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Protecting Confidential Information - The Risks From Within
Perhaps
one of the most serious commercial concerns that most businesses
will have to deal with at some point in time is the protection
of their confidential business information and what to do
when such confidential information has been misused or disclosed
without permission.
Apart
from the appropriate security steps that all prudent businesses
should take to protect the physical integrity of their confidential
information they should never loose sight of the fact that
the greatest risk of misuse or unauthorised disclosure comes
from within their own organisations i.e. from disgruntled
or former employees.
During the course of his or her employment an employee is
bound to acquire information about the employer's business:
such as knowledge and expertise about the way it operates,
the processes involved, or the prices charged by suppliers
and to customers. Unauthorised disclosure or misuse of such
information can have serious commercial consequences.
Employee's legal obligations
An employee is legally obliged not to disclose confidential
or sensitive information to any third party relating to the
employer's business. This may be an express term of the contract
of employment but even if it is not expressly stated it can
be implied as a term of the contract of employment.
Although employees have this legal duty not to disclose confidential
or sensitive information about their employer's business to
any third party, prudent employers should never simply rely
on this legal duty.
Sometimes companies will want to prevent departing employees
from disclosing confidential information.
What should employers do to protect against misuse or unauthorised
disclosure of their confidential information by employees?
Develop a program for the protection of Confidential Information.
1. Identify and document what constitutes your Confidential
Information
It is practically impossible to compose a definitive list
of what information constitutes "confidential information"
in all businesses. Every organisation is different. What constitutes
"confidential information" will vary according to
the trade, business or undertaking and even according to the
circumstances of a particular case.
To the extent that it is possible, employers should try to
list or document the categories of information that are "confidential"
or "commercially sensitive" and which they would
not wish to have misused or disclosed.
Remember that if your confidential information is made public,
your employees are under no duty of confidentiality or of
non-disclosure in respect of this information.
However to the extent that other information associated with
such publicly disclosed information can or should be kept
confidential it should be identified as such so that the legal
confidentiality obligation can clearly attach to it.
For instance, if information about the constituent materials
from which a particular product is made enters the public
domain - perhaps because of published research papers or a
press release by the employer as part of the marketing strategy
- it may be that other circumstances (for example the manufacturing
process or the results of tests on prototypes) remain confidential.
Care must be taken to identify exactly what confidential information
is allegedly subject to the legal obligation.
Guidance as to what constitutes "confidential information"
was given in the leading English case of Faccenda Chicken
Limited v Fowler. The plaintiff company tried to stop
the defendants (the sales manager and eight other ex-employees
who had set up business in direct competition) from exploiting
sales information about the plaintiff's business and customers,
in particular it's pricing structure. There were no express
clauses in the defendants' contracts of employment, which
restricted competition so the plaintiff company had to rely
on the implied duty of fidelity.
In determining what information would be protected by the
implied term from disclosure after the employment terminated,
the trial Judge suggested that the following matters should
be taken into account:-
-
The nature of employment: if the employee habitually handles
confidential material; he may be subject to a higher obligation
of confidentiality because he can be expected to realise
the sensitive nature of the information.
- The
nature of the information itself : information, which
is so highly confidential as to be classed as a trade
secret, for example secret processes of manufacture, cannot
be disclosed.
- Did
the employer impress on the employee the importance of
the confidential, information: though an employer cannot
prevent the use or disclosure of any information merely
by telling the employee that it is confidential, the attitude
of the employer towards the information provides evidence
which may assist in determining whether the information
can properly be regarded as a trade secret.
Many
injunction proceedings taken by employers against former employees
seeking to prevent them from mis-using or revealing confidential
information are lost before the case comes to Court because
the employer failed to take the necessary basic steps to protect
its interests before the problem arose.
The Courts are likely to be more receptive and grant injunctive
relief to protect the confidential information where these
basic steps have been taken
2. Review your standard contracts of employment
If your standard employment contract does not contain
a clause that obliges your employees to keep your confidential
information secret or which imposes a "non-compete "
obligation have the contract reviewed and amended.
If there are such clauses review them to see if they need
to be updated.
Employment contracts sometimes contain "non compete"
clauses in addition to "non disclosure" obligations
that are often relied upon by employers seeking to protect
trade secrets and confidential business information when employees
are departing from the company. Employers must take concrete
steps to protect their confidential information during the
period of employment or else there is no basis for the enforcement
of the restrictive covenant.
Employers need to bear in mind that an employee may not be
excluded from the market merely because he has confidential
information, as this would be very severe on the employee
and prevent him associating with the employer's business contacts
in any way.
