Protecting Your Valuables

In 1993 Mr. Jose Ignacio Lopez, the purchasing chief of General Motors Corporation, left to join Volkswagen AG in a position involving purchasing and production improvements. In a nasty and very public dispute, GM claimed that Mr. Lopez took valuable trade secrets to VW. According to media reports, the dispute settled for a spectacular $US100 million, in cash to be paid by VW to GM along with an agreement by VW to buy $1 billion in parts from GM.

Closer to home, many of us were riveted by the reported law suit of Magna International Inc. against a former employee and U.S. auto parts company, A.O. Smith Corporation. The employee, Mr. Gille, was Magna’s hydroforming project manager and was apparently hired away to develop Smith’s hydroforming operation. Magna claimed that Mr. Gille was using its confidential information, know-how and trade secrets to help Smith, and sought $US100 million in damages, as well as punitive damages, in a U.S. court.

You may well ask yourself, if corporations as large as GM and Magna have difficulty protecting their proprietary information and trade secrets, is there any hope for the smaller employer?

Yes, there are a number of steps an employer can take to protect its confidential information.

Before looking at the law, there are a number of practical measures any employer with valuable information should be following. You should take an inventory to determine what your valuable information is, how it is stored and who has access to it. It will be hard to convince a court later of the value or the confidentiality of your information if you treat it carelessly. Some employers stamp certain plans and documents as “strictly confidential” or “do not copy”. For some documents you may even wish to keep a log of the number of copies and who has them. Make sure you get a copy back at the time of termination of employment or transfer to another position.

With respect to electronically stored data, you definitely should have a software expert look at your system of passwords and access codes. You should consider having restricted access, security clearance levels and encryption in place. You, the employer, must maintain control over your software. I have seen some very unfortunate and entirely preventable situations arise where employers have let employees operate so independently that on departure from employment the employer does not know where data is stored, cannot read disks left behind by the employee and cannot even access the employee’s data base. This should never happen to you. Remember, any employee can get sick, can die or leave at any time. Be ready.

NOW LET’S LOOK AT THE LAW

At common law an employee has a duty to not disclose confidential information. However, remember that not all valuable or business information is considered confidential by the courts. If it can be accessed by the public it is not confidential and will not be protected by the law. For example, information in financial statements may be public or information about suppliers or large customers may generally be known to your competitors. If a former employee breaches the duty to not disclose, the employer can sue for damages, but more usually will seek an injunction to prevent disclosure. Injunctions are not granted lightly by our courts and you will need to prove that “irreparable harm” (i.e. damage that cannot be compensated with money) will result if the injunction is not granted. An injunction is basically a court order to an individual or company prohibiting them from doing certain things.

The duty to maintain confidentiality and to act in good faith is even higher for employees known as “fiduciary employees” – those who are more senior or for some reason are in a position of trust at the company.

Rather than rely on the common law, it is highly advisable that you have employees sign non-disclosure agreements. These should be introduced immediately at hiring to make sure they become part of the employee’s terms and conditions of employment. A signature is essential. The agreement should describe your confidential information, state that the employee will have access to this information during employment, state that it is to be used only as necessary to fulfill job duties and the agreement should include an acknowledgment by the employee that the information is of value to the company, will not be disclosed or allowed to be disclosed, and that a breach of this undertaking will cause serious damage to the company. Try to tailor-make your agreements for various employees in different positions rather than use what looks like a standard contract across the board. It also helps to have these re-signed from time to time.

Every company should also have a written policy on confidential information which can be included in your employee handbook or personnel manual, for example. When an important policy like this is distributed to staff it is helpful to have employees sign an acknowledgment that they have received it and reviewed it.

You should also have clearly defined policies with respect to return of property upon termination. A resignation can happen unexpectedly and you should be ready. Some organizations have checklists of all steps to take at termination of employment so that they needn’t scramble or reinvent the wheel every time an employee leaves. Be ready at termination of employment to immediately change computer passwords, and cancel voice mail and e-mail access. The next Monday is not soon enough. Retrieve all building, office and elevator passes and keys.

If someone leaves to join a competitor and you strongly suspect they are using your company’s proprietary information, act immediately. Delay will look like condonation and can weaken your case in court. Write immediately, or have your company lawyers write immediately, requesting return of all company property and clearly setting out that the former employee is prohibited from using your business information. A copy of the letter should go to management of the competing company. If you believe that your business is about to be harmed or has been harmed, immediately consider an injunction application, coupled with a suit for damages.

PREVENTING COMPETITION

Confidentiality agreements should not be confused with the non-competition agreement. Canadian courts are reluctant to uphold non-competition agreements, on the basis that they are in restraint of trade and against public policy. Such an agreement prevents an employee from competing with the employer after termination of employment. These should be used sparingly. They need to be signed at hiring and a job applicant should be made aware of the requirement before hiring. Otherwise, they may not be enforceable, as a court will view them as unilaterally imposed by the company. A court will only enforce an agreement if it is reasonable in three respects:

* geographic limitation – e.g., preventing someone from competing in North America is often not reasonable, while a scope of 100 kilometres around Calgary could be enforceable;

* time frame – e.g., a one-year term is generally acceptable but a five-year term may be struck out by a court; and

* scope of the prohibited activities – e.g., preventing someone from working for a competitor would be unreasonable if the employer is active in diverse industries.

Do not use non-competition agreements without prior legal advice or you may find that they are not worth the paper they are written on.

While court actions and injunctions are a possibility, this is one area where an ounce of prevention is clearly worth a pound of cure. Get your ducks in order now and look at how your business treats its valuable information.CPL

Anneli LeGault is a partner in the Toronto Labour practice at the national law firm Fraser Milner. She can be reached at 416/863-4450, or e-mailed at: anneli.legault@frasermilner.com