A former employee has stolen my customers and is targeting my staff, what can I do about it?
23/07/2018 | Benjamin Rose
The relationship between employee and employer is one of most integral aspects of any business. As a result of its importance it is vital that both sides are alert to their duties during the course of the relationship but also those duties and rights which extend beyond the employment of the employee by the employer. One of the most important duties owed between them is that of mutual trust and confidence. This is a mutually owed duty for the employer to uphold but which also include the employee's obligations on their duty of confidentiality of the business' assets and the duty not to act in competition.
Where a former employee has stolen or attempted to poach customers of their former employer either for themselves or a new employer they may still owe a duty to the employer. This duty can be taken by the employer to prevent them from continuing to steal customers or poach members of staff as well as potentially providing the employer with damages for any loss suffered by them as a result of the former employee's actions.
Your employment contract is your best defence in protecting your business’ assets and would be the starting point for any court should the matter become contentious. Often, businesses will include restrictive covenants in their employment contracts to provide protections over their business contacts and to prevent unfair competition in the event that the employment relationship is ended. Having an express clause to prevent former employees acting in bad faith after they leave your employ is undoubtedly the optimum protection an employer can obtain. However, to be able to rely on them they must be for a reasonable period of time and only go as far as to protect your vital business interests.
There are four types of restraint of trade covenants which can be drafted into an employment contract. These are: non-competition, non-solicitation, non-dealing and non-poaching.
A non-competition clause typically restricts an employee from working for the employer’s competitor after they leave. The restriction is usually limited in time to between 3-24 months depending on the type and level of their job and often it is restricted to a certain geographical area, although this is not always the case for international or internet based organisations.
A non-solicitation clause restricts the employee from seeking business from a customer or client or potential customer or client with whom they have directly dealt with or had personal dealings during their former employment.
A non-poaching clause restricts the outgoing employee from attempting to persuade other employees of the former employer in joining them at their new venture. This is often referred to as a team-move.
A non-dealing clause, which is arguably the most expansive and far reaching clause going beyond that of a non-solicitation clause as it prevents the employee from having contact with any customer or client (or potential customer or client) of the former employer even if they do not approach the customer or client directly. In these circumstances if a customer or client approaches the employee first, this clause will prevent the employee from working with them. In some circumstances that can include clients with whom the employee has not worked or been involved with, if it was the company’s intention to protect those customers and clients at the time the restriction was agreed.
When drafting a restraint of trade clause it is imperative that the clause is not excessive or beyond the scope necessary to protect the employer’s legitimate business interests otherwise it may be void as a restraint of trade. Also, the business activity restricted should not exceed the activity with which the employer was involved: for example, it would not be possible for an accountant to restrict a former employee from joining a cabaret show, because it would not be in competition with the accountant’s business. In addition, restrictions cannot be unlimited in time and, again, must not be longer than is necessary to protect the employer’s business. Case law has demonstrated that a clause beyond a year will usually be too long but this will depend on the type of industry and how rapidly there is change within the industry. For example, the tech industry is fast changing and an extensively long clause would perhaps be considered too long. Lastly the geographic area should be reasonable in its coverage and this will depend upon the employer and the area in which they carry out their business. If a company operates internationally, and the employee is shown to have had dealings on an international level, it would be more reasonable to have an international coverage in the restrictive covenant. In one historic case involving semi-automatic firearms, the coverage which was granted and approved was worldwide in nature. A further component which went into this approval was due to the niche area of firearms at the time.
Where a valid restraint of trade clause is drafted into the employee’s contract it gives the employer a right to enforce that restrictive covenant against the employee should the employee leave and attempt to damage the business by stealing customers or clients or poaching staff. The clause gives the employer a contractual right to enforce the clause against the offending employee which may include obtaining an injunction which prevents the employee from breaking the terms of the restraint of trade such as stealing customers or poaching staff members. This is known as injunctive relief.
Injunctive relief, which is an order from the court, will prevent the employee from breaching the terms of the covenant and can include measures such as prohibiting former employees from working for a competitor, making any contact with customers of the employer or attempting to poach staff. Where a court order has been granted by the courts, enforcing a restrictive covenant against a former employee, it acts as a severe deterrent as breaching a court order is contempt of court and a criminal offence. In the most severe circumstances, sanctions may include imprisonment. As well as acting as an obvious deterrent in this way it can also, in certain cases, lead to an employer having a claim for damages for any loss suffered as a result of the employee breaching their covenant.
Having in place valid, enforceable restrictive covenants, such as the above restraint of trade clause, is the most pro-active step an employer can and should take to protect their business interests from the disparaging actions of outgoing employees. What happens, however, where there are no restrictive covenant clauses in place? Are there other actions which an employer can take against a former employee who is attempting to steal customers?
What if there are no contractual protections?
