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Australia – These Boots Were Made For Walking: Protecting Confidential Information When Staff Walk Out The Door.

28 November, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Labour & Employment

 

MKP v Arkell [2013] FCA 1066 (22 October 2013)


WHAT YOU NEED TO KNOW

 

  • The decision in MKP v Arkell provides a timely reminder to employers about the importance of protecting confidential information when employees resign or otherwise leave the business.
  • The decision highlights to employees the risks of taking confidential information and then trying to cover their tracks.
  • It can be difficult, time consuming and costly to litigate breaches of post-employment obligations by former employees. Employers should consider taking precautionary measures where possible and proportionate to the level of risk involved.

WHAT YOU NEED TO DO

 

  • The level of protection an employer needs when an employee leaves the business varies according to each individual and the knowledge held by that individual. Some steps employers can take to minimise (or help manage) the risk of breaches of post-employment obligations by former employees include:
    • Negotiating a clear and reasonable post-employment restraint up front
    • Limiting or monitoring a key employee’s access to confidential information when their ongoing employment is under review
    • Monitoring and reviewing current and previous email activity after resignations from key positions are announced
    • Reinforcing post-employment obligations in separation documentation
    • Acting quickly when you become aware of a possible breach of post-employment obligations
    • Gathering evidence of any breaches of post-employment obligations
    • Engaging experts to assist in document recovery and evidence gathering.

Are you confident your employees will comply with their post-employment obligations if they leave your business under any circumstances? Can any employer really hold this level of trust in departing employees?


The recent Federal Court decision of MKP v Arkell [2013] FCA 1066 (22 October 2013) provides a timely reminder to employers about the importance of protecting confidential information when employees resign or otherwise leave the business.


Breaches Of Post-Employment Obligations


The employee resigned after eight years of employment with his employer. The employee had risen through the ranks and was both a senior employee and on the management committee. By virtue of his position, the employee had access to a large amount of his employer’s confidential information, including accounting records, terms of trade, HR records and client lists.


The employee was subject to a confidentiality deed which included obligations not to disclose confidential information either during or after his employment, as well as a restraint clause which specified that he was not to compete with or solicit clients from his employer for twelve months after ceasing employment. Upon his resignation, the employer also informed the employee that he must return all property, confidential information and documents before his departure.


In proceedings brought in December 2011, the employer alleged that the employee had contravened various post-employment obligations including that he:

 

  • Copied and retained lists of clients and other important internal documents of the employer; and
  • Used and disclosed internal information of the employer to establish a business in competition with the employer (and to solicit clients from the employer).

The employee denied the allegations. He claimed that the various restraints to which he was subject to were not ‘valid and enforceable’.


The employee failed to produce key documents during the discovery process and permanently erased key materials relevant to the proceedings. The employer then applied to have the employee’s defence struck out as an abuse of process.


Deletion Of Emails


Despite previously acknowledging his obligations of discovery, the employer established through affidavit evidence, cross examination and expert analysis of the computers in question that the employee:

 

  • Deleted relevant emails including emails sent to and from clients that the employer particularised in its pleadings;
  • Did so without consultation with his legal representatives; and
  • Had not stopped deleting emails after the proceedings commenced.

File Cleaning Software


The employer’s solicitors served a Notice to Produce which required the production of the computers and electronic storage devices used by the employee and another former employee. The notice was not answered in time and the court issued an order for their production.


With expert assistance, the employer identified that:

 

  • The employee’s work computer had various external devices connected to it in the period shortly before his resignation, and internal documents (including client lists) had been downloaded to these devices;
  • File destruction applications had been installed on business computers and on the employee’s home computer, on and around the date that the computers had to be handed over under the Notice to Produce. The software was used to permanently delete files; and
  • Various Google searches had been undertaken by the employee, including “what happens if you don’t comply with a Court order” and “is guttman 35 shredding better than department of defence?” indicating an intention to contravene the Court’s orders for discovery.

