PIPEX, the £300m quoted internet provider that put itself up for sale last week, has become embroiled in a legal action by arch rival Rackspace, a US-owned London web-hosting business, alleging industrial espionage.

The case centres on former Rackspace managing director Dominic Monkhouse, 40, who left the company last July to head Web Fusion, the web-hosting division of Pipex.

Pipex has suspended him and Rackspace has sacked one of its women employees, with whom Monkhouse is alleged to have had a relationship. He has given court undertakings not to disclose any information before a court hearing.

The woman at Rackspace was accused of passing information to Monkhouse after he joined Pipex. That material concerned tenders, bids, and product pricing, according to insiders.

Monkhouse is a well-known figure and has lectured, spoken at conferences and written articles about the business. Former colleagues expressed surprise at the allegations against him. One said: “You’ll find that he is spending rather a lot of time skiing at the moment and not much time at his desk.”

A Rackspace spokesman said: “Rackspace commenced legal proceedings to protect its confidential information with the result that Dominic Monkhouse has given undertakings to the court not to use or disclose any such information pending the trial of this action. The proceedings are continuing.”

Rackspace had taken action against Pipex but Rackspace’s lawyers, Stevens & Bolton, said: “The proceedings against Pipex have been settled.” They refused to say on what terms the settlement with Pipex was made.

A spokesman for Pipex said: “Dominic Monkhouse is in discussions with his former employer. All information regarding any issues arising from this are subject to restrictions under disclosure. At this time Pipex is not party to the discussions and has no involvement in the issue. As such, we cannot make any comments on the validity of any claims in the public domain.”

Rackspace is by far the smaller of the two companies but is growing at a ferocious rate. In the last set of filed accounts it increased its turnover by more than 90% to £16.1m and made after-tax profits of £2.1m. The number of employees has shot up from only four when Monkhouse joined, to more than 100 when he left.

It will be a relief to Pipex boss Peter Dubens and shareholders that Pipex is no longer involved in litigation. Pipex put itself up for sale, with UBS advising on bids, after interest from Richard Branson’s Virgin Media Group, formerly NTL.

Last night Monkhouse could not be reached for comment.

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