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Bringing the family business community together

Bolting The Stable Door

21st January 2013 Michael Halsey, Veale Wasbrough Vizards

Family businesses often run on trust and informality and the High Court has recently afforded family firms some comfort.

Family businesses are often one step ahead of their competitors because they are nimble and reactive.  This is often due to the informal nature of operations and reliance upon trust, both between family members and between the family and the workforce.  As a result, signing people up to written contracts of employment can fall to the bottom of the agenda.
 
This means that for family businesses, key employees or family members leaving and setting up in competition can be a 'worst case scenario.'  The High Court has recently provided some comfort that the courts will step in to assist if key employees breach their fiduciary duties or misuse confidential information.
 
Team Moves & 'Springboard' Injunctions
The case of QBE Management Services (UK) Ltd v Dymoke & Ors concerned a situation where employees left en masse in order to set up in direct competition.  
 
Springboard injunctions are traditionally used where a former employee has already used confidential information to their own advantage.  In such cases, an ordinary injunction would not work as the confidential information is no longer confidential (ie has already been published and use).  As a result, the former employee's use of the confidential information is used as a 'springboard' by their former employer to prevent them obtaining a head start in a competing business.
 
In this case, three employees of QBE tendered their resignations in order to join a competing business.  They were placed on garden leave.  Whilst still on garden leave, the three employees persuaded eight junior employees to resign and join the competing business.  The employer took legal action and was initially granted an interim injunction which enforced the duty of fidelity and non-competition during the period of gardening leave.  The court also ordered disclosure of documents.  
 
Following disclosure, QBE alleged wholesale misuse of confidential information and soliciting of customers in favour of the competing business.  It alleged that months of covert unlawful breaches of employment contracts had resulted in a significant advantage for the former employees' new venture.  In short, QBE argued that wholesale breaches of trust were involved.  The High Court agreed and granted an injunction for a lengthy period preventing the former employees gaining an advantage from their unlawful actions.
 
Whilst this was a good result for QBE, their position would have been significantly strengthened, and the likelihood of very costly litigation reduced, if their contracts of employment had clearly spelt out al of the duties which applied to each of the key employees (for example, the duty to report wrongdoing and the duty not to set up a competing business).  
 
A lesson to all family businesses to make sure that employment contracts are in place and reviewed on a regular basis...
 
Michael Halsey is a Senior Associate at Veale Wasbrough Vizards
 

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