Employee’s Defence Partly Struck Out


Justice Jagot considered the prejudice to the employer caused by the employee failing to produce various documents, as well as the significance of the material that was alleged to have been destroyed.


His Honour concluded that the employee’s conduct was an abuse of the Court process. His Honour found that it would be unfair to strike out the whole of the employee’s defence, but there was sufficient evidence to establish that there was a “real and substantial risk” that the employer would not be able to run an important part of its case due to the employee’s deliberate conduct.


The Court struck out the employee’s defence against the claims that he had approached, contacted and enticed away clients of the employer. The employer is still required to prove the existence of obligations that the employee was allegedly required to meet, including the validity of the restraint clause in the employee’s contract.


Implications For Employers


This Decision Highlights Both:

 

  • the difficulties for employers in protecting confidential information and enforcing post-employment obligations when an employee leaves; and
  • that an employee’s actions in taking confidential information and then trying to delete it can be traceable

It can be difficult, time consuming and costly to litigate breaches of post-employment obligations by former employees. Employers should consider taking precautionary measures where possible and proportionate to the level of risk involved.

 

The level of protection an employer needs varies according to each individual and the knowledge held by that individual. Some steps employers can take to minimise (or help manage) the risk of breaches of post-employment obligations by former employees include:

 

  • Negotiating a clear and reasonable post-employment restraint up front – employees with clear, unambiguous and reasonable post-employment obligations in their contracts of employment have less opportunity to claim they did not or could not comply with their contractual obligations. In assessing the reasonableness of a restraint, consider the geographical region, time period and types of conduct covered and if the combination of these three elements represents the minimum needed to protect the employer’s legitimate business interests. A broad restraint may be useful as a general deterrent, but may be difficult to enforce. Generally speaking, the more narrow the scope of a restraint, the more likely it is to be enforceable.
  • Limiting or monitoring a key employee’s access to confidential information when their ongoing employment is under review – where an employee is aware that their employment could be in jeopardy, there may be a temptation for them to take confidential company information to assist them in finding new employment. Some employers may want to monitor the email activity of these people as a preventative measure.
  • Monitoring and reviewing current and previous email activity following resignations from key positions – where there is a risk that an employee with access to confidential company information has resigned to join or form a competitor, employers should consider reviewing the past email activity of these individuals to look for evidence of potential breaches of post-employment obligations. The sooner possible breaches are raised, the more able the employer is to minimise any potential damage to its business.
  • Reinforcing post-employment obligations in separation documentation – this ensures that employees have a clear, written record of the employer’s expectations of them and understand that they will be held to their contractual obligations.
  • Acting quickly when you become aware of a possible breach of post-employment obligations – as a first step, when a possible breach is identified, employers should remind former employees in writing of their ongoing obligations and the severe repercussions of further (or any) breaches. Employers may also want to seek written undertakings from former employees at this time, to the effect that that they will cease their current actions and not do anything further in breach of their contractual obligations. Delay in enforcing post-employment obligations is a key factor relevant to whether a court will grant an injunction in favour of an employer to prevent a former employee from, for example, soliciting former clients, poaching staff or working for a competitor.
  • Gathering evidence of any breaches of post-employment obligations – employers should ensure they act quickly to gather and safely store evidence, such as archived emails, correspondence with the former employees and electronic equipment. Early monitoring of email activity leading up to separation can assist in this process. Remember that informants may need to swear an affidavit setting out the information they have if it cannot be supported by independent documents.
  • Engaging experts to assist in document recovery and evidence gathering – consider the use of external experts, such as forensic investigators to assist in gathering evidence in case a breach may lead to court proceedings. As can be seen from this case, the breadth of material that IT experts can obtain is extensive and can determine all or part of the issue.

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For further information, please contact:

 

Marie-Claire Foley, Partner, Ashurst
[email protected]


Julie Mills, Ashurst
[email protected]


Amy Linton, Ashurst
[email protected]

 

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