Confidential information and departing employees - the threat from within

Key Points:

Employers can take practical and legal steps to prevent current or former employees from using their confidential information.

Scenario

One of your company's longest-serving and most senior employees resigned recently. His departure was cordial. A farewell lunch was held and was enjoyed by all. A few weeks later, you stop hearing from several of your company's most valuable customers. It soon becomes apparent that your former trusted colleague — contrary to what he had told you during his exit interview — has established a new business in the same field, which is directly competing with your company. A meeting is convened to determine your company's strategy. To the dismay of your company's new chief executive officer, it is revealed that the former employee had insisted for many years that detailed records of all transactions with customers be prepared for him and updated on a weekly basis. And nobody could tell why — until now.

Armed with this information, your former trusted colleague sets about poaching more of your company's valuable customers, offering discounts on "current prices", and demonstrating an uncanny knowledge of each customer's previous purchasing preferences and product lines. In six months' time, all of your company's major customers have left. The business is no longer viable. Your former trusted colleague feels a level of guilt, as he switches from fifth to sixth gear in his new Aston Martin.

The risks posed to businesses by their former employees have never been greater. But what obligations do employees owe to their current and former employers with regard to confidential information? And, perhaps more importantly, what steps can employers take to minimise the risks of a nightmarish scenario such as the one described above destroying the profitability of their business?1

Employees' obligations to their employer

Sources of employees' obligations

Employees' obligations relating to the use of information obtained during the course of their employment may derive from various sources. These include:

express and implied obligations owed as part of their contract of employment; fiduciary duties to act in their employer's best interests and not in their own interests at the expense of their employer, which include a duty not to misuse their employer's confidential information;2 corresponding obligations owed under sections 182 and 183 of the Corporations Act 2001 (Cth);3 and the equitable obligation of confidence.4 Can a person use confidential information obtained during employment?

Yet despite these various sources of obligation, whether a person may use information obtained during the course of their employment can be determined by reference to the following questions:

Is the information in question a "trade secret", "know-how" developed by the employee during the course of their employment, or merely "trivial" information? Is the employee subject to a post-employment contractual restraint that seeks to prohibit the use of confidential information? If so, is that provision enforceable? Trade secret, know-how or trivial information?

The nature of the relevant information is vital to determining whether the (former) employee may use it, and when. The authorities divide information into the three categories mentioned above: trade secret, know-how and trivial information.

Trade secret

From an employer's perspective, the trade secret is tantamount to the golden ticket. A trade secret is secret information that is confidential to the employer.5 It can perhaps be better described as "information which, if disclosed to a competitor, would be liable to cause real (or significant) harm to the owner of the secret".6

Naturally, an employee may not use such information during the course of their employment for purposes other than those that enhance the interests of their employer. However, after an employee has left their employment, the law will also act to prevent the employee using such information,7"whether or not there is a contractual agreement"8 between the former employee and the former employer restricting such use.

Factors relevant to determining whether information is a trade secret

While it is "clearly impossible to provide a list of matters which will qualify as trade secrets or...