Protection against use of client data by an ex-employee

By Anthony Lam, Solicitor, Au-Yeung, Cheng, Ho & Tin

Article is exclusively contributed by Au-Yeung, Cheng, Ho & Tin

An outstanding salesperson can generate substantial revenue for a company and, therefore, the financial risk of losing such a person, by way of death or disability, may be hedged against by buying key man insurance. However, such insurance cannot cover the potential financial loss caused when a salesperson leaves, taking with him client data and contact details, for the purpose of soliciting business for a new employer.

If there is no express term in the employment contract preventing the ex-employee from using that client data, what can the former employer do to safeguard his interests? The case of AXA China Region Insurance Company Limited and others v Pacific Century Insurance Company Limited and others ("AXA Case") may give some hints.

The Plaintiffs ("AXA") and the First Defendant ("PCI") were both insurance companies. PCI launched a policy-matching scheme in March 2000, which targeted AXA policyholders and tried to get them to switch to PCI. At the same time, PCI offered an attractive "welcome bonus" to AXA agents who were willing to join the company. As a result, a large number of agents (about 260 as at 7 December 2000), including the 2nd to 28th Defendants ("the Agent Defendants"), left AXA and joined PCI.

AXA noticed that an unusually large number of client information printouts had been effected via the passwords of some of the Agent Defendants prior to the termination of their agency contracts. This information essentially included the particulars of policyholders and the details of policies ("Client Data"). As a result, AXA instituted proceedings to seek, among other things, an injunction restraining the Agent Defendants from disclosing or making use of any of the Client Data. AXA claimed that the Agent Defendants had removed this in breach of their duty of fidelity during the period of their agency, for use in direct competition afterwards.

In determining the grant of the interlocutory (temporary) injunction, the Court considered two issues:
(i) Was the Client Data protectable information i.e. were there trade secrets or information of a sufficiently high degree of confidentiality to amount to trade secrets?
(ii) Did the Agent Defendants owe a duty of fidelity to AXA in respect of the Client Data while their agent contracts were still extant?

It is a well-established legal principle that an employee owes a duty of fidelity during the period of employment even if there is no express term stating this in the employment contract. In other words, there is an implied duty to serve the employer loyally and in good faith. Such a duty prevents the employee using and disclosing certain information obtained during a current job after his employment has ceased.

The Court set out the scope of information subject to protection and determined it must be:
(a) Used in a trade or business
(b) Confidential i.e. not already in the public domain
(c) Easily isolated from other information which the employee is free to use, so that any person of average intelligence and honesty would think it is improper to put the information at the disposal of his new employer
(d) Liable to cause real or significant harm to the owner, if disclosed to a competitor
(e) Known that the owner of the information limits its dissemination, or at least does not encourage or permit its widespread publication, or otherwise impresses upon employees the confidentiality of the information.

The test to be applied for (b) and (d) is that of the owner's subjective belief in the light of usage and practices in the trade or industry.

Upon applying the test, the Court had no hesitation in concluding that the Client Data was subject to protection. They also reviewed a number of cases in the UK and held that the Agent Defendants owed a similar duty of fidelity as for parties in a fiduciary relationship, such as trustee and beneficiary, principal and agent, master and servant, and solicitor and client.

As the Court was only concerned with the granting of an interlocutory injunction, which was temporary in nature, they made no findings of fact about whether the Agent Defendants did actually remove Client Data. Nevertheless, it is clear that if an agent or employee makes or copies a list of the employer's customer data for use after his employment ends, he will breach the duty of fidelity. The employer can then apply for an injunction to prevent the use of such data and request its return.

Q&A on the use of client information
Q1 Is the ownership of the Client Data or its source relevant?
A1 No. The Defendants argued that the policyholders were the agents' clients, not AXA's, and that the information therefore belonged to the agents. The Court took the view that if the employer or principal had a sufficient interest in the information, they were entitled to prevent its use by the employee or agent.

Q2 Can the former employee use Client Data which has been memorised?
A2 If the Client Data falls within the scope of information which is subject to protection, it does not matter whether it was taken in physical form or committed to memory by the employee.

Taken from Career Times 25 March 2005

(Last review date: 23 August 2013)

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