Confidential Information for Business

 

Confidential information is also referred to as trade secrets and know-how.

Confidential information is any formula, device or compilation of information which is used in a business and which gives the proprietor of the business an opportunity to obtain an advantage over competitors who do not know or use it. The owner of confidential information must take measures to prevent it from becoming available to persons other than those selected by the owner to have access for limited purposes. Examples of confidential information, trade secrets and know-how, include salary information, formulas, specifications, patterns, inventions, customer and vendor lists, unpublished works of authorship, software, industrial methods, techniques and processes, marketing and sales plans, and marketing forecasts and pricing information. 

How does the law classify what is confidential information?

Confidential information is information that is the result of work done by the maker upon materials which may be available for the use of anybody, so as to achieve a result which can only be produced by somebody who goes through the same process. All of its separate features may have been published, or capable of being ascertained by actual inspection by any member of the public, but if the whole has not been achieved, and could not be achieved except by someone going through the same kind of process as the owner (…..), it will despite the publication of the information separately, qualify as being confidential information: (see Gowan J, Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37 at 49).

For instance, all though the names of people are known the work done in collating a client or customer list can result in making the compiled list confidential information. Customer lists and information have been held to be confidential information (see Robb v Green [1895] 2 QB 1; and Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472).

However, just because a party claims that information is confidential is not sufficient at law to elevate the claimed information to be “Confidential Information”. For example: assume you and a third party enter into a confidentiality agreement. The third party under the protection of the Confidentiality Agreement gives you a copy of the front page of today’s Financial Review. The information disclosed on the front page of the Financial Review is by its publication generally known to the public. The Confidentiality Agreement between you and the third party does not alter the nature of the information the third party is claiming to be confidential. The information on the front page of today’s Financial Review is public information. No confidentiality agreement can alter this fact. As such despite any confidentiality agreement any information disclosed on the front page of today’s Financial Review can be used by you without any fear of your breaching the terms of the Confidentiality agreement.

WHY MUST CONFIDENTIAL INFORMATION BE PROTECTED?

Unlike other forms of intellectual property (copyright, and patents), confidential information can be of unlimited duration. By definition, confidential information must be kept “secret” or the trade secret becomes public information and anyone is free to use it. The key to keeping and guarding confidential information is secrecy. For instance, the formula for Coca Cola has been kept secret and for so however long the secret can be kept, Coca Cola has the ability to market and sell Coca Cola without fear of anyone selling exactly the same product.

As long as the secret is guarded by the company, the courts will protect the secret from misappropriation by others. A court will penalise one who seals or wrongfully appropriates a secret. However, a person cannot protect a competitor who has independently developed the same confidential information, nor against one who has lawfully gained access to it. As long as loss of confidential information could mean loss of a competitive edge in the industry, the confidential information must be guarded.

Some special situations concerning confidential information are as follows:

Employees

Employees are in a special class when it comes to dealing with confidential information. The reason for this is that employees invariably receive or create confidential information during the course of their employment. However, the rights of the employer must be balanced against the rights of the employee, especially after the employment terminates, to enable the employee to earn a living using his or her knowledge and skills.
Usually the employment contract will contain a non-disclosure or confidentiality clause requiring the employees to keep confidential any information they learn during the course of their employment which, if disclosed to third parties, may be detrimental to the employer. Under common law principles, in the absence of an employment agreement, an employee during the term of his or her employment will be considered to be under an implied contractual “duty of fidelity” consisting of three main duties:

• a duty to maintain the employer’s information in confidence;

• a duty to disclose relevant information to the employer which was developed or learned during employment; and

• a duty not to compete with the employer’s business.

A former employee may freely work for the former employer’s competitors and engage in activities which directly compete with the former employer, subject to an important restriction that the employee may not utilise the former employer’s confidential information for example, chemical formulae or manufacturing processes that the employer has taken steps to keep secret.

If there is a contract of employment, this freedom would be subject also to any other obligations or restrictions contained in the contract, so long as those restrictions are valid and enforceable. For example, the contract may stipulate a certain restraint of trade clause prohibiting the former employee from working in the same area or in the same industry or for a competitor of the employer for a certain period of time. These restraint of trade clauses will not be enforceable if they are too wide and unreasonable than is necessary to protect the employer’s interests.
An employee however, is not prevented from using his or her recollection of commercial information that has not been kept secret such as names of customers, to compete with his or her original employer.

