Confidentiality, trade secrets & consequences for breaching obligations - Employment Update November

It is not uncommon for employees to be entrusted with confidential and commercially sensitive information. With the rise of digital workplaces and advancements in technology, it is now easier than ever for employees to copy, download and extract large amounts of confidential data for their own use after their employment has ended.

This article discusses the range of legal avenues available to employers when employees breach their obligations by taking confidential information and/or trade secrets from the workplace. It also discusses some relevant case law, including a recent case where an employee was issued with a criminal conviction for taking his employer’s trade secrets.

Confidential information may include client files, business strategies, pricing information, budget forecasts, supplier information, intellectual property and trade secrets — all information that could have taken years to develop, is of significant value for the business, and gives it a distinct advantage within the market.

Taking or unauthorised use of confidential information can cause irreparable damage to a company if that information is misused by a disgruntled former employee and/or any competitors. Consequently, it is important for employers to put in place appropriate protections to minimise the risk of these breaches occurring.

Remedies under employment law

In most employment agreements, there is an express term which provides for the protection of the company’s confidential information and intellectual property. Even in the absence of an express term, it is implied in all employment agreements that employees owe confidentiality obligations to their employer.

In addition, there is an implied duty in an employment relationship that an employee will act in good faith and with fidelity. Fidelity requires employees to not engage in conduct which undermines the relationship of trust and confidence between them and their employer. This includes the protection of the employer’s confidential or proprietary information and not using this information for personal gain or profit during employment.

When an employer is faced with an employee who has taken confidential information from the business, there are various remedies available under the Employment Relations Act 2000 (the Act). For example, the Act provides that parties to an employment agreement can apply to the Employment Relations Authority for an urgent injunction or a compliance order requiring the employee to comply with the implied and express terms of the employment agreement, such as not disclosing confidential information.

Once an employer has proved that an employee has breached his or her employment agreement by taking confidential information and can prove loss, the employer can claim damages. A claim for damages is typically one for loss of profits. However, as the Authority determination noted below demonstrates, it can often be difficult for employers to establish the extent of the loss suffered in these circumstances.

The employer can also seek an award of special damages. Special damages are awarded when an identifiable loss has been incurred as a result of having to investigate or determine the extent of a breach. Special damages can include costs associated with computer forensic specialists, the time spent by executive employees investigating the breach, and the legal fees incurred in conducting the investigation.

In addition, an employer can seek the imposition of a penalty on the employee for any breach of the terms and conditions of employment and/or the duty of good faith. A third party who incites, instigates, aids or abets breaches of employment agreements is also liable for penalties. This third party could be the new employer of the former employee. Although it is very unlikely that the Authority would ever order the maximum penalty, the maximum penalties that can be imposed per breach are $10,000 for an individual and $20,000 for a company. An action for the recovery of a penalty must be commenced within 12 months after the cause of action has arisen or the date when the cause of action should reasonably have become known to the party bringing the action.

Practical guidance for employers

When unauthorised taking of confidential information occurs, it can be costly for employers both in terms of the value of the information taken and the potential cost of preserving that information from misuse. In most circumstances, it is very difficult to retrieve all the digital data from the employee/s and any third parties once it has been taken from the workplace.

There are several steps employers can take to protect confidential information:

  1. All employment agreements should contain a comprehensive provision of confidentiality and intellectual property. The confidentiality clause should clearly define the information the employer is seeking to protect, including the requirement for employees to return the property once their employment ends, and state that the obligation continues after termination of employment. The intellectual property clause should state that all intellectual property created during employment and all associated future rights remain the property of the employer.

  2. If possible, ensure that procedures concerning confidential information are outlined in a workplace policy and appropriately referred to in other related policies, eg social media, disciplinary process. Employers can set out their expectation about the use of confidential information and the potential consequences if confidentiality is breached.

  3. Train employees to ensure they understand their obligations and duties in respect of confidential information and the consequences of breach. The policies must be available and clearly communicated to all employees.

  4. If the employer suspects a former employee may have removed confidential information, it may demand the employee cease and desist from any continuing breach(es) and urgently seek undertakings from the employee in the first instance to ensure that the employee will comply with his or her confidentiality and/or intellectual property obligations.

If that is insufficient, there are various immediate legal remedies employers can pursue — such as an urgent injunction to prevent the employee from acting in breach and filing proceedings in the Authority for breach of the employment agreement. Employers can also seek to recover any financial loss they have suffered.

Reproduced with permission of Wolters Kluwer NZ

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