Ex-Employee and Competitor Disputes in Malaysia: A Guide for Both Sides

What is an ex-employee or competitor dispute?

These disputes start when staff leave and the former employer believes it has lost clients, staff or information to them. The claim is usually against the former employees and the business they joined or set up, and sometimes against the people who run that business.

The situations we see most often are these:

• a salesperson or account manager joins a competitor and several clients follow;
• an employee starts their own business while still employed, or shortly after leaving;
• staff pass clients or jobs to an outside business while still employed;
• client lists, pricing, quotations, templates, source code or CRM records are copied before the employee leaves;
• a team resigns together and moves to a new company.

The same facts often lead to two separate cases: a civil claim in the High Court or Sessions Court about the information and the clients, and an Industrial Court claim if the employee was dismissed. What is said in one can be used in the other, so both need to be handled with the other in mind.

What claims can a company bring against former staff?

A statement of claim in this kind of case usually combines several causes of action. The most common are:

• breach of contract, usually the confidentiality, conflict of interest and exclusive service clauses in the employment contract;
• breach of confidence, which protects confidential information even where there is no written clause;
• breach of the duty of fidelity that every employee owes during employment, and of the fiduciary duties owed by senior staff and directors;
• conspiracy to injure, where two or more people combine to cause the company loss;
• inducing breach of contract and unlawful interference with trade;
• dishonest assistance or knowing receipt, against people who knowingly helped a breach of fiduciary duty or benefited from it;
• passing off, where the new business presents itself as connected with the old one.

The labels matter less than the evidence behind each element. A claim that is strong against the employee who copied files may be weak against a co-founder who never saw them, and the court looks at each defendant separately.

What counts as confidential information, and what does not?

Malaysian courts apply the three requirements set out in Coco v A N Clark (Engineers) Ltd [1969] RPC 41: the information must have the necessary quality of confidence, it must have been given in circumstances that created an obligation of confidence, and there must have been unauthorised use of it.

Information that is usually capable of protection includes a client list the business has compiled with contact persons, buying history and pricing, non-public margins and tender figures, technical drawings, formulas and source code, and internal strategy documents.

Information that usually is not protected includes anything in the public domain, an employee's general skill, knowledge and experience, and the kind of knowledge about the market and potential customers that any experienced person in the industry would carry in their head. English courts drew this line in Faccenda Chicken Ltd v Fowler [1987] Ch 117, and Malaysian courts follow the same approach.

The Federal Court made two points in Dynacast that shape most of these cases. First, the claimant must specify what confidential information was taken or misused, because a general allegation of misusing "confidential information" is not enough. Second, a former employee may use their own knowledge and experience, and setting up a competing business is not unlawful in itself. The court also warned against employers using vague confidentiality claims to stop former staff from competing.

A practical test for an employer is whether it can list, document by document, what was taken and explain why each item is not publicly available. If it cannot, the claim is likely to struggle.

Can a company stop former staff from competing?

Not through a non-compete clause, in most cases. Section 28 of the Contracts Act 1950 provides that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is to that extent void. The exceptions are narrow: the sale of the goodwill of a business, and certain agreements between partners.

What an employer can protect is its confidential information, its property and, depending on the wording, its clients and staff. The table below summarises the usual position after employment ends.

We explain section 28 in more detail in Is a Non-Compete Clause Enforceable in Malaysia?

What can the court order?

Most of these cases are decided in practice at the interim stage, within weeks of filing. The orders the court can make include:

• an interim injunction stopping the use or disclosure of the information, or contact with particular clients, until trial; Malaysian courts apply the approach in Keet Gerald Francis Noel John v Mohd Noor @ Harun bin Abdullah & Ors [1995] 1 MLJ 193, looking at whether there is a serious question to be tried, where the balance of justice lies and whether damages would be an adequate remedy;
• a search order, known as an Anton Piller order, allowing the claimant's solicitors to enter premises and preserve evidence where there is a real risk it will be destroyed;
• orders for delivery up or destruction of documents and data, and for an affidavit disclosing who received the information;
• at trial, a permanent injunction, damages or an account of the profits made from the misuse, and costs.

A company that applies for an interim injunction must normally give an undertaking to pay the defendant's losses if the injunction later turns out to have been wrongly granted. That undertaking, and the risk of overreaching, should be weighed before applying.

How do former employees and their new businesses defend these claims?

The strongest defences usually go to the facts the company must prove. Common lines of defence are:

• the information is not confidential because it is public, widely known in the industry or part of the employee's general skill and knowledge;
• the claim does not identify the information with the particularity the Federal Court required in Dynacast;
• there was no misuse, because the clients approached the new business themselves or were won through public sources and existing relationships;
• the clause relied on is a restraint of trade and void under section 28;
• the loss claimed is speculative or was not caused by anything the defendant did;
• for injunctions, the company delayed, or damages would be an adequate remedy.

People who never worked for the company face a different test. A claim for dishonest assistance requires proof that the defendant acted dishonestly in helping a breach of trust or fiduciary duty, as explained in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. A conspiracy claim requires an agreement or combination to injure and, for unlawful means conspiracy, an unlawful act. A family, friendship or business connection with a former employee is not enough on its own. We cover this in Sued by Your Former Employer in Malaysia? What to Do in the First 14 Days.

Where do dismissal and the Industrial Court fit in?

Employers often dismiss staff for misconduct such as an undisclosed conflict of interest, working for a competitor during employment or disclosing confidential information. A dismissal should follow a fair process, usually a show cause letter and domestic inquiry, because a dismissed employee can file a representation under section 20 of the Industrial Relations Act 1967 within 60 days of dismissal.

The civil claim and the unfair dismissal claim run separately and are decided on different tests. Written explanations, apologies and statements given during an investigation often appear later as exhibits in the civil case, so both employers and employees should take care with what is put in writing at that stage.

What should you do first?

If you are the company:

• suspend the departing employee's access to email, CRM, shared drives and messaging accounts, and collect company devices;
• preserve the evidence before it is lost, including email forwarding, file downloads, CRM exports and access logs;
• do not access the employee's personal accounts or devices without authority, because unlawfully obtained evidence can backfire;
• write down a timeline and identify exactly which documents and clients are affected;
• take advice quickly on whether to send a letter of demand or apply to court without notice.

Our article Ex-Employee Took Your Client List? What a Malaysian Company Can Do goes through these steps in detail.

If you have received a letter of demand or a writ:

• note the date you were served, because the time to enter appearance is short;
• do not delete files, emails or messages, even ones you think are harmless;
• stop using any document that came from the former employer;
• do not sign undertakings, statements or settlement terms before taking advice;
• collect your own evidence of how your clients and work actually came about.