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Protecting Commercial Secrets against Ex-Employees

2007-11-01

I.             HOW TO PROTECT COMMERCIAL SECRETS


A             Current Employees

 

1.            implied contractual duty of good faith and fidelity

2.            what kind of duty?

a.            duty not to use or disclose confidential information for unauthorised purposes or to  unauthorised recipients

b.            duty not to take away or copy confidential information with intention to use it for his own benefit

c.             duty not to compete with the employer while still employed

 

B             Ex Employees

 

1.            implied duty of confidentiality

2.            the duty does not extend to cover all information which is given to or acquired by the employee while in his employment, in particular may not cover information which is only confidential in the sense that an unauthorised disclosure of such information to third party while the employment subsisted would be a clear breach of the duty of good faith   

3.            the duty only extends to what constituted trade secrets

4.            leading case - Faccenda Chicken Ltd v Fowler and others [1986] 1 All E.R. 617 – set out guidelines on how confidential information can be identified in the employment relationship

5.            3 categories of information:-

 


Nature of Information

Implied duty not to use during Employment ?

Implied duty not to use after Employment ?

1

Non-Confidential

 

x

x

2

Confidential

but not Trade Secret

 

Ö

x

3

Trade Secret

 

Ö

Ö

 

6.            4 factors to determine whether any particular item of information constituted trade secret:-

a.            Nature of Employment

·     nature of work : employment in a capacity where “confidential” material is habitually handled  v  employment in a capacity where such material reaches him only occasionally or incidentally

b.            Nature of the information itself

·               information which can be classified as a trade secret or as material which, while not properly to be described as trade secret, is in all the circumstances of such a highly confidential nature as to require the same protection as a trade secret

·        trade secrets are not restricted to secret formulae or processes of manufacture, but can also include highly confidential information of a non-technical or non-scientific nature, such as customers’ names, which if disclosed to a competitor would cause real or significant harm to the owner and which the owner is entitled to have protected

·       the fact that the circulation of certain information is restricted to a limited number of individuals may throw light on the status of the information and its degree of confidentiality

c.    Whether the employer impressed on the employee the confidentiality of the information

d.            Whether the relevant information can be easily isolated from other information which the employee is free to use or disclose

 

7.            Other factors:-

a.        status of employee : directors and senior employees will, by virtue of their fiduciary or quasi fiduciary duties, tend to owe higher levels of responsibility to their employer

b.        know-how : information which an employee had to treat as confidential but which, once learnt in the course of his employment by means of directions or instructions from the employer, “necessarily” remained in his head and became part of his own stock of skill, knowledge and experience applied in the course of his employment

 

8.            Use of express terms

a.            must specify exactly what information is protected

b.            subject to reasonableness test

 

C             Main distinguishing features of successful cases to establish breach of duty

 

1.            Successful

a.            deliberate copying, memorizing or removal of documents or other material

b.            proof of fraudulent or reprehensible conduct by an employee

c.             the more detailed and complex the employer’s information, and the greater the degree of identity between it and what the employee has used or disclosed, the easier it will be to establish a breach by the employee of his duty of confidentiality

d.            employee warned about secrecy

e.            employee occupying a special position of trust

 

2.            Unsuccessful

a.            information which the employee obtains and/or absorbs in order to do his job : ie. know-how

b.            the employee was largely responsible for producing what is alleged to be confidential : lend weight to the argument that the information has become subsumed as part of his innate skill and experience

c.             no warnings given as to secrecy : lax or non-existent security may persuade the court that the employer does not regard his secrets as having much value

d.            the information sought to be protected by the employer is too amorphous or vague

D            Remedies


1.            Injunction

2.            Springboard injunction

a.            applicable where employee by his past misused of confidential information has gained a springboard for his competiting business

b.            employee would be denied any advantage gained from any of such unjust head start or springboard

c.             an injunction for a certain period of time only to neutralise the unfair advantage gained by the employee

3.            Order for Deliver Up of confidential information

4.            Damages

5.            Account for profit

6.            Declaration of a constructive trust

 

E             Practical Measures

 

1.            Employees with authorised access to confidential information should have a  “confidentiality clause” in their contract of employment, the more specific this clause can be as to exactly what information is covered is better

2.            If employer is concerned about the employee using confidential information after the employment is terminated, a “non-competiton covenant” may be included in the contract so that the employee may be kept out of the relevant market altogether for a limited period

3.            If information is regarded as being a valuable trade secret, it should be treated as such in the day to day operations of the company, it should be labelled “confidential” and access to it should be restricted

4.            Steps to be taken to remind employees that the information is confidential, eg. making them sign out numbered copies of confidential manuals, giving annual secrecy covenants to be read and signed

5.            Upon receiving notice of termination, the employee’s access to confidential information should be limited

6.            Activities of terminating employees should be monitored carefully and a full inventory of all company papers in their possession requested prior to departure

7.            Upon receiving notice of termination , close contact with customers or clients should be retained to offset the risk of a wholesale transfer of business

8.            On the final day of employment, the employee should be reminded in writing of the covenants by which he is bound and his continuing duty of confidentiality


II.            HOW TO RESTRAIN COMPETITION BY EMPLOYEE


A             Basic rule

1.            Every man should be free to use his skills and experience in future employment

2.            Any agreement restraining competition is prima facie void and unenforceable

3.            But a court may enforce a restrictive term if :

a.            it protects a legitimate interest of the employer

b.            the degree of constraint imposed on the employee is reasonable

 

B             Legitimate interest

1.            scope of legitimate interest depends on a number of factors, eg. position of the employee; quality, nature and amount of the employee’s exposure to clients; effect of the employee’s post-termination actions; nature and scope of employer’s business and goodwill; nature of the restrictive covenant

2.            protection against competition from a former employee is not a legitimate interest

3.            protection of business connection

a.            business connection belongs to employer and is part of the employer’s goodwill, although it may be the employee who has built it up or maintained it

b.            where an employee is placed in a position in which he has such contact with the customers with the result that the customers may leave with the employee, the court may uphold against the employee restrictions which go no further than is reasonably necessary to prevent that happening

c.             court may allow a certain period of restraint that would be sufficient to break the connection of the employee with customer and let the next man to obtain the connection

4.            protection of confidential information

a.            information confidential in nature, the release of which may be injurious to the employer or advantageous to his rivals

b.            not generally known in the public domain

5.            maintaining a stable and well trained workforce 


C             Reasonableness Test

1.            Time

2.            geographical

3.            scope of business 


D             Usual Restrictive Covenants

1.            restraints from soliciting customers

2.            restraints from setting up competitive business

3.            restraints from working for competitor

4.            restraints from soliciting former employer’s employees

 

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: ldr@onc.hk                                             T: (852) 2810 1212

W: www.onc.hk                                          F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2007

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