Negotiating Damages after One Step: Employment Team Move and Misuse of Confidential Information Cases

Publication Date01 September 2020
Pages363-388
Author
DOI10.3366/elr.2020.0650
Date01 September 2020
INTRODUCTION

It is notoriously difficult to obtain effective monetary relief in employment team move and misuse of confidential information cases. In practice, the default approach is to issue proceedings with a view to obtaining interim injunctive relief (broadly, the equivalent of a Scottish interim interdict) and, if necessary, a speedy trial (or Scottish proof). At the trial stage, while establishing liability for breach of contract or related equitable causes of action like breach of confidence is normally feasible, quantum is a frequent stumbling block. Marathon Asset Management LLP v Seddon1 provides a notable recent illustration. Marathon only recovered nominal damages despite the unlawful copying and removal of 40,000 files by departing senior employees who decided to set up a rival asset management firm.

This article argues that “negotiating damages” (previously Wrotham Park damages2) offer a useful additional compensatory tool in misuse of confidential information cases in the employment context. They can assist in four main ways. First, by overcoming some of the difficulties associated with ordinary contractual damages for loss of profits, even on a loss of a chance basis. Secondly, by reducing the reliance on gain-based remedies, normally only available in equity3 for breach of fiduciary duty or confidence. Thirdly, by minimising the risk of incurring significant costs (expenses in Scots law) without recovering substantial monetary relief. Fourthly, by providing additional protection beyond injunctive relief.

The Supreme Court of the United Kingdom has restated the law on negotiating damages in One Step (Support) Ltd v Morris-Garner.4 The application of Lord Reed's majority approach to employment cases is a matter for lively debate. However, misuse of confidential information is now a clearly recognised situation in which such damages can be awarded on the new deprivation of valuable contractual asset basis.

It will be argued that, in light of One Step, there is a real role for negotiating damages in employee competition cases in which misuse of confidential information is the sole or predominant breach of contract. By contrast, the law as restated is much more restrictive in employment team move cases where there is a substantial overlap with breach of other post-termination restraints, principally non-compete and non-solicitation covenants. It is submitted that the requisite confidential information can be identified by reference to the well-established, though not straightforward, Faccenda5 approach. It is argued below that obtaining negotiating damages will depend on both presentation and substance.

This article does not suggest that One Step has ushered in negotiating damages as the main remedy in misuse of confidential information and, even less, employment team move cases more generally. The Supreme Court's decision confines the place of negotiating damages much more narrowly than the courts below. However, within the framework set by Lord Reed, there is a genuine place for such damages in the employment context. This will be of interest in cases where an ordinary claim for lost profits seems fraught and recourse to equitable remedies is precluded. In such cases, negotiating damages can now be treated as a further possibility. This is an evolving area and further guidance on the One Step approach will be required. This article seeks to contribute to that debate.

As to the scope of this article, the focus on the employment context is deliberate. That said, it is worth noting that at least some of the following analysis on typical remedial issues and the relevance of One Step may well apply in analogous contexts. Non-disclosure agreements are an obvious example. These are commonly used in vendor-purchaser, joint venture and bidding arrangements. As in employment cases, confidential information transmitted and then misused by a competitor can be very damaging. Remedies for breach of such agreements lie beyond the scope of this article.

Section B identifies common remedial issues in the employment team move and misuse of confidential information context. Section C sets out the legal position on negotiating damages before and after One Step. Section D considers the scope for negotiating damages in the employment context in light of One Step, particularly in misuse of confidential information cases. Section E summarises the main conclusions.

