Confidentiality and Trade Secrets

Employment Factsheet No. 2

Introduction

In today’s increasingly competitive world confidential information and trade secrets are crucial to the success of many businesses. From the identity of clients to the method of manufacturing a particular component, businesses today depend upon the confidentiality of their processes and business information in order to stay a step ahead of their competitors. With much of that data being available in electronic format, and with many employees regularly networking electronically with colleagues from other, possibly competing, companies it is becoming much easier for confidential information to be leaked.

Often allowing trade secrets to be acquired by competitors can be one of the most damaging things that could happen to a company. It is essential therefore that companies take all possible steps to prevent this from happening and that they know what to do should such a breach take place.

Duties of confidentiality during employment

All employees are under a duty to keep confidential the information which they have acquired about their employer and their employer’s business and which amounts to a trade secret or which is so sensitive that it needs the same protection as a trade secret. This is an implied duty of “trust and confidence” and is regarded as an essential part of the employment relationship. There is no need for there to be anything in writing for this duty to apply and it applies to all employees – whatever their position in the company and whatever the nature of their employment contract. Indeed, if they are directors of the company then there may be other fiduciary duties placed upon them in relation to the well being of the business.

Where a person receives personal, sensitive or commercially important information in circumstances which are confidential or are in relation to the work which a person undertakes, then that person owes a duty of confidence to the owner of the information. The person receiving the information must ensure that they neither disclose nor make use of that information other than for the purpose which it was given without the consent of the owner of the information.

The employee’s duty of trust and confidence extends to many aspects of his or her daily work, including:

• keeping confidential business and commercial information gained during the course of their employment;
• not using information gained to make a secret or personal profit;
• not competing with the employer whilst employed;
• acting honestly towards the employer; and
• disclosing to the employer any information which might be of benefit to the business.

However, there may be circumstances where an employer would prefer not to rely on these implied duties and would instead prefer to have the security of express terms in the employee’s contract of employment. This might particularly be the case where the employer wants to make it clear what information is confidential and what should not be disclosed.

Contracts of employment can have inserted into them clauses which set out clearly that information which the employer regards confidential and expressly stating the extent to which that information can be used – for example by prohibiting totally the disclosure of the information to a third party or the use by the employee of that information for his or her own purposes.

In the case of such clauses, clarity is essential and where the situation is a complex one the contract may need to set out that which is deemed to be a trade secret, that which is business information about clients and that which is regarded as information which the employee may acquire as part of their knowledge and skill working for the company. So far as the latter is concerned, it will need to be made clear whether knowledge of a process is knowledge of something that amounts to a trade secret or is merely the kind of knowledge that someone acquires generally about a type of process and will simply form a person’s general own skill set which they could, at some point in the future, take away and offer to someone else under the guise of experience.

Duties of confidentiality after employment terminates

The position as to confidentiality after employment ceases is somewhat different.

Whilst it should be noted that the duty of confidentiality does not generally stop former employees from approaching customers or staff of the employer, it can prevent the disclosure of items such as client lists which could potentially damage the employer’s business.

However, any employer who wishes to be sure that their confidential business information remains confidential or who wishes to prevent staff from approaching clients, customers and staff, should ensure that an express contractual clause is included in the contract of employment to restrict this – usually taking the form of a non-competition agreement or restrictive covenant.

In reality, without an express agreement, the only kind of information that can be protected by the implied duty of confidentiality is a trade secret. Exactly what amounts to a trade secret is open to some conjecture – especially in the vague area of what is a secret trade process and what is merely a skill acquired by the employee. Unless it can be shown that a piece of information is a trade secret then an employee will be free to use information they have acquired during their employment either for the benefit of their next employer or for themselves if they choose to compete with their former employer. It is for this reason that it is far safer for an employer to rely upon a specific contractual terms rather than the general implied terms.

By far the most satisfactory way in which to protect information is to make the duty to keep it confidential a condition of the contract at the start of the employee’s employment. This can either be using a term in the main contract of employment or by getting the new employee to sign a separate confidentiality agreement. That way there can be no doubt from the outset what constitutes a trade secret and there is no future difficulty of getting an employee to sign up to a new contract during the course of their employment.

Employers might also like to take the opportunity to remind employees of these terms during any exit interviews or at any point during which they have a suspicion that that the employee may be planning to join a competitor.

