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 th