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Ensure your business stays that way

THE loss of confidential business information and customers as a result of theft by current or former employees can severely damage a business.

Take the case of Mr Heil, controlling director of multimedia technology web site creator, Digital Pulse, who almost lost his business due to two employees taking confidential information and customers.

Mr Heil had employed Mr Harris and Mr Eden to assist in winning new business for Digital Pulse, which had grown from an operation run from Mr Heil’s apartment to a business employing 10 people.

While still employed, Mr Harris and Mr Eden set up a competing business, Juice-D Media. They spent a great deal of their employer’s time diverting business opportunities to their new company and e-mailing one another (using Digital Pulse’s e-mail) about Juice-D’s affairs. Not content with taking some of Digital-Pulse’s business, Mr Harris even e-mailed Digital Pulse’s confidential business plan to Juice-D’s e-mail address.

Soon afterwards, Mr Harris was sacked. Mr Eden resigned the next day.

All employees must act in the interests of their employer with good faith and fidelity. These obligations apply outside normal working hours. Unless there is a valid contractual restraint on competing after employment ends, an employee can take away and use the benefit of personal relationships built up with customers of the former employer, and can solicit customers they can recall from memory or publicly available lists, such as the Yellow Pages. Employees cannot use, for their own benefit, confidential information taken from the former employer.

As the post-employment restraints in Mr Harris and Mr Eden’s contracts were unenforceable, Digital Pulse could not stop them from competing with it when they were no longer employees.

However, Digital Pulse could and did sue Mr Harris and Mr Eden for breaching their duties of loyalty. These duties are implied in all contracts of employment, and also imposed because of employees’ fiduciary relationships with their employers.

The court found that, in taking Digital Pulse’s confidential information and competing with it while they were still employees, the two had breached their duties of loyalty. They were ordered to pay a total of $11,000 compensation for the estimated cost of the business plan they had taken.

Additionally, because they had acted in a consciously dishonest way, carefully planned the fraud, exulted in their success after having used Digital’s confidential information and resources, they were also ordered to pay exemplary damages of $10,000 each. This was the first time an Australian court had awarded exemplary damages for breach of fiduciary duty.

In a comment signifying the seriousness with which the courts view employees’ breaches of business confidences, Justice Palmer said: “Employers should feel able to entrust their business confidences to their employees with security. Employees should know that deliberate and dishonest breach of their fiduciary duties of loyalty, calculated to produce profit for themselves, will not go unpunished and that, at the end of the day, breach of those duties does not pay.”

Employers should not expect they will now have an easy path pursuing current or former employees who have taken confidential information or customers with them.

It can often be difficult to find enough evidence to prove that an employee, or former employee, has taken confidential information or a business’s customers. Another hurdle is proving what damage this has caused to the business.

To better protect themselves, employers need to set up properly drafted employment contracts with clauses covering confidential information, reasonable non-competition and non-solicitation of customers. It needs to be clear that the clauses will continue to apply after employment ends. Restraint of trade clauses must be carefully worded or they will not be enforceable.

Good contracts, plus comprehensive business plans and information which can be used to show potential loss of business, will provide better protection of a business’s knowledge and relationships. Best of all, a culture of respect and loyalty will provide the value base to minimise the risks of current or past employees stealing confidential information and business.

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