cayman Islands to set up the rival business. On the facts of that case, Etherton J, held that a former employee was also in breach of obligations as a fiduciary, whether or not he was to be regarded as a director, and that he was in breach of his duty of fidelity… In UBS Wealth Management v. Vestra Wealth LLP (supra) Openshaw J. said at paragraph 24: "I cannot accept that employees, in particular senior managers, can keep silent when they know of planned poaching raids upon the company's existing staff or client base and when these are encouraged and facilitated from within the company itself, the more so when they are themselves party to these plots and plans. It seems to me that that would be an obvious breach of their duties of loyalty and fidelity to [their employer]". In Kynixia v. Hynes [2008] EWHC 1495 Wyn Williams J. said at paragraph 283: "I simply do not see how one can be acting as a loyal employee when one knows that three senior employees (including oneself) may transfer their allegiance to a group of companies which includes a competitor and yet not only fail to divulge that knowledge but also say things which would have the effect of positively misleading the employer about that possibility." In Tullett Prebon plc v. BCG Brokers LP [2010] IRLR 648 Jack J. said at paragraphs 68-69: "[A] desk head must not do anything to assist the recruitment of his desk... Where a desk head decides that he is in favour of the recruitment of his desk and thereafter assists the recruitment in such small or large ways as may arise, he is in plain breach of his duty: he has crossed the line between observing his duty to his employer and acting in the interest of his employer's rival." The position as regards mutual soliciting by employees is usefully summarised as follows in Goulding on Employee Competition (2nd Edition) at paragraphs [2.164] to [2.166]: "Discussions between employees as to proposed concerted competitive activity will rarely if ever be acceptable, given the near-inevitable damage to the employer as a result of such concerted activity. It remains possible that a discussion between close friends at a similar level within the business as to the potential of working together in the future would give rise to no breach. In such circumstances, neither employee would be soliciting the other and neither would be encouraging the other to terminate their employment with the employer. However, as set out in the British Midland Tool case, once an irrevocable intention to compete is formed, resignation and disclosure of the intention is probably the only certain means of avoiding a breach.”…

What is also particularly interesting about this decision is that the Court found that the non-compete covenants in the employment contracts were not enforceable (see para 237): however, the Court in any case granted injunctive “springboard” relief to prevent the employees from gaining an unfair competitive advantage. This is an interesting point, and I am unaware of an Indian Court refusing to enforce contractual restrictive covenants (say, because of s. 27 of the Contract Act; but then substantially giving the same relief on other grounds). Another interesting point which comes up is this: to what extent is the duty of “fidelity” similar to a fiduciary duty? Justice Haddon-Cave approvingly refers to the following passage from Nottingham University v Fishel[2000] ICR 1461:

“... in determining whether a fiduciary relationship arises in the context of an employment relationship, it is necessary to identify with care the particular duties undertaken by the employee, and to ask whether in all the circumstances he has placed himself in a position where he must act solely in the interests of his employer.
source:law and legal development blog
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