HG Alert: Courts Protect Businesses After Employees Misuse Information - May 2009

In two recent decisions, Courts have protected the business interests of employers by awarding damages against former employees who misused confidential information and intellectual property during, or after the end of their employment. In one case, damages were awarded in the amount of $212,000.

Worsening economic conditions may see an increase in this type of action by employers seeking to protect their business from any threat. In order to succeed in many of these types of claims, employers must have appropriate and enforceable employment contracts in place to protect, for example, their confidential information and intellectual property. Depending on the nature of a business, a restraint of trade clause preventing employees from competing with their employer and soliciting their clients after the end of their employment, may also be appropriate.

Even with employment contracts in place the Courts will carefully consider what, if anything, an employee has done with their employer’s (or former employer’s) confidential information or intellectual property. If they have done nothing more than, say, email documents to themselves while still working for their employer, then they may be found not to have breached their employment contract. Ultimately the outcome in any matter will depend on all of the factual circumstances including, in many cases, the precise wording of the applicable employment contract.

Below are a few recent cases where this issue was examined.

Luxottica Retail Australia v Grant & Ors

In this case, Luxottica runs the OPSM optometry business. Between March 2005 and 2 September 2008, Mrs Janet Grant was employed by Luxottica as an optometrist. Mrs Grant’s husband was also employed by Luxottica until 29 April 2008 when he resigned to take up a position with Specsavers Pty Ltd (a competitor to OPSM).

In April 2008, Mrs Grant approached Specsavers to express interest in working for it. She was offered a position on 25 August 2008. While she accepted the offer the following day (26 August), she did not immediately resign from her employment with Luxottica.

On 27 August 2008, Mrs Grant forwarded 23 emails from her work computer to her home email address. Included in these emails were 4 emails and attachments over which Luxottica claimed copyright. Mrs Grant forwarded one of these 4 emails to her husband. Luxottica claimed that, in sending these emails to herself and her husband, Mrs Grant infringed Luxottica’s copyright and breached her contract of employment.

Mrs Grant said that she sent the documents to her home email address for her own personal use. She did not believe that they were documents that would benefit her in her new job with Specsavers. In forwarding one of the emails to her husband, Mrs Grant thought it would assist him to improve his ability to coach employees (the email attached a guide that related to coaching employees to convert sales).

On 1 September 2008 Mrs Grant gave notice to Luxottica that she was resigning from her employment. The following day, a Luxottica employee inspected Mrs Grant’s emails and saw the emails that Mrs Grant had sent from her work computer to her home email address. Luxottica terminated Mrs Grant’s employment and escorted her from its premises.

Action taken by Luxottica

Luxottica commenced proceedings against Mrs Grant on 4 September 2008. It obtained orders restraining Mrs Grant from altering, deleting or disposing of computer files containing or derived from non-public information about Luxottica’s affairs or business.

On the first day of trial, Mrs Grant offered to give all hard-copy documents to her solicitors and delete all electronic copies of the documents. Luxottica accepted that it suffered no loss arising from Mrs Grant’s actions, and that Mrs Grant, her husband and Specsavers received no profit. It says this was because it was able to “nip matters in the bud” by acting quickly to obtain an appropriate injunction to prevent use or destruction of the emails.

Given this, Luxottica did not seek to maintain any claim for damages, other than nominal damages. The only other issue was whether Luxottica was entitled to additional damages for infringement of copyright under the Copyright Act.

Decision of the Court

The Court found that by simply forwarding emails to her home computer at a time she was still employed by Luxottica, Mrs Grant did not use or disclose, or attempt to use or disclose, ‘confidential information’ as defined in her employment contract.

While she may have sent them with a view to their later use or disclosure, there was nothing in her simply forwarding these documents to her home email address that amounted to an attempt to use or disclose the documents. Also, her conduct did not breach any confidentiality in the information contained in the documents.

However, Mrs Grant’s forwarding of an email to her husband was either a disclosure of the document or an attempt to disclose the document to him. It contained confidential information and the Court found that she breached her employment contract. Accordingly, Luxottica was entitled to nominal damages of $10 against Mrs Grant for the breach of her contract.

