While LinkedIn may have transformed and modernised the recruitment landscapes in many ways, brokering the relationship between client and candidate remains a core part of recruitment consultants' business. The information generated to broker this relationship carries with it great value, and not only in terms of revenue. Information such as the business rates, margins, finances, or the contact details of the clients and candidates is confidential and must be protected.
Departing employees who steal commercial secrets or stockpile CVs and business opportunities to gain a competitive advantage after termination of employment present a major threat to businesses in the recruitment industry. Regrettably, they will continue to do so for those agencies that are seen as soft targets.
IT systems and databases are compromised on a daily basis, often with encouragement from the competitor who expects to benefit from a book of business when hiring a new consultant from a rival agency. With advances in technology such as the advent of cloud computing and increased use of LinkedIn, the data is becoming harder to protect. Security breaches often go undetected by the victim who first learns of it when they hear from a valued client that a former employee has completed the placement of a candidate at that client through a competing business.
What's more, the size and sophistication of data attacks is growing throughout the economy. It is an issue that is particularly prevalent in commission-led industries where employees personally and financially benefit from the value and currency of the data that they use to seal deals.
Data theft can cause significant and long-lasting damage to the business through the loss of staff productivity, business opportunity and commercial advantage. In the most serious and high-profile cases, it can lead to the resignation of the CEO and share price plummeting. The responsibility to look at and protect against these risks begins and ends with the management of the business.
So, while recruitment agencies have a right to protect their data and commercial secrets, to what extent can they prevent competition by departing employees?
A recent case that went all the way to final appeal in the Supreme Court has considered the requirement in a modern economy to, on the one hand, maintain a realistic and fair balance between protecting databases and trade secrets and, on the other hand, not to unreasonably prevent competition in the market place. What follows is a brief synopsis of the case and an explanation of why the legal principles that have been established are particularly relevant to the recruitment market.
Vestergaard Frandsen A/S v Bestnet Europe Limited involved a team move from one company (Vestergaard) to a start-up business incorporated first in Denmark and then in England (Bestnet). The team included Mrs Sig (a salesperson), Mr Larsen (an engineer) and Dr Skovmand (a consultant biologist). The team then used Vestergaard's trade secrets previously stored on its database to design and manufacture mosquito nets for Bestnet in competition with Vestergaard.
Dr Skovmand had played a major role in developing the techniques used to manufacture the mosquito nets whilst at Vestergaard. These trade secrets were stored on Vestergaard's database. Dr Skovmand knew this and had access to the database.
When this case went to trial in the High Court, Dr Skovmand was found to be liable in breach of confidence to Vestergaard - so too were Mrs Sig, Mr Larsen and Bestnet. Dr Skovmand knew that Vestergaard's database contained trade secrets and he had used them as the starting point for developing Bestnet's product. However, no judgment was entered against Dr Skovmand as he was not a party to the proceedings. The Court found that Mrs Sig did not have access to the database whilst an employee of Vestergaard and did not know of the trade secrets. Nevertheless, the Judge found that a person can be liable for breach of confidence even if not conscious of the fact that their actions amount to misuse of confidential information. The decision to find Mrs Sig liable was reversed on appeal, prompting Vestergaard to appeal to the Supreme Court.
In May 2013 all five judges of the Supreme Court unanimously ruled in favour of Mrs Sig – the departing employee who had left to set up on her own. They found that Mrs Sig was not liable as she did not acquire the trade secrets during her employment with Vestergaard or afterwards and furthermore did not know that Bestnet was using Vestergaard's confidential information to develop the nets. The case establishes the importance of the individual's knowledge and state of mind when determining liability for breach of confidentiality obligations.
The relevance of this case to the recruitment sector is obvious. Where a recruitment consultant passes on to the new agency extracts of the confidential database of client or candidate information, and the new agency realises that it is confidential, they must not go on to use that information to generate candidates or place them at client vacancies. To do so exposes them to the risk of litigation. They might face injunctions both for return of the information and to stop them using it. Similarly, even if the new agency does not appreciate that information is confidential when they get it, they may nonetheless become liable from the moment they are subsequently told it is confidential. This underlines the importance of taking the right steps as soon as a business discovers wrongdoing by one of its departing employees or a team of them.
It is vital that businesses get the right contracts in place. Vestergaard ultimately may not have lost its claim against Mrs Sig if it had better contractual arrangements in place with her which it could rely on to protect its confidential information. Bespoke restrictive covenants which take into account the particular commercial interests of the business and the market within which the employee and business operate will also provide the business with a greater level of protection should an employee decide to jump ship. Caution should be exercised as regulators are hot on the heels of any businesses that give any suggestion that they have agreed with competitors to stay out of a particular field or away from a particular customer: they are increasingly looking to enforce criminal sanctions that apply to directors whose companies fall foul of UK competition law.
The Courts in the UK still recognise the requirement to balance the need to protect confidential databases against the right to leave, set up on your own or join an established competitor in an honest attempt to further your career. But, if the right steps are not taken to protect the business from the outset, the agency can come off second best.