The extent to which employees can prepare to compete against their employer is determined by the duty of fidelity, which is implicit in all employment agreements.
A recent United Kingdom appellate decision, Ranson v Customer Systems1, signals a more nuanced approach to this duty than has been taken here to date – one that could see the New Zealand courts condoning preparatory behaviour that would, until now, have been considered illegitimate.
This Brief Counsel compares Ranson with the current New Zealand approach to preparatory competitive conduct, and suggests how to draft employment agreements to prevent your employees from engaging in conduct adverse to your business interests.
Mr Ranson was employed as a software developer in 2001 by Customer Systems, an IT consultancy firm. He moved up the ranks and was ultimately appointed divisional manager - a sales/managerial role. His original employment agreement was not amended to reflect this promotion. Neither did it contain any material restrictions on what Ranson could do after he ceased working at Customer Systems. In 2009, Ranson resigned.
Before and during his notice period, Ranson met with two clients of Customer Systems with an eye to securing contracts for his planned software company - which would be in direct competition with Customer Systems.
At issue was whether these meetings breached Ranson’s duties to Customer Systems.
By defining Ranson’s duty of fidelity with reference to his employment agreement, the Court found that there was no breach because:
one client fell outside the limited “patch” of client organisations for which Ranson had responsibility, and that client had initiated the meeting, and
Ranson’s dealings with the other client did not affect a business opportunity being pursued with that client by Customer Systems.
The New Zealand context
Schilling v Kidd Garrett Ltd2
The facts were similar to Ranson but the Court of Appeal found the employee in breach of his duty of fidelity. Schilling negotiated an exclusive sales agreement between Kidd Garrett and Husqvarna (a chainsaw manufacturer) then, while still employed by Kidd Garrett, formed a competing company and, during his notice period with Kidd Garrett, persuaded Husqvarna to transfer the sales agreement to his company.
Morris v Interchem Agencies3
The Court of Appeal held an employee in breach of his duty of fidelity for failing to inform his employer of a client’s concerns with the employer’s service and for then accepting work from that client in an individual capacity.
A factual dispute surrounded whether the disgruntled client solicited the employee or vice versa. But the Court held that it made no difference – an employee solicited by their employer’s client has a duty to reject that solicitation and to report it to their employer. Morris was subsequently affirmed and applied by the Employment Court in Waikanae Holdings (Gisbourne) Ltd v Smith,4 on broadly similar facts.
This reporting requirement does not extend to requiring employees to disclose in advance their, or a fellow employee’s, intention to simply resign and compete with their employer.5
Protecting your business against adverse preparatory conduct
Although these cases show that the New Zealand courts have defined the duty of fidelity more generally than was the case in Ranson, imposing more rigorous requirements on employee preparatory conduct, Ranson may influence the approach applied here in the future.
In light of this, it is important to ensure that employment agreements:
require employees to act faithfully and in the best interests of the company, including by passing on all relevant business information and potential opportunities, and
are updated to reflect employee promotions, and any associated widening of expectations attaching to employees.