Former employee locking business accounts for IP ransom?

In Grow MF Pty Ltd v Parthy [2023] FCA 442, the Federal Court held that a former employee was not justified in withholding access to company technological accounts on the basis of a potential intellectual property claim.

Background:

The applicant, Grow MF Pty Ltd, operates a marketing technology business. The respondent, Mr Parthy, is a software engineer and was a part-time contractor of Grow MF in June 2022 and was subsequently employed in the role of Chief Technology Officer from 39 November 2022 until his resignation on 24 April 2023. Mr Parthy then attempted to rescind his resignation on 29 April 2023. The applicant refused to accept his withdrawal and on 29 April 2023 terminated his employment because of Mr Parthy’s gross misconduct.

The applicant alleged that Mr Parthy, after resigning, removed access for some Grow MF staff to technological accounts that were required for the operation of the business and sought orders to restore access to these accounts.

Intellectual property cross-claim:

The parties were in dispute as to whether any transfer of intellectual property was made from Mr Parthy to Grow MF when his employment commenced, and whether the rights to intellectual property created whilst he was employed are to be dealt with solely pursuant to Mr Parthy’s employment contract.

Mr Parthy alleged that he had entered into an agreement with Grow MF that in return for the transfer of his intellectual property, he would be remunerated by way of his base salary and a 5% equity share in Grow MF.

The court accepted that Mr Parthy may have a potential cross-claim but did not find this relevant to the current matter or justify his actions in relation to the accounts.

Consideration:

The court was satisfied that Mr Parthy owed duties to Grow MF under the Corporations Act 2001 (Cth), pursuant to his employment agreement and in equity, and has, in breach of those duties, removed Grow MF’s access to the technological accounts and has refused to restore that access.

The court was also satisfied that:

• The balance of convenience weighs against the respondent.
• Mr Parthy, whilst no longer employed at Grow MF, has unauthorised control over copyright works of Grow MF.

As such, the court, whilst balancing the potential for Mr Parthy to bring a claim as to his alleged intellectual property rights, sought an undertaking on behalf of the applicant that it will not delete, destroy, modify, take any step which is likely to damage any of the material held in the relevant technological accounts.

The Court’s decision:

The Court ordered Mr Parthy to restore Grow MF’s employee’s accounts and provide the applicant’s lawyers with a copy of all materials held on the platform.

Practical takeaways:

It is difficult to avoid all risk, however these practical steps can mitigate your business’ exposure:

1. Document and distribute clear policies requiring all digital assets to be:

• held in the name of the company not an individual where possible;
• registered using generic company email addresses so that any ‘forgot password’ emails or attempts to update old employee details can be accessed centrally;
• under the control of at least two administrators, with passwords reset immediately on departure of any administrator;
• manage domain names by one Registrar.

1. Conduct regular audits of your online presence to determine the extent of accounts which are being used/purporting to be used in connection with your business to ensure they comply with policy;
2. Check employment contracts to ensure they require compliance with company policies, including in relation to digital assets; and
3. Obtain written assignments of any individual rights in works underpinning your brand.

For assistance managing employee exits, contact the Red Wagon team on 08 8166 2110.

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