Confidential Information and the Internet

There are two main problems posed by the internet for confidential information:

• the internet allows widespread instantaneous dissemination of information that was once confidential. This will amount to a breach of confidence by a recipient of the information who posts it to the internet. The owner of the confidential information will usually have an action against such a recipient;

• the information may be readily used and further disseminated by third parties, who may be in different legal jurisdictions. This means that it may be difficult for the owner of the information to bring an action against third parties who use the information. If an action can be brought against the original recipient, however, this is not an overwhelming problem.

A person concerned with maintaining confidential information should take steps to ensure that the information does not end up on the internet. As the cases suggest, it is clear that as soon as information is put on a public part of the internet, it will cease to be confidential. Loss of confidentiality depends, however, upon the circumstances of each case. For example, if access to information is controlled by an access prevention measure, such as password protection, then the information may retain a degree of confidentiality, especially if few people have access to passwords.

As explained above, the law does not protect confidential information on its own. There is no general action for “theft” of confidential information. The only protection arises out of the relationship between the parties and the obligation of confidence which arises out of the relationship (contractual or otherwise).

Traditionally, a person who innocently came across confidential information and used it without knowing that it was confidential information was not held liable simply because the person had no obligation of confidence. In the ordinary (offline) environment, the chance of this happening is quite rare. If the information was of value to the owner, the owner would do its utmost to ensure that it is kept secret and secure. Usually, the information would not be disclosed without a breach by someone who is under an obligation of confidence or by an intentional interception or espionage. Innocent third party usage would be quite rare. However, with the internet where communication is instantaneous and worldwide, once information is made available, anyone can come across it without knowing that the information was once confidential and use the information. The owner would have virtually no recourse against these third parties.

The speed with which information can be disseminated with such wide reach also affects the effectiveness of legal remedies that are available and the ability of the courts to act quickly when faced with an application to stop the unauthorised dissemination.

Emails

Email is not a secure communication tool however many people use email to communicate confidential information. Email may be forwarded to any number of people with the greatest ease and if this happens and the dissemination is wide enough, it is likely to be held that the information has lost the quality of confidence.

Intranet

The case of the internet can be contrasted with that of intranets. Many businesses now use intranets for internal activities. Since intranet access is restricted by passwords and IDs, the nature of intranet is different from the Internet and therefore confidential information posted on an intranet may not necessarily lose the quality of confidence. However, the more people who are aware of the confidential information, the more likely it is that it will be leaked. Also, no firewalls or other security measures can withstand the persistent attempts of a determined hacker (as the example of the Microsoft trade secret espionage showed late last year).

 

Receiving Confidential Information from Third Parties

Unsolicited submissions of new ideas are sometimes received from third parties outside the business. Such submissions must be carefully handles to avoid a later accusation of misappropriation of the idea. Many businesses refuse to receive such third party submissions. Other require the submitter to sign an agreement specifying the rights and duties of the parties respecting the information as a condition to accepting the submission, usually specifying that such acceptance will be on a “non-confidential” basis. Many businesses will return unexamined any information received from a third party who has not signed such an agreement, with a request that the agreement be executed prior to re-submission of the information.

Sometimes, a business will receive an offer to receive confidential information from another person under a confidential disclosure agreement. Of course, the agreement should not be signed unless it has been cleared by your legal advisers. If another business’s secrets are received under a confidential agreement, those secrets should be guarded at least as carefully as the receiving business protects its own secrets. They should be used only for purposes covered in the agreement, and should not be shared with anyone, even company employees, except as permitted by the agreement.

Except when provided under covered of a confidential agreement, you should avoid receiving information on a confidential basis from anyone outside of your business. Wrongfully using another’s trade secrets can expose you and your employees to legal action. Observing the following guidelines can help prevent such problems:

• do not assume you have any right to use another’s confidential information;

• do not hire a competitor’s employee to gain access to the competitor’s secrets; and

• if a competitor’s employee is hired, instruct the newly hired employee in writing that the company expects him or her to protect the former employer’s confidential information.

