When and how an employee may be subject to fiduciary duties is a question which both Judges and practitioners and have found it difficult in practice to discern.

In its judgment in Ranson v Customer Systems plc [2012] EWCA Civ 841, last week, the Court of Appeal addressed how a court should go about ascertaining, in the circumstances of each case, whether an employee owed fiduciary duties and the scope of any such duties owed. It did so by a careful analysis and application of the existing case law but I concentrate below on the approach it derived from those cases.

The proper approach

The CA disapproved of drawing analogies with Company Directors and using the Director cases to discern the duties owed. Companies are artificial persons which can only act through human agents – the Directors. The Directors exercise the Company’s powers and are treated as trustees of its property.  For those reasons, they are in a fiduciary capacity in which they have to put the interests of the Company, for which they act as agent, before their own interests. 

Employees are not in such a fiduciary capacity. Any powers imposed on the employee are conferred by the employer under the employment contract. Whether they give rise to a fiduciary duty depends on the terms of the contract. It is the contract which should be the starting point of the analysis. The question is whether there are any specific contractual obligations which the employee has undertaken which have placed him in a situation where equity imposes a fiduciary duty, rigorously restricting his freedom to act in his own interests by requiring him to put his employer’s interests first, in addition to the contractual obligation.

No surrogates

Neither the implied duty of fidelity nor the implied duty of trust and confidence can be used as surrogates for fiduciary duties because:

The scope of the duty of fidelity derives from the terms of the contract.  Unlike the fiduciary duty of loyalty, the duty of fidelity is not a duty to act in the interests of another. It is one where each party must have regard to the interests of the other, but not one where either must subjugate his interests to those of the other.

The trust and confidence term is an incident of every contract of employment by implication of law. As not every contract of employment gives rise to a fiduciary relationship, it is clear that reliance on the trust and confidence duty cannot of itself give rise to fiduciary obligations.

Examples

Take the matter of business opportunities coming to a person’s attention. Whilst a director’s fiduciary capacity dictates that he must put the Company’s interests first and give to it the benefit of every opportunity he learns of falling within the scope of its business, an employee does not in general promise to give his employer the benefit of every opportunity falling within the scope of its business unless he owes a specific contractual duty to secure the work for the employer.

Take the duty to disclose one’s own misconduct. Whilst a director’s fiduciary capacity may dictate that he must disclose his own wrongdoing as part of his fiduciary duty to act in what he considers in good faith to be the best interests of his Company, an employee is not generally obliged to disclose his own misconduct.

Whether the employee has duties to bring business opportunities to his employer’s attention or to disclose his own wrongdoing will depend on the terms of the contract.

Effect

The decision in Ranson is likely to lead to a far more analytical approach to the question of employee duties in Business Protection cases in future.

by Julian Wilson 

The publication last week of the Joint Case Management Statement for today’s hearing in the High-Tech Employee Anti-Trust Litigation Class Actions brought in the US District Court for the Northern District of California, in San Jose, reveals publicly for the first time some of the evidence which was gathered by the US Department of Justice’s investigation into Anti-Competitive Employee Non-Solicitation Agreements between High Tech Companies.

 The DoJ investigation led to a civil antitrust complaint in the U.S. District Court for the District of Columbia and a settlement in September 2010 by which Adobe Systems Inc., Apple Inc., Google Inc., Intel Corp., Intuit Inc. and Pixar were prohibited from engaging in anti-competitive non-solicitation agreements which prevent soliciting, cold calling, recruiting, or competing for employees.

 As a result of the settlement, details of the non-poaching agreements which had arguably been made by some of the companies involved were not made public, but subpoenas in the Class Actions have resulted in disclosure of material collected by the DoJ including emails passing between some of the companies at senior management, and on occasion CEO level, describing agreements not to solicit or hire each other’s employees.

 According to the Joint Case Management Statement, the material includes an email dated 28 May 2005 from Adobe’s CEO, Bruce Chizen emailed to Apple’s Steve Jobs forwarding an email from Adobe’s Senior Vice President of Human resources to others at Adobe regarding “Recruitment of Apple Employees” stating:

 “Bruce and Steve Jobs have an agreement that we are not to solicit ANY Apple employees, and vice versa.” 

 In England, non-poaching agreements between employers have long been found to be subject to the Restraint of Trade doctrine and prima facie unenforceable. Famously, in Kores Manufacturing Co. v. Kolok Manufacturing Co the courts struck down what was described as a “non-poaching agreement” between two companies engaged in high tech chemical process product manufacturing by which they agreed not to employ any person who had been an employee of the other during a prior period of five years. In Esso Petroleum Co. Ltd. v. Harper’s Garage (Stourport) Ltd. two members of the House of Lords expressed the view that Kores could best be explained as a case concerning an agreement contrary to the public interest.

 The Defendants to the US Class Actions contend that the material disclosed shows no overarching conspiracy but only bilateral business arrangements. This is rather reminiscent of the losing argument run in Kores for the employers that as only one other employer was bound by the agreement and there were many other potential employers in the same industry who were not affected by it, the agreement was not an unreasonable restraint of trade. The court declined the invitation to distinguish the case of Mineral Water Bottle Exchange and Trade Protection Society v. Booth in which a trade association, which had 179 members throughout the United Kingdom, had a rule that no member should employ an employee who had left the service of another member until two years had elapsed from the end of his employment. The rule was struck down by Chitty J. as being in unreasonable restraint of trade, because it could have the effect of preventing former employees of any member from finding new work within the industry in which they were skilled. See similarly Eastham v. Newcastle United Football Club Ltd in which the transfer and retention system in relation to the employment of professional footballers in the Football League, which operated to prevent poaching of players between clubs, was held to be subject to the restraint of trade doctrine and to be unenforceable as a result.

Parliament’s Draft Financial Services Bill Joint Committee has issued its First Report recommending that the new PRA and FCA should take an active interest in staff remuneration and should rigorously enforce the Remuneration Code.

The Committee also recommends that the Government and the Regulators should consider increasing the share of executive remuneration that is deferred and conditional on medium term outcomes, or introduce a concept of ‘strict liability’ of executives and Board members for the adverse consequences of poor decisions, in order to ensure that bank executives and Boards strike a different balance between risk and return.