Employers can face hefty costs when involved in confidentiality breaches
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Employers can face hefty costs when involved in confidentiality breaches

Employers can face hefty costs when involved in confidentiality breaches

The loss of sensitive confidential information can severely harm a business. For this reason, there are legal mechanisms in place designed to prevent former or current employees from divulging confidential information to new employers or by creating their own competing business. Depending on the nature of the employment relationship, confidential information may be protected though:

    • Confidentiality provisions and restraints in employment contracts.
    • The equitable obligation of confidence.
    • Fiduciary duties to act in employers best interest.
    • Obligations owed under the Corporations Act.

Importantly, the Corporations Act includes a provision that triggers liability when a person is knowingly concerned in or party to a contravention under the Act. Therefore, company directors should think twice before ignoring their duties by participating in confidentiality breaches.

In a recent case heard by the Federal Court, funeral fund management company ‘Forresters’ was ordered to pay $6.2 million in profits earned to competitor company ‘Lifeplan’ for its knowing involvement in the contractual and fiduciary breaches of two Lifeplan employees. In an effort to prepare a business plan for Forresters and secure employment, the employees used their private email accounts to send confidential Lifeplan documents containing detailed business and financial information.

Whilst still employed with Lifeplan, the employees also actively solicited the business of other Lifeplan funeral directors on behalf of Foresters and themselves. They copied Lifeplan’s disclosure documents, contracts and marketing & administrative documents in an effort to make the move from Lifeplan to Foresters a "seamless transition" for the directors they were attempting to solicit.

The Full Court found that the Forresters board "knew or should have known that they were being supplied with confidential business information of a competitor", which most certainly would have been to Lifeplan’s detriment. It was also stated that "no honest and reasonable person, not shutting their eyes to the obvious, could conclude other than that the document was based on Lifeplan's confidential information". It was agreed that Forresters conduct amounted to "active participation in a dishonest breach of fiduciary duty".

As the outcome of this case highlights, the courts are prepared to punish companies who willingly accept confidential information for their own benefit.

Lessons for employers in protecting confidential information:

    • Ensure contract terms regarding confidentiality are clearly and effectively drafted.
    • When a person’s employment is ending, remind them of their obligations with regard to confidentiality and post employment restraints. Furthermore, seek to have all confidential information returned or destroyed as soon as possible.
    • Develop and implement a workplace confidentiality policy which outlines your expectations regarding upholding confidentiality.
    • Consider monitoring workplace email and internet use to prevent confidential information being transferred to personal email accounts (and ensure you comply with notification obligations).

Summary

Companies are exposed to liability when they are concerned in or party to confidentiality breaches. This was tested in a recent case before the Federal Court, which saw Forresters pay more than $6 million in profits earned to competitor company Lifeplan as a penalty for using Lifeplan’s confidential information.

Image courtesy of digitalart at FreeDigitalPhotos.net

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