The Maritime and Commercial High Court found that a small service company (S) had violated sections 1 and 19 of the Marketing Practices Act by employing a significant number of employees from a large competitor (I) over a short period of time. The Court attached importance to the fact that, during the process, I's regional manager had actively assisted the management of S.

I claimed compensation of DKK 74 million stating that S had inflicted a significant loss on I by way of a systematic and collective approach to I's employees for the purpose of recruiting and subsequently exploiting the loyalty of these employees. The claim was raised both against S and the former regional manager with I, who to a great extent had actively assisted S.

From mid-October to mid- November 2007, a number of employees terminated their positions with I. The notices of termination were given to the regional manager. The non-competition clauses of these employees were terminated by I based on the information provided by the regional manager, From 18 - 23 October 2007, contracts of employment were entered into between many of these employees and S.

According to the information received, 89 employees from I were employed with S within a short period of time.

In the period prior to the termination, there had been some dissatisfaction among I's employees.

S' ACTIONS

During the proceedings, S stated that, in the years prior to the recruitments, S' strategy was to become a nationwide service company. Until now, S had primarily been active on Zealand. In 2007, the owner and management structure of S was changed, which was a further incentive to grow. As part of the expansion plans, a broker contacted I on behalf of S for the purpose of buying I's business, but the offer was turned down.

On 7 October 2007, S sent a draft contract of employment to the regional manager with I. Prior to this, S had received a copy of the manager's contract. It appeared from the draft that if I maintained the clauses vis-á-vis the regional manager, he would become employed and paid as a consultant, and that these services would not be settled by S or any affiliated companies. 

In October and November 2007, S inserted nationwide job advertisements from which it appeared that S was setting up its business in Funen and Jutland. 

On 17 October 2007, S sent draft contracts of employment to seven employees with I to an anonymous e-mail address set up for the regional manager of S. It appeared that six out of the seven employees were to commence with S on 1 December 2007. 

In November 2007, S informed its customers and co-operation partners about the company's expansion.

In November 2007, an order to I was re-directed to S, and also recruitments and attempts to recruit further employees from I were made.

THE REGIONAL MANAGER'S ACTIONS

At the beginning of September 2007, the regional manager sent an e-mail to himself listing high-ranking and executive employees with I.

On 10 October 2007, the regional manager entered into a contract of employment with S, but this contract was subsequently cancelled based on the advice of the manager's attorney.

The regional manager was subject to non-competition and non-poaching clauses preventing him from recruiting employees from I in a specific period.

The regional manager terminated his employment at the end of October 2007, and in this connection, a severance agreement was entered into at the beginning of November 2007 between I and the manager containing, inter alia, a provision concerning a severance pay of DK 400,000.

In November 2007, the regional manager participated in a meeting with the management of S and the employees from I who had been employed with S. 

At the end of November 2007, the regional manager was dismissed summarily by I.

GROUNDS AND CONCLUSIONS OF THE MARITIME AND COMMERCIAL HIGH COURT

The court found that the fact that the management of S and the regional manager had exchanged information on I's executive employees for the purpose of employment with S, and as the regional manager subsequently omitted to give the management of I correct information based on the knowledge that he possessed thereby distorting the picture of what actually did take place as regards S constituted an intentional and gross violation of section 1 of the Marketing Practices Act and, in relation to the regional manager, it constituted an intentional and gross disregard of his obligations as a salaried employee. 

The court further found that the unlawful conduct of S and the regional manager was a contributory cause for I's waiving of the non-solicitation clauses of the resigning employees.

The court found that the severance agreement entered into between I and the regional manager on 2 November 2007 was invalid due to fraudulent misrepresentation. The court took into account that I would never have entered into the severance agreement if I had been aware of the actual circumstances.

According to the court, there was sufficient proof that the regional manager had actively assisted in S' establishment of a nationwide service company, and that the summary dismissal of the manager was therefore fair.

It was also the court's opinion that, on several occasions, S had grossly disregarded the rules of section 1 of the Marketing Practices Act, and on one specific occasion section 19, thereby becoming liable in damages according to section 20 of the Marketing Practices Act. The court also found that, on several occasions, the regional manager had disregarded his loyalty obligation thereby becoming liable in damages to be calculated according to section 4 of the Salaried Employees Act, and also becoming liable to pay the agreed penalty.

I calculated its loss based on the fact that the damage had not occurred. The claim was calculated as lost gross profit for a period of five years after the occurrence, based on the average gross profit in the five-year period before the action.

The court found that I's calculation principles were qualified as the basis of the statement of loss in a case such as the present, where it will be subject to insurmountable difficulties to ascribe a specific loss of turnover to specific customers or employees. The court found, however, that a number of circumstances should result in a significant reduction of the loss calculated by I.

According to an aggregate estimate of the market interruption and the loss that S' unlawful conduct had imposed on I, the court ordered S to pay compensation of DKK 15 million with the addition of interest and legal costs of approx. DKK 1,250,000.

The court found that the actions of the regional manager being liable in damages under the Salaried Employees Act had mainly been performed in the interest of S and without the regional manager obtaining any financial advantage in this respect, and that there was thus not sufficient basis to order the regional manager to pay compensation. However, the regional manager was ordered to pay a penalty adjusted downwards under the clauses of his contract of employment.

At the same time, the regional manager succeeded in his claim concerning holiday allowance and compensation of DKK 25,000 because I had passed on information about a police report concerning the regional manager to a third party. 

COMMENTS

The case is interesting as it concerns a fact - collective employment of a significant number of employees from a competitor - on which there is no important Danish case law. 

Irrespective of whether it may be very difficult to define the specific limitations as to when it is allowed to recruit employees from other companies - when the number is significant - the ruling shows that such limitations exist, which are exceeded if a company exploits and encourages the employees to act disloyally for the purpose of gaining a market advantage by way of customers.

As regards the relationship between the former employer and the employee who is undoubtedly acting disloyally, it is interesting that the court does not order the employee to pay compensation despite the very clear basis of liability. In this connection, the court attaches importance to the fact that the employee did not have any financial interest in the competitor's establishment of the business. In addition, it is noted that the agreed penalty, which the court found that the employee should pay under section 36 of the Contracts Act, was adjusted downwards to only two months' salary. This result is somewhat surprising compared to the documented actions. The reason for the downward adjustment is not mentioned in the ruling, and it is therefore not clear to which factors importance was attached, but it must be assumed that it was due to the specific circumstances.

The ruling also provide guidelines in relation to the calculation of losses in a situation like the present where it is very difficult to calculate an actual loss. The court accepted that the loss was calculated as an average decline in the gross sales compared to the income of a preceding period.

The content of this Newsletter is not, and should not replace, legal advice.

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Erik Wendelboe Christiansen

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Kristine Friis Nolsø

Senior Attorney