Key Concepts in Team Move Cases

By Thomas Linden QC and Thomas Kibling, Matrix Chambers

Introduction

These notes look, in bullet point form, at some of the key legal issues where a team move is proposed or takes place. The focus will be on the main points which emerge from the recent case law and it will be seen that the law has come a long way since Cumming-Bruce LJ said in Searle v Celltech [1982] FSR 92

"in the absence of restrictive covenants, there is nothing in the general law to prevent a number of employees in concert deciding to leave their employers and set themselves up in competition with him"

The Main Constraints on Employees

The Duty of Fidelity

This is implicit in all contracts of employment. Although the contract of employment is not a contract uberrimae fidei, there is a duty to be honest.

Key aspects of the duty of fidelity in this context are as follows, though the drawing of a line between permissible and impermissable conduct is fact sensitive. The implied duty restrains:

• Use, disclosure, copying, downloading, memorising etc, of intellectual property, trade secrets and category 2 confidential information i.e. information short of trade secrets (see, generally, Faccenda Chicken Ltd v Fowler [1986] ICR 297; Robb v Green [1895 2 QB 315 and Universal Thermosensors Ltd v Hibben [1992] 1 WLR 840@850). Per Jack J in Tullett Prebon v BGC Brokers LP & Others [2010 EWHC 484 (QB): whether or not information is classified as confidential, the provision of such information by a desk head where he knows that it will be used for the purposes of recruitment is a breach of the implied duty of fidelity.

• The employee from setting up in competition with his employer, e.g. Thomas Marshall (Exports) Ltd v Guinle [1978] ICR 905. However, there is nothing to prevent the employee from seeking employment elsewhere Laughton and Hawley v Bapp Industrial Supplies Ltd [1986] ICR 634 and preparation by an employee to leave his employer to join a competitor may not of itself necessarily constitute a breach (see the discussion in Lancashire Fires Ltd v SA Lyons & Co Ltd & Others [1997] IRLR 113.

• Recruitment of colleagues and incitement to leave Marshall v Industrial Systems & Control Ltd [1992] IRLR 294.

• Solicitation of the employer's clients (Wessex Dairies v Smith [1935] 2 KB 80) and entertaining offers from them (Sanders v Parry [1967] 1WLR 753).

• Making secret profits (Boston Deep Sea Fishing and Ice Co v Ansell (1889) 39 Ch D 339).

The implied duty of fidelity does not place on the ordinary employee an obligation to volunteer information about his own misdeeds (Bell v Lever Bros Ltd [1932] AC 161 (though see doubts about this expressed by Arden LJ in Item Software (UK) Ltd v FassihiI [2004] IRLR 928)) but it may require disclosure of the misdeeds of others (Sybron Corporation v Rochem Ltd [1983] ICR 801; RBG Resources plc v Rastogi [2002] EWHC 2782 and Pennwell Publishing v Ornstein [2007] IRLR 700) and it may require an employee to give an honest answer to a direct question (Fulham FC v Tigana [2004] EWHC 2585. Moreover, where the contract expressly obliges an employee to report approaches to recruit him, this is not in restraint of trade and will be upheld. The implied duty may also require a desk head to act in the interests of his employer and report attempts by a competitor to recruit members of the desk: per Jack J in Tullett Prebon paras 67+68.

Fiduciary Duties

Are they owed by the employee?

• Yes if s/he is a director (note the codification at ss175-177 Companies Act 2006).

• Yes where:

• The employee agrees to specific obligations which are fiduciary in nature e.g. to act solely in his employer's interests in negotiating on behalf of his employer: Nottingham University Fishel [2000] ICR 1462; see also Helmet Integrated Systems Ltd v Tunnary [2007] IRLR 126.

• The employee, whilst not formally a Companies Act director, has equivalent powers and functions e.g. the sales director in Shepherds Investments v Walters [2007] IRLR 110; see also Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638.

• (possibly) where the role is senior and the individual is entrusted with senior and sensitive tasks Crowson Fabrics v Rider [2008] IRLR 288.

What if the employee owes fiduciary duties?

• Duty to act bona fide in the best interests of the company i.e.

• No profit from their position without disclosure to, and consent of, the company;

• No conflict between the interests of the company/duties owed to it and the interests of the fiduciary.

• The remedy of account of profits is more readily available.

As regards the no conflict rule, anything which breaches the implied contractual duty of fidelity is likely to be a breach of the no conflict rule as well. However, in many cases, the fiduciary duties will be more exacting for the employee:

• Per Hart J in British Midland Tool v Midland International Tooling [2003] 2 BCLC 523: where there is a settled intention to compete the obligation on the fiduciary is to declare this or resign; per Etherton J in Shepherds Investments v Walters [2007] IRLR 110; Balston Ltd v Headline Filters [1990] FSR 385 and Helmet Integrated Systems Ltd v Tunnard [2007] IRLR 126 there is no rule - the issue is fact sensitive. For high water mark case, see Kynixa Ltd v Hynes [2008] EWHC 1495. Whatever the precise boundaries, however, the duties on fiduciaries not to permit a conflict of interest to arise is potentially more exacting that the duty of fidelity.

