When staff walk out with your trade secrets

By Robert Toth | 02 Sep 2019 View comments

Thanks for the memories, oh and your confidential information! What can you do when an employee walks out the door with your valuable knowledge?

It seems a common occurrence these days. A client calls me to say their trusted manager or employee has resigned and set up a business in competition using their confidential information under their arm.

The Australian Consumer Laws and governments anti-competitive policy recognise there should be free competition and you can not stop a former employee establishing a competing business.

Businesses do have rights and have protection at law. However companies need to take active steps to protect themselves to put themselves in the best position to take action.

What practical steps can I take as an employer?

Recognise that documents are your friend.  This means ensuring the following:

  • you have written employment or consultancy agreements in place
  • the employment contract is supported by a confidentiality deed or contains obligations of confidentiality in it properly drawn
  • the agreement or letter of engagement is signed or acknowledged in writing by the employee. It is amazing how often we see clients unable to find their workplace agreements or if they find it, they then realise it was never signed
  • make sure that the workplace agreement is supported by written policies that are acknowledged by the employee or consultant
  • identify and clearly mark information that you may consider is sensitive confidential or commercial information when providing it to your employees or consultant
  • consider whether it is appropriate to include a non-restraint or non-compete restriction in the agreement – despite the issues of whether they are enforceable it is better to have a specific contractual obligation that you can rely on
  • clearly identify the information you want to protect.
  • consider if it falls into the category of trivial, know how or a trade secret.
  • label the information as “confidential” this doesn’t mean it will be treated as confidential, but it does send a message.

What are the duties whilst employed?

An employee has fiduciary duties to their employer during the course of their employment. A fiduciary duty is a legal obligation of a party to act in the best interest of another. For example, the employee is a fiduciary, as it holds the employer’s confidential information entrusted to it.

If the employee then uses that information in a way that harms the employer that is a breach of their fiduciary duty. It also extends to an employee:

  1. Making or pursuing a personal gain where there is or maybe a real conflict of interest between the personal interests of the employee and the interests of the employer.
  2. Making or pursuing a personal gain by using his or her position as an employee or information or opportunities it receives in the course of his or her employment.

Where an employee does make such a personal gain, the employer will be entitled to an account of profits, that is the employee must pay the employer the profit the employee made as a result of the breach.

If there is no profit the employee may still be liable for damages for any loss that it suffered as a result of the breach or breaches

The fiduciary duties are closely related to the implied duty of fidelity and good faith that arise under employment contracts, and the implied or equitable duty of confidentiality to which employees are subject. 

All three sets of duties can be breached by the same act or series of acts.

Duties that survive after the employee leaves

The obligations that extend beyond their last day of work can continue on in relation to use of the employer’s Confidential Information, breach of contract and restraint of trade. 

Breach of confidential information

This is an equitable cause of action when an employee departs and uses information confidential to the employer.

Use of confidential information obtained from an employer without their express or implied consent is a breach of the employer’s rights. 

To succeed with this course of action 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. 

What information is considered confidential?

Information since the case of Faccenda Chicken Ltd v Fowler (1985 All ER 724), have been categorised as trivial information, know-how, and trade secrets.

Trivial information

This is considered information which because of its trivial character or its easy access from public sources would not be regarded by a reasonable person or by law to be confidential.

Trivial information is not confidential information. It may include things like how to use Microsoft Word, email, basic bookkeeping, and information well known in an industry even if not public knowledge.

Know how

This is information which the employee must treat as confidential (either because he is expressly told it is confidential, or because, from its character, it obviously is so). Once learnt it remains in the employee’s head and becomes part of their own skill and knowledge applied in the course of the business.

Know-how is confidential information employers try to protect, but it does not always gain protection by the courts and can include for example customer delivery routes, price lists, results of reports or data stored in one’s memory, persuasive selling techniques, client lists and client information.

Whether or not know-how will be protected by the courts depends on the circumstances of the case.

