How to best Protect your Business’ Confidential Information from Rogue Employees

The employee/employer relationship is extremely complex and typically involves the employer placing a great amount of trust in the employee from an early stage.

This is a necessary step, to allow the employee to perform their duties. However, this trust includes the sharing of confidential information, trade secrets and intellectual property to a new employee that the employer has had very little time with. There is a fine balance an employer must strike to allow the employee to perform their duties whilst protecting the employer’s confidential information.

Inevitably, at some point, most employees will leave their employment and likely end up working for a competitor or even themselves. Employers need to prepare for life without the employee from an early stage and the possibility of the employee going rogue and taking highly confidential information with them.

In this article, we will discuss and consider:

  • The use of employment contracts to protect confidential information belonging to the employer being used by a third party.
  • The use of employment contracts to restrain ex-employees from working and soliciting clients or key contracts by using confidential information.
  • How to resolve disputes relating to ex-employees breaching their confidentiality obligations.

Use of employment contracts to protect confidential information

Express Contractual Term

The main tool an employer has to protect its confidential information is a contract of employment including express clauses dealing with confidential information, trade secrets and intellectual property. Employers should list specific examples and provide descriptions of the confidential information, trade secrets and intellectual property that the employee will be prohibited from using for their own benefit (both during and beyond the termination of their employment). Courts have found that the following information is capable of being protected by employers through express contractual terms:

  • Customer lists.
  • Pricing and costing information.
  • Pricing and costing of suppliers.
  • Profit and loss figures.

Employers should be aware that not all information is capable of being protected from use outside the employer’s business. Where the information is considered trivial or part of the employee’s general knowledge, it will not be capable of being protected by confidentiality or intellectual property clauses and the employer will not be able to prohibit its use by the employee.

For example, information that is so easily accessible from public sources or that is already in the public domain, will not be capable of being protected by the employer.

Best Practice Recommendations

Whilst it is always nice and preferable for an employer to be able to rely upon express contractual terms protecting their confidential information, trade secrets and intellectual property, employers can also take the following practical steps to minimise the risk of rogue employees taking confidential information or intellectual property for their own benefit:

  • Draft and implement a formal policy in relation to the accessing and sharing of sensitive information.
  • Develop security layers within your internal servers or document management system. Undertake regular audits to ensure that information is stored correctly and monitor staff access levels.
  • Implement a password protection system or other electronic controls when sharing information between staff members via email or other communications.
  • Have a detailed policy and procedure for dealing with the resignation or termination of an employee. This should include requiring the employee to hand over all personal electronic devices and issuing the employee with correspondence reminding the employee of their post-employment obligations.
  • Ensure that on the exiting employee’s termination that any remote access privileges are revoked, and passwords are reset.
  • Keep any personal electronic devices and have the devices forensically examined by an IT expert if there is any suspicion of foul play or a breach of their confidentially obligations.

Despite employees owing common law obligations to their employers in relation to confidential information, it is a far easier path for an employer to rely upon express terms of contract rather than relying upon common law duties.

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Employment contracts and restraints of trade

A further step that can be taken by employers looking to protect themselves from rogue employees (and the misuse of confidential information and intellectual property) is the inclusion of restraint of trade clauses into contracts of employment. There are typically two (2) types of restraint of trade clauses seen in employment contracts, they are:

  • Non-competition clauses – These clauses have a purpose of prohibiting an employee from working for a business that directly competes with their former employer for a specific period and within a specific area.
  • Non-solicitation clauses – These clauses look to prohibit an employee from soliciting clients, employees and contractors of their former employees for a specific period.

The inclusion of these clauses works in tandem with the abovementioned clauses in relation the protection of employer’s confidential information and intellectual property. This is because where an employee is breaching a post-employment restraint, they will likely be using confidential information to the detriment of the former employer. Further, restraint of trade clauses can be used as a preventative tool. Prevention is a far easier remedy than cure, and to prevent the misuse of your confidential information and intellectual property is a less burdensome task than looking to recover damages causes from the misuse of your confidential information or intellectual property. Once the information is in the public domain, it is near impossible to recover it.

Any restraint imposed on an employee must be reasonable in the circumstances and go no further than is necessary to protect the employer’s legitimate business interests. If the restraint goes beyond this, it will likely be determined as unenforceable by the Courts. Put simply, a restraint that prohibits competition entirely will likely be unenforceable, however, a restraint that prohibits unfair competition has far greater prospects of being enforceable.

Restraints of trade are powerful tools that can be implemented to protect legitimate business interests from rogue employees before it becomes too late. Confidential information, intellectual property and client connections have been found by Courts to be legitimate business interests and therefore can be protected by way of a restraint of trade clauses. As industries are becoming increasingly competitive, the cost of an ex-employee using confidential information or intellectual property belonging to an earlier employer is greater than ever. Employers must take preventive measures to best protect themselves from rogue employees causing damage that is incapable of being repaired.

How do I enforce a restraint of trade or misuse of confidential information?

Should you become aware that an old employee has gone rogue and is in breach of their restraint of trade or misusing confidential information for the benefit themselves or a third party, it is imperative that you act without delay. This is because the ability to seek an injunction (being a Court order prohibiting the employee from working) needs to be done as a matter of urgency. A failure to bring an injunction promptly will invite criticism from the Court. This is mainly due to the rationale that if the confidential information was highly confidential and important, the employer looking to protect this information would move to protect it without waiting.

When an injunction is sought, an employer will have to prove that there is a genuine issue to be determined by the Court (for example, that there is a legitimate business interest worth protecting). Further, a balance of convenience will need to be evaluated by the Court that falls in the favour of an injunction being granted. This relief is sought in the Supreme Court of New South Wales and can be a costly exercise. Prior to seeking injunctive relief in the Supreme Court, the following steps can also be taken to avoid the need for costly litigation:

  • Upon the employee finishing their employment, conduct an exit interview and provide the employee with correspondence that leaves the employee with no doubt as to their ongoing obligations owed to the old employer and the duration of these obligations.
  • Should you become aware of a rogue ex-employee working with a competitor in breach of their contractual obligations, write to them without delay seeking immediate rectification and an undertaking as to the return of all confidential information. This undertaking is a promise that is made to the employer and can be further used as additional evidence if the employee continues to breach their post-employment obligations
  • Attempt to negotiate with the employee as to an acceptable restraint on their employment that will satisfy the needs of all parties.

In addition to the above, traditional litigation is also available for an employer to recover any monetary damages suffered for any breaches of the employee’s contract, legislation (for example, Corporations Act 2001), or the equitable doctrine of confidence.

Where employees are exposed to confidential information or intellectual property, prevention is always better than cure. Employers should look to implement any combination of the above strategies to best protect themselves from having to seek injunctive relief in the Supreme Court. It is impossible to know the full cost of the information, until you are looking to protect it.

Our employment law team regularly deals and assists employers managing issues in relation to termination of employees and post-employment obligations owed by employees. We take a practical approach to these issues with the overarching goal of protecting your business and taking pride in seeing your business go from strength to strength.

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The information in this article is not legal advice and is intended to provide commentary and general information only. It should not be relied upon or used as a definitive or complete statement of the relevant law. You should obtain formal legal advice specific to your particular circumstance. Liability limited by a scheme approved under Professional Standards Legislation.

Senior Associate Solicitor