Finding a competitive edge over rival organisations is essential to any organisation’s success - and the loss of sensitive information used to achieve that advantage can severely damage a business.
How does an employer protect confidential information from misuse by former employees?
In essence, to claim confidentiality, employers must specifically identify information and prove that it contains material worthy of protection. This can be difficult to achieve, even where an employer has spent considerable resources developing the material.
Take, for example, the Barbagallo case, which illustrates the difficulties faced by employers seeking to protect their confidential information from former employees, and which also highlights the importance of including detailed enforceable confidentiality clauses and covenants in employment contracts.
Four key criteria must be satisfied to protect misuse of confidential information, which, employees have a duty not to misuse. The confidential information must be identified specifically, which means that it must be made known to an employee that the information is, and must remain, confidential. Ultimately, the best practice is to identify the information with precision in an employment contract or non-disclosure agreement that is provided to the employee.
The information must also have the necessary quality of confidentiality such that, as with trade secrets, there is a necessary quality of confidence; mere ‘know-how’, on the other hand, will generally not be protected. Finally, the employee must have received the information in circumstances that imposed an obligation of confidence prohibiting actual, or threatened, misuse of the information.
In Barbagallo’s case, the employee worked for a company, from October 1997, that provided marketing plans to pharmaceutical companies and that person’s duties included preparing proposals for the employer. Significantly, there were no confidentiality or restraint of trade clauses in the employee’s contract.
The employer developed a proposal, which was larger than anything it had previously prepared and which relied on an enormous amount of research, consultation and funding. Sadly, the proposal was ultimately rejected, but the employer decided to use the proposal to develop a template for other proposals that may be formulated in the future.
Two further such proposals were made on the subject, and, again, both were rejected. One of the pharmaceutical companies to which a proposal was pitched, however, decided to purchase the concept behind the proposal and the employee concerned arranged for this transfer of information to occur without the knowledge of the organization that owned it.
The sale included details of all conceptualizations, documentation and market research briefings. One month later, after the sale, in August 2000, the employee resigned and the pharmaceutical company that purchased the concept then engaged that person to run the program.
The former employer sued its erstwhile employee, seeking to account for profits lost. The employer alleged that the employee had breached an equitable duty not to misuse confidential information and argued that the proposal documents were confidential because they constituted a template for it to use in marketing proposals and that this was a fundamental aspect of the organization’s business. The employer asserted that while some parts of the template did not appear to be strictly confidential, the entire template should be deemed confidential because it was developed from combined knowledge, information and experience.
The employer asserted that the employee had breached a duty not to misuse confidential information by entering into contracts with the pharmaceutical company, and by taking the information from the organization after resigning with the intention to obtain business personally.
While the Court accepted that the information had been identified with specificity, it found that it did not have the necessary quality of confidence. Importantly, the Court took notice of the fact that the employee did not seek to conceal the actions and that the information had not been used by the employer for more than 10 years. Also, the company knew about the employee’s actions since, at least, March 2001, but raised no complaint until 2006.
The Court found that the information was not a trade secret, but, rather, fell within the category of ‘know how’, stating that the information carried a low degree of confidentiality because it related only to a method of business. While the Court accepted that the employer’s method of business was not necessarily shared by others, the information was simply a ‘model’, which was capable of being adapted to meeting the needs of various clients. Accordingly, the Court rejected the employer’s claim.
This is a clear and demonstration of the difficulty employers may have protecting confidential information from misuse by employees. Even though the employer had invested considerable time and money developing the information, it was found not to have the necessary quality of confidence.
In cases where confidential information does not meet the requisite classification as a ‘trade secret’ to be protected by the equitable duty of confidentiality, the information may only be protected if there is a valid restraint covenant in place.
Confidential information, and its commercially sensitive aspects, should be protected by employment contracts, agreements and/or organisational policy, which should define the information with precision and include enforceable restraints on its use and disclosure. This is particularly so if the employee presents a risk of resigning and using the information for his or her own gain. It is also important – as the Barbagallo case highlights – to take action to protect confidential information in a timely manner.
For more information on protecting confidential information, please contact Partner, Robin Young.