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Emerald Group Publishing Limited
Copyright © 2011, Emerald Group Publishing Limited
How to protect your trade secrets
Article Type: Corporate law outlook From: Strategic Direction, Volume 27, Issue 10
Companies generally want to attract the best employees who can use their acquired skill and expertise to help further grow the business.
However, there is an inherent tension around how much of the skill and expertise an individual has gained in previous employment can be used by a new employer. If that skill and expertise was generated by working on confidential projects or trade secrets, is the employee allowed to transport that knowledge to the new employer?
Employers often seek to protect their information by use of restrictions in employment contracts. Those restrictive covenants, however, are only enforceable to the extent that they are a reasonable restraint that seeks to protect a legitimate business interest.
When disputes arise, Courts often must decide whether information gained by employees at the employers expense is so confidential that it amounts to a trade secret and cannot be used elsewhere, even if it is “in the head” of the former employee.
1 Case study: Goldenfry Foods
Yorkshire food manufacturer Goldenfry Foods was awarded a High Court judgment in its favor against three former senior employees that misused trade secrets to help secure a £5m contract to supply own-brand gravy granules to a national supermarket chain.
The three-year legal battle resulted in a ruling which meant the former employees were facing a damages and costs claim in excess of £6m being awarded against them and the company they formed, Rotherham-based Frontier Foods.
Goldenfry was advised from the outset by Matthew Howarth, head of commercial litigation at Yorkshire law firm Gordons, and the judgment was given following a trial that lasted two weeks. The court ruled that the defendants had misused trade secrets and that technical director Malcolm Austin had deliberately taken commercial information.
Austin, together with customer service manager Paul Chapman and brands manager Rob Waddell were not pursued individually and neither was Frontier Foods. Instead, Goldenfry purchased the assets of Frontier Foods and ensured that Austin, Chapman and Waddell agreed not to compete in the UK gravy products sector for a period of two years.
Peter Turrill, managing director at Goldenfry, said: “We had no option but to litigate because what happened fundamentally undermined our business. The taking of the trade secrets threatened the livelihoods of people here that had worked extraordinarily hard to make Goldenfry into a market leading company.
“The evidence against the individuals was compelling with the judge saying they were ‘plainly prepared to lie’, that they were ‘unreliable’ and that Malcolm Austin had ‘wrongly retained documents’ after he left our business.
“We could not allow them to get away with it and are relieved that the litigation is over. We were also adamant that, despite what had happened, we did not want to pursue the individuals concerned so we chose instead to enforce a non-compete agreement and purchase the company’s assets.
“Thanks to the outstanding legal advice we received throughout the proceedings from Matthew Howarth and his team at Gordons we are finally able to draw a line under this matter. All of our efforts are now concentrated on continuing to develop and grow Goldenfry.”
Goldenfry Foods is a successful manufacturer of a wide range of packaged grocery products for all of the major UK retailers. The company’s products include gravies, sauces, cake mixes, stuffings and batters.
Matthew Howarth commented: “Many employers are concerned about senior employees leaving their business and taking trade secrets with them. Goldenfry was faced with those trade secrets being actively used against the company and it put Frontier Foods in a position to secure a £5m contract because of it.
“This case has brought these issues to the fore, but employers should take comfort in the fact that if they have relevant restrictive covenants in their contracts of employment they will be enforced. This was the right outcome for Goldenfry and one which should remind employers to ensure they have the covenants in place to protect their trade secrets and confidential information.”
2 The key steps to protecting your business
Matthew Howarth provides insight into how businesses can protect themselves:
Identify what information is important to your business and whether it can be protected. This information can manifest itself in three forms:
Trade secrets. Where there is an implied duty of confidentiality during and after employment. Examples of trade secrets include secret process of manufacture, chemical formulae, designs or special method of construction and “other information which is of a sufficiently high degree of confidentiality so as to amount to a trade secret”.
Confidential information. Where protection is implied but during employment only. Employees use this information only for the best interests of their employer. Examples include a card index system with 325 client contact details, details of customer requirements and pricing, actual and target sales figures, refinements in manufacturing process.
General knowledge. Where there is no implied legal protection. Examples include an employee’s general skill and knowledge, and information that is in the public domain
Understand how you can protect your confidential information during and after employment:
During employment:– Duty of good faith and fidelity.– Senior employees – additional duties.
How is the information treated?– Brand the information as “confidential.”– Limit circulation/exposure.– Provide training on identifying and preserving the confidential nature of the information.– Utilize security measures – passwords, access rights.– Monitor e-mail traffic.– Contractual protection.– Policy.
After employment: express obligations:– Refer to trade secrets and confidential information.– Explain why the information is important and needs protection.
Covenants:– Protect only legitimate business interests.– Trade secrets, confidential information and more including customer connections and stability of workforce.– Reasonable – anymore could be unenforceable.– Non-dealing, non-solicitation, non-poaching etc.
Garden leave:– Express contractual right.– Provides window of opportunity.– Protection.
Look out for warning signs which might indicate something untoward is happening, examples of warning signs include:
Staying late, especially towards the end of employment.
Frequent private calls.
Personal e-mails at work.
There are practical steps that you should take if you believe that an employee might be likely to steal trade secrets and/or confidential information, these include:
Gathering evidence and speaking to other employees.
Signing an undertaking that all company property is returned when an employee leaves the company.
Writing to the employee and putting them on notice.
Consider taking out an injunction.
Claiming for damages.
An on-going risk assessment process will help safeguard company critical information. To be as robust as possible, such risk assessments should be immediate and constant as well as being periodically reviewed.
Matthew HowarthPartner and Head of Commercial Litigation, Gordons LLP, UK
To discuss any of the points in this article contact Matthew Howarth on 0113 227 0379 or e-mail firstname.lastname@example.org