In the US there is a relatively new development called "inevitable
disclosure". This provides that it is inevitable that
a departing employee accepting a new position with a competitor
will either intentionally or inadvertently use confidential
information of his or her former employer. The court may make
an order to protect the disclosure or use of trade secrets.
The injunction may take the form of a prohibition on employment
by the competitor or prohibition on disclosing or using certain
information.
Significantly, an injunction may be issued on the inevitable
disclosure doctrine even in the absence of a written non-compete
or confidentiality agreement. The doctrine is controversial
depending on how expansively it is applied. It could potentially
limit an employee from using expertise acquired during his
prior employment and the spread of general technical skills
within industry.
The doctrine attracted attention following a decision in PepsiCo
Inc. -v- Redmond and the Quaker Oats Company.
In that case a senior executive employed by PepsiCo sports
drink business accepted a position with Quaker Oats Gatorade
division. PepsiCo sought to enforce a confidentiality agreement
signed by the employee, Mr Redmond showing that he had been
given access to sensitive business and marketing plans for
PepsiCo that would be compromised if disclosed to a competitor
such as Quaker Oats. PepsiCo also introduced misleading statements
by Mr Redmond to PepsiCo about his plans to join Quaker Oats
made while he continued to have access to confidential information
about PepsiCo. PepsiCo also argued that Mr Redmond would inevitably
use or disclose the confidential information in his new position,
which involved pricing, packaging, marketing and distributing
products that were in competition to PepsiCo. They argued
that this would give Quaker Oats an unfair advantage since
Mr Redmond's decisions at his new job would be influenced
by the knowledge of PepsiCo plans.
The US Court came to the conclusion that it was appropriate
to restrain threatened misappropriation of trade secrets by
way of injunction. Mr Redmond was prevented from accepting
certain responsibilities at Quaker Oats for six months and
permanently prevented from using confidential information
he had gained as a result from his employment with PepsiCo.
The outcome will depend on the facts of a particular case
including the extent (if any) of employee wrongdoing. It is
clear that the doctrine does not offer relief simply upon
the occasion of a valuable employee departing for a competitor.
The doctrine continues to be controversial and US Courts are
split as to how it is to be applied in particular circumstances.
It remains to be seen whether it will be adopted by the Irish
Courts.
3. Adopt a Confidential Information Protection Policy
Conduct a Confidential Information Audit within your organisation
to identify what information is confidential and sensitive
and review the steps needed to be taken to protect this information
properly.
If you cannot identify for your employees what is confidential
or sensitive information you will have difficulty convincing
a Court to grant an injunction to prevent unauthorised use
or disclosure of such information.
Prepare a Confidential Information Policy Statement, which
should be clear and easy to follow, then implement it.
Remember that if a company fails to follow it's own internal
policy concerning the protection of its confidential information,
such failure may be used by a former employee in defence of
a Court injunction application to demonstrate that as the
company failed to take adequate steps to protect it's own
confidential information, he or she - the former employee
- should not be held legally accountable for unauthorised
use or disclosure.
4. Conduct an Exit Interview
One potential critical preventive step that employers could
adopt would be to conduct an exit interview with all terminating
employees.
Seek to identify the employee's new position and the identity
of the new employer. Remind the terminating employee of the
c ompany's policy regarding the protection of its confidential
information and of his or her obligations under their terms
and conditions of employment.
If the terminating employee refuses to identify his/her new
employer and there is a reasonable suspicion that he/she is
going to work for a competitor, it would be prudent for the
employer to seriously consider taking immediate legal advice.
Such legal advice should address the issue as to whether any
preventative legal steps are appropriate in the circumstances.
5. Act Promptly
Senior Management need to be aware that once a potential
violation of the confidential information obligation by an
employee is identified it must be dealt with promptly. A failure
to respond promptly could result in damage as a result of
the loss or misuse of confidential information. Difficulties
could also arise in seeking legal redress before the Courts
because of delay.
Not every violation of the obligation not to misuse or disclose
confidential information need result in litigation. However,
at a minimum employers should carefully evaluate their particular
situation in order to work out a programme or plan of action
appropriate to its particular circumstances.
Delay could be fatal. By waiting days, weeks or months to
respond to the breach of the confidential information obligation
certain legal remedies that would otherwise be available may
well be lost.
For further information or general enquiries please contact:
Anthony Layng
Email: alayng@kilroys.ie
Telephone: +353 1 4395600
Fax: +353 1 4395601/4395602
© Kilroys Solicitors 2003
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