Koger v. HWM: significant Irish software case on competing with former employer

This week’s big intellectual property news might have been IRMA v. UPC, but last week saw another major judgment in Irish IP law: on Friday 8 October 2010, Mr. Justice Feeney gave judgment in Koger Inc. & Koger (Dublin) Limited v. O’Donnell, Woolman, Gross & HWM Financial Solutions Limited. The outcome has been described as “a victory for the right of IT employees in Ireland to regard their know how and experience as their own intellectual property.”

The case concerned former employees and contractors of the plaintiffs who set up in competition with them. This can be a fraught area, though of course there is nothing, of itself, wrong or unlawful about competing with a former employer or customer. The most common legal issues that arise in relation to such scenarios involve allegations that (1) the new competitor has breached contractual terms restricting them from such competition, and/or (2) the new competitor has breached the intellectual property rights of the former employer. Koger v. HWM involved such allegations, but it is also of wider relevance to the law on discovery.

All parties to the proceedings are involved in the  transfer agency software market and their customers are major financial services fund managers. The plaintiffs are linked companies marketing one of the leading products in that market. The three individual defendants formerly worked for the plaintiffs, either as employees or contractors, and subsequently set up the fourth defendant company to compete with the plaintiffs.

At the outset of the proceedings, the main case advanced by the plaintiffs was that the defendants developed their ManTra product to compete with the plaintiffs’ NTAS product as a result of a breach of confidence and an infringement of the plaintiffs’ copyright, particularly in their source code and design materials. This suggests a literal copying claim, ie: the defendants must have literally copied some or all of the plaintiffs’ source code and design materials. However, over the course of the proceedings it appears that the plaintiffs were forced to abandon this element of their claim, with their core expert giving evidence that he had never believed literal copying to have taken place.

This was a particularly interesting aspect of the case as, a few months before it went to trial, Mr. Justice Kelly gave judgment on a discovery motion brought by the plaintiffs. Kelly J’s judgment is of interest itself, as it deals with the extent to which a court can limit access to documentation discovered during court proceedings. For the purposes of seeking discovery, the plaintiffs’ experts “expressed the view that the defendants must have relied upon the plaintiffs proprietary source code and database structure information in order to develop the ManTra product” and they provided reports stating that they had discovered instances of literal copying. This allegedly copied code later transpired to have been licensed from third parties and was proprietary to neither side. Indeed, up to the time of the trial one of the plaintiffs’ experts contended that the defendants’ product contained source code from the plaintiffs’ product [Feeney J, para. 22]. However:

As the plaintiffs’ case was presented to the Court it became apparent that the plaintiffs no longer sought to rely on a claim based upon literal copying notwithstanding having claimed that such copying was substantial. [Feeney J, para. 24]

While the case started out, therefore, as being primarily concerned with literal copying of software source code it developed into a claim that the defendants had improperly benefited from their former association with the plaintiffs when setting up in competition. The allegations made by the plaintiff included that the defendants had conspired to set up in competition before they had terminated their involvement with the plaintiffs, that they had set about destroying the plaintiffs’ business and that they conspired to poach the plaintiffs’ staff.

Feeney J. noted that the credibility of witnesses was central to these matters. He found that the defendants’ witnesses were “truthful and reliable … coherent, accurate and credible.”

The evidence of [the defendants’] witnesses stands in sharp contrast with the evidence of [the plaintiffs’ two primary witnesses]. Both those witnesses demonstrated a willingness to provide misleading and unreliable evidence. They were evasive and unreliable in their evidence. Where there is a conflict [in evidence …] the Court favours the accounts given by and on behalf of the defendants. [Feeney J, para.18]

Feeney J also commented:

The manner in which the plaintiffs have prosecuted their claims demonstrates a willingness to alter and vary such claims without explanation. They have proceeded to drop a significant element of their claim, in abandoning the claim based upon E*TAS, without any explanation. Similarly, they have been prepared to persist with claims, such as the claim of literal copying in a material respect notwithstanding that their experts either did not believe that there was such literal copying or had not made the effort or been requested to ascertain and confirm that the common source code identified in the two products emanated from common third party sources. It was not until the very end of the plaintiffs’ case that there was an acknowledgement that the plaintiffs were not pursuing a claim for literal copying. A more troubling matter arose in evidence when it became apparent that the plaintiffs were prepared to plead and swear directly contradictory accounts in respect of the same set of facts in different jurisdictions. This was indicative of an approach whereby the plaintiffs were prepared to use a set of facts in such a manner as to manipulate them for present advantage without regard to the real truth. [Feeney J, para 28]

With regard to discovery, Feeney J characterised the litigation strategy of the plaintiffs as being “to make extensive and general assertions against the defendants and seek to have those parties disprove such matters.” This extended to seeking “further discovery when the discovery which has been obtained does not establish the claim already made”.

In effect, the overall approach to litigation demonstrated by Koger is that in relation to former employees the onus is on them to prove that they have done nothing wrong and that Koger can and will sue those parties to see whether or not discovery might produce the documentation necessary to prove Koger’s case and if the original discovery does not achieve that end, then further and additional discovery will be sought. [Feeney J, para. 31]

In light of the above, it is easy to predict the outcome of the case: all of the plaintiffs’ claims were dismissed. The judgment is long but worth skimming through, given the colourful nature of the proceedings (including Feeney J’s description of the plaintiffs’ manner of running their business and allegations that a death threat was made against one of the defendants’ witnesses when he was an employee of the first plaintiff).

The judgment helps define what is acceptable when a departing employees decide to compete with their former employers. For example, it confirms that embryonic discussions about a potential new business may be acceptable while still employed by another person.

A core argument advanced by the plaintiffs was that it was not credible for the defendants to develop their product so quickly without resort to improper methods. Feeney J found that the individual defendants succeeded in developing their ManTra product quickly as a result of their own significant skill and expertise. While some of that may have been gained while working for the plaintiffs, the defendants did not infringe the plaintiffs’ rights by employing such skill and expertise. An employer can protect their intellectual property rights, but that does not extend to the skill and expertise an employee or contractor might develop while working for that employer.

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