A recent English High Court case involves a valuable lesson in how not to go about promoting a new business. A former employee was found liable to his former employer for passing off and breach of confidence when promoting a new company he had established. The former employee had created the impression his new company had taken over the business of his former employer, while utilising its client list. Our Intellectual Property team examines the decision and its implications.

A recent English High Court decision[1] imposed damages on a former employee in favour of his former employer for passing off, damage to reputation and breach of confidence. This arose from the means by which he promoted a new company he had set up. The case is a useful reminder that anyone setting up a new business should be careful in how they promote the business so as not to infringe the rights and entitlements of a third party, especially a former employer. Not exercising adequate care or applying sound judgment can prove to be expensive and, ultimately, do more harm than good. If in any doubt about whether the promotion of a new business may potentially be problematic, it is prudent to obtain legal advice. This case is interesting as it involved breach of confidence in the promotion of a new business but also involved a passing off claim of the former business.

Background

The factual scenario here involved a recruitment agent who resigned his position in June 2021 with the claimant, which traded as Cosmopolitan Recruitment. The former employer specialised in the landscape, horticulture and gardening sector. In giving his notice, he had stated he was moving to a larger company to take up an alternative position in a managerial and training role. However, before the end of his notice period he had in fact incorporated a new recruitment company, GreenScape. This venture was used as a vehicle for working as a recruitment agent on his own account. Prior to giving his notice, he had also exported various documents and data from his former employer. These materials included spreadsheets entitled ‘Live Jobs’ and ‘Financials’, and a folder named ‘Campaigns’, comprising details of recipients of previous marketing campaigns. Using that information, within two weeks of giving his notice he had e-mailed over 500 client contacts about his new company. That communication stated that “we never liked the name ‘Cosmopolitan Recruitment’” and referred to “a change of name and location”. However, it stated “the contact number remains the same”. All of this suggested the new company had taken over the business of Cosmopolitan Recruitment. The former employer sued for passing off and brought a breach of confidence action under the employment contract and in equity.

Decision

The court first addressed the claim of passing off. Passing off involves an interference with a claimant's rights to its goodwill, brand, business name and reputation by misrepresenting goods or services as being the goods and services of another. The court noted that the former employee had conceded Cosmopolitan Recruitment had reputation and goodwill. The former employee also conceded that the e-mail amounted to a misrepresentation that the services of the new company were those of the Cosmopolitan Recruitment. However, he denied that any damage was caused by the e-mail. Rather, he claimed that none of those e-mailed were actually misled so the claim in passing off failed because there was no causal link. Therefore, the court had to determine if Cosmopolitan Recruitment could prove loss and damage arising from the passing off, noting that the “principal head of damage is the loss of business profits caused by the diversion of the claimant’s customers to the defendant as a result of the defendant’s misrepresentation; beyond this, damages may be awarded for any loss of business goodwill and reputation arising from the passing off.”[2]

The court was satisfied that the e-mail was misleading and that it did mislead. It noted Greenscape was engaged in work immediately after its establishment and that there was no evidence to demonstrate how this work was won. The court was also satisfied that the claimant’s business underwent a significant and immediate decline after the e-mail had been sent. The court found that the e-mail caused confusion and caused work to be diverted from the claimant to GreenScape. It concluded that this was damage amounting to both loss of profit and loss of reputation and was sufficient to meet the test for passing off.

Regarding the breach of confidence claim, the court noted that the law of confidence in an employer / employee relationship was reflected in the UK decision in Faccenda Chicken v Fowler.[3] In summary, this provides that where the parties are linked by a contract of employment, the obligations are determined by the contract and there is an implied duty of good faith / fidelity on the employee. This would be violated where an employee makes or copies a list of the customers of the employer for use after his employment ends. This duty also protects an employer’s trade secrets.

The court accepted the definition of ‘trade secret’ used in Lansing Linde v Kerr[4]. This definition describes a trade secret as information that is used in a business which, if it were to be given to a competitor, could lead to significant damage. In addition, the owner of this information has kept it restricted or has not allowed it to be widely shared. The court was satisfied here that customer lists, like Cosmopolitan Recruitment’s client list was confidential information within the definition of the former employee’s employment contract. As a result, his export and use of those client details was a breach of his contract. In addition, the equitable duty of confidence was breached because the client list was confidential information which amounted to a trade secret.

The court ultimately awarded the claimant damages of £38,079.93 for loss of profit. This was based on the revenue reduction from clients in the year following the sending of the e-mail, £20,000 damages for loss of reputation and £1,499 for loss of management time in dealing with the issues arising from the e-mail.

Conclusion

The decision highlights that behaving improperly in starting up a new business can have serious and costly consequences. It serves as a useful reminder that employees owe contractual and implied duties of good faith / fidelity concerning confidential information. Obtaining and using client lists obtained from a former employer can amount to a breach of confidence. Even if there is no improper use of client details, any communication to prospective customers about a new business should avoid any suggestion or implication that the goods or services being offered are those of another. Clear and accurate messaging is vital.

For more information and expert advice on commercial disputes, contact a member of our Intellectual Property team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.

[1]PSN Recruitments Ltd (t/a Cosmopolitan Recruitment) v Ludley & Greenscape Specialist Recruitment Ltd [2023] UK HC 3153 (IPEC).

[2] McGregor on Damages

[3] [1987] Ch 117

[4] [1991] 1 WLR 251