UK: Protecting Intellectual Property - Preparing for Competition from Employees and Consultants

Businesses spend an inordinate period of time and money establishing client relationships during the course of building their business and venturing into new markets and technologies. An inevitable part of that process is engaging trusted people to carry out the work required to generate new revenues, build new technologies and manage the business. These processes create personal human relationships between members of staff and external suppliers and clients.

Courts have always been reluctant to prevent people from working and unreasonably preventing competition by allowing onerous restrictions on employees when they end their relationship. In the case of consultants, the legal obligations owed to the people paying for their services are generally more relaxed.

In the rush to engage skilled staff businesses frequently neglect to safeguard themselves against what might be called unfair competition – establishing relationships and networks on the pocket of the business and then leaving to join or create a competing enterprise. Tensions rise after the employment relationship ends and an employee wishes to use confidential information of their former employer for their own interests even when they compete and conflict with their former employers’. The courts say that ex-employees are permitted to earn a living without unreasonable or unfair restraint upon competition. After an employment contract ends, the legal relationship descends from one of a fiduciary relationship where employees are not permitted to compete with their employer, even during their spare time, to one where a court is reluctant to intervene.

How then is it that companies may properly protect their intellectual property from the outset? Firstly, receiving an assignment of the intellectual property rights in consultancy or freelance arrangements is key. In the case of employment relationships, intellectual property rights are owned by the employing business by default.

It is one thing to try and protect a business by ensuring that it owns the intellectual rights in creative materials, it is quite another to safeguard itself after the employment relationship has ended.

Looking forward and planning for the post employment or retainer relationship requires an appreciation of the nature of the information that is protected both during and after the employment relationship.

Information acquired during the employment relationship may fall into two separate categories:

1. information (confidential or otherwise) that may be used post employment, as the quality of confidence is lost at the end of the employment relationship;
2. trade secrets that may not be used after employment relationship has ended.

The boundary of the law with respect to these two types of information is this: whether the information in question is fairly considered part of the employee’s stock of knowledge which a person of ordinary honesty and intelligence would recognise as to be the property of their former employer. If the question is answered affirmatively, the information is confidential and protectable. Answered in the negative and the information is characterised as know-how and not protectable, falling into the general knowledge or know-how of the employees’ own trade.

A court will be more inclined grant relief to an employer on the basis that information is a trade secret where:

1. the employee habitually comes into contact with trade secrets
2. the information disclosed meets the requirements of the test set out in the previous paragraph
3. the nature of the information was impressed on the employee – this best supported with contemporaneous evidence in writing
4. whether the alleged trade secret may be separated from other less important information

Instances of confidential information that have been successfully protected in the courts are:

• Unpublished catalogues
• Customer lists
• Mathematical formulae
• Prices and products sold to customers
• Engineering drawings
• Technical information
• Manufacturing processes, such as printing methods
• Chemical processes
• Management accounts
• Reactions to drugs
• Concepts for television series
• Feasibility studies
• Plans and designs for new products
• Client information
• Technical maintenance procedures
• Pricing and sales information

In the absence of post-contractual restrictions, at best a court will only restrict use of sensitive information for a finite period of time.

Restrictive covenants are contractual obligations that are limit employees performing named activities after their employment has ended. In the context of consultants, the restrictions may apply during and after their services have ended.

Restrictive covenants between business and their employees and consultants attract a reverse onus when they are relied upon in litigation. That is to say provisions of employment & consultancy contracts that prevent a member of staff performing some task are considered void from the outset, leaving it to the business to prove that the restrictive provisions are reasonable, and go no further than what is necessary to protect the legitimate interests of the business.

Interests that may be restrained by businesses are:

1. prevention of competition from the employee or consultant for a limited period of time.
2. having their customers taken away by former employees and consultants;
3. maintaining stability of their workforce;
4. the goods that named customers buy;
5. protection of supplier relationships; and
6. disclosure of trade secrets and highly sensitive confidential information.

Restrictive covenants are also able to regulate to some extent the activities of the person or company after the event. Again, their must be a nexus between the interest of the company and the activity regulated, and it must not extend too far in order to be enforceable. It depends on the business and their particular interest.

