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HISL v Tunnard: competing businesses and unregistered design right infringement
A recent judgment in the Patents County Court has provided useful guidance on the duties owed by an employee wishing to set up a business in competition with their employer, and what constitutes ‘surface decoration', a feature that is not protected by unregistered design right.
Helmet Integrated Systems Ltd v Tunnard: Facts
The case involved Helmet Integrated Systems Ltd (HISL) and its former salesman and the first defendant in the action, Mitch Tunnard (T). HISL manufactures and sells helmets and other equipment used by the fire and emergency services and by the armed forces. T was a salesman responsible for selling HISL's 'flagship' F600 helmet.
While working for HISL, T came up with an idea for a modular helmet, which could be modified according to the individual wearer's requirements. He went to his employers with the idea, but they did not wish to take it further. As a result, T decided to set up his own business to produce, manufacture and sell a modular helmet.
During the last few months of his employment with HISL, T took some preparatory steps to set up his new business. In particular, he briefed a design company, AME Product Development Solution Ltd, about his ideas for a new helmet and gave AME samples of existing helmets, including HISL's F600.
T also applied for, and obtained, a government grant for his new business. He showed AME's initial design drawings to his friend, Mr Tyrell, who acted as a consultant to HISL and other helmet manufacturers, and asked for his opinion on them. Mr Tyrell thought that Lion Apparel Inc (Lion), a manufacturer of safety equipment, might be interested in the design. Mr Tyrell was also a consultant to Lion. All this work was done in T's own time, and he did not tell HISL about his plans. T resigned and left HISL on 28 February 2002.
Two months after leaving HISL, T set up Modular Helmet Systems Ltd (MHSL), the second defendant. T is the director and minority shareholder of the company; the majority shareholding now being owned by Lion. Lion had been one of HISL's largest customers and, following the approach by Mr Tyrell, was interested in T's ideas for a modular helmet.
T had no direct contact with Lion until after he left HISL and Lion did not invest in MHSL until several months later. T went on to develop his concept, which became the TARGA helmet, and which has been sold through the second defendant since 2005.
Employee duties
HISL contended that, by taking secretive steps to set up a competing business before leaving its employment, T was liable for:
- breach of his fiduciary obligations (it was claimed he had such obligations even though he was only a salesman and not a director of HISL); and
- breach of his duty of fidelity or, alternatively, breach of his contract of employment.
Despite the specialist nature of HISL's business, T's contract of employment did not contain any restrictive covenants. The only provision that HISL could rely on was set out in the company handbook, which states:
'10.1 No employee will be permitted to undertake any work or arrange the undertaking of any work which can be seen to affect adversely or be in competition with the company.'
This provision was treated by the Court as being equivalent to the common law duty of fidelity, which is addressed below.
Fiduciary obligations
The parties sought to rely on a number of authorities in relation to this issue. It was noted that most of the cases in this area relate to directors and senior employees of similar status, where general fiduciary obligations spring from their very positions in their organisations. In contrast, T was a middle-ranking employee.
The judge, HHJ Fysh QC, relied mainly on the case of Nottingham University v Fishel and another. That case involved a claim against Dr Fishel, a distinguished scientist specialising in IVF treatment. Dr Fishel was employed full-time by the University to run an infertility clinic and to carry out research in that field. While so employed, he not only undertook overseas work for remuneration without his employer's consent (as required in his contract), but also arranged for other employees of the clinic to work with him overseas, also in breach of their contracts of employment. The Court held that Dr Fishel was in breach of contract and that, by profiting from the overseas work of the employees under him, he had put himself in a position of conflict between his duties to the University and his own financial interests. However, in the absence of a fiduciary obligation, an employee was not obliged to disclose the fact that he was doing outside work in breach of contract.
In Nottingham University the Court identified the following three categories of relationships that can give rise to fiduciary obligations:
1) where the obligations arise out of the fact that one party is in a position of influence over another;
2) where one party is in receipt of information imparted in confidence by another; and
3) where there exists a relationship of trust and confidence which arises where one party undertakes to act in the interests of another, or where he places himself in a position where he is obliged to act in the interest of another.
The Court in Nottingham University decided that only the third category arose in that case and stressed that a fiduciary obligation in such circumstances only arises 'out of the employment relationship, but is not inherent in the nature of the relationship itself'. The judge in HISL v Tunnard remarked that this category also applied to the present case. The core of a fiduciary obligation of this kind is the obligation of loyalty. Therefore, to determine whether a fiduciary relationship arises it is necessary to identify the specific duties of the employee and decide whether, in the circumstances, the employee has put their own interests before those specific duties.
The judge commented that an intention to set up in future business is not to be regarded as something that places the employee in potential conflict with their employer, having regard to public policy principles on restraint of trade.
Duty of good faith and fidelity
The duty of good faith and fidelity is a lesser obligation than that of fiduciary duty, and is common to all employees. To succeed under this claim, the claimant must show actual competition or that the defendant misused confidential information which was in their possession.
The judge commented that acts of preparation before departure are not actionable; there is no breach of duty of good faith and fidelity on the part of an employee who decides to set up in competition with an employer and takes preliminary steps to do so. He stated that to rule otherwise would be against public policy, as it would lock an employee into corporate bondage or prevent them from getting a running start were they to leave.
