If you want to stop your ex-employees starting up a competitor business, Blackmagic won’t get you there!
In Blackmagic Design Pty Ltd v Overliese the Full Court of the Federal Court was recently asked to consider the legal remedies available to an employer in the event that his or her employee appropriates confidential information for the purposes of establishing a competitor business.
Blackmagic is a company that provides products and services for the television and film industry, and the litigation centred around a video capture card that was being developed by two of Blackmagic’s ex-employees. The video capture card was never actually offered as a substitute for Blackmagic’s products, and Blackmagic ultimately developed a card with enhanced functionality. In the meantime, however, Blackmagic went to court seeking a permanent injunction restraining the ex-employees from:
- using the misappropriated information; and
- producing the competitor card.
Blackmagic also sought equitable compensation in the form of the damages it suffered due to the delay in being able to produce its own card.
At first instance (see here for the judgment and here for the orders), Jessup J was prepared to issue a permanent injunction restraining use of the misappropriated information, but refused to make an order for damages or issue an injunction restraining the ex-employees from producing a competitor card.
The interesting part of Blackmagic’s case (and an aspect that it pursued on appeal) was that the competitor card was a “business opportunity or concept” that was Blackmagic’s property in equity. This equitable transfer was said to be the result of the failure on the part of the ex-employees to disclose the business opportunity to Blackmagic, which was (again, according to Blackmagic) a breach of a fiduciary duty owed by one of the ex-employee’s to Blackmagic.
In dismissing the appeal, and upholding the trial judge’s findings, Besanko J (for the Court) rejected Blackmagic’s argument and held that the competitor card “was at the most a product concept of some potential and not something over which there could be a property right”. Blackmagic’s breach of fiduciary duty argument received a similar treatment, with the Court finding it to be inconsistent with the general principle that fiduciary duties under Australian law are proscriptive, not prescriptive (ie there is no standalone “disclosure duty”). Instead, according to the Court, disclosure is to be treated as an element of the doctrine of conflict of interest, so, for example, a conflict of interest can be avoided if the person owing the duty discloses all material aspects of the conflict and obtains the consent of the person to whom the duty is owed.
So why was there no breach of fiduciary duty, given that there was definitely no consent on the part of Blackmagic to the conflict of interest? Rather frustratingly for Blackmagic, the Court found that Blackmagic had failed to join the dots between the conflict of interest and failure to disclose when it put together its case, with the consequence that no breach of fiduciary duty had been proved.
If a general theme can be drawn out of this, it is that courts are sensitive to the difference between protection of confidential information and inhibiting competitor businesses. In the finish, Blackmagic ended up bearing the lion’s share of the costs both at first instance and on appeal.