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Protecting intellectual property through employee contracts

A recent High Court case highlights the dangers of taking employees at face value when protecting IP

In the information age intellectual property and wider knowledge can be among an employer’s most valuable and prized assets. In the recent case of MPT v Peel the High Court was presented with the salutary tale of an organisation that had seen its key employees take their vital knowledge into competition despite their word that they wouldn't.

Mr Peel and Mr Birtwistle were employees of MPT, which developed machines manufacturing mattresses. This is a niche business, with MPT being the only producer of such machines in the UK. That is until Peel and Birtwistle’s resignation in August 2016. Each was subject to restrictive covenants preventing them from dealing with customers with whom they had personally dealt for a period of six months. As is common, before they departed Peel and Birtwistle were asked what their intended next steps were. Both denied that they were going into partnership together, and cited opportunities in non-competing industries.

As soon as the covenants elapsed Peel and Birtwistle established a rival business, MattressTek, in direct competition with MPT. They began to market their own machines in March 2017. MPT was adamant that they had moved too quickly and brought a number of claims, including for an injunction restraining the new business. However, in a novel argument MPT also suggested that the longstanding duty of trust and confidence between employer and employee required employees to answer questions truthfully (subject to exceptions, such as questions regarding personal matters), including those about their future plans.

The judge agreed that the duty of good faith prohibited employees from inviting colleagues to join their new businesses. However, he was reluctant to find that it required a departing employee to ‘explain his own confidential and nascent plans to set up in lawful competition’. He noted that in general employees are ‘free to make their own way in the world’.

This freedom is not the boon for employees that it may initially seem, as the decision is not binding authority on this point and the judge acknowledged he might be wrong. In addition, certain employees – crucially those with the greatest exportable knowledge and experience – are subject to further-reaching fiduciary duties, which more stringently limit attempts to form competing businesses.

Nevertheless, it is unwise for employers’ first steps to protect their organisations’ knowledge and intellectual property to be questions in exit interviews. Thought should be given at the outset to a comprehensive suite of restrictive covenants, specifically tailored to those with indispensable information. Once these covenants are in place they should be reassessed as an individual progresses, for all too often junior employees reach senior levels without corresponding efforts to ‘beef up’ their obligations.

There is also a host of less formal steps that can be taken to protect intellectual property. One is to think carefully and holistically about who holds key knowledge internally, and whether it is unduly concentrated in a few individuals. Appropriately secured IT systems and rigorous internal IT practices can also make it significantly more difficult for key employees to ‘lift’ information as they leave.

Lastly, MPT v Peel is a reminder of the limits of the legal duty of trust and confidence between employer and employee. Perhaps one of the biggest challenges to employers and HR professionals – but potentially one with the greatest rewards when protecting their organisations’ intellectual property – is to ingrain that trust and confidence within the day-to-day culture, and make competition less attractive in the first place.

Daniel Parker is a trainee solicitor at Winckworth Sherwood