Misuse of confidential information during employment

Article exclusively contributed by Johnson Stokes & Master

In July 2005, the entire workforce of Slik Hong Kong Company Limited walked out and, with the exception of the managing director, all subsequently joined a competitor, Salmi International Ltd. The owner of Slik, who was based in the UK, only found out about the defection when a customer forwarded an email sent by one of the former employees, advising clients that Slik's entire sales and customer service team had joined Salmi. Prior to these events, Slik's business in Hong Kong had been manufacturing and selling zips, an area which Salmi had never previously been in.

Slik applied to the court for injunctions against Salmi and eight of the former employees to prevent them from dealing with any of Slik's customers for a period of six months. This is also known as "springboard relief" since the essence of such an injunction is to prevent a person who has obtained confidential information from using it as a springboard, or to obtain a head start, for activities detrimental to the company which originally provided it. Slik also sought orders for its former employees to deliver up any confidential information they might have taken.

In the Court of First Instance, Judge Gill found that some of the employees had been secretly planning the defection to Salmi up to six months in advance. They had each spent some time working on projects for Salmi while still officially employed by Slik. In particular, this had happened during their notice periods. The work they had done included setting up a website, and renting and fitting out premises. They had also been engaged in copying Slik's accounts, customer details and other confidential information such as codes, spreadsheets, production orders, pricing data and shipment details.

The judge found that this had been taken for the improper use of a competitor. What emerged from the evidence was that Slik's workforce was in breach of contractual and common law duties of fidelity owed to the employer up until the expiry of notices of termination. The judge concluded that the misuse of confidential information had given Salmi a head start which was unlawfully achieved and therefore unfair.

The outcome was that he granted springboard relief and restrained the employees for a period of six months. Those involved were also ordered to deliver up any confidential information rightly belonging to Slik.

The former managing director, who had joined a different company (not Salmi), was the only person whose contract of employment contained specific covenants restricting him, among other things, from engaging in the business of zip fasteners for a period of six months in the UK or Southeast Asia. Restraints of this kind are void unless it can be shown that they are necessary to protect a legitimate business interest and that protection goes no further than is reasonable.

In this case, Judge Gill found that the restriction was enforceable because the nature of the restricted activities, the geographical scope and the duration of the restriction were reasonable. While acknowledging the accepted view that Southeast Asia does not include Hong Kong, he was prepared to find on this occasion that there was a strong prospect that the intention of the parties was that Hong Kong was meant to be included. He therefore found the restraint was enforceable.

Q&A on post-termination restrictive covenants
Q1 What obligations does an employee have to keep information belonging to his employer confidential?
A1 The courts have accepted that there are essentially three categories of information. The first is information which is freely available and can be used by the employee both during and after the termination of employment. The second is confidential to the employer, while the third is information which amounts to a trade secret. The two latter types may not be made known to people outside the company during the term of employment, while trade secrets can in addition not be used after termination of employment.

Q2 What is a trade secret?
A2 For something to be a trade secret depends on all the circumstances involved. However, the following can be used as a general guideline:
(a) it must be information used in a trade or business
(b) the owner must limit the dissemination of that information or at least not encourage or permit widespread publication, and
(c) it must be information that, if disclosed to a competitor, would be liable to cause real (or significant) harm to the owner of the secret.

Q3 Once I have given notice of termination to my current employer, can I start work for my new employer during the notice period?
A3 No. A contract of employment is not terminated by giving notice. It is only terminated once the notice period expires. Therefore, you will still be bound by your contract of employment with your current employer until that notice expires. In all contracts of employment there is an implied term of good faith and fidelity, which means that anyone who starts work for a new employer during the notice period will be in breach of the existing contract.

Taken from Career Times 23 December 2005

(Last review date: 23 August 2013)

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