Imagine a very senior employee of your organisation, one who is responsible for managing key client relationships, knows your industry well and is aware of information that may be critical to giving your business an edge over its competitors. Imagine the damage that could result if your employee used that information to set up in competition. It's a sobering thought.
In previous updates ( Prevention is better than cure and a 10 minute health check), we've discussed steps that you can take to protect your customer connections. This time, we'd like to talk about your confidential information—what it is and when you can protect it.
It seems pretty straightforward: many employment contracts will contain a confidentiality clause that protects defined categories of confidential information during the course of employment. And after employment ends, there may be a contractual restraint that continues to bind the ex-employee. But what happens if there isn't an express protection of confidential information? Or your confidentiality clause is in generic terms? Or the restraint period has expired or is not enforceable?
What is confidential information?
The definition of "confidential information" at law does not shed much light. Information will be "confidential" when:
- it has "the necessary quality of confidence", and
- is imparted in circumstances importing an obligation of confidence.
More practically, courts have identified factors that may suggest information held by an employee is confidential in nature. The more of these factors existing in the circumstances, and the stronger they are, the more likely it is that your information will attract the protection of law. The considerations can include:
- the extent to which the information is known outside the business
- the extent to which the information was known by employees and others involved in the business
- the extent of measures taken to guard the secrecy of the information
- the value of the information to the business and its competitors
- the amount of effort or money expended by the business in developing the information
- the ease or difficulty with which the information could be properly acquired or duplicated by others
- whether it was plainly made known to the employee that the material was regarded by the employer as confidential
- the fact that the practices of the industry support the assertions of confidentiality
- the fact that the employee has been permitted to share the information only by reason of their seniority or high responsibility, and
- the information can be readily identified.
When will confidential information be protected?
Whether or not your information is "confidential information" is critical and will affect both the enforceability of contractual restraints and the availability of remedies.
Courts will distinguish between confidential information that is protected (trade secrets) and confidential information that, subject to any contractual limitations, employees are entitled to use and is generally not protected (know-how). Sometimes the distinction between the two types of information can be difficult to draw, particularly when it is all just information in an employee's head. In some cases, a court will provide a post-employment restriction on the employee's dealings with the employer's clients. This may be because the employee might use information to the employer's detriment in circumstances where it would be very difficult for the employer to prove that confidential information was being misused.
How is confidential information protected?
It's best to have a contractual term that sets out what information is confidential and prohibits employees from misusing the information. Be specific! Don't rely on generic descriptions used by lawyers in employment contracts. If you have certain information or documents that you want to protect, then describe them, specifically, in the contract. For example, rather than "marketing and financial plans" try "The ABC 2016 Marketing Plan". Of course, you may not know what specific documents need protection, or they may not be in existence yet. And there is a whole range of information that may not be contained within a document and can't be accurately described. So you'll still need a well-described catch-all clause, because you won't be able to describe every piece of confidential information.
In the absence of clearly defined contractual terms, employers are still able to prevent the use and disclosure of confidential information through an implied term that'll restrict employees from disclosing their employer's confidential information. Employees also have a duty to act in good faith and in their employer's best interest, which gives employers some protection against employees who use confidential information for their own benefit.
In circumstances where the employee has left employment and is using confidential information to give themselves a competitive edge over the employer, courts can apply the "springboard principle" to restrain the employee from using confidential information, contacting clients, or even from working in a competing business. The purpose of this type of non-contractual restraint is to prevent the confidential information from being used by an employee to give themselves a head start over their former employer, who will have expended time, effort and resources developing the confidential information.
Business critical information protected by non-compete restraint: Special Broadcasting Service Corporation v Andrew Corbett  NSWSC 461 (19 April 2016)
SBS sought an injunction against Mr Corbett, who resigned from his employment partway through a fixed-term contract. SBS sought to restrain him from working for the ABC or for any other media organisation or competitor of SBS, for the remaining duration of his employment agreement and, additionally, to restrain him from disclosing SBS's confidential information.
The information sought to be protected was information that Mr Corbett obtained while working on projects for the SBS, particularly the Broadcast Playout Project and the Media Asset Management Project (MAM Project). Although Mr Corbett contended that none of the material to which he was given access to was particularly confidential, the Court found that the material represented major business plans and project budgets of the SBS—material that is often treated as confidential, particularly when considering competitors having access to such material.
The specifics of the projects were subject to confidentiality undertakings, which meant details were not made public in the proceedings. But the Court heard that the Broadcast Playout Project sought to reform the manner in which broadcast content was received by SBS for transmission. And that SBS would adduce evidence at final hearing that it would be one of the only broadcasters in the world to outsource this function to an external provider.
SBS also proposed to adduce evidence at final hearing to support the conclusion that both projects required significant financial investment and the commitment of substantial executive time on the part of SBS.
For all of these reasons, the Court was prepared to award the SBS an interlocutory injunction, restraining Mr Corbett from working for the ABC or any other competitor.
Business manual is confidential information: Ezystay Systems Pty Ltd v Link 2 Pty Ltd  NSWSC 1105
Ezystay operates student accommodation in Sydney. Mr Riches was appointed as Ezystay's director. Mr Riches and his wife went on to set up a competing student accommodation provider, Link 2. Under a deed with Ezystay, the Riches were required to deliver Ezystay's documents and not copy or reproduce Ezystay's confidential information. In issue was whether Ezystay's business manual and systems manual that set out the procedures and processes for Ezystay's business model were confidential information.
It was accepted that the Riches had copied parts of the business manual and other documents to create Link 2's business documents. In determining that this material was confidential information, the Court considered a range of factors, such as the time and cost expended in preparing the material, the fact that access to the material was restricted and that the purpose of the material was to give Ezystay a competitive advantage.
The Court held that the business manual was Ezystay's "business model or formula for success for the operation of its business" and fell within the meaning of confidential information as defined in the Deed. IIn copying the confidential information, the Riches were found in breach of their deed with Ezystay.
To be added to our restraint of trade mailing list and receive future updates on the topic, please complete the restraint of trade subscription form by clicking here.
We would like to acknowledge the contribution of Conor McNair to this article.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.