As discussed above, both employees and employers owe each other a number of duties which have been created through statute and common law and are derived from cases which have been heard before a judge. It is an implied duty of any employee that, during their employment and after their employment ends, they will owe a duty of confidentiality. This duty was established in the leading case of Faccenda Chicken v Fowler case. In this case an employee left Faccenda and set up a rival business. In the course of setting up this business the former employee had stolen the top secret chicken recipe of his former employer and had poached a number of staff members in the process.
In Faccenda Chicken v Fowler the court determined that an employee owed a duty of confidentiality to the employer for all information which constitutes a trade secret, other confidential information or information which has been impressed as confidential onto the employee by the employer whilst they remained employed. The case went further to establish to what extent the duty of confidence exists on an employee whose employment has ended. The Court of Appeal set out that an employee owes a duty of confidence to the employer after employment only to the extent of information which is considered a trade secret or is akin to a trade secret. A trade secret, as opposed to confidential information, is a document or fact which is of the highest level of secrecy and importance to the business; an example of a trade secret would be the recipe for Coca Cola or software which rests behind an operating system.
In another important case, Roger Bullivant v Ellis, where an employee had taken a database of over 300 of the former employer’s business contacts, the court considered, taking into account the Faccenda Chicken principles, whether a stolen database was protected. The court concluded that information such as a company database would not amount to information akin to a trade secret because it is information that the employee could “carry away in their own head in good faith”. However, in this case, due to the size and amount of information which was taken it would have been impossible for the employee to retain the information in their head. The court said it was a deliberate act by the employee to steal information which they would not have otherwise been able to retain without the aid of a written list. As such the court held that this is capable of protection. Therefore, a list or database of customers would be regarded as a trade secret and capable of protection after employment. In short, recalling some names of customers is not protected but a deliberate act of memorising those names is.
Therefore where you have an outgoing employee it will be possible to restrict them from targeting your customers where they deliberately memorise as well as copy the customer list and then attempt to steal those customers or clients. Express restrictive covenants in the contract are clearly easier to enforce as, otherwise, the protection is limited to where the employee acts in bad faith and is also limited to the highest level of confidential information such as trade secrets. However where you have a situation in which a former employee is targeting your customers, and you are able to show reasonable evidence that they have stolen a customer list, there is a common law protection available which can be exerted to protect your business.
Where the contract of employment between the employee and employer does not include any restricting provisions preventing the employee damaging your business after employment then it may be possible to present the employee with a settlement agreement. A settlement agreement is a contract, usually between an employee and employer, which sets out the agreement between the two parties after termination of the employment.
A settlement agreement, formerly known as a compromise agreement, is where an employee will agree to give up any potential claims which they may have against an employer in return for a settlement sum. However, as well as extinguishing potential claims which an employee may have against an employer, it can also be a useful instrument for an employer to put into place protections, such as restrictive covenants, which protect their vital interests. Although the employee does not have to agree to new restrictions presented at the end of employment, particularly if they seek to prevent them working in their chosen field. In the ideal situation employers will have restrictive covenants in place at the outset of a contract of employment which protect their vital interests. Due to the potential damage that can be caused by an outgoing employee who is not subject to restrictive covenants, it is advisable to present a settlement agreement at the end of the employment to incorporate some protections. This may, typically, involve a fee being paid to the employee in return for their agreement to the terms. When compared to the damage that an outgoing employee could cause this may be the best course of action to protect the business.
The important points to take away are that being proactive and forward thinking as an employer cannot be understated. Having restrictive covenants incorporated from the outset makes all future actions easier, more time effective and cheaper in the long run. The employer will always have a greater bargaining power with an employee at the start of employment which is more effective than trying got negotiate with an exiting employee.
However, where this is not the case there is still the option to attempt to negotiate these restrictions with the employee at the end of employment by way of a settlement agreement. This has the attractive benefits of express restrictive covenants due to the definitive nature of the agreement. Unfortunately it will be more costly as it requires the agreement of the outgoing employee which will undoubtedly come at a price. The outgoing employee is not obliged to agree to the restrictive covenants and therefore will have to be financially persuaded by the employer to accept the terms.
A final resort available to an employer to protect their interests involves relying upon the common law duties of mutual trust and confidence owed by the employee. As stated above, the duty of confidentially owed by the employee is limited to the highest grade of confidential information such as trade secrets. It follows therefore that any action taken by an employer to stop the employee from stealing customers will be limited in nature. As well as the limitations of the common law duty it will involve legal proceedings which require time and cost, particularly if seeking injunctive relief.
As with all areas of law, being pre-emptive is the most advisable path to take. It provides a more certain protection to an employer, is far less time consuming and, as a result, has far fewer costs associated with it. Where this is not the case there are still actions open to a business which can be taken by the employer to protect from damage caused by an outgoing employee but these ultimately involve more time and cost to ensure the protection of the business.