The greatest asset of a business is its employees. However, a business’s employees also constitute one of its greatest threats. It is the employees that run the business, conceive new products and services, develop business and pricing strategies, manage relationships with customers and suppliers, and have access to highly sensitive trade secrets and confidential information. So, if an employee decides to misuse or disclose sensitive confidential information to a competing business, the potential effects can potentially be catastrophic. In this article, David Parry, partner in our employment team, and Alex Smith, senior associate in our commercial litigation team, explain the key matters that all businesses should consider in order to reduce the risk of rogue employees misusing confidential information.
All employees are prohibited from misusing confidential information during their employment. However, once the employment relationship has ended, the employee is only prohibited from misusing a very narrow type of confidential information known as a ‘trade secret’. As the vast majority of the information that a business will regard as being sensitive confidential information will not amount to a trade secret, it is imperative that businesses ensure that the employment contracts of its employees (especially those with access to sensitive confidential information) contain express confidentiality clauses which specify that all confidential information (not just trade secrets) continue to be protected after the termination of employment.
In addition, there are a number of practical steps that businesses can take to protect confidential information, such as clearly marking sensitive documents as ‘strictly confidential’, restricting access to those employees who actually need use to the information, ensuring that confidential information is password protected or encrypted, monitoring the use of printers, photocopiers and scanners, prohibiting employees from copying or downloading business information to portable data storage devices or from uploading the same to cloud-based storage platforms, and implementing robust ‘bring your own device’ policy if employees are permitted to connect their own devices to a workplace IT system.
A business might want to stop a departing employee from performing their regular duties and instead require the employee to remain at home for the duration of the notice period on full pay and benefits. This is known as putting the employee on ‘garden leave’. By remaining an employee during the garden leave period, the individual is prohibited from engaging in activities that are in competition with the employing business. The usual aim of garden leave is to keep the employee out of the marketplace for a period of time, thereby breaking the individual’s links with customers, other employees and removing the individual’s access to confidential information.
Garden leave is commonly used in conjunction with restrictive covenants for maximum effect and the ability to place a departing employee on garden leave is a considerable advantage, which can be safer than relying on restrictive covenants alone. However, in most cases, an employee can only be placed on garden leave if there is an express garden leave clause in the employee’s contract allowing their duties to be varied, or withdrawn altogether, during the notice period.
Another tactic to reduce the significant risk posed by departing employees is to include well-drafted post-termination restrictive covenants in employment contracts and service agreements. Common types of post-termination restrictive covenant include:
- A ‘non-compete’ covenant: this is generally regarded as the most powerful weapon in a business’s armoury as it prevents an employee joining a competing business for a defined dperiod after termination
- A ‘non-solicitation’ covenant: this prevents an employee from approaching the customers and suppliers of his former employer for the benefit tof his new employer for a defined dperiod after termination
- A ‘non-dealing’ covenant: this prevents an employee having any dealings with customers and suppliers of his former employer for a defined dperiod after termination
- A ‘non-poaching’ covenant: this prevents an employee from poaching employees from his former employer for a defined period after termination
The starting position is that post-termination restrictive covenants are void on public policy grounds as being in restraint of trade unless they protect a legitimate business interest and are drafted as narrowly as possible in protecting that interest.
The main legitimate business interests which covenants may protect, include customer connections, trade connections with suppliers, confidential information (including trade secrets), and the stability of a business’s workforce.
A covenant that is drafted more widely than is reasonably necessary to protect a business’s legitimate interests is likely to be unenforceable. It is common for restrictive covenants to last between six and twelve months, but the appropriate duration really depends upon what is appropriate in the particular circumstances of the case.
It is important to appreciate that the court will assess the reasonableness of restrictive covenants as at the point at which the covenants were entered into (which is normally at the time the employee signed the employment contract or service agreement). Therefore, restrictive covenants need to be reviewed periodically (perhaps prior to salary reviews and promotions) to ensure that they provide suitable protection, having regard to any changes in the role and level of seniority of employees.
The most common remedy sought by businesses who believe that a current or former employee has acted in breach of a duty or restrictive covenant is for an interim injunction stopping the unlawful competitive activity to be granted by a court. While an application for an interim injunction can be costly and time consuming, this is often outweighed by the potentially catastrophic damage that could be caused by a current or former employee acting in an unlawful manner.
Businesses that suspect or discover competitive activity on the part of a current or former employee should take specialist legal advice as a matter of urgency – delaying matters can seriously harm the chances of a court granting an interim injunction.