Can Employers Protect Their Confidential Information?

You may be able to seek an injunction in Court and seek a return of the information and orders preventing use of that confidential information, but this needs urgent action and is a costly exercise. The Court may not grant an injunction where they consider damages are an alternate remedy.

The first step is to identify whether in fact the information falls within the type of “confidential information” a Court will protect.

The Governments anti competition policy which carries through in the Australian Consumer Laws (ACL) seek to restrict anti-competitive conduct, so the Courts will generally not restrict a former employee establishing a competing business if they have not used your confidential information.

The Federal Government is proposing to introduce new laws to restrict employers enforcing non- compete provisions where the employee’s salary is below $175K per annum. Non-compete provisions are therefore getting harder for Employers to enforce.

It may be the case that you cannot stop a former employee establishing a competing business using their own knowledge acquired whilst employed after they resign or they are terminated.

Employees have fiduciary duties to their employer while employed, to act in the best interests of their employer. As a “fiduciary” the employee holds the employer’s confidential information in trust and cannot use that information in a way that harms the employer as that would breach that fiduciary duty. The duty extends to obligations not to make or pursue a personal gain:

The duty to not use the employers Confidential Information continues post their employment.

If the employee departs and uses confidential information of its employer without their express or implied consent, it is an equitable cause of action and to succeed the employer must show:

• the information has the necessary quality of confidence.
• the information was imparted in circumstances imposing confidence.
• there has been an unauthorised use of the information by the former employee.

Not all information that an employer might consider confidential is in fact treated as confidential information that can be protected.

The leading case is Faccenda Chicken Ltd v Fowler (1985 All ER 724), where the Court categorised information into the following categories:

• Trivial information – this information which is easy to access e.g. from public sources like how to use Microsoft Word, emails, basic bookkeeping, and information well known in an industry, even if not public knowledge is not considered confidential information which an employer can stop an employee using.

• Know How – this is information an employee must treat as confidential either because they are told it is confidential, or from its character, it is obviously so. Although know-how is generally considered by an employer to be their confidential information, it is not always the case.

• Know-how is information that once learnt remains in the employees’ head and becomes part of their own skill and knowledge and can include things such as – customer delivery routes, price lists, results of reports or data stored in one’s memory, sales techniques, client lists and client information. Whether or not know-how will be protected depends on each case.

• Trade Secrets – are considered confidential information and will be protected by a court and includes for example, original recipes developed and marketed, use of equipment to achieve a unique manufacturing result or specifications for manufacture of a product.

This was described by the Court in Faccenda to be “specific trade secrets so confidential that, even though they may necessarily have been learned by heart and the servant may have left the service, they cannot lawfully be used for anyone’s benefit but the master.”

Know-how may only be protected in certain circumstances, while trade secrets are invariably protected.

Surprisingly client lists, price lists and customer information (which employers most want to protect) may not be considered confidential information and protected by the Court. It will depend on the nature of the business.

The Faccenda Chicken case “categories” have been accepted and are regularly applied in Australian Courts, so cases regarding protection of confidential information focus on whether the confidential information is know-how or a trade secret.

Courts have developed tests to determine if confidential information is know-how or a trade secret as follows:

The honest, reasonable employee test:

What would an honest and reasonable employee consider the information to be?

If special and valuable to the employer, it is likely a breach of confidential information, whereas if it is the employee’s own knowledge and skills developed in the business, it is unlikely to be a breach.

Other factors the Court will consider determining if the information was confidential information and able to be protected are:

The extent to which the information is known outside the business and by other employees; measures taken by the employer to guard the secrecy of the information;

The value of the information to the employer and value of it to their competitors;

The effort or money spent developing the information;

The ease or difficulty the information could be acquired or duplicated by others; and industry practise which may support the assertion of confidentiality.

Was the information guarded by the employer and not readily accessible to employees? If it could not be accessed without considerable effort and/or risk, for example only by senior or restricted employees due to their roles in the business, that would suggest it is more likely to be protected.

For confidential information to be protected as a trade secret it also needs to be precisely identifiable, so keeping a ledger of all your confidential information will assist and marking it “confidential” also displays an intention to the employee and helps support the assertion.

In Independent Management Resources Pty Ltd v Brown [1987 VR 605], IMR the employer sued Brown (employee) who successfully tendered for work with the MFB, the day after she left IMR.

During Brown’s employment the MFB notified IMR that they would not be renewing their contract and would go to tender. IMR then advised Brown that she would soon need to find another job.

While still employed, Brown told IMR she intended to apply for the MFB tender. The day after her final day she tendered (in competition with IMR) for the MFB work and she was successful!

IMR sued Brown for breach of confidential information, which they stated were weekly reports, its marketing methods and strategy, their costing and productivity levels, and details of the MFB tender.

The Court held that:

a)  the marketing strategy information did not have the necessary quality of confidence as it was of the “simplest kind and required little expertise.”

b)  Brown’s role required no more than the application of ordinary common sense to the task of making appointments.

c)  As IMR had given her the MFB tender, there was no detriment to IMR and therefore, she had not breached the confidential information of the employer.

What this case shows is that it can be quite difficult for employers to stop an employee competing once they leave and difficult to identify what confidential information is.

Recognise that documents are your friend! This means ensuring that:

• you have written employment or consultancy agreements in place in which there is reference to the employer’s ‘confidential information’ and may even identify what information is CI.

• ensure your agreements are signed by the employee – it is amazing how often we see clients unable to find their workplace agreements or if they find them, they are unsigned!

• support the agreement with written company policies which the employees acknowledge receipt of, in writing.

• identify and clearly mark information that you consider to be confidential or commercially sensitive information as “Confidential” when providing it to them.Bear in mind marking it “confidential” does not necessarily mean it will be treated as confidential if tested by a Court, but it does send a message! Also consider whether to include a non-restraint in your employment agreement as despite issues of enforceability, it is better to have a contractual obligation to rely on.

Each case is determined on its own facts so despite the best evidence you think you may have, it may not be enough to meet the legal threshold needed.

So, what’s mine is mine and what’s yours may also be mine, unless you take steps to protect it!

Contact: Sanicki Lawyers Commercial Group

Robert Toth | Special Counsel | Accredited Commercial Law and Franchise Specialist robert@sanickilawyers.com.au | Mobile: 0412 673 757