When employees leave: What employers in Asia/Pacific need to know about protecting company rights and confidential information - Contract of Employment

This publication is based on a 2015 webinar presented by a representative group of the Asia/Pacific members of the Employment Law Alliance focusing on "When Employees Leave: What Employers in Asia/Pacific Need to Know about Protecting Company Rights and Confidential Information." It briefly describes how the issues of non-competition and protection of confidential and proprietary information are handled in 16 jurisdictions across Asia and the Pacific, and the steps companies can take to protect their interests when employees leave.

The three key issues addressed during the webinar – and again by the participating jurisdictions in this publication – are:

Is it possible to prevent employees from competing? If there is a post-termination non-compete, what are the remedies? Are injunctions available?
What remedies are possible for a breach of a confidentiality obligation and IP rights?
What are the considerations if the breach involves cross-border?

QUESTION 1:

Is it possible to prevent employees from competing? If there is a post-termination non-compete, what are the remedies? Are injunctions available?

Employees can be prevented from competing with their employer (e.g., being involved in a rival business) during employment under the common law-implied term of fidelity and good faith. This obligation does not continue post-employment. However, competition within this context can be prevented where the employment contract of the former employee includes an express restraint clause.

Restraint clauses are subject to the common law doctrine of "restraint of trade," – i.e., to be valid, such a clause must be directed at protecting the legitimate business interests of the employer, such as trade secrets or the goodwill of the business. The courts will not uphold a clause that restricts competition per se, and will not allow unfair limits placed on an employee's employment opportunities.

Restraint clauses typically prohibit an employee from setting up or working for a competitor, "poaching" clients or staff of the business, and/or using the employer's confidential information for a specified period after his or her employment ends.

In determining if a restraint clause is reasonable in scope, and therefore enforceable, courts will consider: (1) its duration/how long it applies; (2) the geographical area in which it applies; and (3) the activities of the former employee that it seeks to control.

If a court finds that a restraint clause is too broad or goes beyond protecting the employer's business interests, there may be a possibility of "severing" or "reading down" the clause to make it enforceable. However, this will depend on how the clause is worded. The courts will not rewrite a restraint clause, but they may strike out the unreasonable terms of one that is "stepped" or "cascading" (i.e., a series of overlapping restraints) so that the remainder is enforceable against the former employee.

In the state of New South Wales, specific legislation ( Restraints of Trade Act 1976 (NSW)) enables the courts of that state to "read down" an invalid restraint clause to give it the extent of operation that the court considers reasonable (irrespective of whether the clause contains "cascading" provisions).

Enforcement of a valid restraint clause against a former employee is usually done by way of an application for an interlocutory injunction. In this type of proceeding, the employer would need to show that the restraint clause is enforceable; is being, or is likely to be, breached by the former employee; and that the balance of convenience favours granting an injunction.

Monetary damages may also be available where the employer can show that damage to its business interests has in fact occurred (e.g., loss of clients to the former employee's new company).

QUESTION 2:

What remedies are possible for a breach of a confidentiality obligation and IP rights?

An employer is protected against unauthorised use or disclosure of confidential information communicated to or acquired by an employee in the course of employment, during or after the employment relationship.

An employee's obligations with respect to confidentiality are derived from the common law implied duty of fidelity and good faith, and the equitable obligation of confidence. Confidentiality restrictions are also commonly imposed through express contractual provisions.

The post-employment constraints on an employee's use of the employer's confidential information will only apply to information that is genuinely "secret" or "confidential." This includes, for example, formulas or manufacturing processes, marketing plans, business strategies, client lists, etc.

However, information that employees naturally acquire during their employment, or the "know-how" they acquire over a number of years, will not be protected (i.e., the employee will be allowed to use that kind of information post-employment).

An employer whose confidential information has been misused by an employee/former employee may be entitled to remedies, including damages for breach of express or implied contractual obligations, compensation for breach of the equitable duty, an account of profits, or injunctive relief. A court may also order the delivery up and destruction of documents containing the relevant confidential information.

In general, IP rights vest in the employer where the work/material/inventions protected by patents, copyright, trade marks, or designs are created in the course of an employee's employment. This general position will be subject to any agreement reached between the employer and employee (e.g., most universities allow academics to retain copyright in books, journal articles, etc. that they author).

QUESTION 3:

What are the considerations if the breach involves cross-border?

Choice between Australian and foreign law: This could arise, for example, in relation to enforcement of a post-employment restraint against an employee of an overseas-based company working in Australia. In this situation, it is likely that an Australian state or territory court would apply the law applicable to restraint clauses in that state or territory – even if the contract had been entered into in an overseas jurisdiction. In some instances, however, an Australian court will be guided by the law nominated by the parties in their contract (i.e., the proper law of the contract).
Choice of law among Australian jurisdictions: This is generally not a major issue given the similarities in restraint of trade laws operating throughout Australia, with the exception of the specific legislation operating in New South Wales (see above). Further, an Australian state or territory court is obliged to give full faith and credit to the judgments of courts in other states and territories. Therefore, any order made with respect to a breach of a restraint clause or confidentiality obligations may be enforced in a different state or territory to that where the order was made.

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.