For­mer direc­tors need to watch their step

Intro­duc­tion

It is not unusu­al for for­mer direc­tors of com­pa­nies to set up in com­pe­ti­tion against their orig­i­nal com­pa­nies. When they do so, they need to watch their step. For­mer direc­tors may find them­selves in a poten­tial mine­field with legal mines at every turn.

A salu­tary les­son for for­mer direc­tors involved the recent Fed­er­al Court case of TICA Default Ten­an­cy Con­trol Pty Lim­it­ed v Datakatch Pty Lim­it­ed (2016) 120 IPR 98. In this case, the Appli­cant was a com­pa­ny which pro­vid­ed infor­ma­tion about ten­ants to real estate agency clients through a com­put­erised sys­tem. For­mer direc­tors of the Appli­cant lat­er set up a sim­i­lar oper­a­tion in com­pe­ti­tion with the Appli­cant. The Appli­cant sub­se­quent­ly com­menced pro­ceed­ings against the for­mer direc­tors and their com­pa­ny based on grounds which includ­ed copy­right infringe­ment, breach of con­fi­dence and breach of fidu­cia­ry duty.

Copy­right infringement

The alle­ga­tions of copy­right infringe­ment relat­ed to the alleged repro­duc­tion of the source code in the Appli­can­t’s com­put­er pro­gram, the schema of the data­bas­es and the for­mat of the stylesheets. The Court found that the alle­ga­tion of repro­duc­tion of the source code was not sus­tained because the amount of code copied was ​“triv­ial”. The Court also found that there was an insuf­fi­cient degree of sim­i­lar­i­ty between the schema and the for­mat of the Appli­can­t’s oth­er copy­right works and those of the Respon­dent. In reach­ing its deci­sion the Court referred to evi­dence pro­vid­ed by expert wit­ness­es on the sim­i­lar­i­ty of the respec­tive copy­right works. In assess­ing such sim­i­lar­i­ty it is impor­tant to remem­ber that copy­right does not sub­sist in an ​’idea” but rather in the par­tic­u­lar ​“expres­sion” of that idea. 

Breach of confidence

The Court then focused on the behav­iour of the for­mer direc­tors of the Respon­dent com­pa­ny. The alle­ga­tion of breach of con­fi­dence relat­ed to the acqui­si­tion and use by the for­mer direc­tors of the user names and pass­words in the com­put­erised sys­tem of the Appli­cant. The Court not­ed that this mate­r­i­al had been made avail­able to the for­mer direc­tors on a con­fi­den­tial basis when they were direc­tors of the Appli­cant. The for­mer direc­tors there­fore had an equi­table duty to the Appli­cant to main­tain this con­fi­den­tial­i­ty. This duty sur­vived the ter­mi­na­tion of their tenure as direc­tors of the Appli­cant. Uni­ver­si­ty of West­ern Aus­tralia v Gray (2009) 179 FCR 346. The for­mer direc­tors were there­fore found to have breached their duty of con­fi­den­tial­i­ty to the Appli­cant by acquir­ing and using the rel­e­vant con­fi­den­tial mate­r­i­al with­out authorisation. 

Breach of fidu­cia­ry duty

As a corol­lary to their breach of con­fi­den­tial infor­ma­tion, the for­mer direc­tors were also found to have breached their fidu­cia­ry duty as direc­tors of the Appli­cant under Sec­tions 182 and 183 of the Cor­po­ra­tions Act 2001 (Cth).

Con­clu­sion

As a gen­er­al prin­ci­ple, there is no restric­tion on for­mer direc­tors or for­mer employ­ees set­ting up in com­pe­ti­tion against their for­mer employ­er unless there is a com­pet­i­tive restraint agree­ment in place. How­ev­er, in doing so, it is impor­tant for those direc­tors or employ­ees to avoid repro­duc­ing sub­stan­tial parts of copy­right mate­r­i­al or dis­clos­ing infor­ma­tion which they may have been pro­vid­ed on a con­fi­den­tial basis. This duty of care not to dis­close con­fi­den­tial infor­ma­tion places an addi­tion­al onus on for­mer direc­tors who must also con­sid­er their fidu­cia­ry oblig­a­tions under the Cor­po­ra­tions Act as well as under com­mon law. 

The moral of this case is that for­mer direc­tors need to watch their step. Legal mines may lie hid­den around every corner.