Protecting confidential information and business goodwill before, during and after employment

By Andrew Tobin / 01 May 2012
11 min.
Worthwhile read for: Employer, Business Owner, In-house Counsel

Employment lawyers are often called on to help employers manage disputes that emerge when senior employees leave the business to take up a role with a competitor.

Employers are often concerned that a former employee is in possession of information that is confidential and might be used to disadvantage the employer, such as client lists, pricing information, business plans and so on. In many cases, the employer will also want to hold their former employee to previously agreed non-compete, or restraint of trade, obligations.

While managing disputes of this kind will depend on the circumstances of the situation, what has gone on previously in the relationship between the parties can have a substantial impact. If the employer has never before given much thought to the management of these kinds of issues, they may be sorely disappointed about the extent to which, if at all, they can protect their interests.

Regardless of the size of your business, you have the right and the ability to protect your business assets - in the nature of your confidential information and goodwill found in client, referrer and supplier connections - from misuse by your current and former employees. This protection starts with the inclusion of specific terms in your employment contracts. But this is just the beginning.

Here, partner Andrew Tobin and solicitor Dominique Lamb explain how restraint of trade clauses can be used to protect your businesses assets in the nature of your business relationships, as well as your confidential information.

Key points

  • An employer who fails to include restraint of trade and/or confidentiality provisions in their employees contracts for relevant positions, and neglects to actively manage those issues at all stages of the employment relationship, is putting their business at risk.
  • Protecting your confidential information and business goodwill requires you to: 
    • include express terms dealing with your confidential information in employment contracts;
    • educate your employees about their obligations to your business in relation to your confidential information and the ramifications of a breach of those obligations;
    • include well-drafted and reasonable restraint of trade clauses within your employment contracts; and
    • place appropriate emphasis on restraint of trade and confidentiality obligations at the inductions and departures of your employees.

Protecting confidential information

Both during and following termination of their employment, employees have an obligation not to disclose or use information confidential to their employer (or former employer) otherwise than for the employer’s benefit.  While it is best for the contractual arrangements between the parties to expressly deal with the issue of confidential information, the law will protect certain kinds of information from unauthorised use or disclosure regardless of the contractual arrangements between the parties.

The courts have taken a fairly narrow view of the circumstances in which remedies will be provided for misuse of information claimed by a party to be confidential to that party. In general, in order to take a former employee to task for a breach of confidentiality, the following criteria must be met:

  • The information must not be publicly available (for example, on the employer’s website). 
  • The information must be valuable and sensitive to the employer, providing the employer with a competitive advantage.
  • The information must not be easily obtainable or replicated by others.
  • The employer must have taken positive steps to protect the confidentiality of the information (steps must have been taken to secure the information, and employees should have been put on notice as to the confidential nature of the information).

In Prime Creative Media Pty Ltd v Vranjkova and Motoring Matters Pty Ltd (2010), the Federal Court explained that the protection that should be afforded to information was not afforded due to its confidentiality or from any secrecy surrounding it, but rather afforded protection because of the purpose for which the information had been compiled and because the information was not accessible to those other than the business’ employees.

Examples of information commonly claimed by employers to be confidential to them include the following:

  • Lists of customers/clients and contact details
  • Price lists and other pricing or costing information
  • Market research data
  • Information about products and new product development
  • Employee remuneration
  • Details of tenders
  • Sales/marketing plans
  • Inventions or other processes unique to the employer
  • Terms of business

Information that is not usually regarded as confidential information capable of protection includes the following:

  • Knowledge acquired by the employee as a routine part of performing their duties
  • Information available via other legitimate sources
  • ‘Whistle blowing’ where it is in the public interest to disclose the information and it is disclosed to an appropriate authority such as the police, ASIC, the Fair Work Ombudsman or another relevant regulator.

Employers are required to take positive steps to protect information they claim to be confidential to their business.  Information that is not treated by an employer as confidential during the course of an employment relationship may not, after the employment ends, be recognised as confidential in a claim for remedies for alleged unauthorised use or disclosure of the information. This is one of the reasons why it is best that specific confidentiality clauses are included within your employment contracts. It is important that these clauses are not vague or used to cover all information, but that they include specific definitions and examples if necessary or appropriate.

The courts have upheld the notion that business information is only to be regarded as confidential if the use or disclosure of the information, or the threat of such use or disclosure, compromises or prejudices the employer’s business in some way, or has the potential do so. Additionally, the onus is on the employer to prove that the relevant misuse or disclosure, or threat, has harmed or has the potential to harm its business.

Enforcing a breach or anticipated breach of confidentiality against an employee can be tricky, but if you can prove that your employee (whether current or former) possesses specific and identifiable confidential information, and that the use or disclosure, or threatened use or disclosure, of the information has damaged or will damage your businesses interests, then that may entitle you to a range of potential court ordered remedies, including orders:

  • preventing use or disclosure, or further use or disclosure;
  • for the delivery up of relevant information; and
  • for the recovery of compensation.

