How well protected are you? - Protecting your client lists, candidate lists and confidential information from data theft

In the current economic client it is becoming increasingly important for the recruitment sector to ensure that it has the maximum protection in place to prevent employees from taking confidential information and clients with them when they leave. What steps can be taken to protect the confidential information and prevent clients and staff from being solicited? Once a business becomes aware of employees undertaking such activities in breach of express or implied obligations what can they do to prevent further loss or damage to their business?

Putting in place protection.

All businesses will have information which they consider invaluable and integral to their success. For a recruitment sector business this information is likely to form a large part of the value of the business. It consists of client lists, candidate lists and standard business documents. Together this confidential information forms a substantial part of the value of the business. Restricting the use of confidential information by employees after their employment ends is vital to the protection of a business. A former employee who has knowledge of such information may be an attractive asset to a competitor or may be able to gain an unfair springboard into setting up a competing business.

Employers can seek to protect such information with the inclusion of Post Termination Restrictions (PTRs) (commonly referred to as Restrictive Covenants) in the employee’s contract of employment. PTRs can come in a variety of forms but essentially there are 5 types.

• Non Solicitation of Clients/Prospective Clients
• Non Dealing with Clients/Prospective Clients
• Non Solicitation of Key Employees
• Non Interference with Suppliers
• Non Competition Clauses

The starting point for such clauses are that they are potentially unenforceable unless the employer can demonstrate that they have a legitimate business interest to protect and that the restriction is no wider than is necessary to protect that interest the scope of which is beyond this article. Legal advice should always be sought to determine what level of protection is reasonably necessary for your business and to ensure the highest probability that the clauses will be enforceable.

In the absence of express PTRs, employers will have no protection from employees who simply wish to resign and join a competitor. The only implied obligation which continues post termination of employment relates to protecting Trade Secrets which is a much higher threshold than merely confidential information. In the absence of express restrictions many claims relate to the actual retention of physical property of the employer such as taking copies or downloading client lists which can be difficult to prove.

Post termination breach. Act fast!

Once it has been decided that relevant activity being undertaken or the information being used by a former employee is protectable given its nature and any express or implied restrictions between the parties, an employer needs to decide upon the most appropriate course of action to protect their interests. Legal advice should be sought as soon as possible to prevent further loss. Where you have express clauses restricting a former employee’s activities a breach of restrictive covenant is essentially a breach of contract, as a result of which damages may be awarded.

Contractual Undertaking

The most basic form of protection to seek following an initial breach is a contractual undertaking. This essentially requires the employee to provide an assurance that they will not use confidential information or carry out the restricted activity. The ex-employer may also seek an undertaking from any third party it knows or believes to be in possession of its confidential information. This approach will place the new employer on notice that the relevant information is confidential and should not be used. This step may also assist with a possible claim for inducing the breach of contract against the new employer. This option can be used prior to issuing legal proceedings.

Advantages

• May on its own discourage an ex-employee who is not prepared to engage in a full scale legal battle.
• A failure by an ex-employee to give an undertaking may indicate bad faith and a court may take this into account when granting an interim injunction.
• A court may look favourably on a former employer who is making a genuine attempt to settle matters before issuing proceedings.
• If this approach is successful the ex-employer will save legal costs.

Disadvantages

• A contractual undertaking is no more enforceable than the original contractual obligation that the ex-employee has already breached. If the employee subsequently breaches the undertaking the ex-employer will still have to threaten and issue proceedings

Undertakings to the Court

Once an ex-employer has issued proceedings for an order restricting a certain activity it is possible to encourage the ex-employee to give undertakings to the court. For example, undertakings could be given to the court where an ex-employer applies for an interim injunction to prevent misuse of confidential information pending a formal trial on the matter. If an ex-employee does not want to contest they may offer undertakings to the court.

Advantages

• Breach of an undertaking to the court is contempt or court and could result in imprisonment.

Injunction

If the parties are unable to resolve the matter through undertakings the ex-employer may proceeed with the  issue of a claim for an injunction, damages or both. An injunction is a Court Order prohibiting a person from taking a particular action or requiring them to take a particular action. An interim injunction order may be granted early in court proceedings as a holding measure to preserve the ex-employers position by restraining the ex-employee from doing a particular act until the main case can be heard. The application will normally require three days notice for the ex-employee.

