Confidentiality / Trade Secrets

There will be instances where legal protection of intellectual property will not suffice or is not applicable or is too expensive. Examples include inventions that are not patentable, technical know-how, client lists, etc. Such information will often be a valuable form of property that should be protected. In such circumstances, the best means of retaining the value of the information is to keep it secret and to ensure that any disclosure is made in circumstances of confidentiality.

There are a number of situations where the need for confidentiality arises. These include the employment setting, joint ventures, manufacturing and distributing arrangements, etc.

Confidential Information vs. Patents

There are some disadvantages in patenting inventions. These include:

• the requirement for full disclosure;
• limited duration after which the invention can be freely used;
• the time and expense involved in obtaining and maintaining the patent.

Disadvantages of confidential information include:

• once disclosed in public, the advantage of the confidential information is lost;
• there is not prohibition on another person independently creating the same invention; and
• commercial exploitation of the information enables others to obtain the relevant information by reverse engineering.

The owner of the secret information must make the decision to opt for confidentiality or patenting once the decision is made to commercially exploit the information. If the decision is made too late some of the essential requirements for patenting may not be capable of being fulfilled.

Contractual Protection Of Confidential Information

Confidentiality can be protected by contractual agreements. Confidentiality clauses may be included in the main agreement or a separate confidentiality agreement may be entered into.

In the employment setting, an employee is under a duty of fidelity during the course of their employment with the employer. The duty of fidelity is an implied term in the employment contract and is also a fiduciary obligation of the employee.

One of the classic examples of breach of this duty is copying of client lists with the intention of using them after the end of the employment contract. Breach of the duty requires deliberate copying. If the list comes into the employee’s head as a matter of course and there is no special effort to retain it there will be no breach. The duty of fidelity does not extend beyond the duration of the employment contract.

In general, it is recommended that confidentiality clauses are included in employment contracts. By this means, the information can be protected both during the course of employment and when the employment contract comes to an end. The same considerations apply to other contractual arrangements involving the disclosure of confidential information.

Care should be taken in drafting confidentiality clauses. If they are too broad they could be struck out by the court as being in restrain of trade. It is recommended that legal advice should generally be sought as to the permissible extent of the restraint.

Contractual provisions are only enforceable as between the parties to the contract. In many instances, the person benefiting from the disclosure may not be a party to the contract. As such, the full extent of the loss suffered by the disclosure may not be recoverable through an action for breach of contract.

Equitable Protection Of Confidential Information

In addition to contractual protection of confidential information, there exists an equitable action for misuse of confidential information. There are three essential elements to this action:

1. the information has the necessary quality of confidence;
2. the information must have been reported in circumstances importing an obligation of confidence; and
3. there has been unauthorised use of the information to the detriment of the party communicating it.

1. Confidence

Clearly, as a starting point the information must be secret. It may be necessary to disclose the information to a number of people including employees, joint venture partners etc. In the employment setting, the courts have determined a number of criteria in determining whether information is confidential:

• the extent to which it is known outside the employer’s business;
• the extent to which it is known by employees and others involved in the employer’s business;
• the extent of measures taken by the employer to guard the secrecy of the information;
• the value of the information to the employer and to competitors;
• the amount of money and effort expended by the employer in developing the information; and
• the ease or difficulty with which the information could be properly acquired or duplicated by others.

When information has been disclosed in circumstances of confidentiality and subsequently becomes public the person to whom the information was disclosed in confidence is still obliged not to use the information as a ‘springboard’ for activities detrimental to the person who made the confidential communication. The springboard will lapse when the information is in the public domain to such an extent that the confidant no longer has an unfair head start over other competitors.

2. Receipt of Information

The receipt of information in circumstances of confidentiality requires that the confidant has knowledge that the information was disclosed in circumstances of confidence. This is an objective test – whether a reasonable person would have realised on reasonable grounds that the information was given in confidence.

3. Unauthorised Use

There must be unauthorised use of the information. Disclosure presupposes that some use will be made of the information. Impermissible use will generally occur when the confidant has made ‘unconscientious use of the information’. The confidant will also be liable for negligent misuse of the information. Misuse of confidential information extends beyond the confidant to third parties. As such, the confider can take action both against the confidant and against third parties.

Defences and Remedies

Defences

Disclosure will be allowed in certain circumstances. These include where there is just cause or excuse, when the public interest favours disclosure and when required by law.

Remedies

As with other forms of intellectual property, remedies for misuse of confidential information include injunctions, damages and account of profits. The courts may also award a constructive trust in which case the confidant will hold any benefit obtained from the breach in trust for the confider.