Further, various tools are available to gather evidence. Where reasonable grounds can be shown, a court will make orders for the search of premises or for the inspection, for example, of computers and other data storage devices.  It is essential that all of your employees understand what confidential information is and what the ramifications are of improper use or disclosure of your confidential information. In most instances, this education will go beyond merely including a relevant clause within their contracts or providing them with a list or a policy.

As best practice, an employer should ensure that all of its employees are aware of the consequences involved in a breach of confidence and, where appropriate, take from employees appropriate non-compete covenants for added protection.

Restraint of trade clauses in employment contracts

To restrain a former employee from participating in certain types of conduct, such as soliciting clients away from your business or working for a competitor, you will need to include specific restraints within their employment contract.

Unlike confidentiality obligations, in the case of former employees, non-compete obligations do not arise under the general law independently of anything expressly provided for in the employment contract or related arrangements.  Further, relevant clauses must be drafted carefully, as improperly written clauses are very often unenforceable.

There are two general issues which arise out of restraint of trade clauses:

  1. The extent to which the employer can prevent former employees from using information that the employer regards as confidential
  2. The extent to which the employer can restrain an employee from engaging in activity in competition with the (former) employer once the employee leaves

Generally, at common law, all restraint of trade clauses are deemed to be contrary to the public interest and are therefore considered to be void. As a result they can be difficult, though not impossible, to enforce.

There is a general misconception in some quarters that restraints of trade are ‘not worth the paper they are written on’ and are unenforceable. This is wrong. An employer seeking to enforce a restraint of trade will be able to do so if they can show that the restraint is not against the public interest and goes no further than is reasonable to protect a legitimate interest of the employer.

However, much like enforcing confidentiality obligations, it may not be enough to simply have an employee agree to a restraint of trade clause within their employment contract. A recent decision of the Federal Court of Australia demonstrates that a robust dialogue between the parties relating to the employee’s post employment non-compete obligations can justify the enforcement of a very substantial post employment restraint.

In HRX Holding Pty Ltd v Pearson (2012), the Court upheld a restraint of trade clause for a period of two years, because:

  • the employer had a well developed policy of imposing post employment restraints on staff and the employee in question was familiar with this policy;
  • the parties had agreed on the definition of ‘restrained business’ in pre-employment negotiations;
  • the employer had given the employee consideration by way of remuneration and shares in exchange for his post employment non-compete obligations;
  • there had been detailed and lengthy negotiation between the parties, over a period of months, before the employment contract was signed;
  • the employee had received legal and accounting advice during the course of the negotiations; and
  • the employee acknowledged in his negotiations with the employer that the restraint of trade period was reasonable.

Otherwise, the courts consider a number of factors in determining whether a particular restraint of trade clause is reasonable, including:

  • the geographical area in which it is expressed to apply (although a valid restraint need not necessarily be limited by geographical application, provided it is appropriately limited in other ways);
  • the period or periods for which it is expressed to apply; and
  • the activity or activities to which it is expressed to apply.

Geographic restraint of trade clauses

If a restraint is limited geographically, the limitation must bear a reasonable relationship to the geographical area in which the business of the employer is conducted. For example, if the employer carries out business in Brisbane only, it is unlikely that a court will enforce a restraint expressed to apply beyond the Brisbane area.

Appropriate restraint periods

A restraint will not be enforceable for any longer than is necessary to protect the employer’s relevant interests. For example, a restraint to protect business goodwill found in client connections will not be enforceable for a period longer than it is reasonable to expect that the relevant goodwill ‘attaches’ to the departing employee. This will vary between employees according to their individual knowledge of the employer’s business and the extent of their influence within the business.

A restraint to protect confidential information will not be enforceable for longer than the information, as in the possession of the former employee, can be expected to retain its confidentiality.

In many cases it may be appropriate for the restraint to provide multiple options so that, for example, if a restraint period of 12 months is found to be too long to be reasonable, the restraint still might be enforced for a lesser period, such as six or three months. While restraints drafted this way can be enforceable, they are difficult to properly draft and that exercise should be left to an expert.

Restraining activities

For maximum effect, the activities to which the restraint is expressed to apply should be drafted to consider the tasks the employee performs in the course of their employment. For example, if your concern is to prevent an employee who performs sales activity from canvassing your customers, prospects and referrers for the benefit of their new employer, then the restraint should extend to prevent solicitation, in competition with you, of your customers, prospects and referrers. However, it cannot go so far as to seek to prevent all competitive activity generally because such a restraint – known as a ‘bare restraint’ – will be considered unreasonable. Again, drafting these restraints presents some challenges and is best left to a professional advisor.

The general rule is that the greater the scope of the restraint, whether geographically, temporally or by reference to the activities to which it is expressed to apply, the greater the onus on the employer to show that the restraint is no more than is reasonable to protect the employer’s legitimate interests.

For more information, please contact HopgoodGanim’s Employment law team.

Andrew Tobin
Andrew is a Partner and the head of HopgoodGanim Lawyers’ Workplace and Employment practice.

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