What happens when your employee sets up in business against you and worse still uses your business secrets to compete against you and you don’t have a confidentiality agreement to protect you?

A decision of the New South Wales Court of Appeal in Del Casale and Ors. v Artedomus (Aust) Pty Limited [2007] NSWCA 172 answers these specific questions.

The facts

Artedomus, a company which imported stone for the building industry, tried to stop two of its former employee/directors from importing a particular stone from Italy, arguing that information relating to the source of the stone (including the name of the supplier) was confidential. The former employees had set up a competing business after they left Artedomus and sourced the same stone from the same supplier as Artedomus. Artedomus had no written contract with the two former employees that prevented them from disclosing and using the information. Artedomus claimed that the two former employees were in breach of their common law duty of confidence as well as their statutory duty under Section 183 of the Corporations Act. (Section 183 states that a person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to either gain an advantage for themselves or someone else or cause detriment to the corporation).

The decision

The Court of Appeal decided that in the absence of an express contractual restraint, the former employees were not restricted from using the information after they had left the employment of Artedomus. In arriving at this decision the court asked two questions:

  • Was the information relating to the source (and suppliers) of the stone confidential? and
  • If the information were confidential, could it still be disclosed and used by the former employees because it was part of their general knowhow?

The court set out a range of factors to consider in answering question 1. Those factors included:

  • the extent to which the information was known outside the business
  • the extent to which the information was known by employees and others involved in the business
  • the extent of measures taken to guard the secrecy of the information
  • the value of the information to competitors, and
  • the amount of effort or money expended in developing the information and the difficulty in duplicating the information.

The court stated that the stronger the evidence on these factors, the more likely that the information would be confidential. In the present case, the court decided that the information was confidential.

Regarding question 2, the court asked whether the confidential information was of such a type that it could be ‘readily isolated’ from the employees’ general knowhow, in which case the information could not be disclosed and used. (The court stated that an employees general knowhow should be able to be used after his or her employment ceases).

Whether information can be readily isolated from a persons general knowhow will not be an easy question to answer. The court said that if the information was in a secret form and the whole process involved a number of elements of independent discovery would otherwise be unlikely to occur, the confidential information could not be used or disclosed. However, in the present case, the court decided that the information relating to the type of particular stone (and persons that supplied such stone) could not be separated from the general knowhow of the former employees and therefore could be used by the former employees.

Although Artedomus also claimed that the former employees had breached Section 183 of the Corporations Act, the court said that there was no ‘improper use’ of the information as required by the section as there had been no breach of confidence as assessed at common law.

Practice point

Don’t rely on common law rights to protect confidential information. If you do, you run the risk that the information is not inherently confidential or part of a person’s general knowhow. It is best to ensure that you have written constraints on the disclosure of commercially sensitive information for your employees and contractors, not only during employment but also after employment ceases. The restraints should be broad enough to cover information that may not necessarily be confidential under common law.