• Per Etherton J in Shepherds Investments v Walters [2007] IRLR 110 there is no separate duty of disclosure of wrongdoing/intention and/or preparation to compete; the duty arises where the fiduciary would otherwise be in breach of duty without making disclosure e.g. because he is in a conflict of interest situation. Per Arden LJ in Item Software v Fassihi [2005] ICR 540 the duty arises as an incidient of the duty of good faith. However, whatever the basis, the duty of disclosure of any facts which give rise to a conflict necessarily means that the duty is more onerous.

• Encouraging others to leave as part of a team move will be a clear breach: UBS Wealth Management (UK) Ltd v Vestra Wealth LLP [2008] IRLR 965; British Midland Tool v Midland International Tooling[2003] 2 BCLC 523.

The duty not to induce breaches of contract by colleagues

OBG Ltd v Allan [2008] 1 AC 1

• an intention to cause a breach of contract is a necessary and sufficient requirement for liability.

• in order to be liable a person has to know that he is inducing a brech of contract and to intend to do so with knowledge of the consequences;

• a concious decision not to inquire into the existence of a fact could be treated as knowledge for the purposes of the tort;

• a person who knowingly induces a breach of contract as a means to an end has the necessary intent even if s/he was not motivated by malice but has acted with the motive of securing an economic advantage;

• however, a breach of contract which was neither an end in itself nor a means to an end but was merely a foreseeable consequence of a person's acts does not give rise to liability; and

• a person cannot be liable for inducing a breach of contract unless there has in fact been a breach by the contracting party.

Conspiracy

There are two types of conspiracy:

• Conspiracy to injure i.e. where there is a dominant intention or purpose to injure and the laefulness or otherwise of the means is therefore irrelevant; or

• Unlawful means conspiracy. Per Nourse LJ in Kuwait Oil Tanker Co v Al Bader and Others [2000] 2 All ER (Comm) 271 at 312. "A conspiracy to injure by unlawful means is actionable where the Claimant proves that he has suffered loss or damage as the result of unlawful action taken pursuant to a combination or agreement between the Defendant and another person or persons to injure him by unlawful means, whether or not it is the predominant purpose of the Defendant to do so". As to intention, it is sufficient if the injury to the claimant's business is a consequence of the agreement to use unlawful means even though it is not an end in itself: per Jack J in Tullett Prebon (para 144) and see OBG Ltd v Allan, above.

This tort may not add a great deal to the torts of inducing breach of contract but it was included in Tullett Prebon on the basis that is assisted in supporting continuing relief by injunction (para 138).

Garden leave

This is a more flexible area than post termination restrictive covenants because, although restraint of trade principles apply, the question is addressed as at the time of enforcement and the court has a discretion as to the scope and duration of the relief which it decides to grant.

Per Jack J in Tullett Prebon:

• "Where the court considers that the period for which the employer is entitled to protection ends during the time for which the employee may be on garden leave, it will enforce the garden leave provision for that period, and will decline to enforce any enforceable post termination restriction. It will decline the latter because the employer will have already got all the protection he is entitled to, and the court has a discretion not to enforce an enforceable post termination restriction or covenant where the circumstances are such that it should not. (para 124)

• The court may consider that the period for which the employer is entitled to protection extends beyond the period which is available for garden leave and into the period covered by an enforceable post termination restriction or covenant. The court will then exercise its discretion as to the enforcement of the restriction and will enforce the restriction for the whole or such part of the period provided by the terms of the restriction as is appropriate...." (para 125)

Note, also, the recent cases on the right to work where there is no garden leave clause:

• SG&R Valuation Service Co v Boudrais [2008] IRLR 770: the right to work is subject to the qualification that the employee only has the right to be provided with work if he has not, by his conduct, rendered it impossible or reasonably impracticable for the employer to do so. (Here by theft of confidential information and preparation for a team move).

• Standard Life Health Care Ltd v Gorman [2010] IRLR 233: CA approves Boudrais - the employer's obligation to provide work is interdependent with the employee's duty to act loyally and/or to be ready and willing to work.

Post Termination Restrictive Covenants

The torts of inducing breach of contract and other duties, conspiracy and breach of confidence etc. (see below).

Note the following from Tullett Prebon:

• It is not necessary that the recruiting employer positively intends that there will be a breach of contract by the employee - indifference to whether there will be a breach i.e. the absence of an honest belief that there will not be a breach is enough (para 179).

• Forward contracts are permissable (para 142(a)).

• As is the use of sign on payment (para 142(b)).

• As is the use of indemnities to protect the employees from the consequences of breach, although the fact that there is an indemnity increases the risk that the employee will be cavalier about his duties to his current employer. Attempts by the prospective employer, as part of the term, to control the actions of the employee will also increase the risk of findings against the poacher (para 142(c)).

