How far can employers go to keep their trade secrets safe?

How far can employers go to keep their trade secrets safe?

To what extent does an employee owe a duty of confidentiality to his former company after his resignation?

The Federal Court’s decision on 16 May 2016 in Dynacast (Melaka) Sdn Bhd & Ors v Vision Cast Sdn Bhd & Another helps shed some light on this issue.

These are the salient facts:

  • Cheok was an employee holding various high level positions in the Dyncast group of companies.
  • 15 months after his resignation from the Dynacast group, he incorporated a competing business.
  • Dyncast sued Mr. Cheok and alleged that he had misappropriated confidential information of the group in order to encroach onto their ongoing projects and compete with the group. They sought to enforce the non-disclosure agreement signed by Mr. Cheok when he was an employee.

The Federal Court decided in favour of Mr. Cheok.

Here are some of the key takeaways from the judgment.

Confidentiality obligations can be perpetual.

The non-disclosure agreement signed by Mr. Cheok did not stipulate any limitation by time. There is no requirement for protection of confidential information to have a time limit and it is possible for make one party observe the obligation of confidence “forever”.  A contrary view would mean an ex-employee could exploit confidential information with impunity since all that an ex-employee would have to do is wait until the expiry of the restriction period. Such an outcome could not have been intended by any of the contracting parties as it would defeat the very purpose of having a confidentiality provision in an employment agreement.

The Federal Court followed the position in Australia which recognises perpetual confidential obligations. (This can be contrasted from the position in some states in America which view confidentiality agreements without a specified duration as being unreasonable and unenforceable.)

As such, non-disclosure agreements or confidentiality clauses can be drafted such that an employee is perpetually bound by his obligations of confidentiality, even after his employment has ended.

Are perpetual confidentiality clauses void for being in restraint of trade?

The Federal Court held that while protection of confidential information can be perpetual, it is still subject to other principles of law and equity that may be applicable such as the doctrine of restraint of trade.

Section 28 of the Contracts Act provides that any clause which is in restraint of trade shall be void. Unfortunately, the Federal Court declined to specifically answer a question as to whether an agreement not to disclose confidential information “during employment or at any time thereafter” is rendered void by Section 28 of the Contracts Act for being in restraint of trade.

However, the Court did warn against employers using a vague allegation of breach of confidentiality to place fetters on the ability of ex-employees to compete, quoting Scott J in the UK case of Balston Ltd v Headline Filters Ltd (1987) FRS 330:

“The use of confidential information restrictions in order to fetter the ability of these employees to use their skills and experience after determination of their employment to compete with their ex-employer is, in my view, potentially harmful. It would be capable of imposing a new form of servitude or serfdom.”

The implication here is that whether a clause is void for being in “restraint of trade” will still be determined on a case by case basis.

Claims for breach of confidentiality must be specific.

Dynacast’s claim failed because it did not specify what kind of confidential information or trade secrets were allegedly misappropriated by Mr. Cheok.

In a legal claim, it is not sufficient for an employer to allege that an ex-employee has “misappropriated private and confidential information” without providing sufficient particulars as the ex-employee is entitled to know what private and confidential information was said to have been misappropriated by him.

In light of this decision, employers should bear the following in mind when dealing with confidentiality obligations:

  • The Federal Court held that an employee’s obligations of confidentiality very much depends on the terms of the agreed contractual obligations.  Employees who have access to confidential information should be made to sign non-disclosure agreements (NDAs) and legal advice should be sought when the NDAs are being drafted. As the enforceability of NDAs may vary from jurisdiction to jurisdiction, “template NDAs”, if used, should always be reviewed from a local law perspective.
  • In the event of a breach of confidentiality, employers must be able to identify and particularise the confidential information said to have been misappropriated or misused. The law allows ex-employees to use their own knowledge and experience accumulated over the years and this includes potential customers, price trends and market information that is in the public domain. Usage of this personal knowledge and experience is not a breach of confidentiality.
  • If an ex-employee has set up a competing business, an employer must evaluate whether there has been an abuse of confidential information by the ex-employee and if there is clear evidence to that effect. The mere act of setting up a competing business is not a legal wrong, and employers cannot use confidentiality obligations to restrain competition unless there has been a cogent and specific breach of confidence.

***

ABOUT THE AUTHOR. This article was written by Donovan Cheah with assistance from Wong Yen Ni.  Donovan Cheah is a partner at Donovan & Ho. He is an advocate and solicitor of the High Court of Malaya, and his writings have been featured in publications like The Edge, The Star, the American Chamber of Commerce updates, and Asialaw.

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