In this way, companies are able to expand their protection to a limited extent from employees competing with them after the period ends. Garden leave may also be used to extend the period to some extent.

The benefits of having contractual rights are:

1. lesser obligations of proving confidentiality, in that it may not be readily apparent that the disclosure was confidential simply by drawing on the circumstances of disclosure;
2. clarity as to the activities that are intended to be protected or otherwise;
3. damages are available for breach of contract as against the former employee in addition to an injunction, as opposed to relying on the equitable right that will only make available an injunction and not damages.

In the absence of a restrictive covenant, consultants the ordinary law of confidential information apply and they will be able to use any information that has is not considered confidential by the circumstances of the disclosure or were not notified that the information was confidential prior to its disclosure to them. As the default rules of intellectual property have the consultant owning the IP rights, is it a good idea to ensure that these are displaced in their engagement letter or contract, as you never know what future uses you will want to make of the materials created, and it is an uphill battle to rely on implied licenses.

Agreements for employees on secondment should ensure that IP rights are assigned to the intended party, there is authority to say that it is the legal person who pays the salary who owns the IP and not the person with whom they are employed.

With or without restrictive covenants in place against the former employee or the consultant, some intellectual property rights may play in part in limiting the activities of ex-employees and consultants in a measured way. Loosely speaking, IP rights owned by a business will protect against blatant acts of copying in their various forms. It must said therefore that relying on intellectual property rights is a distant second place to having the terms of the post-contractual relationship agreed at the outset.

Of course, assuming that the appropriation of materials is blatant and obvious injunctions and other relief will be available for a wider range of actions.

Former employees and consultants are well positioned to identify gaps in the market and niches not fulfilled by present products and services. It is difficult to protect against competition in the post employment and consultancy relationships. The law is unreservedly in favour of competition at the end of relationships and the best protection available is only available for a limited period of time. Use of restrictive provisions that apply after the relationship is ended must be carefully and thoughtfully drafted as overstepping the mark renders the provisions unenforceable. The benefit of the provisions are only available if the employer is not in breach themselves. By shoring up employment and consultancy contracts, and ensuring that future intellectual property is dealt with appropriately reduces the avenues of competition available and creates a buffer period within which the employer may improve their product further.

Obviously, these intellectual property rights have a far broader application than simply between ex-employees, consultants and their former paymasters. Registered intellectual property rights protect particular materials in the form specified by the enabling legislation and unregistered rights of passing off and confidential information are the most flexible of the mix. In the final analysis, the facts of the case must fit a cause of action to obtain relief.

1. Ensure that the employer owns the intellectual property rights.
2. Updating employees’ contracts to include restrictive covenants is a delicate process. The process must be conducted fairly amongst other things. The appropriate time to seek to incorporate such provisions into employees’ contracts may be when they receive promotions that will involve them in dealing with information with a higher degree of sensitivity. Consultants’ contracts in most cases should not present the same difficulties.
3. Carefully consider the scope of employees’ duties and responsibilities and the business with whom they interface when building commercial relationships with suppliers and customers.
4. Consider incorporating provisions for garden leave at the end of the engagement.
5. If the employee or consultant is exposed regularly to highly sensitive information, or has the opportunity to store it electronically off-site, it may be appropriate to incorporate provisions requiring consultants and employees to verify on oath that they have complied with the requirements of their contracts of engagement to return company equipment and destroy all copies of information on demand.
6. Restrictive covenants may be agreed with both the employee or consultant and the supplier or customer, creating two avenues of enforcement of the restrictions.
7. Where restrictive covenants are agreed with customers and suppliers, incorporate a minimum threshold of pay to which the restrictive covenants will apply. The risks to a business are not the same for a mail clerk leaving the business it may be for a member involved in research and development or financial transactions.
8. Warn employees of the highly sensitive nature of the information prior to it being received.
9. Consider incorporating optional provisions for garden leave in contracts for particularly privileged employees.
10. PDF documents, Word and Excel documents may be electronically marked, databases may be seeded and emails may be tracked electronically to elicit evidence of unlawful disclosures. Thus systems must be place to cater for the event.