The employee is leaving – what are they taking with them? Employment constraints, taking the client list and what else…

ACCC sues for breach of Franchising Code of Conduct

Employers can take practical and legal steps to avoid embarrassment, use of the employers contacts trade secrets, client and intellectual property.

Let’s set the scene

So your trusted second in charge has opted out of the industry, decided its time for a sea change and has advised you it’s time to call it quits and that his next stage in his work career is undecided. You have been happy with his performance, you let him work his notice period, other staff are happy to have a party for him (of course thrown by you) and all things go well to see him off.

You move on, manage his work load whilst looking for a good replacement and keep an eye on the accounts and clients he handled.

Funny thing after a few weeks of his departure, those long term clients of yours that your former second in change handled haven’t called, haven’t placed orders and haven’t returned your emails or texts.

Then on LinkedIn you discover your former trusted second in charge has set up a business directly in your space and is competing with you. You then look at his emails and soon discover deleted emails, he thought were permanently deleted, now lead to you discovering a systematic approach to utilizing you business for his gain.

Staff also tell you, he insisted on reports about dealings with clients of yours and now you know why.

You then discover your former trusted colleague sets about poaching more of your  valuable customers, offering discounts on “current prices”, and demonstrating a unique knowledge of your client’s orders, preferences and needs.

In six months’ time, all of your company’s major customers are teetering on leaving and asking for major discounts on work orders. You go into damage control work doubly hard to keep ahead of the game and take three more years to recover to be where you were prior to your faithful employee leaving.

None of this should have happened.

The risks posed to businesses by their former employees have never been greater, confidential information has never been easier to obtain and risks to a business owner are now great

So what to do to protect yourself?

Employees’ obligations to their employer

Employees have an obligation to their boss/employer in using, obtaining or retaining confidential information that generates from a business whilst being employed there.

These can be:

  • obligations owed by the employee as part of their contract of employment whether expressly written or implied;
  • fiduciary duties to act in their employer’s best interests and not in their own interests at the expense of their employer, which includes a duty not to misuse their employer’s confidential information. This is called a duty of fidelity, which really does give the basis of an employee/employer relationship which can be very different to a contractor relationship for example;
  • corresponding obligations owed under sections 182 and 183 of the Corporations Act 2001 (Cth);[3] and
  • the equitable obligation of confidence.[4]

Employee’s use of confidential information obtained during employment?

Despite the above obligations, whether a person may use information obtained during the course of their employment can be determined by reference to the following questions:

  • Is the information in question a “trade secret”, “know-how” developed by the employee during the course of their employment, or merely “trivial” information?
  • Is the employee subject to a post-employment contractual restraint that seeks to prohibit the use of confidential information?
  • If so, is that provision enforceable?

Trade secret, know-how or trivial information?

Case law divides information into these three categories mentioned above.

Trade secret

From an employer’s perspective, the trade secret is an asset and to be protected and nurtured. A trade secret is secret or confidential information of an employer. This information can be determined and measured as information, which if it was to fall into the hands of a competitor, can damage your business or be used to obtain an unfair benefit.

Naturally, an employee may not use such information during the course of their employment for purposes other than those that enhance the interests of their employer.

What ought to occur is that an employment contract affords the employer protection from this theft or use should this employee leave.

Elements determining whether information is a trade secret

There is no set checklist to determine what a trade secret is, however the following elements should be considered:

  • the extent to which the information is known or able to be obtained outside of the employer’s business;
  • measures taken by the employer to guard the secrecy of the information;
  • whether the circulation of the information in question is limited to only certain individuals within the employer’s business;
  • the value of the information to the employer and the employer’s competitors; and
  • can the information be legally acquired or duplicated by others outside of the business.

Information possessing the quality of confidence

Although each case must be determined on its own facts,[11] courts have adjudged the following can be declared as trade secrets:

  • data base of client contact details;[12]
  • client price list and details of client orders;;[13]
  • pricing information;
  • costing information and matrixes of same;[15] and
  • P&L and balance sheets of the employer.[16]

Know-how

Know how is defined as information and skills learnt on the “job”. This skill and attributed asset is learned on the job.

However these trade secrets whilst developed on a job do not preclude the employee from utilizing them later for their personal benefit and after employment ends with the employer, because at common law, a former employer cannot deny an employee the right of earning a living once they have left their employ.