Trade secrets

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 masters.”

Trade secrets are confidential information of an employer, which will be protected by a court and can include for example, original recipes developed and marketed, use of particular apparatus to achieve a unique manufacturing result, configurations for the mode and manufacture of a product. 

In certain circumstances and subject to the nature of the business, client lists and customer information can also be held to be trade secrets.

The Faccenda Chicken case categories have been accepted and are regularly applied in Australian Courts. 

The cases regarding the protection of confidential information focus on whether the confidential information is know-how or trade secret.  Know-how can only be protected by courts in certain circumstances, while trade secrets are invariably protected.  

Is it know how or trade secret?

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

The honest, reasonable employee test

What would an honest and reasonable employee ask him or herself about the information? Is it so special and valuable that it could not be regarded as his or her own or is it his or her skill?

It is likely a breach of confidential information if the information would be considered special and valuable to the employer. If it is the employee’s own knowledge and skill, there would likely be no breach.

Some of the factors the Courts have relied on are as follows to determine whether information was a trade secret

(1)   the extent to which the information is known outside of the business and known by other employees involved in the business

(2)   the measures taken to guard the secrecy of the information

(3)   the value of the information to the owner/employer and competitors

(4)   the effort or money spent developing the information

(5)  the ease or difficulty with which the information could be properly acquired or duplicated by others

 Other factors the court may take into account are:  

      1. whether the information is jealously guarded by the employer and not readily made available to employees and could not, without considerable effort and/or risk, be acquired by others; 
      2. If made known to the employee, the material was regarded by the employer as confidential;
      3. Industry practise supports the assertion of confidentiality; 
      4. If the employee has been allowed to share the information only by reason of his or her senior position and responsibility in the business.

The confidential information to be protected as a trade secret needs be precisely identifiable. These tests assist in deciding whether the information will be classified as know-how or a trade secret. 

A classic case in point

In Independent Management Resources Pty ltd v Brown [1987 VR 605], the employer sued a former employee who successfully tendered against the employer for the same work she performed for the employer the day after she left. 

The employee was employed as a project detailer and the company was contracted by the MFB to market a new fire alarm system to the public.

The employee’s duties were to make appointments with property owners, meet, and persuade them to change to the new alarm and report to the employer.  

During her employment the MFB notified the employer they would not renew their contract and they would go to tender. The employer then advised the employee she would soon need to find alternate employment.

While still employed there the employee told her employer she intended personally to apply for the MFB tender. She had been given the MFB tender brief by the employer.  

The day after her final day she tendered (in competition with the employer) and was successful.  Outrageous you say! 

The employer sued her for breach of confidential information stated to be weekly reports, methods for marketing its system and marketing strategy, it’s costing and productivity levels, and the details of the MFB tender.  

The Court held that the marketing strategy information did not have the necessary quality of confidence as it  “amounted to no more than personal contact by two people with the MFB clients, and diplomatic explanation assisted… by visual aids” and was of the “simplest kind and required little expertise”.

The court also held the employee’s role required no more than the application of ordinary common sense to the task of making appointments, at which simple and tactful explanations were to be made of a mutually advantageous innovation.

What of the MFB tender document?

As it was freely given to the employee by the employer there was no detriment to the employer and no evidence that she knew of or made use of information in the employer’s tender to her advantage. Therefore, she had not breached the confidential information of the employer.  

What does this show?

It shows it is quite difficult for employers to protect what they consider to be their confidential information. If it is considered confidential information at the very least state it on the document itself loud and clear and in supporting emails.

Take active steps to protect it!

The Court may not agree that information an employer believes is confidential so using the tests can assist to determine if it is trivial, know how or trade secrets.

Each case is determined on its own facts and may fall flat if the information does not meet the confidentiality test.

The courts balance the employers’ rights to protect their information against the employees’ rights to utilise their skills and know-how acquired as employees for their own commercial benefit.

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