August 2007

Employers, lock up your secrets! What to do when ex-employees use your confidential information

An old Arabian proverb observes that a secret is like a dove: when it leaves one's hand, it takes wing.

For the very reason that it is difficult to monitor the misuse of confidential information by employees and ex-employees, businesses need well drafted confidentiality agreements supported by effective restraint clauses. Relying on the implied duty of good faith and fidelity is no longer sufficient protection to prevent an ex-employee misusing commercially sensitive information, as demonstrated in a recent case: Del Casale & Ors v Artedomus Pty Ltd [2007] NSWCA 172.

In Artedomus, the employer had sought to prevent two of its former directors profiting from commercially sensitive information said to have been given to them in confidence while they were employees. The NSW Court of Appeal said that in the absence of an express obligation of confidentiality the employees had no implied contractual duty to keep that information secret and confidential after they left. The Artedomus case provides a good lesson for employers in managing confidential information.

The Dispute

Artedomus imported a particular kind of stone from a region of Italy and gave it the name "Isernia". The fact that Isernia was a particular kind of Italian stone from a specific region was kept confidential by Artedomus and was not easily ascertained.

When two director employees left the company, they immediately set up their own business importing the same Italian stone as their former employer but sold under the new name of "Timpa".

Had the directors breached their implied duty of good faith and fidelity in the absence of express post employment restraint in using confidential information?

Is the implied duty of good faith good enough?

Employment contracts include an implied term of good faith and fidelity which encompasses an obligation on employees not to divulge confidential or commercially sensitive information, or use that information in a way detrimental to their employer. However, once employment ceases the implied term is unlikely to continue to operate, or only to operate in a more restricted way. The Court held that matters of confidentiality are usually best dealt with under equitable principles rather than implied contractual terms.

These equitable principles only protect information that is truly confidential, such as trade secrets. To determine if information fits the category capable of protection the Courts will look at, amongst other things, the extent to which the information is known inside and outside the business, the value of the information to competitors, the effort spent in developing the information and the difficulty in acquiring or duplicating the information.

In Artedomus, the court was unwilling to find that that information Artedomus sought to protect was in fact confidential even though Artedomus thought the information was highly confidential.

As the Court said:

".... subject to any contract that may have existed, the [employees] were entitled to compete with Artedomus in the stone business after their employment had come to an end, and they were entitled to obtain stone for that purpose from any source. They were entitled to go to a trade fair, and to look for suppliers of stone at that fair, including suppliers of stone similar to Isernia. What restraint of use of this particular piece of confidential information would require is that in doing so, they somehow blot out their knowledge that Isernia was modica stone..."

It was simply too artificial to expect the employees to separate the so called confidential information from their general know-how. They could hardly have done their work without knowing that information.

Lessons to be learned

Artedomus shows the high price to be paid for the omission from an employment contract of a term expressly preventing the use of commercially sensitive information once employment ceases.

If an employer wishes to protect its commercially sensitive information, it must have a valid contractual restraint with the employee. Restraints can protect many legitimate interests, including an employer's trade connection with its customers and its connection with its staff. But a restraint must go no further than necessary to protect those interests and must not be against the public interest. A restraint will be invalid if it does no more than prevent competition.

The Artedomus decision also highlights the need for employers to treat confidential information as secret if they want to protect it.

By allowing information to become part of the employee's know-how the employer opens the cage. The only effective lock on the cage is a post-employment contract that restrains the use of the information.

Author: James Mattson