Confidential information and Non-Competes: are you adequately protecting the “Lifeblood” of the business?

It goes without saying that a business’s information is of paramount importance to it and is a core part of its value. We regularly advise both businesses prioritising measures they can take to protect their confidential information, as well as senior executives who have been alleged to have, for instance, taken and misused confidential information by their current or former employer.

In this article we explore what constitutes "confidential information", and how employers can protect that information in circumstances where their employees are leaving. In particular, we have examined how employers can use express confidentiality clauses and post-termination restrictions, particularly non-competes, in order to try to protect their information.

What is confidential information?

The first concept that businesses need to grapple with when considering how to protect their confidential information is that there are different types of business information, only some of which can be said to be confidential and thus capable of legal protection.

Trade secrets

At one end of the spectrum there are trade secrets, the most sensitive type of information a business can have. The courts have confirmed that employees are required to keep trade secrets confidential even after their employment has ended. The courts will imply a term of confidentiality into the employment contract to achieve this (see the case Faccenda Chicken Ltd v Fowler [1984] ICR 589 if you would like more information on this).

“Mere confidential information”

Below trade secrets, in terms of sensitivity, you have other confidential information or "mere confidential information". This point was explored in the case we referred to above, Faccenda Chicken Ltd v Fowler, where it was found that information that is not so confidential as to qualify as a trade secret was said to fall into the category of "mere confidential information", which is still proprietary information belonging to the employer. The employee must keep mere confidential information confidential while they remain employed, but, as the information becomes part of the skill and knowledge of the employee applied in the course of business, once the employee’s employment is terminated, in the absence of other restrictions, they are allowed "to use his full skill and knowledge for his own benefit in competition with his former employer".

Other information

In terms of further categories of business information, a business cannot protect certain types of information including information that amounts to the skill and knowledge of the employee or public information.

The question of whether information is even confidential, and in particular whether it is a trade secret, is often up for debate. There is often a blurred line between mere confidential information, trade secrets, and what constitutes the skill of an employee. Most often, these disputes crystalise when the employment relationship terminates, in particular where an employee seeks to work for a competitor. Where information is merely confidential, as opposed to being a trade secret, the big question is then - can the information be protected by an express post-termination restriction?

How do you protect your information?

In order to properly protect confidential business information, employers need to consider the obligations they place on their employees both during employment and following termination. Protecting confidential information is something which businesses need to think about at the very start of the employment relationship to ensure that when the relationship ends, they are in the best possible position to protect their value.

During employment

While employed, employees are under an implied duty to maintain confidentiality over both trade secrets and mere confidential information. However, there are many reasons why an employer will nonetheless want to draft a precise and robust confidentiality clause, including:

• To properly define what constitutes confidential information and a trade secret, making it much easier to enforce the clause should a dispute arise.
• It leaves the employee under no doubt as to the extent of their obligations.
• It is always preferrable to enforce an express term than rely on nebulous implied terms.
• The process of drafting the clause, and in particular thinking about what the confidential information is, focuses an employer’s mind on what exactly they are seeking to protect and why.

It is important to note that employees who have fiduciary duties may have more extensive confidentiality obligations than those employees who just have duties of fidelity.

Important drafting considerations

The most important rule when drafting confidentiality clauses is to draft the clause as precisely as possible. Employers need to think about the purpose of the information they are seeking to protect and its component parts, so that confidential information can be properly defined and thus properly protected.

When drafting employment contracts, one needs to do more than simply use pre-prepared bog-standard lists of ‘confidential’ information. It is not enough to simply assert that certain information is confidential, an employer needs to think about why it is confidential. The employer will also need to give thought to what it defines as a trade secret and justify this in its own mind and in the clause. Clauses ought to:

• Carefully consider the scope and type of the information to be covered;
• - Consider whether it addresses a legitimate business interest (is it really confidential / important information);
• State that it does not seek to cover public information;
• Assert the damage that breach could do to the business; and
• Make clear that nothing in the clause prevents the employee from:
  
  
  • Whistleblowing, or more precisely, disclosing information in accordance with the Public Interest Disclosure Act 1998 and / or section 43A of the Employment Rights Act 1996, as any attempt to prevent an employee from whistleblowing would be void;
  • Reporting a suspected criminal offence to the police or any law enforcement agency regarding a criminal investigation or prosecution;
  • Doing or saying anything that is required by HMRC or a regulator, ombudsman, or supervisory authority; or
  • Complying with an order from a court or tribunal to disclose or give evidence.

