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8 March 2017 Former directors need to watch their step

By Eric Ziehlke, Partner

Introduction

It is not unusual for former directors of companies to set up in competition against their original companies.  When they do so, they need to watch their step.  Former directors may find themselves in a potential minefield with legal mines at every turn.

A salutary lesson for former directors involved the recent Federal Court case of TICA Default Tenancy Control Pty Limited v Datakatch Pty Limited (2016) 120 IPR 98.  In this case, the Applicant was a company which provided information about tenants to real estate agency clients through a computerised system.  Former directors of the Applicant later set up a similar operation in competition with the Applicant.  The Applicant subsequently commenced proceedings against the former directors and their company based on grounds which included copyright infringement, breach of confidence and breach of fiduciary duty.

Copyright infringement

The allegations of copyright infringement related to the alleged reproduction of the source code in the Applicant's computer program, the schema of the databases and the format of the stylesheets.  The Court found that the allegation of reproduction of the source code was not sustained because the amount of code copied was "trivial".  The Court also found that there was an insufficient degree of similarity between the schema and the format of the Applicant's other copyright works and those of the Respondent.  In reaching its decision the Court referred to evidence provided by expert witnesses on the similarity of the respective copyright works.  In assessing such similarity it is important to remember that copyright does not subsist in an ’idea" but rather in the particular "expression" of that idea. 

Breach of confidence

The Court then focused on the behaviour of the former directors of the Respondent company.  The allegation of breach of confidence related to the acquisition and use by the former directors of the user names and passwords in the computerised system of the Applicant.  The Court noted that this material had been made available to the former directors on a confidential basis when they were directors of the Applicant.  The former directors therefore had an equitable duty to the Applicant to maintain this confidentiality.  This duty survived the termination of their tenure as directors of the Applicant.  University of Western Australia v Gray (2009) 179 FCR 346.  The former directors were therefore found to have breached their duty of confidentiality to the Applicant by acquiring and using the relevant confidential material without authorisation. 

Breach of fiduciary duty

As a corollary to their breach of confidential information, the former directors were also found to have breached their fiduciary duty as directors of the Applicant under Sections 182 and 183 of the Corporations Act 2001 (Cth).

Conclusion

As a general principle, there is no restriction on former directors or former employees setting up in competition against their former employer unless there is a competitive restraint agreement in place.  However, in doing so, it is important for those directors or employees to avoid reproducing substantial parts of copyright material or disclosing information which they may have been provided on a confidential basis.  This duty of care not to disclose confidential information places an additional onus on former directors who must also consider their fiduciary obligations under the Corporations Act as well as under common law. 

The moral of this case is that former directors need to watch their step.  Legal mines may lie hidden around every corner. 

Eric Ziehlke, Partner  |  Phone: +61 2 9233 5544  |  Email: ejz@swaab.com.au

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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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