When the skillful employee becomes a competitor

English

Newsletter

Published 01 July 2022
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When an employee leaves their position and starts a competing business, it can create legitimate concerns for the former employer. If the former employee has had access to trade secrets, valuable and sensitive information and holds important customer relationships, this can be especially concerning for the former employer. Although employees can start or join competing businesses, some important limitations exist for such activities. A recent judgment from the Court of Appeal illustrates these limitations, as it concerns a former employee's competing activities against the employer both during the employment and following the termination of the employment relationship. In this article, we use the judgment to illustrate the extent of these limitations and the important considerations which exist in such situations.

By Anna K.O. Eide, Thomas Hagen and Sigud Holter Torp

Background

Klinger Westad AS ("Westad") claimed compensation from a former employee ("Party A") due to the Party A's competing activities both during and after the notice period. The dispute concerned the production, marketing, and sale of soft seals for the Westad-produced valves. Party A had worked as a service engineer in Westad for nine years, where he was responsible for selling spare parts and services. At the end of 2017, Party A left Westad and established a competitive business in the aftermarket through the company World Cryo Service AS ("WCS"). The main question in the case was whether Party A had used Westad's trade secrets and proprietary information to establish drawings for production. Further, Party A had made damaging remarks and conducted competing activities during the notice period, for instance, by recruiting a former employee in Westad ("Party C").

As a starting point, an employee may use their knowledge, contacts in the industry and start or join competing businesses after terminating an employment relationship with a company. Both the Norwegian Marketing Control Act and the new Trade Secrets Act are based on the premise that competition in the market is desirable as it ensures that customers receive the best products and services at the lowest prices. At the same time, it is important for competitiveness and innovation that companies receive protection of their trade secrets and others' unfair use of their technical know-how. Consequently, the Marketing Control Act and the new Trade Secrets Act sets out limits on what information can be used by a former employee. The central questions in the case between Party A and Westad was whether Party A had acted in breach of Marketing Control Act sections 28, 29 and/or 25 through its actions during the notice period and following the end of the employment relationship.

Party A's competing activities during the notice period

Employees are obligated to act loyally to their employer. This duty of loyalty and good faith applies during employment and the notice period, limiting the employee's right to act in a manner that may damage the employer. In this case, Party A admitted to having committed disloyal acts during the notice period. For instance, Party A had made several inquiries to Westad's customers, marketed his own competing business, and made negative statements about Westad's business. The Court of Appeal concluded that Party A's actions were egregious and constituted a clear breach of the duty of loyalty and good faith. As a result, the Court of Appeal concluded that Party A was responsible for Westad's costs of securing evidence in the case, reviewing the evidence and lawyer fees amounting to NOK 1,400,000.

Party A's competing activities after the end of the notice period  

The duty of loyalty and good faith applies as long as the employment relationship lasts. Thus, a former employee is generally free to conduct competing activities after the termination of the employment – provided that the employee is not bound by any non-compete clauses prohibiting such actions. However, former employees cannot use protected trade secrets and other proprietary information to compete with their former employer and gain an unlawful advantage in the market. Using such information in the market may constitute a breach of relevant sections of the Marketing Control Act and the Trade Secrets Act.

Westad claimed that Party A utilized protected drawings and information in bad faith to start its competing business in breach of the Marketing Control Act. Party A's employment agreement referred to a general confidentiality clause in the Westad personnel handbook but did not hold a non-compete clause. Westad claimed that WCS's drawings were based on the information Party A had access to during his employment in Westad and that Party A had received Westad's drawings from Party C.

The Court of Appeal found that the drawings Party A received from Party C constituted a breach of the Marketing Control Act sections 28, 29 and/or 25. However, the Court of Appeal also found that the drawings were not used for any production. Consequently, the obtained drawings had not given Party A or WCS any unlawful business advantage or resulted in any actual loss for Westad.

Party A had given a third party ("Party B") the assignment to produce drawings on behalf of Party A. Party B had previously produced similar products for Westad. However, the Court of Appeal found that the specific measurements in the drawings did not correspond with those in Westad's drawings. Party B testified that he had used Westad's drawings obtained from the open internet and products received by Party A to reverse engineer and establish the drawings. The products delivered by Party A were Westad products that Party A had received from customers. Although confidentiality clauses bound the customers, the Court of Appeal concluded that the confidentiality clauses could not be regarded as limiting the customers' right to dispose of the products. Thereby, products received from the customers could legally be used for reversed engineering.

The Court of Appeal concluded that neither the time it took Party B to produce the drawings nor Party B's previous consulting assignments for Westad indicate that Party A should have suspected that Party B had unlawfully created the drawings. Accordingly, the Court of Appeal found that Party A and WCS had not acted in breach of the Marketing Control Act and that they could not be held liable for any loss of income endured by Westad as a result of their competing businesses. 

Key takeaways from the case

Under Norwegian law, employees may start competing for business with their former employer if this does not involve using information or documentation obtained in breach of the Marketing Control Act or the Trade Secrets Act. If the employee has access to sensitive information, the employer can prohibit certain activities from the former employee for a limited period by implementing non-compete clauses in the employment agreement. Further, it is important that companies act fast and obtains the necessary evidence and seek legal assistance promptly to limit the exposure and consequences of such disloyal activities.