REMEDIAL ISSUES IN EMPLOYMENT TEAM MOVE AND MISUSE OF CONFIDENTIAL INFORMATION CASES Inadequacy of ordinary contractual damages

In claims for ordinary contractual damages for loss of profits, it is usually factually difficult and costly to prove how employees and clients would have behaved had it not been for contractual breaches by errant employees. There is also the further difficulty of employees being able to claim that substantial parts of prima facie confidential information are accessible from legitimate sources, negating or significantly reducing the recoverable monetary loss.6

As a consequence, first, loss of chance damages on the Allied Maples Group Ltd v Simmons & Simmons7 basis are often the only realistic option in the present context.8 This doctrine also exists in Scots law. It is aimed at situations in which proof of loss or damage on the civil balance of probabilities standard is not possible or feasible. In this context, the dependence on loss of chance damages stems from pecuniary losses typically depending on the behaviour of multiple actors as well as wider market factors. In short, there are problems of counter-factuality and futurity.9 It is thus hard to prove that a given loss would have been suffered but for the errant employee's breach. This is notwithstanding the more generous application of the civil standard of proof when dealing with future events, affirmed in Parabola Investments Ltd v Browallia Cal Ltd.10 Loss of chance damages in English law are subject to two main restrictive features: the requirement (1) to prove future conduct by parties on the balance of probabilities, with only third party conduct attracting a lower standard of proof;11 and (2) for any such chance to be “real and substantial”, usually set at an absolute minimum of 10 per cent.12

Secondly, as to cost, wide-ranging factual and expert evidence is often necessary. That cost can be wholly disproportionate to the possible quantum – a modest percentage of lost profits. Marathon v Seddon illustrates this point vividly. Marathon established liability against senior asset managers who attempted to set up a rival asset management firm for international clients serviced by Marathon's Global team. Extensive contractual breaches in relation to confidential information were proved.13 However, Marathon could not establish substantial competitive use of sensitive business files and the rival venture met with limited success.14 Difficulties with realistic valuations of the unlawfully removed information plagued the judge.15 Ultimately, Leggatt J granted a mere £2 in nominal damages,16 strongly doubting whether Wrotham Park damages were a suitable remedy at all.17 Marathon incurred very substantial costs in pursuing the claim and had to bear 50% of part of the defendants' costs.18 Such costs exposure can serve as a huge disincentive for the pursuit of litigation with the object of business protection.

Thirdly, a common difficulty in misuse of confidential information cases, specifically, is that errant employees can argue that information copied, removed or otherwise misappropriated contrary to their express or implied contractual (or equitable) obligations could have been obtained through legitimate sources. The confidential information may be an amalgam of, or derivable from, publicly accessible sources. If such a (partial) defence is made out, the recoverable monetary loss to the employer can be negated or significantly reduced. Crowson Fabrics Ltd v Rider and UK Dry Risers Ltd v Maher are illustrative.19

Lastly, direct claims against the rival employer for the economic torts of unlawful means conspiracy, conspiracy to injure or inducing breach of contract are usually even more difficult to establish. A helpful summary of the legal hurdles is found in OBG Ltd v Allan.20

Issues with alternative equitable causes of action

It might be thought that these difficulties can be overcome by framing claims in equity. The main alternative causes of action in English law are breach of confidence and breach of fiduciary duty.21 These would offer certain remedial benefits. First, there is the more flexible approach to causation and remoteness for equitable compensation (as opposed to common law damages), especially in relation to breach of fiduciary duty.22 Secondly, gain-based remedies (specifically an account of profits) are the default remedy for breach of fiduciary duty,23 unlike for contractual claims where Attorney General v Blake sets an exceptionality threshold.24 In breach of confidence claims, an account of profits is also available,25 though the English courts26 normally require some degree of conscious dishonesty, or wilful or reckless breach.27 Thirdly, in some cases, forfeiture of remuneration is available against a fiduciary.28 That said, such equitable claims face a number of hurdles in the employment context.

First, the English courts are reluctant to impose fiduciary duties on employees who are not also statutory directors or partners.29 It is usually insufficient to be an important or senior company employee.30 Absent significant managerial, financial and/or reporting responsibilities, only more limited contractual duties of fidelity apply.31 In essence, this means an employee is only required to be faithful to their contractual employment relationship by not positively acting to jeopardise the employer's interests.32 An employee fiduciary is under more demanding duties, including the duty to act in the best interests of the principal, which...

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