Covid-19 has triggered a rise in redundancies, restructures and senior exits; whilst many departing employees move on without issue, it only takes one ex-employee who has been privy to confidential information and key contacts to cause a former employer a massive headache and, potentially, large commercial, reputational and financial loss.
The key principles of business protection have been highlighted in a High Court decision in the case of CT Dent Ltd v Atias.
Mr Atias was the former CEO (and statutory director) of a profitable dental scanning company, C. T. Dent Ltd (the employer). The employer’s commercial success was, in part, as a result of a bespoke software package (and associated database) incorporating significant customer data which was accessible both internally and externally via a dedicated web portal.
Mr Atias relocated to Israel in 2019, and tension developed regarding the company’s management, direction and finances. In August 2020, a new CEO was appointed and Mr Atias, threatening to take valuable staff with him, set up in competition.
The new CEO quickly realised that access to the employer’s internet host had been transferred away from the employer at Mr Atias’ request. The employer wrote to Mr Atias on several occasions requesting that he disclose the required log in details but he didn’t comply.
The employer faced further significant difficulties as a result of Mr Atias’ actions, including allegations by Mr Atias that the employer did not own the rights to the licences of software which the employer had developed and problems regarding the employer’s marketing materials, which were held by a third party graphic designer.
Soon after resigning, Mr Atias incorporated Dental Scan Limited in direct competition with the employer which, in view of the employer’s name, the judge considered “rather speaks for itself…”
The employer issued pre-action correspondence and requested that Mr Atias sign undertakings, which he declined to do. Accordingly, they applied to the court for injunctive relief on 23 September and, a week later, issued proceedings against Mr Atias for, amongst other things:
- breach of fiduciary duty
- wrongful interference with company property
- infringement of copyright.
The High Court considered the employer’s application for injunctive relief on 2 October (employers reading this will note how swift this process is, and needs to be) in which the employer sought:
- an Access Order, to access various electronic databases/systems which Mr Atias had refused to provide
- a Delivery-Up Order, requesting that Mr Atias ‘deliver up’ or return to the employer various company property and documents he had wrongfully retained
- an Interim Restraint Order, to prevent access to, or the use of, the employer’s confidential information and property and for non-solicitation of its customers
- an Imaging Order, to gain access to devices and online services previously used by Mr Atias.
The court held that, on the facts, without the Access Order and Delivery-Up Order, the employer faced a “virtual certainty of….irreparable damage”.
In relation to the remainder of the application, whilst emphasising the value of proportionate pre-action correspondence, the judge held that Mr Atias’ “…almost total lack of proper co-operation with the claimant’s reasonable requests, his evasive and misleading responses and his grievances with the remaining directors, which manifest themselves in his stated aim of destroying [the employer] lead to the conclusion, in my view, that [the employer] needs the fullest degree of protection”.
Costs were awarded in favour of the employer, in view of its success with its application and the conduct of Mr Atias.
Tips for employers
This judgment highlights the significance of proportionate pre-action correspondence from employers and acts as a reminder that successfully obtaining orders is dependent on the quality of the evidence relied on by the employer. The orders sought by the employer were some of the most extensive the court will grant, and they were only given because the employer was able to present such strong supporting evidence.
Employers must act swiftly in moving to protect their business when it becomes apparent (or suspected) that an employee is looking to unfairly compete with their employer, and/or wrongfully exploit their employer’s confidential information, rights and contacts. Proper preparation at the start of the employment, and on any promotion, can also lay the groundwork in case enforcement is needed at exit.
Practical steps include:
- reviewing employment contracts, service agreements and social media and IT/computer policies to ensure that business protection is suitably covered. (Take legal advice to ensure that restrictive covenants are prudently drafted to increase enforceability prospects.)
- considering whether an individual should be a statutory director of the company. A statutory directorship brings with it powerful legal obligations to act in the best interests of the company and these can be a helpful addition to contractual obligations. The desire to be removed from the board swiftly can also be a useful early warning sign of potential problems
- implementing robust internal procedures for control of instructions to third parties and holding passwords for social media and online customer accounts. A dual sign off can prevent a single departing employee from taking control of systems or accounts
- before the employee/director leaves, writing to them with a clear reminder of their ongoing contractual obligations (confidentiality, post-termination restrictive covenants, intellectual property rights etc) enclosing the relevant contract(s)
- monitoring email and computer use for unusual activity, screenshotting any evidential or incriminating conduct
- reviewing the employee’s phone records and LinkedIn activity, screenshotting or audio recording and transcribing any evidential action
- where a current or former employee has breached their obligations, seeking urgent legal advice, in order that pre-action correspondence can be sent to the employee (and their new employer, if relevant), including suitably drafted undertakings
- for high value/sensitive matters, urgent forensic investigation into device usage may be required
- avoid allowing employees/directors to use their own personal devices for business purposes.
For employers particularly wishing to improve their business protection, our webinar on this topic, full of practical guidance, can be found here.