Permitted disclosure

There are circumstances, however, when an employee will be permitted to disclose confidential information – for example under the provisions of the Public Interest Disclosure Act 1998 (“the Act”) because it relates to alleged wrong doing by the employer.

Commonly referred to as “whistleblowing”, the Act provides that those “workers” who make a qualifying disclosures under the Act will be protected provided that the disclosure is a qualifying disclosure, that is to say a disclosure which is made:

• by a ‘worker’ – widely defined to include employees, some independent contractors, agency contract staff, temporary staff, trainees, home workers and others;
• in relation to qualifying material – that is to say:
  • that a criminal offence has been or is likely to be committed;
  • that a person has failed, is failing or is likely to fail to comply with a legal obligation to which she/he is subject;
  • that a miscarriage of justice has occurred, is occurring, or is likely to occur;
  • that the health and safety of any individual has been, is being, or is likely to be jeopardised;
  • that the environment has been, is being, or is likely to be damaged;
  • that information intending to show any matter falling within the above categories has been, is being, or is likely to be deliberately concealed.
• in a qualifying way – that is to say made by a worker in good faith and without an ulterior motive or for personal profit or gain, and
• made to a qualifying person – that is to say:
  • an employer or some other responsible person who has legal responsibility for the matter or whose conduct it relates to;
  • some other person in accordance with the employer’s procedure;
  • a legal advisor in the course of obtaining legal advice;
  • a Minister of the Crown where the employer is appointed by the Minister.

It is also worth bearing in mind that there will be no breach of the duty of confidentiality if the disclosure is in relation to information which is already in the public domain – for example information which has already been disclosed through other sources.

What constitutes confidential information?

The following are examples of information which might be considered to be confidential:

• trade secrets such as computer source codes, recipes, ingredient lists, chemical or scientific formulae, production or manufacturing methods, research results, blueprints, technical diagrams, precedents, and manufacturing data,
• business processes, information and systems such as lists of clients and customer, marketing plans, budgets, trade databases, market analysis and any other information acquired by the employer to give them a market advantage,
• professional information such as that which might be given to an accountant, solicitor or other professional advisor for the purpose of receiving professional advice, and
• personal Information about the employer, employees or clients and customers – for example personal papers and diaries, financial information, photographs and images, private and other information and anything else which could cause embarrassment or discomfort.

Pursuing an action

If you are an employer and confidential information has been disclosed by an employee then, before taking the matter any further, you need to ask a number of questions, including:

• was the information actually confidential? – in other words was it information that was a trade secret or is it simply something which you would have preferred others not to have known;
• was the disclosure of the information in circumstances which were capable of giving rise to a duty of confidentiality?
• has there been or is there likely to be an actual unauthorised use or disclosure of the information? and
• can the costs of taking the necessary legal action be afforded – especially if the opponent is a major organisation?

If the answer to all of these question is yes then you have a number of options open to you, including:

• applying for an injunction order restraining the employee from acting in contravention of their contract of employment;
• seeking damages for any direct losses incurred as a result of the breach complained of. To succeed the financial loss to must be quantifiable;
• rather than seeking damages for loss, seeking an account of profits that the employee has made as a result of the breach; or
• in some circumstances, making a claim against the employees new employer.

Restrictive covenants and garden leave

Sometimes, an employer will want to be sure that information about customers, suppliers, clients and so forth remains confidential or that an employee with a reputation or following will not be able to capitalise upon that reputation or following after they leave. This can often be achieved by placing the employee on “garden leave”. The aim of garden leave is to maintain the employee’s duty of confidentiality and at the same time preventing the employee from contacting customers, suppliers, clients and confidential information – effectively taking them out of the business for a period. The effect of garden leave is to require the employee to serve their contractual notice at home and not in the workplace or in a new job.

Normally, for an employer to be able to require that an employee take garden leave the employer will need to have had the right to do so included in the employee’s contract – otherwise it could be held to be a breach of the right to work – and may in turn invalidate any restrictive covenants.

Employer’s duty to the employee

Finally, employers may also wish to bear in mind that they may owe duties of confidentiality to their employees, especially in relation to personal information gained during the course of employment and which have been communicated to the employer on the understanding that they would not be disclosed more widely.