Does a departing employee need to admit to plans to compete after their restrictive covenants have come to an end, when asked by their employer?
In a recent case, the High Court has concluded that an employee does not have to admit to planning to compete, and that an untruthful response did not breach the employee’s duty of good faith.
The Court’s decision affects the law on good faith insofar as it applies to employees that do not owe fiduciary duties to a company. It remains to be seen whether the judgment would apply to more senior employees or directors.
The facts
MPT, a mattress machinery producer, sought injunctions and so-called ‘springboard relief’, which aims to eliminate any wrongful advantage obtained, against two former, senior employees. The two employees both had restrictive covenants preventing them from soliciting or dealing with MPT’s customers for six months after their employment ended. Following the expiry of this six month term, they set up a new company, in direct competition with MPT.
MPT claimed that the defendants had breached their employment contract by:
- Wrongly downloading, misusing and divulging to third parties MPT’s confidential information;
- Soliciting each other from MPT for the purpose of their intended competing business; and
- Failing to answer questions truthfully as to their future intentions.
MPT claimed that the speed with which the new company had brought their new machines to market could only have been achieved by using MPT’s confidential information.
Future intentions
Before leaving, MPT had asked the employees what they intended to do once they had left its employment. One stated that he wished to work from home and spend more time with his child, whilst the other said that he had been offered a position doing panel wiring. Both denied any intention of going into partnership with each other.
MPT felt that this was breach of an employee’s duty of good faith to answer questions truthfully and also implied that they had used MPT’s confidential information to obtain a springboard advantage in the market.
The Court was reluctant to find that the defendants were required to disclose their future intentions to MPT when asked. The judge stated that the courts were there to protect confidential information and uphold enforceable restrictive covenants – but that otherwise, employees are “free to make their own way in the world”.
The judge disagreed with the assertions that a lack of candour would necessarily lead to an inference of copying and using MPT’s data, finding that all that implied was that the Court should “take a jaundiced view of the Defendants' current explanations”.
The implications
The effect of this judgment in respect of employees that do not owe a fiduciary duty to a company is clear. Provided that they abide by enforceable restrictive covenants and do not misuse confidential information, employees will be free to go about making plans without the expectation that such plans will need to be disclosed if they conflict with the interests of their employer. On the face of it, this seems a reasonable conclusion to reach, clearly limiting the extent to which an employer can intrude on an employee’s life.
A more interesting question relates to employees who owe fiduciary duties to a company. These employees have a duty to disclose conflicts of interests and to disclose knowledge that, if left undisclosed, could be detrimental to the company’s financial circumstances.
Given such obvious implications for the company, would a director or senior employee have to disclose, if asked, any and all plans they may have if it could negatively impact the company – even if the plans would not involve any breach of their contractual obligations? In many circumstances such disclosure would undermine the basis of these plans, not to mention undermining the director’s credibility at the company.
Whilst the employees in MPT v Peel and others were too junior for the Court to have to consider this question here, a test case may well follow. A particular consideration would be whether an element of reasonable foreseeability in relation to the damage a plan might cause needs to exist, in order to prevent total and unfettered disclosure. It therefore remains to be seen whether duties on fiduciaries will extend to mandatory disclosure of lawful corporate opportunities which are part of a director’s future plans.