He quoted with approval from a passage in Robb v Green, which states that, while the contract of service exists, a person intending to enter into business for himself:
'... may legitimately canvass, issue his circulars, have his place of business in readiness, hire his servants, etc. Each case must depend on its own circumstances.'
Conclusions on fiduciary and contractual claims
The judge held that T's activities were all reasonable and necessary acts of preparation for departure. There was neither a breach of any fiduciary duty nor a breach of duty of fidelity on the part of T.
In particular, he stressed the fact that T was not a designer himself and needed independent assistance if he was to be in a position to sell a competitive product. Although T had taken some steps for his new business in the few months before leaving HISL, this should be viewed in the context that it takes up to three years to produce a new helmet conforming with the necessary safety standards.
Any obligation of fiduciary duty owed to HISL by T must be confined to his duty as a salesperson. He was not, therefore, obliged to report any of his own preparations for his future which one day might possibly enable him to compete.
Design right claim
HISL alleged that the TARGA helmet infringed four design aspects of the F600 helmet, including the shape and configuration of a symmetrical double 'scallop' appearing on the helmet. HISL also included an 'omnibus' claim, alleging infringement based on the overall shape and configuration of the front half of the helmet arising from the combination of the other four features claimed.
The defendants put forward a three-pronged defence:
a) the TARGA helmet was independently designed, ie its design was not copied from the F600;
b) even if copying had occurred, a substantial part of the designs had not been copied; and
c) the 'scallop' design was excluded from protection under s213(c) of the Copyright, Designs and Patents Act 1988 (the 1998 Act) since it constituted surface decoration.
The judge noted that it was a normal and necessary part of the product design process for designers to familiarise themselves with the competition. As mentioned above, T had supplied a sample of the F600 helmet to AME, the designer of the TARGA helmet. AME's designer was adamant that he had not based his design for the TARGA on any of the helmet samples T had supplied, and the judge accepted this.
Having considered the features that were alleged to have been copied and the evidence regarding the design of the helmets, the judge concluded that three of the four claims for the infringement of design aspects of the F600 helmet should fail. He stated that 'the similarity of these features in the two products is... only apparent at the very broadest level of generality'. The judge concluded that this finding diminishes the 'omnibus' case.
As for the scalloping, the judge noted that it was accepted that the mere idea of providing scallops cannot support a legitimate design right claim because this is a standard technique used to break up a large and bulbous surface.
The judge went on to consider the statutory exclusion under s213(c) of the 1988 Act, which excludes surface decoration from design right protection. HISL admitted that the scalloping had been introduced to improve the look of the helmet, but argued that the scalloping feature is also functional in that it provides extra stiffening of the visor cover.
The judge considered several authorities on this issue, and relied, in particular, on the judgment of Mann J in Dyson Ltd v Qualtex (UK) Ltd. Mann J stated in Dyson that:
'... a subsidiary functional purpose does not take the design aspect out of this exemption if the primary purpose is surface decoration. However, the additional purpose has to be subsidiary.'
Applying this test, the judge held that the prime purpose of introducing the scalloping was decorative, and thus it was excluded from design right protection under s213(c). The fact that the scalloping may have a subsidiary functional purpose does not take the design aspect out of this exemption since the primary purpose is surface decoration.
The judge concluded that there was no copying, even sub-conscious copying, in the design of the TARGA helmet, and ruled in favour of the defendants.
Conclusion
The case confirms that acts taken by an employee, while still employed, in preparation to compete with their employer after their employment ends, are lawful. To commission an industrial design company to produce a new design for an article which may one day compete with the employer's product was an act of preparation and not an act of competition.
In many ways the position in this case was relatively straightforward, as the employee was a salesman with no design experience and no access to confidential design information. A similar case may be harder to defend if the employee was, for example, a key designer with access to their employer's confidential design information. In theory, the employee would still be free to commission a new design, but in practice would be more vulnerable to allegations of misuse of confidential information in doing so.
The judge's conclusions on the claim for unregistered design right infringement demonstrate the need to rely on specific, well-identified design right features in such claims, and to produce good evidence of copying. The case also demonstrates that defendants can rely on the exclusion for surface decoration even where the claimant can prove that there is a subsidiary functional purpose behind the design.
In short, T successfully defended all the claims against him and is free to continue manufacturing and selling the TARGA helmet. HISL had been claiming a 'springboard injunction' to stop sales of TARGA, and so the good news following this judgment is that firefighters can continue to use a state-of-the art helmet to protect themselves.
Helmet Integrated Systems Ltd v Tunnard (unrep, 10 February 2006)
Nottingham University v Fishel and another [2000] EWHC 221 (QB)
Robb v Green [1895] 2 QB 1
Dyson Ltd v Qualtex (UK) Ltd [2004] EWHC 2981 (Ch)
Nick Rose is head of intellectual property and technology litigation at Field Fisher Waterhouse. Field Fisher Waterhouse acted for the defendants, including Mitch Tunnard and Modular Helmet Systems Ltd, a subsidiary of Lion Apparel Systems Inc.