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Breach of confidentiality: ex-employees liability

Warning: ex-employers can not stop ex-employees exploiting trade secrets, unless employment contracts adequately protect confidential information.

In this insight, we look at

  • How employers can protect confidential information.
  • Why it is practically and commercially important to protect confidential information.
  • How an interim or final injunction can be used as the ultimate deterrent.

Protecting confidential information

Businesses have valuable business secrets, clients and other assets that need to be protected in order to survive as a business. However, where an ex-employee is helped in his or her new business venture by another ex-employee (or consultant), there are special considerations. The ex-employer may not be able to stop ex-employees exploiting its trade secrets if the employment contract was not explicit enough in protecting trade secrets and confidential information. This is reinforced by a recent decision of the Supreme Court.

The interpretation of the courts

Mrs Sig was an employee of Vestergaard. She had a confidentiality clause in her contract. Vestergaard made bed nets and the manufacturing included a trade secret on how to repel unwanted bugs. Vestergaard had worked with two other people: Dr Skovmand and Mr Larson on the bed nets and both had access to Vestergaard’s trade secrets. Mrs Sig later left the company and set up in competition with Mr Larson and in turn engaged Dr Skovmand. Dr Skovmand utilised trade secrets to help Mrs Sig develop bed nets in competition with Vestergaard.

The court decision on protecting confidential information

Vestergaard lost their case. The Supreme Court said that Mrs Sig could not be held liable for breach of confidentiality because she firstly never came across the confidential information. Secondly, she did not appreciate that any such trade secrets of Vestergaard’s were being used by an employee at her company. Finally, it was held that Mrs Sig could not be liable for simply hiring an employee who might be deemed as a ‘risky’ hire. There was no liability for turning a blind eye where there was no dishonesty.

Action points to protect trade secrets and other confidential information

  • The court will be reluctant to imply a term of confidentiality which is inconsistent with an express clause of confidentiality.
  • The importance of a carefully drawn up confidentiality clause cannot be underestimated. A poorly drawn up confidentiality clause can leave your business exposed to third parties.
  • A business in a fierce market place depends on retaining a competitive and losing that competitive edge can mean lost clients and in turn lost revenue.
  • Ex-employees who wish to start up business in competition with their old employers should seek legal advice before doing so when contemplating using information gained during a previous course of employment. Restrictive covenants are common in practice. Whether they are enforceable will require specific legal advice.
  • Ex-employees are not liable for breach of confidentiality simply because they hire someone who might be deemed as a ‘risky’ person to employ.
  • An ex-employee may well be liable for breach of confidence if secret information is imparted to them in some way.
  • Competition must be promoted and thus strict liability cannot be imposed when it comes to misuse of confidential information.
  • Competition must be protected in that unfair ‘knowledge based’ breaches are punished.
  • Liability for misuse of information is not strict and requires a mental element.

The ultimate recourse for an employer, or ex-employer, is to apply to court for an interim or final injunction that restricts the activities of the employee.

John Deane is the partner charged with running the commercial team. John can advise on the intricate issues that crop up with confidential information, and the use of it both during and after employment. There are steps that can be taken to reduce risks. 

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