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Court steps in after business locked out of its own #ITsystems

Court steps in after business locked out of its own #ITsystems

  • United Kingdom
  • Technology, Media and Telecoms

16-07-2018

Summary

Keyfresh IT Limited (“Keyfresh”) acquired the assets of insolvent software company iTech IT Ltd (“iTech”). Fourteen minutes later, an iTech employee changed the passwords for iTech’s IT systems, locking Keyfresh out and effectively re-registering iTech’s website to iTech Information Technology Limited (“IIT”), a company incorporated by an iTech shareholder, Mr Barrett. Keyfresh asked the Court to grant injunctive relief against IIT.

What?

Mr Barrett developed a software program called ProFresh in association with Ferryfast Limited (“Ferryfast”), pursuant to a software engineering agreement entered into in 2005. In 2010, iTech was incorporated by Mr Barrett and the shareholders of Ferryfast. Mr Barrett assigned the benefit of the intellectual property in ProFresh to iTech and granted a non-exclusive perpetual royalty free licence to iTech to use the ProFresh platform. iTech subsequently developed ProFresh into a management system called iFiniti, and iTech’s focus became the development, licensing and support of iFiniti.

The relationship between Mr Barrett and the other shareholders of iTech eventually broke down, and in March 2018 iTech went into administration. On 19 March, Mr Barrett incorporated IIT. The remaining shareholders incorporated Keyfresh on 9 April. Keyfresh purchased the undertaking and assets of iTech (including goodwill and intellectual property as well as the right to use its name) at 9:14am on 12 April 2018.

Fourteen minutes later, key passwords on computer systems relied upon by iTech were changed. iTech’s website, "itechit.co.uk", was also “effectively re-registered in the name of Mr Barrett”, with the effect that emails sent to that domain and intended for iTech were re-routed to IIT. Customers of iTech later found that their support contracts had been transferred to IIT, and it emerged that IIT had canvassed former customers of iTech via emails with the subject “Our New Location” advertising that services formerly provided by ITech were now to be provided by IIT and describing IIT’s services as being an “the opportunity to continue receiving the same great managed IT services together with continued support for iFinity from the same great team”.

Keyfresh applied for injunctive relief. Keyfresh’s application was successful and the Court issued an injunction including orders restricting IIT and Mr Barrett from using certain confidential information; from accessing or attempting to access Keyfresh’s servers; from altering or attempting to alter login details of Keyfresh or its customers; taking steps to divert emails; from selling or licensing the iFiniti software; and from trading under the names “iTech Information Technology” or “iTech”. In reaching its decision, the Court considered the well-known test for interim injunctions established by American Cyanamid Co v Ethicom Ltd [1975] AC 396. Applying those tests in turn, the Court found:

1. Is there a serious issue to be tried? Yes. Keyfresh relied on passing off, copyright infringement and breach of confidence. The Court accepted that a serious issue arose in relation to each cause of action:

a. Former iTech customers had been confused by the similarity in both the names of the companies and the services they provided, in addition to the ‘re-registration’ of iTech’s website to IIT. The Court was satisfied that such confusion was sufficient evidence that a serious issue had arisen in relation to passing off.

b. The Court found that alteration of passwords and thereby disabling the ability to cancel licences provided to customers raised a serious issue to be tried in relation to copyright infringement.

c. There was an arguable case that confidence had been breached when the confidential universal password, applicable to all customers, was used to access iTech’s systems and enable alterations to be made to customer accounts.

2. Are damages an adequate remedy? No. Although the Court considered that some of Keyfresh’s losses would have been quantifiable, it would also suffer unquantifiable loss both in relation to potential new customers and because IIT may have been able to establish itself as a competitor in the market via the use of copyrighted or confidential material and/or goodwill which belonged to iTech. A factor in in support of the Court’s determination was that it was not satisfied that IIT or Mr Barrett would be in a position to pay any damages which may be awarded.

3. Where does the balance of convenience lie? In deciding to grant the application, the Court carefully considered the impact of granting the relief on IIT, a company in its infancy. The Court concluded that IIT was so new that it could create a new brand should it lose the action. In addition, it was submitted that customers were attracted by Mr Barrett’s connection to a company and therefore the name of such company would be of lesser significance. It was decided that the balance of convenience came down to preserving the status quo as it was at 9:14am on 12 April 2018.

So What?

As the Court summarised its decision, “the simple fact is that the administrator sold the goodwill and intellectual property of iTech IT Limited to Keyfresh. Somebody, to the advantage of iTech Information Technology Limited, has accessed Keyfresh's purchased systems, has diverted emails, has taken control of the domain name and has held itself out as the newly relocated business providing exactly the same services as were provided by iTech IT Limited. In my judgment, the purchaser of the business is entitled to be protected against conduct as to which there is a serious question as to its lawfulness in circumstances where it cannot be properly compensated in damages.”

This case highlights the importance of heeding the terms of (and restrictions arising out of) the sale and transfer of a business, particularly when the transaction follows a breakdown in relations between key figures in the business. It also provides a welcome reminder of the extent to which the Courts may be willing to intervene when a business is faced with such conduct in respect of its IT systems.

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