Employees ordered to pay SEK 1.5 million for competing with employer's business

In June 1998, three employees who started a company competing with their employer's business were ordered by the Swedish Labour Court to pay the extraordinary sum of SEK 1.5 million in damages. For the first time, the Court applied the special provisions regarding the liability of employees in the Act on the Protection of Trade Secrets.

On 17 June 1998, the Labour Court (Arbetsdomstolen, AD) ordered three employees to pay SEK 1.5 million damages to their former employer (AD 1998/80). The sum is extraordinarily high by Swedish standards.

The employer is a "personnel secondment" firm, ie a company which leases personnel to other employers on temporary basis. The three employees had strategic positions in the company and a good knowledge of its customers and their requirements. At the end of 1994 a conflict arose between them and the company owners, and some months later all three left without observing their terms of notice. They enticed several colleagues to join them and immediately set up a personnel leasing firm of their own, recruiting their former employer's customers.

To start a competing business while one's employment contract is till in operation is regarded as a severe breach of the duty of loyalty enshrined in the contract. However serious, had this been the only offence, the three people concerned would normally be liable only for comparatively low damages for not having observed their terms of notice. But in this case the employees had also caused considerable economic loss to their former employer by making use of information about the employer's customers and the special skills of each of its personnel - information which constitutes a trade secret in the meaning of the 1990 Act on the Protection of Trade Secrets, the Labour Court ruled. This explains the extraordinarily high damages. This was the first time that the Court had applied the special provisions on the liability of employees in this Act.