Sandra Richmond is a member of the KNOWlaw group of the Toronto law firm McMillan Binch. This article was prepared with the assistance of Aaron Dhir.

Employees who leave and go to work for competitors are a fact of life for employers. But when your senior development executive or chief financial officer walks out the door, what happens to all your confidential information that your ex-employee knows?

Confidential information

The law defines confidential information generally as information that relays a business advantage due to the fact that it is kept secret.

Different types of information may be considered confidential – for example, market projections, a company’s financial situation or business plans, negotiations between parties to a joint venture, manufacturing processes, and information exchanged between a licensor and licensee.

When deciding whether particular information has a ‘quality of confidence’ to it, courts have looked at factors such as:

* how many people (both inside and outside the company) have access to the information;

* what steps the company has taken to keep the information confidential;

* how valuable the information is to the company – and would be to its competitors;

* the amount of money or effort the company expended to develop or obtain the information;

* whether the information is original or novel;

* how easy or difficult it would be for someone else to properly acquire or duplicate the information independently;

* whether the owner of the information, and the party confided in, treat the information as being confidential;

* the extent to which the information is known to others within the particular industry or trade.

Non-confidential information

Not all of your business information is confidential, even though it may be important to you and you may not want other people to know it. For example, organization and management methods are not generally considered confidential. And simply labeling something ‘confidential’ won’t make it so.

Even information that is considered confidential may lose its ‘quality of confidence,’ for example, through disclosure to the public.

And confidential information learned by an employee may become non-confidential when the employment contract ends if that information has become part of his or her skills. Employees are entitled to use the experience they have learned during their employment if it cannot be separated from their general knowledge.

Keep in mind, though, that there may be other legal protections for some kinds of business information that may not be confidential. For example, while an employee may be entitled to ‘take’ computer programming skills when he or she leaves, any actual program created in the course of employment may be protected by copyright which might be held by the employer.

Employee obligations of

confidentiality

For information that is confidential, however, employees have obligations to their employers and sometimes ex-employers to maintain that confidentiality.

Sometimes that obligation is contractual. More and more frequently, employers are asking employees to sign confidentiality agreements as part of their employment contracts. However, like any other contract, these must meet certain requirements to be enforceable.

A confidentiality agreement that the employer has asked the employee to sign some time after starting work may be more difficult to enforce – in effect, the employer is changing the conditions of employment and not giving the employee any additional consideration for it. And the more restrictive and unreasonable the contract is, the less likely the court is to enforce it, particularly where the employer has more bargaining power than the employee.

Even if there is no written contract, courts have found that it’s an implied term of the employment contract that employees are not permitted to reveal the confidential information of their employers. This implied term continues after employment ends.

Common law obligation

Aside from contractual obligations, there is a common law duty not to breach confidence by misusing or disclosing information that is sufficiently confidential (such as a trade secret) and that was communicated in confidence.

Generally, the employment relationship itself gives rise to an obligation of confidence and you don’t have to establish that information was communicated in confidence to an employee. However, if you’re dealing with someone else, you need to establish that the information you are disclosing to them is confidential and that they are required to maintain that confidentiality.

Fiduciary duty

For higher-level employees, such as officers and managers who occupy positions of trust, there may be an additional obligation of a fiduciary duty of loyalty and good faith to the employer, which includes an obligation not to misuse or disclose confidential information. For example, if a manager resigns in order to realize a business opportunity that he or she developed or became aware of while employed, that would likely be considered a breach of fiduciary duty to the employer.

Unlike the obligation not to breach confidence, there must be a special relationship in order for a fiduciary duty to exist. It does not apply to all employees and can, in some circumstances, apply to people who are not employees (for example, partners and parties to a joint venture).

Where’s the dividing line?

Whether particular information is confidential and whether the use of it would be considered a breach of confidence will depend on the specific facts.

Courts will look at both what the information is and how the ex-employee is using it in order to balance the competing interests of protecting a person’s right to make a living and protecting commercially valuable information.

Information that can be precisely defined or identified is more likely to be seen as confidential. For example, information about the effectiveness of various media for promotional purposes is likely to be seen as general know-how; information about a particular proposed promotional strategy is more likely to be seen as being confidential information.

Use of information is more likely to be seen as a breach of confidence if the ex-employee is selling or giving the information to someone and not using it as part of their own work.

However, the courts have disapproved of the practice of ‘springboarding,’ in which ex-employees use confidential information gained during employment for their own benefit or the benefit of their new employer. For example, if a company hires employees away from its competitor for the purpose of using their knowledge about technological advances to gain a competitive advantage or to accelerate the development of its own products, it is likely to be seen as a breach of confidence.

Remedies

If you find out or suspect that one of your ex-employees is using your confidential information, you should obtain legal advice about the steps you can and should take. It might be sufficient to write a letter demanding that they stop using your confidential information. If not, you have to decide whether you want to pursue a claim in the courts. This can be expensive and time-consuming, and it may be difficult to prove your case and the damages you suffered.

However, if the information is important enough, you may feel you have to act. The possible remedies available include injunctions, both before your case is heard in court and on a permanent basis, damages, an accounting of profits, and delivery to you or destruction of property wrongfully created by misappropriated information.

Prevention

If you want to try to protect yourself from the misuse of confidential information in future, remember that the central factor used to determine whether information is confidential is whether the information is actually held in confidence.

So, if you have confidential information that you want to protect, you should have a written policy dealing with how it’s to be treated and you should ensure that policy is followed.

Depending on the size and formality of your business and on the type of information you wish to protect, your policy may include some of the following:

* have all employees sign a confidentiality agreement and state clearly in the contract that the obligation continues after employment ends;

* mark all confidential information as ‘confidential’;

* protect confidential information by putting it in locked cabinets or in password-protected computer files;

* limit access by employees to confidential information on a ‘need-to-know’ basis and, if appropriate, limit physical access to the area in which confidential information is kept;

* if you have to disclose confidential information to third parties, identify the information as being confidential and enter into a non-disclosure agreement first.

You may also wish to include a provision in your employment agreements stating that the employee will not use or disclose any confidential information of his or her previous employers.

You should also be careful in how you treat information received from new employees. If you discover or are told that your new employee is using someone else’s confidential information, you should consult with a lawyer to determine whether the information is confidential and what steps you should take to protect yourself from claims by the previous employer against you.

(this article contains general comments only. It is not intended to be exhaustive and should not be considered as advice on any particular situation.)