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Employees ordered to pay compensation to their former employer after establishing a competing business

The Supreme Court of Queensland has ordered two individuals to pay $211,933 to their former employer to account for lost earnings and a reduced sale price of the employer’s business that resulted from the employees setting up a competing business during their employment.

Implications for employers

This decision reinforces that disclosure of trade secrets or confidential information by an employee during employment, or use of that information in a way that is detrimental to their employer, is prohibited by the implied duty of good faith and fidelity. However, to maximise prospects of successfully protecting their businesses and confidential information, employers should include express carefully crafted confidentiality and post-employment obligation clauses in their contracts of employment with staff.

Background

Mr Dinte, the plaintiff, operated a business called SkyComm. SkyComm provided mobile communications goods and services on the Gold Coast between May 1989 and September 2005.

Mr Hales, the first defendant, was employed as the service manager for SkyComm between September 1998 and May 2005. During his employment with SkyComm, Mr Hales had unrestricted access to SkyComm’s confidential information including customer lists, sales data, pricing requirements, computer software related to the service requirements of particular major customers, including Motorola, and details of SkyComm’s commercial relationships with its customers.

Mr Campbell, the second defendant, worked for SkyComm over several periods as an installer.

In May 2005, Mr Dinte discovered that Mr Hales and Mr Campbell had established a business - DapComm - while still employed by SkyComm. DapComm had been competing with SkyComm since June 2004. Shortly after Mr Dinte confronted Mr Hales about the DapComm business, Mr Hales resigned from his employment with SkyComm. However, he continued to operate the DapComm business with Mr Campbell.

In September 2005, Mr Dinte sold the SkyComm business after it experienced a substantial drop in profits over a twelve month period. As a consequence of the lack of profitability of the business, SkyComm was sold for a significantly reduced price.

Decision

The Queensland Supreme Court held the defendants owed SkyComm an implied duty of good faith and fidelity. This included that they would seek custom for SkyComm, protect SkyComm’s interests by not acting in a way which would detriment SkyComm and not use knowledge of advantages or opportunities arising out of their employment with SkyComm to make a personal gain.

The Court found the defendants breached their duty of good faith and fidelity in several ways during their employment with SkyComm including by:

  • acting secretly to set up the competing business;
  • diverting custom from SkyComm to DapComm by using opportunities available to them because of their employment with SkyComm; and
  • canvassing existing SkyComm customers for the benefit of the competing business.

The Court also found the defendants continued to act in breach of their implied duty of good faith and fidelity following the cessation of their SkyComm employment, by continuing to pursue and canvass custom which had been improperly diverted from SkyComm to DapComm during their employment. The Court rejected the defendants’ claim that DapComm’s custom was sourced by chance encounters, Yellow Pages advertisements and being approached by customers themselves.

The Court awarded Mr Dinte damages for both loss of profit and the reduction in the sale price of the SkyComm business.

While the Court conceded that the nature and extent of the damage that flowed from the defendants’ conduct could not be calculated with precision, the Court ordered the defendants to pay $67,533.19 to Mr Dinte, being an amount equivalent to the estimated loss of profits caused by the diversion of custom from SkyComm to DapComm at the hands of the defendants.

The Court also held that in respect of the reduction in sale price of the SkyComm business, the defendants were liable to pay $144,400 to Mr Dinte. The Court arrived at this figure after hearing evidence from the purchaser of the SkyComm that it offered to pay only $650,000 for the business due to a significant drop in its EBIT figures for the 2005 financial year - the year in which DapComm secretly commenced operating in competition.

In total both defendants were found liable to pay total damages in the amount of $211,933 to Mr Dinte.

Dinte v Hales & Anor [2009] QSC 63

Who does this affect?
All Australian employers

What do you need to do?
Ensure you are updated on recent developments

Author(s)

  • Louise Walker - Senior Associate | Email
 

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