• Provisions for repayment of signing on or retention payments were enforceable:

• They were not in the restraint of trade (para 267);

• The law relating to penalties was inapplicable as the provision for repayment was not related to compensation for breach (para 269).

The Main Constraints on the Gamekeeper

Constructive dismissal:

• An employee can rely on the employer's breach even if he did not leave in response to it: per Jack J in Tullett Prebon para 78.

• The fact that the employee has acted in breach may disentitle him from relying on breach of mutual trust and confidence, albeit on the basis that the employee's conduct may have so damaged the relationship of mutual trust and confidence that the employer's conduct is of little effect (Tullett Prebon paragraph 84).

Lack of evidence.

The Main Remedies for the Gamekeeper

Springboard Relief

Key development: this type of relief is not limited to cases of breach of confidence during employment and to restraining the use of stolen information; it may be triggered by any breach of duty which leads to the employee securing an unfair advantage: see Midas IT Services v Opus Portfolio Limited Unreported, 21 December 1999. Per Openshaw J in UBS Wealth Management (UK) Ltd v Vestra Wealth LLP [2008] IRLR 965:

"It is available to prevent any future or further serious economic loss to a previous employer caused by former staff members taking an unfair advantage, or "unfair start", of any serious breaches of their contracts of employment (or if they are acting in concert with others, of any breach by any of those others)..."

Aim: to cancel out an advantage which must be in existence at the time when the injunction is sought and to prevent further losses, but not to punish past breaches of contract.

In this context note that the relief in Tullett Prebon Plc v BGC Brokers LP [2009] EWHC 819 included an interim injunction to prevent poaching or attempted poaching of brokers by BGC, whether lawfully or otherwise. Jack J took the view that this was appropriate to prevent BGC from taking further advantage of the situation which it had created through its cynical disregard of the employees' and its own obligations. The basis was that BGC was carrying on an unlawful course of conduct which the Court was entitled to stop and that injunction would not be limited to unlawful recruitment because of the likelihood that there would be further illegality and the difficulty of policing such an order.

Main limitations:

• There must be a disadvantage at the time of the application: see Sun Valley Foods Limited v Vincent [2000] FSR 825.

• The Court will only cancel out the disadvantage and will not do more: see Sun Valley Foods Limited v Vincent [2000] FSR 825.

• The Court will grant order which interfere with contracts which have been formed as a result of the unlawful conduct but will not do so lightly: see PSM International Limited v Whitehouse [1992] IRLR 279.

• Claimants should be careful in terms of the period for which they contend. As the decision in Universal Thermosensors Limited v Hibben [1992] 1 WLR 840 demonstrates, if the Court orders relief which, at trial, turns out to be too extensive the Defendants may, despite their wrongdoing, be entitled to recover on the cross-undertaking for damages.

• There is an issue as to whether springboard relief may be granted on a final, as opposed to interim, basis Vestergaard Frandsen v Bestnet Europe [2009] EWHC 2662.

Garden leave injunctions

See above. Note the importance of keeping the contract "alive" by not accepting short notice or any other repudiatory conduct by the employee.

Enforcement of Post Termination Restrictive Covenants

See above.

Injunction vs the poacher to restrain inducement to breach of contract

See above.

Disclosure Orders

Note that in Tullett Prebon Jack J made orders that BGC and 3 of the key players in the recruitment exercise swear affidavits identifying the Tullett employees who had been approached through the key recruiter, Mr Hall. Mr Hall was also ordered to swear an affidavit which explained how his BlackBerry had been "lost" shortly after receipt of the application for it to be delivered up.

In Aon Ltd v JLT Reinsurance Brokers Ltd [2010] IRLR 600 however, pre action disclosure orders were discharged in the context of a team move case on the grounds that:

• The claimant could plead its case without this relief. There was no reason to subvert the normal accusatorial basis of litigation into an inquistorial one, where it was assumed that guilt had been proved and the defendants were obliged to disclose wrong-doing.

• The order sought was very wide and the very antithesis of the focused and proportionate approach that might have made such an application more palatable.

• It would not have the effect of saving costs. In fact, additional costs would probably flow from the order: requests for yet further disclosure from the claimant; allegations that the disclosure was manifestly incomplete; and attempts by the defendants to compel the claimant to plead its case.

• Damages would be an adequate remedy in the circumstances. To say that damages might be difficult to prove was not the same thing as to say that damages were an inadequate remedy.

• The claimant could take pragmatic steps to protect the business from future and further loss without the order. There were things that an employer could do to discourage his employees from leaving: one of them was to talk to the employees concerned. As for clients, it was a compact market, and the defections would be widely known about. There were steps of a commercial nature which the claimant could take to bind its clients to it.

• Nor was the disclosure necessary to police the other uncontentious relief that had already been granted. That relief was powerful, specific and would be widely known about by the relevant staff.

The question is whether the circumstances were such that it was appropriate to make what is on any view an exceptional order, which should not be made as a matter of course where prohibitory injunctions have also been made.