What to do when employees spill trade secrets

15 July 2020

We are living in difficult economic times. Many of us are benefiting from the Government's wage subsidy and support packages but these will not last forever. By the end of the year subsidies may be lifted and the economic focus will be on rebuilding the economy.

This climate will undoubtedly place new pressures on the relationships between employers and employees.

Employers will be working out how to weather the economic downtown, and many employees may be feeling job insecurity. This can lead to employees taking advantage of their current position to secure other employment.

A data recovery company recently reported a 30 to 40 per cent increase in the number of quotes to investigate a data breach following lockdown. The company, Datalab, noted that there was a rise in cases of people recently made redundant going to direct competition and "using their previous company's data".

The managing director also noted that with an increase in the number of people working from home, came some doing so without adequate security protections.

Such breaches can be anything from trade secrets, client lists, contact lists, or supplier details. Disclosure of such information can be devastating for organisations.

Just look at the current controversy surrounding the America's Cup and Team New Zealand.

It has emerged that Team New Zealand has had secrets leaked from its Auckland base over a series of months. The organisation had been suspicious for six months that there were "informants" and went as far as having the base "swept" twice and performing checks of the computer firewalls.

When sensitive information came back to the organisation from external third parties, the suspicions of an information leak were confirmed.

It was also revealed that the leakers had made what Team NZ bosses described as "highly defamatory and inaccurate allegations regarding financial and structural matters" against the organisation. The Ministry of Business, Innovation and Employment is investigating the claims.

Team New Zealand identified a kiwi contractor who was involved and was subsequently terminated from the organisation.

Leaking sensitive sporting secrets is a dismissible offence. But what about when it relates to less high-profile issues? Or to organisations without the budget to do extensive investigations into potential leaks?

When confidential information can be instantly loaded to a USB, or even simply attached to an email, how can an employer protect themselves?

The first line of defence is the employment agreement. Many employment agreements include a confidentiality clause that prevents disclosure of information gained during the course of the employment.

Even if this clause is not specifically in the agreement, the courts have found the duty of confidentiality in respect of trade secrets to be an implied term automatically applying to all employment relationships.

Another way employers can protect their secrets is through restraints of trade - these are clauses in the employment agreement that prevent an employee working for a competitor or even in the same industry for a certain period of time.

This can protect confidential information by making it out-of-date or less relevant by the time it can be used by the employee.

While these clauses can be enforced against employees and prevent leaks happening, they provide little assistance once the cat is out of the bag.

In some cases, employers can take action in the courts - they can seek an injunction to prevent the use of the information, damages to compensate the loss of profits caused by the disclosure and penalties for breaches of employment duties. There are also criminal charges for taking trade secrets and using a computer system dishonestly.

An example of the potential consequences is a case involving an oil company, Tag Oil, where an employee downloaded a large amount of company data and took it with him when he left the company. He downloaded so much information that would, if printed out and stacked up "reach the height of 40 Auckland Sky Towers".

There was no evidence that he had disclosed this information to anyone, but the Employment Relations Authority found he breached his employment agreement and the implied duties of fidelity and trust and confidence to his employer.

The authority ordered the employee to pay $65,567 in special damages to cover the investigation and legal costs relating to the copying of information, and $12,000 in penalties, half of which was to be paid to the employer.

The employee was also charged in the criminal courts with dishonestly using a computer system. He was initially convicted and sentenced to two-and-a-half years in prison. Subsequently, the Court of Appeal quashed the conviction and reduced the sentence to the 10 weeks prison time already served

Undoubtedly, such penalties and sentences will dissuade many from covertly taking their employer's secrets. However, the Team New Zealand saga demonstrates the damage that such leaks can do, and that the remedies available in the courts may not remedy the broader political losses or the loss of public confidence.

While Team New Zealand was able to terminate the contractor involved in the leaks, the fallout is still ongoing.

The difficult economic times ahead are likely to test the ability of employers to protect their competitive advantage through departing employees using their knowledge and connections against the old employer.

Employers would be well advised to check their employment agreements and policies to give themselves the best possible protection.