How to manage the risks when an employee leaves

Post-termination restrictions, in particular non-compete clauses, are often a controversial topic for employees who are alarmed at the potential erosion of their freedom to find (and operate effectively in) a new role once they have left their current employment. Employers, on the other hand, want to be able to protect their confidential information, client relationships and business generally.

Public policy generally frowns upon the attempt to limit an employee’s ability to make a living, and this is reflected in recent government proposals to limit the maximum period of a non-compete to three months and require payment of salary throughout its duration. If the proposals become law, non-compete clauses will no longer be the tool in a former employer’s armour that they have been.

With this in mind, employers may look to alternative ways to minimise the risk presented by a departing employee.

Alternatives to the non-compete clause

There are currently no proposals to limit clauses that prevent employees from poaching or doing business with customers or clients of their former employers. However, there is a degree of uncertainty as to whether it is possible to stop clients or customers doing business where they please.

Garden leave remains a good option, and since the employee remains employed throughout, this generally provides employers with a greater degree of control over their departing employees. This is traditionally seen as the expensive option, given that full salary and benefits must continue to be paid throughout but if payment for the duration of a non-compete becomes a requirement, garden leave will clearly be the best way to ensure that the former employee does not immediately leave to work for a competitor. It may also be helpful for employers to have longer notice periods where they have concerns over employees who might have the necessary knowledge to cause damage.

Given the potentially unsatisfactory nature of post-termination restrictions, it may be worth considering what really needs to be protected. In some cases the biggest risk is perhaps not that a departing employee moves to a competitor but that they take important documents, data, or other valuable content, with the intention of using it at their new employer. This can provide a competitor with an unfair commercial advantage and cause irreparable damage to the former employer’s business.

In the above scenario, intellectual property (IP) rights such as copyright and database right can, in the right circumstances, offer enhanced protection for a former employer.

How can copyright protect a former employer?

Copyright can offer protection to literary, artistic, music and film works that are essential to the operation of a business, such as written documents, databases, spreadsheets, reports, designs, images, photographs, logos, text files, video and audio files.

Copyright does not require registration; it arises automatically on creation of a particular work (e.g. the writing of a report or the taking of a photograph), and where that work is created by an employee in the course of employment (subject to any agreement to the contrary) the employer is automatically the first owner. Copyright generally lasts for 70 years, from the death of the relevant employee.

As the owner of copyright in a particular work, the employer has various rights, including the right to prevent a third party (the departing employee or their new employer, for example) from:

• copying and holding copies of a particular work;
• issuing copies of, or communicating, a copyright work to the public; and
• making an adaptation of a copyright work.

If a former employee carries out any of the above actions without permission and infringes copyright, the copyright owner can take action to enforce their rights. It may also be possible to bring an action against the departing employee’s new employer, insofar as they possess or have used any of the former employer’s copyright protected works.

The remedies available to the copyright owner, against an infringing party, include:

• search orders, freezing orders and interim injunctions;
• an order for seizure and delivery-up of copied infringing copies; and
• an award of damages or an account of profits.

If it is discovered that a departing employee has, without permission, downloaded a copyright-protected report with the intention of using it in either their new employment or in any external commercial activities, an urgent injunction and seizure order may be sought to prevent use of the material.

Where a former employee’s infringing actions are only discovered sometime into the future and damage has already been caused to the former employer’s business, an award of damages may also be sought, to financially compensate for any loss suffered. Where loss is difficult to quantify or prove, as an alternative to damages, an ‘account of profits’ may be sought, such that the infringer surrenders to the copyright owner the profits gained from the infringement.

How can database right protect a former employer?

In addition to copyright, a further protection for employers is database right: protecting the compilation of information comprising a database. The criteria for database right protection is that there has been “a substantial investment in obtaining, verifying or presenting the contents of the database”.

An employer is the owner of a database made by an employee in the course of their employment, subject to any agreement to the contrary, and the right lasts for 15 years from the end of the calendar year in which the making of the database was completed.

The infringement of a database right is the extraction or re-utilisation of all, or a substantial part of, the contents of a protected database, without the owner’s permission. In practice, this will cover a permanent or temporary transfer of all or a substantial part of the contents of a database to another medium by any means or in any form, and the making of the contents of the database available to the public by any means. In the case of a departing employee, if they were to take without permission a copy of a customer database (for use in their new employment or business), that will likely constitute an infringement of their former employer’s database rights.

The remedies available against an infringer are similar to those under copyright, and include:

• an injunction against further acts of infringement;
• damages or an account of profits; and
• the delivery-up or seizure of infringing copies.

Defending a challenge to a former employer’s IP rights

While copyright and database rights can provide robust protection, it is not uncommon in the defence of enforcement proceedings for the ownership of IP rights to be challenged; if one does not own the rights, one cannot enforce them.

The ideal position, therefore, is for a former employer looking to enforce their rights to be able to provide clear and unequivocal evidence proving that the relevant copyright work, or database, was created “by an employee in the course of their employment”:

1. Is the relevant individual an employee? If the individual was acting under contract of service, i.e. an employment contract, then it may be a straightforward exercise to prove their “employee” status. If, however, they were acting under a contract for services, they are more likely to be an independent contractor (not an employee), in which case they will be the first owner of copyright in any work they create.

It may be straightforward to prove employee status for an individual; however, in less-straightforward, more nuanced situations, the case law shows the court’s determination as to IP ownership in such cases may not be as expected.

In the case of an independent contractor, it is also recommended that clear terms are put in place at the outset to ensure that all and any rights that arise in works created vest in the paying party.

2. Was the work created in the course of employment? It will be important to be able to, as accurately as possible, define the employee’s employment: their current role and obligations. If a valuable work was created outside of the course of the relevant individual’s employment, copyright and database right will not automatically vest in the former employer. There is a risk that any uncertainty, again, could lead to an unexpected outcome in court.

This further underlines the importance of ensuring well-drafted and up-to-date employment contracts are in place with key employees.

What can a business do to protect its interests?

Where a business wishes to protect its interests, and mitigate the risk presented by a departing employee, it is recommended that:

• employment contracts are periodically reviewed and updated for key employees in respect of relevant post-termination restrictions, confidentiality provisions, notice periods, garden leave and IP protection clauses;
• practical steps are considered, such as restrictions on employee access to sensitive commercial information and materials, thereby limiting the number of individuals who have the potential to steal valuable IP, particularly during an employee’s notice period or where there are concerns over their performance or behaviour;
• an audit of IT systems is undertaken before and after a key employee’s departure, as a potential early warning as to IP theft; and
• when an IP theft is detected, there is no delay in seeking legal advice (delay can be a bar to an injunction, for example).

Depending on the case facts, it may be necessary to consider the enforcement of further legal remedies, such as a claim for misuse of confidential information, in addition to the above.

If you have concerns about a departing employee and issues that may arise around IP rights, please contact Emma Wayland and Will Charlesworth.