The nightmare scenario. Your co-directors leave and set up a competing business. They lure employees to join them and use your systems and processes to create a copycat product or service. What can you do?
A recent decision, Allfiled v Eltis, shows that there are steps you can take.
Software development company Allfiled UK Ltd offered a personal data storage service to individual customers. It also made the data available, where there was appropriate consent, to other businesses wishing to contact those customers. Allfiled was going through a sticky patch with disagreements among directors and the main investor.
Then in January 2015 Allfiled found, to its horror, that three directors had left, set up their own business (Port Tech) and, said Allfiled, enticed all of its software development staff to work with them. What’s more, Port Tech then signed a software agreement with former customer Magpie. The agreement was almost identical to an earlier one between Magpie and Allfiled.
Allfiled’s remaining director, Mr Shah, found email correspondence between the departing directors that referred to the possibility of ‘stealing’ IP rights and a ‘shadow structure’ to ‘mitigate any legal claim’. One employee had stored material in a folder called ‘takeaway’ created on the day he handed in his notice.
The three departing directors were of course bound by special duties to Allfiled, on top of broadly drafted IP ownership, confidentiality, non-compete and non-solicit obligations in their employment contracts.
It took Allfiled a couple of months to start court proceedings – Mr Shah said that he had been preoccupied with crisis management in the immediate aftermath of the departures. But on 16 March 2015 Allfiled asked the court to order that the fleeing army stop using and give back its proprietary materials, and stop competing with it. A short term order to preserve the position was granted with four further court hearings in March, April and May.
Going through the required steps of the legal analysis the judge decided that an injunction pending trial was appropriate. Port Tech’s argument that it could not survive under the limits imposed on it did not persuade him, although he did allow Port Tech's existing business to continue, with financial reporting to Allfiled and safe keeping of software code. He also directed that the full trial should take place as quickly as possible.
This case demonstrates that with (reasonably) quick action the disembowelment of a business can be halted, at least temporarily. The English courts can act swiftly. An obvious drawback, though, is the airing of all this dirty linen in public.