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What happens when your best employee becomes your worst opponent?
It seems to be a theme of countless love songs. You don't know what you've got until it's gone.
Anybody who was in New Zealand during the last America's Cup competition will know all about this concept. It all seemed so wonderful when Russell Coutts was a part of Team New Zealand - but when he left to join the organisation which took the cup away, we had a myriad of different feelings about him.
Employment law recognises these concepts (and, in fact, one might argue that Russell Coutts' case is an example of an employment situation that might have been handled differently).
During the course of employment, an employee owes an obligation of loyalty to the employer. Amongst other things, this general obligation means that an employee should not work for a competitor - nor do anything which might tend to bring into question the allegiance that is given to the employer's business.
An obligation of confidentiality is also an inherent part of the employment relationship. An employee owes a general obligation to keep secret those parts of the employer's business which are confidential to it. This general obligation means that the employer can take some comfort that key parts of its business - which are essential to it - will not be disclosed to competitors.
Many employment agreements make express reference to these obligations - and some include particular provisions to address the issues which may arise as a consequence.
Despite this, however, it is an area of employment law which is given to difficult problems. These are illustrated by the recent decision of the Employment Relations Authority in Harris Fashions v Lang Yun Ying (Unreported, Employment Relations Authority, Auckland, 29 August 2003).
Harris Fashions operates a bridal and evening wear fashion business. Its Managing Director - and principal designer - is Jane Yeh. Yeh has a particular reputation as a designer of wedding and evening dresses.
Ms Lang was employed by Yeh for four years in the business. Amongst other things, Lang's job involved sewing, beading and fitting. Prior to working for Yeh, Lang had no experience in the bridal fashion business.
In April 2002 Yeh introduced written employment agreements for her employees, including Lang. Amongst other things, the written agreement included a restraint of trade provision which sought to prevent any employee from establishing or obtaining an interest in any business in competition to Harris Fashions (within a five kilometre radius).
In May 2003, Lang had a holiday in China. While she was away, Yeh heard about another bridal shop which was soon to open close to her business. Yeh had thought that Lang and her husband had gone to China to make arrangements to open a restaurant in Auckland. However, another employee informed Yeh that Lang had returned from China with suitcases full of beads and fabric.
Yeh's suspicions were raised as a consequence of these different pieces of information. Her concerns were heightened by Lang's behaviour following her return to work. The Authority's decision records incidents where Lang was apparently spotted visiting the proposed new bridal shop.
Eventually, Lang told Yeh that she wanted to resign. At this point, Lang confessed that she was going to work in the new bridal shop - but only as an employee (rather than the owner of the business). A dispute arose between the two women about the potential effect of the restraint of trade clause.
The new bridal shop opened about a month after Lang's departure from Harris Fashions. Yeh argued that some of the garments produced by this store bore a striking resemblance to her own clothing. She argued that Lang had learnt techniques for the creation of a particular style unique to Yeh's work while she had been employed at Harris Fashions - and that these techniques were now inappropriately being used in the new business.
The Authority accepted that Lang owed a duty of fidelity to Yeh whilst in her employment. It did not, however, accept that Lang had breached this duty by being involved in the setting up of a competing business prior to her resignation. In short, the Authority held that Yeh failed to establish that Lang's actions prior to leaving employment had undermined the business of Harris Fashions. There was no evidence of disclosure of confidential information (such as customer lists or patterns) and insufficient evidence to allow the Authority to hold that Lang had failed to apply herself appropriately to the business of Harris Fashions while she had been employed by it.
Further, the Authority considered the reasonableness of the restraint of trade provision. It held that, so far as the clause prevented Lang working as a machinist or tradesperson in the clothing business, it was unreasonable. It also held that Yeh did not have a proprietary interest (in the techniques used to create gowns) that was capable of protection by a restraint of trade. For those reasons, the Authority found that the restraint was unenforceable.
The end result was that Lang was able to work in the competing business without suffering any penalty (or being required to make payment of any damages to Yeh).
This decision illustrates the difficult issues which arise concerning restraints of trade and the protection of confidential information. It also illustrates the level of emotion that parties feel in situations involving "defecting employees". Russell Coutts might be able to tell us something about that ?
