Allfiled allegations and interim relief: balancing the interests of litigants -- and customers

Another in this Kat's series of not-quite-so-recent cases that he is writing up now because they flashed past him when he was too busy to grasp hold of them a couple of months ago is Allfiled UK Ltd v Eltis & 16 Others [2015] EWHC 1300 (Ch), a 19 May 2015 decision of Mr Justice Hildyard, in the Chancery Division, England and Wales, in an action seeking an interim injunction to stop a total of 17 defendants -- former directors and employees and three companies -- from using its confidential information and intellectual property and from carrying on a trade similar to its own.

Once Allfiled realised that its
employees were missing, it
didn't take too long to find out
Allfiled, a company that had developed technology for the storage of important or confidential personal data, alleged that the defendants, who had all worked in developing this system, had left it in order to set up a new company that was developing and selling a similar product, and to poach Allfiled's customers. Damages were claimed for breach of fiduciary duty and breach of contractual covenants not to compete or to solicit Allfiled's customers. While Allfiled sent letters before action in January 2015, when it realised that it had lost staff and contracts, it delayed for two months before applying to the court -- and even then it only did so on the basis of the proceedings it expected to commence and without having issued a claim form. The defendants said they had used neither Allfiled's confidential information nor its intellectual property. In any event, they argued, the covenants on which Allfiled relied were too broad to be enforceable since that most computer programming companies would, on some level, compete with Allfiled and that the balance of convenience between Allfiled and the various defendants before trial weighed against the grant injunctive relief.

Hildyard J had something to please both parties in his 177-paragraph judgment, since he granted interim relief -- but only in part. In his view:

* Allfiled's basic business idea was clearly the same as that developed by the new company, even if there were differences between their respective technologies. However, competition in itself was not precluded.

* Whether the conduct of departing directors and employees was permissible or not was a fact-sensitive question.

* Allfiled's non-competition and non-solicit covenants were broad; they reinforced obligations which might otherwise be implied, but they did not define what information was properly to be characterised as confidential.

* When considering whether to grant a pre-trial interim injunction, the court had to seek to protect rights and expectations which were arguably enforceable, the breach of which could not be properly compensated by damages, applying the American Cyanamid test of whether there was a serious question to be tried unless there were "extreme circumstances where a trial is rendered plainly and obviously otiose" [para 78].

Well, they were
preparing ...
* Even though Allfiled put a term in its customer contracts that intellectual property rights vested in the customer, the evidence disclosed an at least arguable case raising a serious issue to be tried that the work done in relation to its storage system, and the system itself, was confidential and belonged to Allfiled. If this were so, any use of it by the defendants would be a serious breach of Allfiled's legal rights and a serious breach of an ex-director's fiduciary duty. There was a good arguable case against all the defendants that their implied duties of good faith and fidelity as employees included a duty not to make preparations during their employment to compete with Allfiled after their employment ended, and not to solicit other employees to leave.

* Factors against granting an injunction were that Allfiled might not even benefit from it, since it had lost its entire workforce and was in a perilous financial position, while the new company (Port Tech -- the 15th defendant) appeared interested in only one of Allfiled's customers, Magpie: this meant that leakage of information elsewhere was unlikely and an injunction could even backfire on Allfiled because, if the new company was allowed to continue trading, it was more likely to be able to pay damages than if it was forced out of business.

Some magpies seem quite
well able to look after
their own interests ...
* While those factors were outweighed by several factors in favour of granting injunctive relief, it was still inappropriate to stop the new company developing its storage system and fulfilling its contract with Magpie so long as it did so without the use of any property or confidential information that belonged to Allfiled. Injunctive relief would therefore be granted with that proviso, with Port Tech putting part of its profits in escrow -- and an expedited trial of the proceedings would be ordered.

* Given the court's assessment of the balance of convenience, it was not strictly necessary to consider what should be taken as the status quo for the purpose of the American Cyanamid test. Allfiled had actually delayed seeking relief and, while delay was not of itself fatal to relief, the longer the "last change" had gone unchallenged, the more likely that it would be established as the new status quo. The fact that Allfiled had taken a risk in waiting two months after issuing its first challenge to the defendants was another reason for the provisos in the injunctive relief granted.

This Kat hasn't come across an instance before in which the party seeking interim relief no longer has a workforce to service lost customers and wonders if this has happened before. Since specific performance of contracts of employment and, presumably, directors' contracts, is not an available option, the notion of protecting the interest of Magpie -- not a party but nonetheless represented in these proceedings -- seems only right and proper.
Allfiled allegations and interim relief: balancing the interests of litigants -- and customers Allfiled allegations and interim relief: balancing the interests of litigants -- and customers Reviewed by Jeremy on Thursday, July 02, 2015 Rating: 5

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