Businesses need to take adequate precautions to protect themselves against employees taking, and utilising, sensitive and confidential business information and competing with them during and, if appropriate, after the employment ends. A failure to take these precautions can have dire consequences, as a recent decision of the Federal Court of Australia demonstrates.
In that case, the Court ordered two managers to pay their former employer almost $50,000 by way of an account of profits made by them through a consultancy company they had established, in circumstances where it was found that the managers had substantially used the former employer’s confidential information to establish the consultancy company and to make an initial profit.
What did the managers do?
The two managers, a funeral fund manager and the national sales manager of the former employer, hatched a plan to set up a consultancy company to provide assistance to a competitor of their former employer in return for commission payments. The managers ultimately took up employment with the competitor after their employment with the former employer ended.
One of the managers admitted to sending material which contained the former employer’s confidential information to his personal email address during his employment with the former employer, often under the guise of subject headings such as, ‘recipe’ and ‘new food condition’. The managers then used some of their former employer’s confidential business documents and information to prepare a business plan which was presented to (and taken up by) the competitor. They also used the former employer’s marketing templates to produce material for the competitor and sent the former employer's list of clients to a mailing house on behalf of the competitor. In addition, the managers contacted their former employer’s clients with a view to soliciting business for their own consultancy company and for the competitor.
It was asserted that, as a result of these actions, the former employer’s once profitable funeral bond business fell away, while the competitor’s funeral fund, which had been historically weak, grew substantially.
What did the former employer do?
The former employer commenced proceedings against the two managers, asserting a breach of a range of duties and obligations, including a breach of fiduciary duties, a breach of the duty of confidence, a breach of their employment contracts and of confidential and intellectual property declarations signed by them. The former employer also sued the competitor on an account of profits for inducing the two managers to breach their employment contracts with it, and also for knowingly assisting the two managers to breach, among other obligations, their duty of confidence to the former employer.
What did the Court find?
The Court found that, by their conduct, the managers breached their fiduciary and contractual duties, as well as their duty of confidence, to their former employer. One of the managers was also found to have breached his duties as an officer under the Corporations Act 2001 (Cth).
Accordingly, the Court ordered that the former employer was entitled to an account of profits against the managers - being the drawings and profits earned by them in the first year through the trust of which their consultancy company was trustee - because these profits could be linked directly to the managers’ “blatant” and “deliberate” breaches. This totalled about $50,000.
The competitor was found to have participated in the managers’ breach of some of the duties they owed to the former employer because, for example, the competitor was shown to be open to receiving the former employer’s confidential information from the managers and did not require the managers to remove the confidential information from the business proposal when it was presented to the competitor’s board. However, on the facts, the competitor was found not to have induced the manager’s breaches of contract because it did not create a reason for the managers to break their respective contracts.
Despite the finding that it participated in some of the managers’ breaches of duty to the former employer, the competitor successfully defended the former employer’s claim for an account of profits in relation to management fees earned by the competitor on bonds or plans written after the time period when the managers’ breaches occurred estimated to total approximately $30 million. That is because the former employer was unable to prove the link between the breaches and the competitor’s profits.
What should employers do?
Employers should take appropriate measures to protect their confidential information, valuable customer connections and sensitive business and market information. At a minimum, employers should do the following:
- Ensure contracts of employment contain robust clauses
Employers should have suites of employment contracts that contain appropriately drafted clauses, including in relation to confidential information, intellectual property, return of property after employment and post-employment restraints of trade (as appropriate). Courts in Australia are willing to enforce post-employment restraints of trade provided they go no further than is reasonably necessary to protect a legitimate business interest. Appropriately drafted restraints can prevent an employee moving to a competitor for a limited period of time within a prescribed area and can prevent the solicitation of customers, clients, suppliers, employees and contractors.
- Issue new contracts of employment when employees change roles
Employers should have processes in place to ensure that employees who have been promoted or transferred are required to sign new employment contracts – containing the robust clauses referred to above - prior to any change. A failure to do so could leave the employer without adequate protections, including with regard to confidential information, intellectual property and post-employment restraints of trade.
- Implement appropriate workplace policies
Employers should also implement a comprehensive suite of policies that cover such things as workplace surveillance (as required by relevant workplace surveillance legislation) and information technology. Such policies will better enable employers to quickly identify when employees have wrongly emailed confidential information to themselves in breach of their obligations, allowing the opportunity to minimise damage. Policies should be communicated to employees and there should be periodic training on policies.
- Introduce processes to identify unusual activity and protect your business
Employers should have IT capability to monitor unusual transfers of confidential information or intellectual property. This can allow the employer to become aware of potential breaches and take action to prevent damage from occurring.
Managers and HR staff should be educated on what to say during resignation and exit meetings to ensure that post-employment restraints of trade are reinforced, and not waived or compromised. There should also be processes in place to assess and manage any potential risk of employees leaving the business misusing confidential information or intellectual property, including computer and email audits (which may need to comply with relevant workplace surveillance legislation).