Protecting trade secrets

Protecting trade secrets when an employee leaves

How do you protect confidential company information from being used against the company in the event that an employee resigns to join a competitor? So often a company loses an employee… only to have the employee hand over confidential information to their new employee. This can do no end of damage to the ex-employer! There are two ways of handling such a scenario: proactively or reactively.

Reactively handling the situation would involve getting an interdict to prevent the ex-employee and their new employer from using the information. This is what happened in the 2015 case of Mullane v Smith. Smith and Mullane were both shareholders and directors in a company called Coleman Tunnelling. Smith was also an employee of the company. A competitor in their industry, Bothar Boring, was interested in acquiring Coleman Tunnelling. During the course of acquisition discussions, Smith was provided with confidential information belonging to Coleman Tunnelling, which he needed to negotiate the deal. However, the acquisition negotiations failed, and each company returned to their normal trading. Smith subsequently resigned from Coleman Tunnelling, and joined Bothar Boring. But before resigning, he copied confidential information belonging to Coleman Tunnelling from his office computer, and took this information with him to Bothar, where the information was used. Mullane and Coleman Tunnelling launched an application for an interdict to prevent Smith and Bothat Boring from using, communicating or publicising any of the confidential information and trade secrets that Smith had taken with him.

In considering the matter, the judge contemplated whether Smith and Bothar Boring’s actions comprised unlawful competition. The court observed that for Coleman Tunnelling’s claim to succeed, they would have to show that there was wrongful interference with their rights as a trader. To do this, Coleman Tunnelling needed to prove to the court that:

  • Smith and Bothar Boring committed a wrongful act of competition;
  • This act infringed (or threatened to infringe) on Coleman Tunnelling’s goodwill;
  • And that there was no other remedy available that could rectify the wrong.

In this case, the court held that Coleman Tunnelling had successfully proven its claim. Smith and Bothar Boring had clearly attempted to benefit from their wrongful use of Coleman Tunnelling’s protectable inside information. The interdict was therefore granted. Which meant that the confidential information that Smith had surreptitiously stolen from Coleman Tunnelling and given to Bothar Boring was effectively rendered worthless, as Smith and Bothar were prohibited from using this information in any way.

Coleman Tunnelling and its shareholders must have been relieved to have the case go in their favour. But the fact remains that there are many, many employees across the country who covertly do damage to their ex-employees on a daily basis. An employee resigns, taking confidential information and trade secrets with. If s/he is employed by a competitor operating in the same industry, the use of any confidential or intellectual property that s/he misappropriated can be extremely damaging to the ex-employer. When an ex-employer, dissatisfied with this state of affairs, applies to the High Court for an interdict, the court has to identify the line between:

  • The employee’s right to use the knowledge and skills that s/he acquired while employed by the employer; and
  • The employer’s right to trade without wrongful interference with their rights as a trader.

And there’s no guarantee that the court will find in favour of the disgruntled ex-employer.

The proactive way for an employer to protect itself is to ensure that any employees with access to the company’s confidential information, trade secrets and intellectual property are required to sign Restraints of Trade and Employee Secrecy Undertaking, preventing them from a) being employed by a competitor after their resignation and b) using or benefiting from the company’s confidential information.

It goes without saying that trying to protect your information after the employee has left is far more expensive, not to mention the stress, the time wasted, and the reputational cost. Companies that proactively implement Secrecy Agreements and  Restraints of Trade into their Recruitment Processes find it a lot easier to protect their confidential and proprietary information from abuse by past employees.

Cautionary note: make sure that your Restraint Agreement is reasonable or you may find it being unenforceable. How valid is a Restraint of Trade Agreement?

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.