Protecting your confidential information – don’t get taken for a ride

In this age of information, with seemingly endless amounts of data just one Google search away, it can be difficult to keep anything a secret.  However, most businesses possess information that cannot be found on Google, which if disclosed or misused could result in that business suffering significant harm.

The issue for many business owners is how to keep this information confidential, significantly, what happens if your company’s confidential information is used by a third party?  Unlike other forms of intellectual property such as trade marks or patents, there is no real form of legislative protection specifically designed to protect confidential information. 

Materials containing trade secrets, such as scientific formulae, explanations and diagrams for inventions or methods of manufacture, client lists, and customer information, (Confidential Materials) need to be kept secure, and the information within them confidential. 

In some cases, an aggrieved party may rely on certain provisions of the Copyright Act 1968 to seek a remedy against another party who has misappropriated confidential information (on the basis that the information contains material in which copyright subsists), but commonly, breaches of confidence and misappropriation of confidential information will usually fall upon the interpretation of agreements between parties and the obligations enshrined in confidentiality agreements, employment contracts, collaborative agreements and other types of contracts between parties exchanging and receiving confidential information. 

The recent Australian case of RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd [2011] FCA 423 illustrates the importance of protecting your confidential information, as well as the potential consequences of misusing someone else’s confidential information.  Similarly, in the recent decision of the US Federal District Court in E.I. Du Pont De Nemours and Company v Kolon Industries, Inc Civil Action No 3:09cv58. 21 July, 2011 we are given an extreme example of the serious approach taken by US Courts when awarding damages to parties whose confidential information has been misused.

The RLA Polymers case

In RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd, RLA Polymers Pty Ltd (RLA), a flooring adhesive manufacturer, imparted certain confidential information to its employees regarding the ingredients and use of its products.  Some of RLA’s employees later resigned and started their own company, Nexus Adhesives Pty Ltd (Nexus). 

Soon after, Nexus set about manufacturing a floor adhesive, and marketed it in direct competition with RLA’s product.  In commencing proceedings, RLA alleged that Nexus, by virtue of its directors being former employees of RLA to whom its confidential information had been disclosed, used this confidential information in order to market its product sooner than if it had researched and developed its own product from scratch, thereby giving it a significant competitive advantage.

In reaching its decision, the Court was required to consider whether:

  • the former RLA employees owed obligations of confidentiality to their former employer and if so, whether they breached these obligations; and

  • the information used by Nexus was confidential.

As to the first issue, the former employees conceded that they owed equitable and contractual obligations of confidence to RLA.  However, they argued that they had not breached those obligations as the information in question was not confidential in nature.

As to the second issue, the Court determined that the information was confidential by applying the following well established principles:

  • the information was confidential in character, that is, it was not public knowledge and had the necessary quality of confidence about it; and

  • the information was imparted in circumstances importing an obligation of confidence, that is, the employees were made aware that this information was not publicly known.

Upon finding that the information was in fact confidential, the Court accepted the evidence led by RLA that it would usually take about 12 months to develop and manufacture a flooring adhesive product from scratch. 

As Nexus took only five months to do this and was consequently able to bring its adhesive product to market in much less time than it would usually take, the Court concluded that Nexus could not have achieved this without using RLA’s confidential information.  Accordingly, Nexus had 'spring boarded' itself into the market and gained a commercial advantage at RLA’s expense.

The Court ordered Nexus to pay damages to RLA in the form of an account of its profits for sales over the preceding five and-a-half month period before RLA brought its adhesive product out into the market.  This was taken to be from the date of Nexus’ first actual sale of its flooring adhesive up to the date that it would reasonably have been ready to launch its product if it did not have the benefit of RLA’s confidential information.

DuPont case

Recently, in E.I. Du Pont De Nemours and Company v Kolon Industries, Inc, the US Federal District Court held that Kolon Industries, Inc, which had engaged a former senior DuPont employee as an external consultant, had stolen a number of DuPont’s trade secrets, including information relevant to the production of ‘DuPont Kevlar® aramid fibre’, a product commonly used in defence and police equipment.  The jury verdict in favour of DuPont led to an order that Kolon Industries pay damages in the amount of US$919,900,000 (about AU$900,000,000).

Whilst this is an extreme example of the potential damages payable for misuse of confidential information, it goes to show that the value of confidential information should not be underestimated.

Protecting confidential information

The development of confidential information is normally the result of a significant investment of time, skill and financial capital.  Accordingly, protecting this information from misuse should be a paramount consideration for any business owner.  A breach of confidence could be a commercial windfall for a third party, but have the effect of defeating any monopoly you have in relation to a particular product or service, or diluting your market share.

To protect your business against misuse of its confidential information, you should consider:

  • restricting access to confidential information and Confidential Materials on a strict ‘need to know’ basis;

  • clearly marking all Confidential Materials, whether in hardcopy or electronic form, as being confidential.  This can be simply done, for example, by using a rubber stamp or electronic watermark to place the word ‘Confidential’ on every page of a document;

  • securely storing Confidential Materials separately from other documents, in doing so you should ensure that:

    • all hardcopy documents containing confidential information, such as reports, plans, or schematics, are securely locked away in a fire-proof safe or padlocked cabinet; and

    • any confidential information that is stored in electronic format, such as Microsoft Word documents or electronic accounting records, should be secured with a password or other encrypted security wall.  You should consult with an IT security consultant as to the most appropriate forms of electronic protective measures for you.

  • clearly marking the storage spaces referred to above with written warnings that they contain Confidential Materials, and that unauthorised access is forbidden;

  • develop, implement and enforce an official confidentiality policy detailing:

    • how Confidential Materials are to be marked and stored;

    • the circumstances in which personnel can have access to Confidential Materials;

    • the purposes for which Confidential Materials can be used; and

    • actions to be taken should a breach of confidentiality, or other misuse of confidential information be suspected.

  • incorporate the confidentiality policy into all employment contracts, and explain it to your employees as a routine part of their induction program or other organised training;

  • requiring your employees, as well as any third party contractors or consultants, to execute a written confidentiality agreement before they are allowed access to any Confidential Materials; and

  • when an employee resigns, or their employment is otherwise terminated:

    • conduct an exit interview to explain that person’s ongoing legal obligations of confidence; and

    • ensure that they return any Confidential Materials in their possession.

By taking the above steps, you will minimise the risk that a third party will be able to take you for a ride, and use your confidential information for its own benefit.

If you would like to obtain more information about keeping your confidential information secure, please contact:

Wayne Zappia Nada Maltaric
Partner Associate
(08) 9288 6931 (08) 9288 6998

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.