Legal opinion: Protecting intangible assets

The need for businesses to protect their assets, including intellectual capital – such as confidential information – has become more acute in the current downturn. Departing employees may take sensitive information such as customer lists, trade connections and pricing data in a misguided attempt to give themselves a head start with a competitor.

Recent figures show a dramatic increase in claims brought against employees who misuse their employer’s confidential information – claims launched in the Chancery Division of the High Court rose from three in 2006 to 23 in 2008. There is little doubt the courts recognise the damage that this sort of activity can do to a business.

Take the recent case of UBS Wealth Management v Vestra Wealth LLP. After 78 employees of UBS resigned and defected to Vestra Wealth – a company set up by a former UBS managing director – the court granted an injunction restraining Vestra from doing business with or attempting to poach clients of UBS.

What can businesses do to prevent employees from taking and misusing confidential information and so avoid costly and time-consuming litigation? A good starting point is to protect confidential information and restrict competition by incorporating well-crafted confidentiality clauses and restrictive covenants in employment contracts.

Inadequate assumptions

While every employee owes an implied duty of confidentiality to their employer, this duty can fall short of providing adequate protection, particularly after the employment has ended. Express contractual confidentiality clauses are strongly recommended. These clauses should be carefully drafted and particular attention given to what exactly the employer regards as confidential. The definition of confidential information should also include specific reference to information that is considered to be particularly sensitive.

Restrictive covenants can prohibit poaching of or dealing with customers and/or employees, in competition with the employer. Again, these restrictions can apply both during employment and after termination. They are particularly important to control the activities of senior employees.

However, employers must be careful with the drafting of these clauses. Restrictive covenants will be unenforceable unless they are no wider than is reasonably necessary to protect a legitimate business interest of the employer. They should, therefore, be tailored to the individual business and the individual employee or class of employee – as a very rough rule of thumb the more senior the employee and the greater the prospect of damage to the business by his misuse of customer connections, the wider will be the allowable restrictions.

If it does fall to a court to consider the enforceability of a restrictive covenant, the following are relevant:

  • The needs and interests of the business

  • The employee’s position in the business and the information he/she can access

  • Whether a narrower restriction would meet business needs

  • Duration of the restriction

  • Geographical extent of the restriction.

Specific factors to bear in mind are that restrictions prohibiting poaching of customers/trade connections should only relate to customers with which the employee has had dealings. Where poaching of employees is prevented, this should only relate to key employees such as directors, senior management and those exposed to trade secrets, and again ones with whom the employee has dealt.

Prompt action

It is essential to take prompt action if information theft is suspected. An investigation to establish if there is evidence to support the suspicion should be launched. This will include examination of e-mails and telephone records and consideration of unusual behaviour, such as photocopying large amounts of documents. Policies should be in place which allow this monitoring without infringing personal data protection and other rights. It may be necessary to suspend the employee during the investigation.

If the investigation elicits evidence that the employee has taken confidential information this is likely to amount to gross misconduct and should justify summary dismissal, although proper disciplinary procedures must be followed.

Key points

  • The credit crunch has sparked a seven-fold increase in the number of claims against employees over confidential information

  • Employers need tightly drafted confidentiality clauses and restrictive covenants to protect their businesses

  • Stealing confidential information is likely to justify summary dismissal.

Simon Henthorn, solicitor-advocate and Polly Rodway, trainee solicitor, Reynolds Porter Chamberlain

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