The Importance of Protecting Your Business Secrets – Part III

Previously, in Protecting the Secret… The employer and ex-employee are in the ring, slowly circling each other, acutely aware of their opponent’s every movement, each bracing for the next blow. The employer has taken an early lead, but the beads of sweat evident on his forehead give away his uncertainty. The ex-employee has lost some of the confidence and bravado that was evident before The Great Reveal: restraints of trade can be enforced. But clings grimly to the glimmer of hope inherent in the proviso to The Great Reveal: not all restraints of trade are enforceable. They can be struck down if found to be contrary to public policy. The crowd holds its collective breath, with the employers rooting for the sanctity of contract and the employees cheering loudly in support of freedom of trade. Who will gain the upper hand and emerge the victor?

The answer, my friend, lies in a question. Five questions, to be exact.

1. 1. 1. Does the employer have a legitimate interest that deserves protection when the employment relationship comes to an end?
      2. If so, could that legitimate interest be prejudiced by the actions of the employee?
      3. If so, how does the employer’s interest weigh up against the employee’s right to be economically active?
      4. Is there any other facet of public policy that is applicable when determining whether the restraint is to be enforced or struck down?
      5. Is the ambit of the restraint (activities, geographical area and duration) justifiably necessary to protect the interests of the employer?

It is clear from these questions that when deciding whether to enforce a restraint, the court will consider all the facts of each individual matter. There is no definitive, one-size-fits-all rule that can be applied to guarantee a restraint’s validity. If the court finds that the right of the employee to be economically active and productive surpasses the interest of the employer, the court will hold that such restraint is unreasonable and unenforceable.

Illustrations

An employer who relies on a restraint of trade agreement to protect trade secrets and confidential information must show that the information or methods being protected are unique and peculiar to his business and that such information is not public property or in the public domain. As every case is determined on its merits, the application of the principles is probably best illustrated by way of two contrasting cases that have come before the courts. In one, the restraint was upheld. In the other, it was struck down.

Illustration 1:

The employee was appointed by a telecommunications company, at which time he signed a restraint agreement where he undertook not to work for any competitor in the same province for a year if he were to resign. The company then sent him on training, both locally and abroad. In due course, he resigned in order to take up a position with a competitor company, being a position similar to the one he had occupied at his previous company. The company took steps to enforce the restraint against him. The court ruled that, in these specific circumstances, there was a clear risk that the employee would disclose confidential information belonging to his previous employer to his new employer. Thus the restraint was not unreasonable nor against public policy. After having considered all the facts, the court held that the restraint should be enforced.

Illustration 2:

The company took steps to enforce a restraint signed by the ex-employee, who had resigned and gone to work for a competitor company. After considering the facts of the case, the court found that the employee had been given no training by her previous employer, nor had she acquired any confidential client information. Indeed she had brought her own business contacts with her into the company. When she resigned, she took with her no more than she had brought into the business, being her experience and business contacts. Consequently, her previous employer had no proprietary interest that was worthy of legal protection. All that a restraint would achieve is to prevent her from being commercially active. As such a consequence alone would not be reasonable, and accordingly would be contrary to public policy, the court ruled that the restraint agreement was unenforceable.

The difference between the two illustrations is that, in the first case, the employee had obtained specific information from his previous employer, including through extensive training provided by the employer, and this information could be used by a competitor to the prejudice of the previous employer. In the second case, the employee had been given no training and had acquired no confidential information from the employer. The previous employer had therefore not imparted any proprietary information to her. As the courts have observed, the information which a former employer wishes to protect must be objectively useful to a competitor in order to be confidential and protected as between the ex-employee and the previous employer.

To Restrain, or not to Restrain?

When deciding whether to require an employee to sign a restraint, the employer should first ask: Why?

Does the employer simply wish to prevent an ex-employee from working for a competitor? Perhaps in an effort to stunt the competitor’s ability to employ experienced staff? Or the desire to retain staff by restricting their post-employment opportunities? While the employer’s distaste for competition is to be anticipated, such inherently selfish reasons are unlikely to win favour with our judges, and any restraint serving these purposes has little chance of survival.

Or does the employer intend to impart critical company information to the employee? And/or spend time and money training and up-skilling the employee on the specifics of the industry? Is the employer’s intention behind the restraint not a personal one, but rather an effort to protect the considerable value inherent in the information imparted to the employee? Does the employer have a proprietary interest that is worthy of legal protection? A restraint serving such purpose has a markedly improved chance of survival.

Note our choice of words: A restraint designed to protect a company’s proprietary interest has a markedly improved chance of survival. It is not guaranteed survival. Once it has been established that the employer does indeed have legitimate proprietary interests that will be jeopardised if the employee defects to the opposition, the next question to be considered is whether the employer’s interests have been properly balanced, and do not unfairly prejudice the employee’s rights. In other words, what does the restraint of trade actually say? Stay tuned for the fourth and final edition of our epic saga.

To Be Continued…..

In Summary: When appointing a new employee, fair and balanced a Restraint of Trade can be a useful tool to protect against an ex-employee using confidential company information and causing the company harm after the employment relationship has terminated.

Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.