The Court decided not to make an additional award of damages for the infringement of Luxottica’s copyright. The Court had regard to its finding that Mrs Grant was not conscious of any wrongdoing, she did not attempt to cover her tracks, and she did not derive any benefit from the infringement of Luxottica’s copyright. It did not consider that the interests of deterrence would warrant the award of additional damages. It noted that the commencement of proceedings against Mrs Grant would be likely to deter other employees from similar actions.

Dinte v Hales & Anor

In this case, Mr Dinte carried on a business called SkyComm, between May 1989 and September 2005. SkyComm sold radios, mobile telephones and other telecommunications and electronic equipment, together with related software. Motorola was a major supplier of product, for whom SkyComm acted as a “premium dealer” in South East Queensland. This dealership was an important part of the SkyComm business.

Mr Hales was the Service Manager for SkyComm between 7 September 1998 and 25 May 2005. Mr Campbell was an installer between April 2001 and July 2004, and then again from August 2004 to September 2004. In June 2004, while both working for SkyComm, Mr Hales and Mr Campbell formed a partnership and commenced a business trading under the name of “DapComm”. The partnership ceased on 31 March 2007.

Mr Dinte had identified Mr Hales as his “heir apparent”, giving him unrestricted access to information concerning the business from early 2004. Mr Hales had full access to SkyComm’s confidential internal files relating to its customer base, as well as access to special Motorola software necessary to sell Motorola products. The Motorola products could not be sold without this software.

In May 2005, Mr Dinte discovered that Mr Hales and Mr Campbell were running DapComm. The mobile phone that Mr Dinte had provided to Mr Hales for use in connection with SkyComm business was listed on the letterhead of DapComm stationery. The telephone account for the mobile phone indicated that it was being used extensively by Mr Hales to communicate with Mr Campbell, after Mr Campbell had stopped working with SkyComm.

Within days of Mr Dinte discovering the existence of DapComm, Mr Hales resigned from SkyComm. After he left, a number of customer files were found to be missing.

Mr Dinte sold the SkyComm business in September 2005 and claimed a loss of profits and damages in respect of the sale of his business.

The amount paid for the business was less than would have otherwise been the case because of a substantial drop in profits in the 2005 financial year, due in part to the activities of Mr Hales and Mr Campbell. The purchaser’s normal method of valuing a business was to average the earnings of the business over the previous 3 years. However, because of the actions of Mr Hales and Mr Campbell, the purchaser offered to buy the SkyComm business based only on the 2005 financial year earnings.

Court decision

The Court found that, while working for SkyComm:

  • Mr Hales and Mr Campbell acted secretly to set up a business in competition with it, in circumstances where Mr Hales dishonestly diverted custom to DapComm through opportunities made available to him because of his employment with Mr Dinte.
  • Mr Hales canvassed existing customers of SkyComm or businesses whose custom SkyComm would have expected to secure.
  • Mr Hales placed orders for the benefit of DapComm with Mr Dinte’s suppliers and for the purpose of competing with Mr Dinte, without Mr Dinte’s knowledge.
  • Mr Hale secured benefits for DapComm as a result of SkyComm’s status as a premium Motorola dealer.

The Court said that these actions breached the duty of good faith and fidelity owed to SkyComm. Mr Hales and Mr Campbell were not entitled to use knowledge of opportunities or other advantages arising out of their employment to make a gain without SkyComm’s consent. They could not act to SkyComm’s detriment, by diverting clients to DapComm.

Damages awarded

Ultimately, the Court calculated damages on the sale of business in the amount of $145,000. It applied the same formula to calculate these damages as had been used by the purchaser to determine the sale price of the business. Damages for loss of profit were awarded at $67,500. The total ordered to be paid was $212,000. Both Mr Hales and Mr Campbell were jointly liable for the damages.

For further information please contact HopgoodGanim’s Industrial and Employment team.