Disclosing information while employed, compared to when no longer employed

Is there a difference?

Whilst employed, the employee would breach the duty to act in the employer’s best interests if they disclose or use this kind of information to the employer’s detriment.

However once the employee leaves the employment he/she has a right to utilize his skills to earn a living for his/her own betterment.

Thus in referring to our scenario described above, if the employee leaves a particular employment, he/she can obtain your clients if honestly gained and outside of any employment contractual obligations that may exist in any employment contract and which survive an employee’s termination.

There is substantial case law describing how former employees seek to establish that the information they have used in their new business was not a trade secret of their former employer, but simply “know-how” that they had acquired over the course of their many years in the relevant industry.

Often, however, evidence of the actual conduct of the former employee can be used to counter such a submission.

In Halliday & Nicholas Insurance Brokers Pty Ltd v Corsiatto,[22] the court held that where an employee goes “to the trouble of” copying documents of his employer, in doing so the employee “establishes both their importance to himself and their confidential nature”.

To put it simply “one doesn’t need to copy “know-how” as know how is acquired or learnt rather than acquired as information or knowledge.”.

Trivial information

The third category of information that is relevant in this context is “trivial information”. As Megarry J put it in Coco v AN Clark (Engineers) Ltd,[27]“equity ought not to be invoked merely to protect trivial tittle-tattle, however confidential”.[28]

In other words, although a piece of information gained by an employee may strictly be confidential, where it is trivial (in the sense that the former employer has no legitimate interest in preventing its further use), the courts will not act to prohibit the employee from using it.[29]

So, what can a business do to protect its confidential information?

Legal steps: the post-contractual restraint

Express prohibitions in employment contract

The primary legal means by which a business can protect its confidential information is by imposing express prohibitions upon the use of such information in employment contracts.

Thus the key point here is the acquirement of a skill or learning from a workplace can be used in a subsequent employment, data or confidential information cannot.

Specific descriptions of types of information prohibited from use

It is useful to set out in an employee’s employment contract specific descriptions of the information that the employee is forbidden to use (both during and after the term of employment).

This can be done in the form of a schedule setting out specific examples. It is best practice to have a mechanism to update that schedule as new confidential information is developed within the business and as the employee’s role changes.

Contract drafting: square pegs – round holes

In this regard, it is important to remember that employment contracts should be drafted with precision, and obligations relating to confidential information should be tailored to the employee concerned. One contract will not suit all employment situations.

Of note the consideration of what a restraint clause can be used to obtain a fair and reasonable protection to the emploer and not unfairly restraining an employee is paramount.

Practical steps

Legal means aside, the best way to prevent an employee or former employee from using the confidential information of your business to its detriment is to take practical steps within the business in order to prevent employees from accessing and/or taking such information with them when they leave.

In particular, it is important to build a fence around corporate confidential information, and keep the gate shut. Knowing what is within the fence is the first step. This can be achieved by conducting regular audits. If you do not know what confidential information is held within your business, you cannot properly develop, commercialise and protect it.

In addition, doing the simple things can make all the difference. If a document is confidential, mark it as such. Only record and share confidential information as appropriate. Limit disclosure to those who need to know — the more valuable the confidential information, the more limited its disclosure should be. Having said that, there is a significant danger in having one employee who is “too valuable” to lose because they hold key confidential information in their head.

It is also important to put in place systems to restrict access to confidential information (such as by using password protection or user access controls for electronic data) and to monitor such access and use. Again, there is little use in having systems in place to control access if those systems are not used.

And, for when an employee resigns…

Finally, your business should have standard procedures for dealing with departing employees. Among other things, those procedures need to deal with the issue of corporate confidential information. In particular, at the exit interview, remind the employee of their continuing confidentiality obligations and require the employee to hand over personal electronic devices (laptops, tablets and smartphones). If the device is the employee’s own, remove corporate confidential information and then return the device to the employee.

Further, where the employee leaves to go to a competitor or to start up their own competing business, quarantine the former employee’s computer (and corporate laptop, tablet and smartphone) for a short period following their departure. If you later become concerned that the employee may have taken confidential information when they left, a forensic analysis of computer systems will be critical in determining what action to take next.

Finally, and most importantly, investigate concerns and take swift action where appropriate.

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