“All’s fair in love and war, but not in business.” (Modern twist on the old proverb)
Your business is flying after years of hard work and personal sacrifice. Suddenly, your most trusted employees resign and set up in direct opposition to you. The speed with which they do so makes you realise there’s something fishy going on.
Sure enough, they are brazenly using your confidential knowledge, resources and client relationships against you.
A recent High Court decision provides a perfect illustration of how our law can and will protect you from that sort of unfair competition.
A new business and software in 11 days? Something’s fishy
This unhappy saga starts with a company in the niche business of measuring and analysing diesel engine emissions. Monitoring these emissions is important in several industries, most notably the underground mining industry. It’s the first and only such business in South Africa thanks largely to two factors: firstly, its exclusive Africa-wide distribution agreement with a German supplier of specialised equipment, and secondly, its founder’s development of custom software.
All went well until two of the company’s senior managers resigned from their positions. Just 11 days later they had set up their own business in direct opposition to their erstwhile employer. One can only imagine his distress and anger when he realised that they were using the fruits of his technical expertise and hard work to try to poach his clients from him.
He lost no time in taking legal steps, and when the managers refused point blank to stop trading, he asked the High Court for an order forcing them to do so.
What is springboarding?
“Springboarding”, as the Court put it, “entails not starting at the beginning at developing a technique, process, piece of equipment or product, but using as a starting point the fruits of someone else’s labour.”
Competition and entrepreneurship are of course healthy and to be encouraged, but only if they are lawful. Springboarding grounded in unlawful conduct is prohibited.
From springboarder to belly flopper
The evidence of unlawful conduct in this case was overwhelming. For example, one of the managers had months previously been suspended under suspicion of planning a competing business after a budget for a new venture, including a provision to buy the specialised German equipment, was found on his laptop. In due course their new company duly bought the equipment, despite them having full knowledge of the distribution agreement in favour of their employer (they couldn’t deny knowledge, having actually signed the agreement on behalf of the employer).
The Court was also sceptical of the new company’s claim to have developed its own independent software in a matter of weeks, especially in light of evidence that, shortly before resigning, one of the managers had emailed his employer’s software to himself.
The final nail in the managers’ coffin was that their marketing presentations to two of the employer’s clients were sufficiently similar to the employer’s presentations for the Court to conclude that they were using its business model, methodology, equipment and software against it.
As regards their terms of employment, only one of the employees had signed a contract (it included a confidentiality clause). But what mattered was not their contracts, but that as employees they had a general fiduciary duty to act in good faith and in their employer’s best interests.
Referring to the abundant evidence of their misuse of confidential information gained during their employment, the Court slammed the managers and their new company with a series of orders that will presumably cripple their new venture, at least for now.
They and their new company are prohibited from unlawfully competing with the original business for eighteen months, they must return all confidential information and documentation (deleting electronic copies), and cannot disclose the information to anyone else. What’s more, the Court ordered them to pay costs on the punitive attorney and client cost scale.
A checklist to protect your business from springboarding
The employer is victorious, but it’s taken him almost a year to get here, and inevitably his business (and he personally) will have suffered.
With prevention always being a great deal better than cure, you can protect your business from going through all the delay, cost, trauma and business risk of a court fight with this checklist:
- Watertight contracts. Your employment contracts, particularly those relating to senior staff with access to vital confidential information, should contain strong confidentiality, non-disclosure, good faith, conflict of interest and restraint of trade clauses. This employer was able to rely on a breach of his employees’ general fiduciary duties, but his position would have been that much stronger had both senior managers been bound contractually as well.
- Widen the net. Looking beyond employees, consider also other business partners like suppliers and contractors who might gain access to confidential information, and structure your agreements with them accordingly.
- Quantify your worth. Identify and list all your confidential information: intellectual property, technical know-how, client and other business relationships, pricing strategies, business strategies, trade secrets and any other sensitive information.
- Be prepared. Check that everything is held securely, that access is limited on a need-to-know basis to trusted personnel, and that access is recorded. This way, if you are stabbed in the back by an employee, you’ll be able to prove misconduct and breach of fiduciary duty.
- No stone unturned. When staff leave, remind them (in writing) of their duties in regard to confidential information, and recover all company documentation, laptops etc before they leave.
- Be vigilant. Monitor for “information leaks” and for any other possible misuse of confidential information. Increase your monitoring when staff resign. Keep an eye on your competition for any signs of them using information leaked from within your ranks.
Perhaps most importantly, act decisively at the first hint of a springboarding attempt. A robust lawyer’s letter will often be enough to nip the problem in the bud.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.
© LawDotNews