Employers will also want to consider express clauses requiring an employee to return all confidential information on the termination of their employment or, at the company’s request, at any time during their employment. This should make clear that this includes returning and irretrievably deleting confidential information stored on their own devices / email accounts.

Post-termination position

As outlined above, the common law position on the protection of confidential information once employment has ended differs depending on the classification of the information. Trade secrets are protected by an implied duty to maintain confidentiality and this duty persists even after employment has ended. This is not the case with other confidential information.

Can express covenants protect mere confidential information post-employment / information falling short of a trade secret?

Although the law is clear that trade secrets can be protected by express confidentiality clauses after termination of employment, it is less clear about whether an express confidentiality clause can protect "mere confidential information"’. There has been a significant amount of case law following the decision in Faccenda (almost 40 years ago). While the position is nuanced, as matters currently stand, it appears that the courts will uphold express confidentiality clauses even when employment has ended. In some instances, the courts have doubted the utility of the distinction between trade secret and mere confidential information when it comes to express restrictions. However, the dominant thrust of the case law is that a properly defined and sufficiently precise restriction on the use of information falling short of a trade secret may be enforceable. The courts will focus on the nature of the information which an employer is seeking to protect when deciding if the express clause is enforceable.

Ultimately, however, given continuing uncertainty over the extent to which the courts will protect confidential information short of a trade secret, an employer will want to do more than simply rely on a confidentiality clause. Businesses will therefore want to explore whether they should impose other types of post-employment restrictive covenants in order to protect their confidential information following termination.

Post-termination restrictive covenants

Properly enforceable restrictive covenants, such as non-competes, non-solicitation of clients / potential clients, and non-dealing with clients / potential clients, can have the effect of keeping employees out of the market or away from customers for an appropriate amount of time, so that the confidential information they once knew no longer poses as significant a threat to the lifeblood of the business.

With all restrictive covenants, the starting position is that they will be unenforceable as an unlawful restraint of trade unless they are no wider than reasonably necessary to protect a legitimate interest. Legitimate interests will include, inter alia, the protection of confidential information and client contacts. The reasonableness of a restriction is normally assessed according to the activity being restricted, its length, and (where relevant, albeit less common nowadays) its geographical reach.

Non-competes

As discussed in our previous blog non-competes are the most draconian post-termination restrictions and therefore need to go no further than necessary to protect the legitimate interest. In particular, they should not be excessively long in duration or overly wide in the definition of competitor. However, a non-compete can be an effective tool in protecting confidential information for a period of time until that confidential information becomes less relevant by essentially keeping that employee out of the market. It is important for the business to consider whether it can be achieved through a less draconian measure (eg a non-solicit of clients or a non-deal with clients).

By relying on properly drafted and enforceable post-termination restrictions, businesses may be able to achieve effective protection of their confidential information without having to test the enforceability of their confidentiality clauses. Thus, avoiding costly litigation to determine whether something is a trade secret or falls to be protected by the clause.

Summary of important takeaways

Businesses should:

1. Have in place properly drafted, precise, and specific confidentiality clauses in their employment contracts;
2. Think about what information they want and need to protect, and tailor the clause to the employee in question;
3. Think about trade secrets, and seek to define the information they want to protect as a trade secret;
4. Have in place well drafted restrictive covenants, in addition to confidentiality clauses, which go no further than necessary to protect legitimate business interests; and
5. Take expert legal advice early.

Businesses should not:

1. Take a one size fits all approach to confidentiality clauses;
2. Be too vague or broad in their confidentiality clauses or restrictive covenants; or
3. Rely only on confidentiality clauses.

With many thanks to Conor Kennedy, a current barrister secondee, for their help in preparing this briefing.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, October 2023