Good as ‘Gold’: Former employee liable in damages for using employer’s client list to promote competitor business

There are a number of checks and balances that should take place when an employee leaves an organisation, including that the employee has returned, and no longer has access to, the organisation’s confidential information and intellectual property. The failure to take these steps may result in a former employee using an organisation’s confidential information to solicit clients or set up a competitor business, which is exactly what occurred in the decision of Gold Titan Pty Ltd v Lopez [2021] FCA 918.

In that decision, the Federal Court of Australia (the Court) held that a former employee, Mr Nicholas Lopez, breached a confidentiality clause contained in his employment contract with Gold Titan Pty Ltd trading as Evagroup (Gold Titan), when he utilised a customer contact list owned by Gold Titan to solicit customers for his newly established competitor business.

The Court found Mr Lopez (and his business) liable in damages to Gold Titan as a result of him breaching his contractual obligation of confidentiality and him and his business breaching their equitable obligation of confidence.

Facts

The applicant, Gold Titan, was a floor product wholesaler, and relevantly, a reseller of Cemimax Products. Mr Lopez commenced employment with Gold Titan in April 2019 as a sales manager. He had no background in the flooring industry upon commencement of his employment.

The terms of Mr Lopez’s employment were set out in a letter of offer dated March 2019 which relevantly included that he was not to “use or disclose confidential information relating to the business of the employer, including but not limited to client lists, trade secrets, client details and pricing structures”.

In the course of his employment, Mr Lopez was given access to an electronic Excel spreadsheet containing a list or database of customer details held by Gold Titan. This list had been complied over some 12 years in the course of Gold Titan’s business (the Customer List). The Customer List was considered by Gold Titan to be a confidential document and access to it was limited only to certain employees (including Mr Lopez). It was never shared with any third parties.

On 9 August 2019 Mr Lopez resigned from his employment with Gold Titan, with his last day of service agreed as being 12 August 2019. ASIC records show on that same day, Mr Lopez established Imperial Flooring Pty Ltd (Imperial Flooring) and was its sole director and company secretary. From about 15 August 2019, Imperial Flooring had an operating website which described itself as a “Wholesaler & Commercial Flooring Supplier”, “a partner of Cemimax Australia”, and its “number 1 distributer”.

Mr Lopez sent a large number of unsolicited emails on behalf of Imperial Flooring touting for business, including emails sent on 9 September 2019 to a number of Gold Titan’s customers who, incidentally, were on the Customer List. The email introduced Imperial Flooring as a supplier of floor preparation products.

A number of Gold Titan’s customers, upon receiving the emails from Imperial Flooring, forwarded them on to a Managing Director at Gold Titan. The proceedings subsequently followed. In the course of the proceedings, Mr Lopez denied using any list from Gold Titan to source the email addresses for emails sent by him on behalf of Imperial Flooring.

Decision

Justice Abraham of the Court found that Mr Lopez had in fact, after ceasing his employment with Gold Titan, utilised the Customer List when he sent the unsolicited emails on behalf of Imperial Flooring, the business he established in competition with Gold Titan. Additionally, he would have been aware of the confidentiality clause in his employment contract given the relatively short period of time between his signing the contract and the conclusion of his employment with Gold Titan.

Justice Abraham further found that, for the Customer List to be confidential, it need not only contain customer contact details. For example, it was accepted that the Customer List contained details of other Gold Titan employees and its former landlord. This did not detract in any way from it being correctly characterised as a customer list or containing customer contact details.

It was held that there was nothing preventing Mr Lopez from doing his own research on behalf of Imperial Flooring. His obligation, arising from his employment contract with Gold Titan, was not to use Gold Titan’s confidential information, in this case the Customer List, in the manner that he did.

The Court outlined that the characteristics of the information, and the way in which the business compiled, protected and utilised the information will be relevant to determining whether the information is sufficiently protected by a confidentiality clause in an employment contract.

Mr Lopez was found liable in damages to Gold Titan for the breach of his employment contract. Additionally, the Court found that Mr Lopez and Imperial Flooring, by using the Customer List, breached their equitable obligation of confidence to Gold Titan. The amount of damages payable by Mr Lopez and Imperial Flooring is still to be assessed by the Court.

Take Home Messages

The decision in this case demonstrates that employees can and will be held liable for breaches of employment contracts where they inappropriately use confidential information of their employer, including in circumstances where the employee’s employment has ceased. Critically, Mr Lopez’s employment contract contained a clause prohibiting him from using and disclosing Gold Titan’s confidential information following employment, which Gold Titan could successfully rely upon in its litigation.

Employers should ensure that confidential information held by them and critical to their business operations is appropriately protected. At a minimum, we recommend that employment contracts contain an appropriately drafted confidential information clause and that access to confidential information is appropriately restricted during employment depending on an employee’s level of seniority. Upon cessation of employment, employers should also take steps to ensure that employees no longer have access to any confidential information or intellectual property, including on personal devices.

For more specific information on any of the material contained in this article please contact Lincoln Smith on +61 8 8210 1203 or lsmith@normans.com.au, Ganesh Krishnan on +61 8 8217 1395 or gkrishnan@normans.com.au or Anastasia Gravas on +61 8 8217 1331 or agravas@normans.com.au.