22 October 2009
Can you keep a secret?
What aspects of your business are considered to be trade secrets? And can you prevent departing employees from taking those secrets with them? Louise Burn reports
Information and knowledge acquired by employees during their employment is usually considered to be a key asset to any business. Employers, therefore, take steps to protect such information, for instance by inserting express confidentiality clauses into contracts of employment.
But what factors do the courts consider when, in the absence of express clauses, it is alleged that there has been a misuse of confidential information? This was considered in the recent case of Vestergaard Frandsen A/S v Bestnet Europe and Others .
Dr Skovmand was a consultant to a Danish company, Vestergaard. He did not have a written consultancy agreement. He was, for the purposes of the case, treated as being in a position analogous to an employee. While with Vestergaard, Skovmand helped to develop a specialised mosquito net. He then left and worked for a UK company, Bestnet Europe.
Bestnet developed a competing mosquito net. Vestergaard sued, claiming that Bestnet had breached confidence by using details from Vestergaard's product development database. Vestergaard said that information such as test results and chemical mixes amounted to 'trade secrets', which were protectable and were used by Bestnet, after transfer by Skovmand.
The High Court found that Skovmand had used part of Vestergaard's database to develop the competing net. It is also held that he owed an obligation of confidence to Vestergaard because it was an express term of his oral contract that he would keep information arising out of his work confidential and that the rights to any products developed during the course of that work belonged to the company.
The High Court considered that the product development database was a 'trade secret' and was, therefore, protectable. It considered several factors which can help point to whether information is a trade secret:
- Nature of the work: Skovmand was employed in a role likely to produce inventions, which he had assigned to Vestergaard;
- Nature of the information: experimental results, and deductions from them, should be protected as a trade secret in the same way as formulas and manufacturing processes;
- Attitude of employer: Vestergaard regarded the database as confidential;
- Steps taken to protect information: Vestergaard took steps to keep the information secret, ie by obtaining secrecy agreements with third parties;
- Separability of information: the information in the database could be separated from Skovmand's general knowledge and skills;
- Commercial value of information; and
- Usages and practices of the trade: evidence suggested that trade would treat information such as that on the database as a trade secret.
The parties agreed that, after Skovmand left Vestergaard, any obligation of confidence owed by him did not extend beyond information that amounted to the company's trade secrets. Skovmand was, therefore, entitled to continue to use for his own benefit, or that of a third party, information forming part of his own skill, knowledge and experience.
This case also highlights that, while trade secrets are protectable after termination of employment without express covenant, a prudent employer should consider imposing express confidentiality obligations. In conjunction with legal advice, employers should determine what information could e considered a trade secret.
For manufacturers, information that has been considered to be a trade secret – and is therefore protectable – includes:
- A list of trade contacts
- Secret formulas for products, customers' names and goods they buy
- Customer contacts, customer requirements or prices
- Detailed information on costing, customer accounts, profit margins, sales and development plans
- Drawings and copy drawings used for the manufacture of equipment, and information relating to dealings with suppliers and customers
- Refinements to manufacturing processes.
Employers can also consider protecting confidential information by inserting garden leave provisions and restrictive covenants into employees' contracts of employment, to either prevent them from accessing and using confidential information while under notice and/or from working for competitors for a period of time after the termination of their employment.
Bear in mind that bringing legal action to try to enforce confidentiality provisions and/or restrictive covenants can be extremely timely and costly. It is therefore worth drafting precise contractual provisions at the outset of an employment relationship.
Louise Burn is in the employment law team at Pinsent Masons: www.pinsentmasons.com
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