There are a number of factors which the court will consider before granting an interim injunction including whether there is a serious case to be heard, whether damages alone would be an adequate remedy e.g. because the loss can be clearly quantified, whether more harm will be done by granting or refusing an injunction and whether the status quo should be maintained.

Advantages

• Proceedings can take weeks to reach trial, by which time considerable damage to your business may have been already done. Further the ex-employee may have the funds to compensate you in damages. An interim injunction allows for almost immediate protection.

Disadvantages

• The costs of an interim application can be very large for all parties involved. There is a considerable amount of work required by your legal advisers on very short notice and a barrister will need to be instructed to represent you at the interim application hearing. In view of the fact that such proceedings are expensive, you will need to ensure that you have a strong case before taking these steps. If you fail to convince the court that you should be granted an injunction the costs consequences can be severe.

Where employees have used their former employers confidential information to get a head start in setting up a competing business the court can grant what is known as a springboard injunction.

Enforcing Post Termination Restrictions/Confidentiality in Practice

In the reported case of Your World Recruitment Ltd v Woodhouse and others [2011] All ER (D) 69 (Jan) the Claimant recruitment company brought an action against a former employee for misusing confidential information and diverting business to a competitor in breach of a non competition clause in their contract of employment. The non compete clause stated that the ex-employee should not work in the field of medical recruitment for a period of 6 months after the termination of his employment. The ex-employee argued that the non competition clause was unenforceable due to being drafted too widely and that it was unreasonable. The court considered that there was a serious issue to be tried in the main case and although there were arguments regarding enforceability of the relevant restrictions in the contract there were also arguments to suggest it may be enforceable. Damages were not considered an adequate remedy as it was impossible to discover the full extent of what the ex-employee had done if he had been in breach. The non compete restriction was considered to be in force  in the absence of evidence to the contrary and therefore the court held that the status quo would be to grant an injunction to reflect this position until the trial.

In the case of Company X v Mr Y & Company Z Debenhams Ottaway acted for the respondent employee Mr Y. Mr Y’s employment contract with Company X had contained a twelve month non competition clause referring to an attached list of competitors and a clause prohibiting the solicitation of customers for 12 months following termination. Mr Y resigned and joined a competitor (Company Z) who was not named on the prohibited company list attached to Mr Y’s contract but was on a current list maintained on the company’s intranet. Mr Y’s former employers (Company X) sent a letter before action alleging breach of his post termination restrictions and asking him to confirm he was not in breach. Mr Y did not respond as he believed he was not in breach.

Some weeks later Mr Y was served with proceedings by Company X shortly before midnight on Friday 17th June at his home address inviting him to an interim injunction application to be heard on the morning of Thursday 23rd June. Company Z was also listed as a respondent for allegedly inducing a breach of contract and they were separately represented. Company X’s claim centred around an alleged visit by Mr Y to an existing client of Company X. This client was also an existing client of Company Z. Mr Y denied that this visit took place. Company X alleged that Mr Y’s silence to their initial enquiries was relevant evidence.

Debenham Ottaway vigorously defended the application on the basis that in the absence of a specific non dealing clause the alleged meeting complained of (which in any event was denied) was not in itself restricted as there was no act of solicitation. Mr Y argued that in the absence of any further evidence of breach of the existing contractual obligations the claim against Mr Y had limited prospects of success. Mr Y further argued that the status quo of the protection offered by the contractual post termination restrictions should remain and in view of this no injunction was necessary prior to the trial.

The Judge indicated that in this particular business, clients were not individual to one provider and Mr Y could have attended the alleged meeting on legitimate business for his new employer, which in itself, was not in breach of his contract of employment. In the absence of any further evidence the Judge concluded there was not a serious case to be heard and the application for the interim injunction was rejected.

Costs for the application were awarded to both Mr Y and Company Z on the Indemnity basis. There were large city firms acting for Company Y and Company Z which meant that the total legal bill for Company Y for the failed application was in the region of £100,000. Shortly afterwards Company X withdrew their main claims against both Mr Y and Company Z.

The clear message from the above cases is that it is essential to draft appropriate restrictions in contracts of employment tailored to the needs of your business and to the role of each employee. If a breach occurs, or is anticipated it is appropriate to take proportionate and decisive legal action, only applying for an injunction if there is no other option available and there is strong evidence to support the use of such a strong legal tool.

For any queries relating to the above article please contact Michael Kerrigan on 01727 738244 (DDI) or email mk@dolegal.co.uk