Damages for using a client list

Damages for using an Employer’s client list

There is a reminder to former employees that they cannot use the client lists of their past employer to solicit business after they have left their employment. If they do they may be liable for loss of goodwill suffered by the employer.

A former employee is entitled to use knowledge which the former employee remembers, the employee is not allowed to take documents and notes about confidential information including details contained in client lists and using that information otherwise they will be in breach of their duty of confidentiality.

However provided there is no breach of confidentiality, a terminated employee is not prohibited from soliciting business from clients of their former employer unless there is a valid restraint trade in the contract of employment.

Confidentiality clauses and restraint of trade clauses in employment contracts play a vital role in protecting the legitimate interests of a business when an employee departs that business.

Recently in the NSW Supreme Court, the matter of Commercial & Accounting Services (Camden) Pty Limited v Cummins provided this reminder.

Cummins was an accountant. He sold his practice to Commercial & Accounting Services (Camden) Pty Limited (“C&A”). C&A also traded under the name “Best Practice”. In the Sale Agreement, Cummins undertook to refrain from conducting a

business of accounting services or tax preparation for a period of at least three years within a radius of ten kilometres of the business address of C&A.

Cummins also became an employee of C&A and was to create a minimum level of billings each week (17 hours). He was employed by C&A for three years then he terminated his employment

After the sale Cummins obtained a franchise to operate as a licenced financial planner under the name “ReInvest”. He rented premises and worked in his new business from these premises as well as for C&A. C&A even provided some referrals to ReInvest and referred client details of some C&A clients to Reinvest to facilitate invites to seminars run by ReInvest. He then sought to operate an accounting practice from the premises where ReInvest conducted its operations.

Cummins sent letters to those previous clients of C&A which included the following comments:

“Latest News – After working part time at Best Practice for the past several years, my contract there has ended June 2009. Many people have expressed their wish to continue having their accounting and tax needs met by myself, for which I am grateful. This has necessitated my return to my own accounting and tax practice as Dennis Cummins Public Accountant and Tax Agent …

The new contact details are as follows …”

A draft letter was attached with that letter. The draft letter was addressed to C&A which instructed the recipient to direct C&A to deliver the tax file papers of the client to Dennis Cummins.

These letters were staggered in their sending as lists were put together by Cummins and members of his family compiled from Cummin’s recollection and information ReInvest had. Though the number of C&A clients that received the letter was not able to be established.

The witnesses for Cummins gave evidence that lists were prepared on excel spreadsheets consolidating previous Re-Invest mail out lists, seminar survey responses, emails and telephoning people at their place of work.

In the first half of 2009, ReInvest had about 250 clients and by August 2010 it had 1,093 clients. Reinvest had grown its client base by 876 clients who were former clients of Best Practice and 550 of them were clients of the business purchased by Best Practice from Mr Cummins.

C&A’s business was almost destroyed while Cummins’ business apparently grew by the approximate number of clients that left C&A led to the conclusion that Cummins must have solicited many more clients of C&A than he admitted to.

The volume of clients that left C&A also led to the conclusion that Cummins could not have recalled the details of all of the clients that were solicited and that the client list of C&A was the source of information used in the mail out campaign. The Court noted that to obtain over 1,000 clients the letter must have gone to a lot more people who were not ReInvest clients for they were only about 250 people.

Cummins accepted that the details of the clientele of Best Practice were confidential information.

Gzell J noted that the details of the clients of C&A was not information that an employee was free to use after his termination of employment. It was not information “that once learnt necessarily remains in the servant’s head and becomes part of his own personal knowledge.”

Gzell J also noted that even if Cummins was free to use this information after the termination of his employment: “A former employee’s entitlement to use knowledge which the former employee remembers, and the absence of an entitlement to make notes and lists while in the employment and take them and use them, are very long established and are not open to doubt or debate.”

Gzell J noted the use of the client list of Best Practice offended these principles.

Gzell J noted that: “The employee cannot remove, whether by using paper or using memory, a material part of the former employer’s business records; but the employee can approach a particular customer or client whom that employee can recall without a list or deliberate memorisation.”

In this case, Cumming had grown his client base by 876 clients. Gzell noted that 876 clients left Best Practice and the Court assumed that they were solicited by Cummins using Best Practice’s confidential information. Gzell J speculated that of the 876 former clients of Best Practice more than 100 former clients were friends and relatives of Cummins and her daughter leaving 775 clients who were in all probability contacted by Cummins using the client list. 775 clients represented 75% of the number of clients in Best Practice.

The Courts decision was to award 75% of the loss of goodwill of C&A based upon a loss of 75% of its clients and this resulted in an award of $117,995 plus costs.