Employment Law - What information is confidential when moving between employment
Date: October 07, 2010
Authors: LAC Lawyers
The facts:
With his employer’s knowledge and consent, our client Bob moved from his first employer (Company 1) to a new employer (Company 2) in an aligned industry to Company 1. Company 1’s business sold industrial parts. Company 2 had patented and sold occupational health and safety equipment.
The two employer businesses were aligned to the extent that they marketed their goods somewhat to similar industries. However, Company 2 had a substantially wider target market because the product was new and focussed on occupational health and safety.
At first glance, the roles performed by Bob were different.
At Company 1, Bob was as a manager of a sales team and spent most of his days mentoring his team to achieve targets, dealing with the team budget and ad hoc management duties within Company 1. Bob spent his days in the office.
At Company 2, Bob worked as an equipment demonstrator for a new product patented by his employer. Bob spent his days largely out of the office, on-site at customer businesses and offered free demonstrations to prospective customers. When in the office, Bob finished up paperwork and attempted to generate new leads for his free demonstrations of Company 2’s patented equipment.
Bob worked for Company 1 for many years and developed a knowledge base of Company 1’s products and customer contacts. Through the course of employment, Bob acquired a bundle of business cards and had built a reputation which Bob knew would follow him to Company 2. Bob even told his customers at Company 1 he was leaving, where he was going and what he was doing. Bob’s market contacts was even one of the reasons he was successful in obtaining employment with Company 2: Bob was skilful and brought connections to the market to Company 2.
One afternoon when leads were slow at Company 2, Bob consulted with his new manager at Company 2 about using his market knowledge and contacts acquired at Company 1. Company 2’s director made little enquiry what part of work related knowledge Bob would use. Nevertheless, Company 2 authorised Bob to use the contacts.
Bob typed an email to Company 1’s customer base and a few other potential customer sources inviting those contacts to arrange a free on-site demonstration of Company 2’s patented occupational health and safety product. The email contained an address leading back to Company 1. Company 1 wrote to Bob and Company 2 and threatened them each with a law suit if they did not stop improperly using Company 1’s information.
Panicked, Bob contacted LAC Lawyers Pty Ltd for help. At the first conference, our solicitor reviewed several contracts relating to Bob’s employment at both workplaces. The contracts contained confidentiality clauses and restraint of trade clauses. The advice given was:
- Bob was in breach of Company 1’s restraint of trade and confidentiality clauses;
- Bob was in breach of the fiduciary duties that all employees owe to employers; and,
- if not handled properly, the consequences for Bob may be dire:
- Company 1 could sue for breach of contract and of fiduciary duties including seeking an account of profits for money lost to Company 1 connected to the conduct of the Bob; and
- Company 2 could be joined to that law suit – making the lawsuit messy and perhaps making life difficult for Bob at his new employer.
The problem:
Bob used Company 1’s confidential information for Company 2’s profit. Bob knew his employment contract contained a confidentiality clause and knew that the information he was using at Company 2 came from his work at Company 1.
The law:
All employees owe their employers a duty of loyalty and confidence. That duty survives termination of employment and is one of the highest duties in the employment law area. Loyalty and confidence are connected to the trust between an employer and employee, which is a key feature of every employment relationship. The duty also interrelates with the duty not to compete with a former employer.
The law also recognises that employees obtain access to several types of knowledge during the course of employment. Information which is a trade secret or highly confidential, like a customer list or database however obtained, will provide an employer with legal protection from the improper use of that information by a former employee. Often, the use of customer contact lists from a former employer falls into the category of competition.
However, the law also identifies that employees obtain information in the course of their duties which cannot be extracted from their mind. This knowledge becomes part of an employee’s ‘stock in trade’. If the knowledge is part of the employee’s stock in trade, the question is whether any part of that knowledge is derived from or added to by an objectively recognisable source such as a list or database: here, the matter becomes quite complicated and will require legal advice.
The solution:
Bob was required to hand all business cards and contact lists to Company 1’s lawyers. For a minimum of 12 months, Bob was prohibited from communicating with any customer he knew from his work at Company 1. As a risk minimisation measure, Bob was advised that if Company 1’s customers contacted him in the 12 months, he should advise he cannot deal with them and should inform Company 2 who the customer was and allow Company 2 to deal with the situation.
Naturally, Company 2 needed to obtain its own independent legal advice about its legal position in the matter.
