How employers can protect confidential information

confidential-information

Recent statistics have indicated a rise in the number of attempts by employees or former employees to misappropriate an employer’s confidential information and trade secrets. Oliver Spratt looks at what employers can do to prevent this.

It is estimated that one company in five has suffered at least one attempt to steal trade secrets in the past 10 years. This increase would appear to be a byproduct of a growth in the number of outsourcings and collaborations between companies, combined with easier and faster access to data via the internet. The improved job market and subsequent rise in mobility of employees are further indicators of the growing importance to employers of ensuring that they adequately protect their confidential information and trade secrets.

So, how can employers do this through the effective drafting of post-termination restrictions (and other contractual provisions) in their employment contracts? How and when might such covenants be introduced during the employment relationship? And what options are available to employers in the event of a theft – or potential theft – of this nature?

Defining confidential data

As a starting point, it is important to understand what is meant by “confidential information”. While there is no statutory definition of what would amount to confidential information, it would generally include knowledge that is proprietary and private to the business.

Similarly, there is no uniform definition of trade secrets but, again, it could cover a range of commercial and technical information. So as to avoid uncertainty later, it is helpful to clearly set out what the employer means by the terms “confidential information” and “trade secrets” in the employment contract.

In circumstances where an employee might have access to, or intimate knowledge of, a particular product or business plan, it would be advisable to make specific reference to this in the relevant definitions.

It is important to remember that, while all employees owe a duty of confidence to their employer during the employment relationship, this duty does not automatically continue on termination of employment and so the contract should include a clause confirming the employee’s acceptance of their duty not to disclose confidential information during the period of their employment, or at any time after its termination.

How to use post-termination restrictions

In addition to confidential information and/or trade secrets, the disclosure of which can be effectively prohibited in the employment contract, certain employees might also be able to cause harm to the business after their employment terminates by, for example, using their influence or knowledge of particular parts of the business or its products to solicit customers or key employees, and to unfairly compete with the business.

In order to reduce the risk of this happening, employers should ensure that they have drafted effective and enforceable post-termination restrictive covenants into the contracts of employment that it considers might be able to damage the business in this way.

Post-termination restrictions will usually include non-solicitation and non-dealing covenants relating to both customers and other senior employees, as well as (in more limited cases) non-compete covenants.

When drafting post-termination restrictions, it is essential to remember that they will only be enforced by the courts (if challenged) if they go no further than is necessary to protect the “legitimate business interests” of the employer. The courts will, therefore, scrutinise the drafting of the restrictions to ensure that they do not seek to grant the employer more than is absolutely required for it to protect its legitimate business interests.

If the covenants are not sufficiently tightly drafted to ensure this protection, there is a very substantial risk that all of the restrictions will be struck out and the employer will not be able to rely on them after termination of employment.

Given the difficulties in enforcing post-termination restrictions, employers are also advised to include garden leave provisions in their employment contracts, which can be relied upon in conjunction with them. Garden leave clauses are unlikely to face the same degree of scrutiny as post-termination restrictions (although they must still be reasonable) and so they are generally easier to enforce.

Against this background, employers must ensure that they bear the following principles regarding enforceability in mind when introducing restrictive covenants for new or current employees. What amounts to a “legitimate business interest” will likely include the protection of trade connections (either with customers or suppliers); trade secrets and confidential information; and/or the stability of the employer’s workforce.

Having established a legitimate business interest to protect, the employer must then consider the effect of its proposed restrictions on each of the employees who will be subject to them, bearing in mind that the restrictions must be reasonable and not go further than the employer needs in order to protect that legitimate interest.

There is, therefore, unlikely to be a “one-size-fits-all” approach that would ensure all types of restriction will be reasonable in respect of each employee and, as such, blanket restrictions in all employment contracts face the risk of being successfully challenged on the basis that they are unlikely to be reasonable in all cases.

When drafting post-termination restrictions, the employer must always consider issues such as: the relevant employee’s seniority within the business; how long they might be able to damage the business after the termination of their employment; and what influence they have over other employees and/or customers or suppliers.

Reasonable restrictive covenants

The post-termination restrictions must be limited accordingly, always bearing in mind the need for reasonableness. It is advisable to take a relatively cautious approach when drafting post-termination restrictions and not to be “greedy” as to the length or scope of the restriction: if, for example, an employee’s influence over customers will not last longer than six months because of the nature of the product in question, drafting a 12-month non-solicitation clause would very likely render the covenant unenforceable as it goes further than is necessary. As employees gain seniority and influence within an organisation over time, the question as to what is reasonable in terms of the relevant post-termination restrictions might also change.

As such, employers should regularly review their posttermination restrictions to ensure that they remain enforceable. If an employer needs to introduce new covenants for its current employees, it must clearly link the introduction of these new or revised covenants to “actual” considerations such as, for example, the payment of a bonus or an annual pay rise.

In the recent case of Re-Use Collections Limited v Sendall [2014], involving a longstanding employee who was asked to enter into new restrictive covenants during the course of his employment, the court held that the employer had failed to link the introduction of these covenants to any actual consideration. It said that, in the circumstances, it was unable to rely on “continued employment” as adequate consideration. Accordingly, the covenants were deemed unenforceable, which would appear to indicate that, in the future, it is extremely unlikely that “continued employment” would amount to adequate consideration for the introduction of new restrictive covenants to existing employees.

What to do if you suspect an employee is misusing confidential information

If an employer suspects that an employee or former employee may be misusing confidential information or otherwise breaching their post-termination restrictions, practical steps should be considered.

As a first step, the employer should ensure that any evidence relating to the possible breach is retained. This can be achieved by limiting an employee’s access to the relevant parts of the employer’s database; and requiring the employee to undertake that they will not remove any confidential information and comply with their post-termination restrictions.

The employer might also need to instruct forensic IT experts to examine the employee’s digital devices to ascertain whether or not the employee has sought to cover their tracks by, for example, deleting incriminating emails. In the most serious cases, the employer could seek court orders requiring disclosure of information (although obtaining orders of this nature will be time-consuming and expensive).

While there are various avenues that can be pursued if it appears that a breach has, or is likely to, occur, prevention is often better than cure in such circumstances and so care should always be taken (and, if possible, legal advice sought) when drafting restrictive covenants to ensure that they meet the strict requirements for enforceability described above.

Employers should also check the contracts of employment of more senior employees to ensure that the contracts do offer protection that is likely to be enforceable and, if new restrictions are required, these must be linked to actual consideration, such as the payment of a bonus.

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