Confidential information can have significant value. Just ask KFC how much the secret herbs and spices are worth. Unfortunately, many businesses do not take reasonable steps to protect their confidential information.
This article aims to provide business owners with the following:
- An overview of common risks that involve employees and confidentiality.
- Practical tips employers can use to protect their confidential information.
About Confidentiality and Confidential Information
What is Confidential Information?
While there is “no single test for determining when confidential information will import an obligation of confidence” (Ansell v Allied), I summarise confidential information to mean information kept in relative secrecy that has commercial value and is not trivial or obvious.
Employees’ Duty of Confidentiality
Employees are subject to confidentiality under several laws, including common law (including contract and equity) and the Corporations Act. Accordingly, an employee may breach their duty of confidentiality by disclosing or misusing their employer’s confidential information without authorisation.
The most common way employees breach their duty of confidentiality is through unauthorised disclosure, which often occurs when sharing their former employer’s confidential information in a new business they start.
The threatened or actual misuse of confidential information of an employer occurs when an employee or a former employee uses confidential information outside of the permitted purpose for which it was disclosed (Corrs Pavey Whiting & Bryne v Collector of Customs (Vic)  FCA 266). For example, an employee may have the right to use confidential information to create goods in their former work but not in their new workplace after changing jobs.
Examples of Confidential Information
Confidential information often subsists in recipes, formulas, business and manufacturing methods (with numerous elements), customer & supplier databases, specialist tools, technical drawings, technical data, research studies, analyses, summaries, compilations, financial projections, balance sheets, budgets, and other financial records.
Please read the in-depth article on Confidential Information & Trade Secrets.
The Duty of Confidentiality in Employment Contracts
Confidentiality clauses in employment contracts usually set out employees’ duties concerning confidential information. Equity can provide relief for employers whose employees and former employees breach their duty of confidentiality – even if there is no written employment agreement.
In the absence of an express contract, the equitable duty of confidence imposes obligations on employees not to disclose or misuse the employer’s confidential information. Notably, a duty of confidentiality under an employment contract and an equitable duty of confidence can co-exist.
Over the years, I have seen many employment contracts that do not address confidentiality adequately. The primary risks I have seen involve secretive information, such as engineers.
Recommendations for Employment Contracts
I recommend employers who have highly confidential information, such as a secret recipe, process, or source, to:
- Specify such information in their employment contracts
- Describe how the employee may use that information (ideally, link to a ‘need-to-know’ disclosure policy)
- Stipulate to whom the confidential information may be disclosed
- Include provisions to prevent the unauthorised disclosure or misuse, post-employment
Confidential Information of Former Employers
Naturally, there will always be a risk that an employee uses the confidential information of a former employer in their new employer’s business.
You could be forgiven for thinking such risk is solely the employee’s because:
- The duty of confidentiality is imposed on the employer by their former employer, and
- There isn’t a legal relationship between the new employer and the employee’s former employer.
While that is correct, if a court finds that the new employer knew the information was confidential, it will impose a confidentiality duty on them.
Recommendations to Prevent Post-Employment Disclosure
To help mitigate such risk, employers must:
- Train employees not to use confidential information of their former employers
- Not advise employees on their duty with their former employer
- Mark such information ‘Confidential’ ‘Secret’ or with a similar designation
Employers who try to enforce a duty of confidentiality on a former employee must ensure that the information has the necessary quality of confidence. Otherwise, attempting such a duty may amount to a restraint of trade, which is difficult to enforce unless the business can prove that it was necessary to protect its legitimate interests.
Employee’s Know-How vs Confidential Information
The difference between an employee’s know-how and confidential information has been the subject of contention. We will examine how the court has drawn the distinction below.
Employees’ know-how is information and knowledge gained during the ordinary course of their employment and is often referred to as part of an employee’s ‘own stock knowledge’. Employees may use their know-how throughout their careers with various employers.
The law strikes a reasonable balance between the public policy to allow employees to use their knowledge, skills, and experience to make a living and the employer’s rights to protect their legitimate interests. An employee’s know-how is distinct from an employer’s, which may contain confidential information.
Numerous legal cases distinguish an employer’s confidential information and an employee’s know-how. For example, in Wright v. Gasweld, the court considered the extent to which the information can be isolated from the employees’ general know-how is a factor in deciding whether the employee is entitled to use the information after his employment ends.
Similarly, in Del Casale & Ors. v. Artedomus (Aust) Pty. Limited , the court found that where an employee’s know-how is difficult or impossible to separate from confidential information, the employee will not be prevented from using that information in their new employment.
Recommendations to Distinguish Know-How From Confidential Information
To help mitigate such risks, business owners should:
- Document confidential information (that often only exists in people’s heads)
- Clearly mark such information as ‘confidential’.
Like to Know More?
Contact me to discuss how your business can protect its confidential information and trade secrets more accurately.