GUARDING AGAINST INADVERTENT PUBLICATION OF CONFIDENTIAL INFORMATION

Many businesses encourage their employees to publish articles in professional and trade journals and to make presentations at meetings of professional societies. Such activities enhance the professional career of the employee and the prestige of their employer. However, you should guard against inadvertent disclosure of confidential information by such activities. Some ways to protect confidential information from inadvertent publication are:

• screen abstracts and drafts of articles by the employee’s supervisor for appropriateness for publication;

• require clearance by the business’s communications or public relations office;

• submit technical publications to a review committee that will approve the subject matter, type of publication and the publishing entity, forum or society for all employee papers or articles suggested for publication; and

• clear the proposed publications through the business’s legal advisers.

Consequently even though there is a confidentiality agreement the person claiming the right to have the information kept confidential must as Megarry J, held in Coco v AN Clark (Engineers) Ltd [1969] RPC 41 at 47 ) prove three things, namely, that the :

1. alleged confidential information has the necessary quality of confidence (ie the information qualifies as being confidential information);

2. information was imparted to the recipient in circumstances importing an obligation of confidence; and

3. there is an imminent and real risk that the alleged confidential information will be or that the alleged confidential information has been used in an unauthorized manner to the detriment of the person claiming that the information is confidential.

To establish that information has the necessary quality of confidence what is needed to be established is that the information has the requisite degree of being the product of the result of work and the extent to which the information is known, being that:

• information is only known by those involved in the Disclosing party’s business that have a need to know about it;

• the extent to which the information is known by other employees and others involved in the business;

• the extent of measures taken to guard the secrecy of the information;

• the value of the information to the disclosing party and competitors of the disclosing party;

• the amount of effort and money expended by you in developing the information;

• the ease or difficulty with which the information could properly be acquired or duplicated by others (ie, by their independent efforts: (see Gowan J, Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37 at 50).

REMEDIES FOR DISCLOSING OR USING CONFIDENTIAL INFORMATION

The owner of confidential information can seek one or more of the following remedies against a person who has breached the confidence:

1. order allowing the search of premises and the seizure of documents and products if there is a risk that evidence may be destroyed;

2. an injunction restraining the use and disclosure of the information;

3. an order requiring the return of the information; and/or

4. an order seeking an account of profits or damages to compensate the owner.

The usual difficulties associated with finding and proving the culprit of breach of confidence is compounded by an Internet environment where electronic footprints can be very hard to track. 

HOW TO GUARD CONFIDENTIAL INFORMATION

As it can be difficult and expensive to establish a breach of confidence that some one has misappropriated confidential information guarding the use or disclose of it is the best form of protection.

The one sure way of protecting confidential information is not to disclose it to anyone.

Unfortunately, that is not always practical, at least not if the confidential information has to used. The best way to protect confidential information is to disclose it to as few persons as possible and to be sure those persons know they are to keep it secret. That is, only disclose on a need to know basis.

An owner of confidential information must take reasonable steps to preserve its confidential information in order to later be able to enforce its rights. Of course, what is “reasonable” depends on the circumstances. The following are some techniques that may be of value in keeping confidential information secret and in persuading a court that “reasonable” steps have been taken:

• keeping confidential private or confidential;

• do not disclose confidential information to people outside of the business and then only disclose it to those in the business who had a need to know it;

• mark the information as “Confidential Information”, “Company Confidential”, “Secret”, or the like;

• restrict access to the information, for example, by maintaining it in a secure place;

• establish and enforce a system of physical plant security (gate or entrance guards, clip-on employee ID tags, briefcase inspections, not allowing cameras onto the premises, card-key security doors into sensitive areas, etc);

• destroying or shredding waste materials containing confidential information;

• require employees and contractors to sign secrecy agreements (these are often combined in a single document with patent and copyright assignment agreements); and

• conduct interviews emphasizing to newly hired and departing employees that they have a legal duty to maintain the secrecy of the business’s confidential information.

If further information is sought on this confusing and confounding topic contact Etienne Lawyers.