5 easy steps to protecting confidential information

In this article, Dr Maria Anassutzi, intellectual property expert, analyses and discusses the various issues employers must look for when trying to protect their intellectual property, know-how and confidential information from their employees and independent consultants.

Employees owe their employers implied duties of confidence and of fidelity or good faith. Employees who are also directors owe an additional fiduciary duty to act in the company’s best interests. These implied duties are breached if, for example: (i) An employee sets up in competition with their employer or copies or deliberately memorises lists of customers to use after termination or (ii) A former director seeks to exploit what was a maturing business opportunity for the employer. However, these implied duties are not owed during any contractually enforced garden leave period.

There are three specific categories of confidential information:

1. Trivial: information that, due to its trivial character or its easy accessibility from public sources, cannot be regarded as confidential.
2. Confidential: information that the employee must treat as confidential because: (i) the employee is expressly told it is confidential; or (ii) from its character it obviously is confidential. This information, once learned, necessarily remains in the employee’s head and becomes part of the employee’s own skill and knowledge applied in the course of the employer’s business. Generally, an existing employee can be stopped from misusing or disclosing this information but will not impose any implied restrictions on the employee’s ability to use or disclose it, even to a subsequent competing employer, after the employment ends.
3. Trade secrets: information that, by its nature, is highly confidential and is referred to as “trade secrets” or their equivalent: for example, chemical formulae, designs or special methods of construction. The courts will imply terms to protect this against misuse or disclosure post-employment.

Trade secrets include information used in a trade or business which is subject to limited dissemination (or at least where widespread publication is not encouraged) but which, if disclosed to a competitor, would be liable to cause real (or significant) harm to the owner of the secret.

Therefore the implied duty can extend to cover highly confidential information that is not just of a technical or scientific nature. Information concerning personal relationships can also be trade secrets for the purposes of imposing implied restrictions post-employment.

Even though mere “confidential information” is not implicitly protected post-employment, employers can use restrictive covenants in their employment contracts to extend the implied protection of confidential information. Restrictive covenants fall into two categories:
(i) Covenants that relate specifically to certain information (non-disclosure/use clauses). These may attempt to extend the duration of the employee’s implied confidentiality obligations that arise during employment and
(ii) Covenants that prohibit certain acts, irrespective of whether specific information is being used (for example, not to compete within a certain area or not to solicit former customers or employees, in each case for a limited period post-employment).

Either type of covenant is susceptible to being held unenforceable depending on the information itself. For example is it information with a limited “shelf-life” or to which the particular employee could not possibly have had access? What is the nature of the market in question, how localised it is, how quickly things move on?

Another way employers can protect their know-how and confidential information is to include a provision in the employment contract for a specified period of “garden leave”. During this time the employee remains employed but does not attend work. As a result, the employee is effectively denied access to the company’s information and contractually bound not to work for anyone else. The implied protections do not survive during this period so a garden leave clause should include express terms to continue the implied obligations of confidentiality, at least until the period ends.

These clauses are particularly beneficial to protect information that is commercially sensitive whilst current but not a trade secret (that is, which may not be protectable post-employment, even with an express provision). However, a long period of garden leave may have an adverse impact on the enforceability of otherwise reasonable restrictive covenants, in particular if the latter also last for a long period. Therefore, it is not uncommon to provide for a corresponding reduction in the restraint period for each day of garden leave served.

Employers seeking court protection need to take action promptly to restrain any misuse of IP rights or confidential information. Delay is a bar to injunctive relief, particularly where the employer has allowed the employee to set up or join a competing venture before deciding to take action. For example, a delay of two months may be considered unreasonable.

It is also essential that the employer is not in material breach of the employment contract. Where this is the case, the former employee can rescind the contract and all its clauses, including the restrictive covenants. This is the case even where the covenant is stated to apply after the termination of the contract “howsoever arising”. For example, attempts by the employer to make a non-contractual payment in lieu of notice could trigger a wrongful dismissal claim and leave the contract unenforceable. Therefore, where the enforcement of post-termination covenants is important, it is important to include a payment in lieu of notice provision.

However all cases are considered on a case by case basis, Where an independent contractor was involved it was held that a provision protecting confidential information continued to apply after the termination of a contract for services despite a repudiatory breach of the agreement. Significantly, the court held that it would have come to the same conclusion if the case had involved an employee, arguing that there could be no justification for making a wrongly dismissed employee “a present” of his employer’s trade secrets or other confidences.

All articles are for general purposes and guidance only and do not constitute legal or professional advice.