The High Court has considered, in the case of Customer Systems plc v Ranson and others, the circumstances in which employees owe fiduciary duties to their employers, and whether or not they are in breach of such fiduciary duties, and their duty of fidelity, when they leave to set up in competition.
Every contract of employment contains a duty of fidelity, owed by the employee to the employer, which incorporates a duty not to compete with the employer. Whilst this generally only lasts during employment, it can continue beyond the end of the relationship for directors, and employees of sufficient seniority. Fiduciary duties arise only in certain circumstances, which give rise to a relationship of trust and confidence. Directors owe fiduciary duties to their company. Senior employees may owe fiduciary duties if, for example, they have a discretion or power which will affect the employer’s interests and if the employer relies upon the senior employee for information or advice.
In this case, Ranson (R) was a senior employee of Customer Systems (CS) who set up his own company in competition. Before leaving CS, he approached customers of CS with a view to securing work from them, emailed contact numbers for clients and certain documents from CS’ IT system to himself, and had discussions with other employees of CS about them joining his new company. Certain customers and employees of CS did then leave in favour of R’s new company. Another employee, O, was aware that R was approaching customers of CS whilst they were both still employees, but failed to alert CS to this, and in respect of one customer, actively assisted R. He also had a restrictive covenant in his contract preventing him from carrying out work for customers of CS, after leaving CS. He subsequently left to join R in his new company, and carried out work for former CS customers. CS brought claims against R and O for breach of their fiduciary duties and their duty of fidelity, and in respect of O, breach of his restrictive covenant.
In respect of R, the High Court held that he was entitled to set up his own business and not inform CS of this, but was in breach of his fiduciary duties and duty of fidelity to CS in seeking work from customers of CS whilst still an employee, and in forwarding confidential information to himself. As R was a senior sales manager, he dealt directly with customers and CS had no way of controlling what he did with information he received. He was therefore in a fiduciary relationship, and was in breach of these duties by using the information for his own benefit.
The case against O raised the question of whether or not an employee who learns of confidential matters from a potential new employer is bound to pass this information onto his current employer. The Court confirmed that this would constitute breach of confidence to the new employer, and so the employee was under no duty to disclose such information to the current employer. However, it held that O was in breach of his fiduciary duties and his duty of fidelity to CS in assisting R seek business from customers of CS, whilst he was still an employee of CS. This was going beyond simply the receipt of information. The Court however found that the covenant restricting O from carrying out work for CS customers after termination of employment was too wide, and therefore unenforceable, and so O was not in breach in this respect.
Impact for employers
- This case is a useful reminder of the circumstances in which fiduciary duties arise in respect of employees other than Directors, and the action an employer can take to protect its business interests when employees leave to join a competitor;
- It is worth bearing in mind, however, that fiduciary duties are not automatically owed by all senior employees, and whether or not they arise depends on the circumstances in each case. In practice, in order to protect your interests against employees joining competitors as best you can, it is advisable to ensure you have effective restrictive covenants in your contracts;
- It is also a useful reminder of the principle that if an employee acquires information from a prospective new employer, they are not under a duty to pass that onto the current employer: the duty of fidelity to the current employer will not necessarily defeat the duty of confidence to the new employer.