Employee post-termination confidentiality restrictions - less is more

Employee post-termination confidentiality restrictions

Trade secrets are often key assets for science and technology businesses, and the people who know and understand these assets best are its highly-skilled employees. Leakage when these employees move on is, therefore, the kind of thing that keeps people awake at night. The temptation is to impose wide-ranging confidentiality restrictions. A recent High Court case highlighted the dangers of drafting such restrictions too widely. Employees are entitled to use information which forms part of their general knowledge, skill and experience and clauses which limit this right may result in confidentiality restrictions being unenforceable.

 

Sustainable nylon

The case concerned three employees of Invista Textiles, well known for making Lycra.  Invista’s products include nylon and chemical intermediates used to make nylon, a petrochemical. The three individuals were employed by Invista as part of its ‘Sustainability Group’, which was trying to make these intermediate compounds biochemically – an attempt to move away from oil. The three employees had exchanged information relating to a new venture while still employed. Two of them (Dr Botes and Dr Chen) then left and set up their own biotechnology business and the third left to join another company. Invista commenced proceedings after files relating to the new venture were found on one of the employees’ work computers. It claimed, among other things, misuse of its confidential information and breach of the employees’ employment contracts.

Contractual duties of confidence were too ambitious

The employment contracts included widely drafted post-termination obligations of confidence covering “confidential information and trade secrets” concerning the business of the employer including, among other things, in relation to business methods and processes, technical information and know how.  The judge, Birss J, held that this clause was far too wide to protect Invista’s legitimate interests and that consequently the whole clause was unenforceable as an unreasonable restraint of trade. The key point (based on the leading case of Faccenda Chicken v Fowler (High Court, 1987)) was that an employee could only be restrained from using information post termination if it was highly confidential trade secret information or akin to a trade secret (“trade secret type information”). Whereas the judge indicated that a clause expressly limited to trade secret information might have been upheld, this clause went far wider than that and, as a result, failed as a whole, even in respect of genuine trade secrets.

Could the equitable duty of confidence save the day?

Despite the failure of the contractual clause the former employees still owed an enforceable equitable duty to Invista not to disclose or misuse trade secret type information after the employment had ended. So the question then arose as to whether they had breached this equitable duty and this depended largely on whether they had taken or disclosed ‘trade secret type information’. The question of what constitutes trade secret information is very fact specific, but it is interesting to note what the judge considered constituted trade secret information in this case. The Sustainability Group in which the three employees worked was using biotechnology to try to make chemical intermediates. Among other things, they were using certain bacteria as host organisms on which to carry out metabolic engineering, their preferred bacteria being C.necator.  This was not a new idea, and C.necator’s suitability for this purpose was known in the field.  By contrast, the use of this approach to design specific experiments to engineer particular compounds in particular circumstances might amount to trade secret type information, and the Sustainability Group had produced genuine trade secrets of this kind. However, in the event the judge found that the employees had not in fact appropriated or used any of this specific trade secret type information. They were simply taking their expertise in relation to the relevant host organisms with them to their new enterprise. The equitable duty did not, therefore, help Invista in this case.

How does one distinguish between trade secrets and expertise?

How does one distinguish between trade secret type information, which can be the subject of an express contractual restriction, and information which forms part of the employee’s general knowledge, skill and experience? The question of what exactly constitutes trade secret information has been variously interpreted by the courts and is highly fact dependent; secret manufacturing processes, recipes and chemical formulae are often regarded as archetypical trade secrets but the term can include a wide range of other things, including business and customer information. In practice it is often important that it is clearly identifiable and that its disclosure would result in real damage to the business. The courts have acknowledged that there may be difficulties in separating trade secrets and expertise in many cases and have indicated that where it is not practical for the employer to identify which information is entitled to protection the solution may be to use a reasonable post-termination non-competition clause, which may prevent disclosure of some information which is wider than trade secrets for a limited period.  An attempt had in fact been made to use such a clause in this case, but it failed.

Why did the non-competition clause fail?

The non-competition clause prohibited the employees, among other things, from being employed by a business which was about to be engaged in research in relation to any product, process or service with which they had been working at Invista in the five years before termination. The problem identified by the judge was that the reference to products, processes and services covered a very wide field of research indeed including subject matter which would not actually compete with Invista.  For example, Dr Botes had already been an expert on the host organism Y. lipolytica, which is a well known host organism in the field, when she came to Invista; using that host was part of Dr Botes’s general knowledge, skill and experience. However, under the terms of the non-compete clause she would have been barred from working on this for three months after leaving.  The judge held that the clause as drafted was an unreasonable restraint of trade and therefore unenforceable.

How can an employer improve its position?

Both in relation to the confidentiality clause and the non-competition clause the clear message is to keep it as specific as possible; drafting too widely may result in the clause failing in its entirety – less is more.  The judge indicated that a clause expressly limited to trade secrets as such is likely to be enforceable. However, without more this leaves the uncertain question of what amounts to a trade secret in a particular case wide open to legal argument, potentially racking up costs. If the parties can agree on categories of information such as processes, algorithms or types of document which will have the character of highly confidential information, this is likely to be very persuasive in any future litigation. (The relevant clauses should be separated so that they can be severed (or ‘blue pencilled’) if any of them are found to go too far.)

In addition, it is essential for the employer to be able to demonstrate that it has had a consistent policy of ensuring that important confidential information is subject to rigorous security requirements, access is restricted on a need-to-know basis and that employees with access to it are made aware of its sensitivity. This is a crucial factor in establishing that information has the status of ‘trade secret type information’. This is true under English common law, and the point has obtained added importance following implementation of the EU Trade Secrets Directive (2016/943) in the UK in June 2018. This Directive is intended to ensure a minimum level of protection for confidential business information throughout the EU.  Although the general feeling is that the requirements of the Directive were in principle already met by the English common law breach of confidence action, the Directive expressly defines protectable confidential information as information which has commercial value because it is secret and which the business has taken appropriate steps to protect. Evidence of this is therefore likely to take a central role in breach of confidence actions in the future.   A point to note here also is that the Directive specifically preserves the right of employees to use experience and skills honestly acquired in the normal course of their employment.  Although this appears to reflect the position under English common law, this is a point which was heavily debated during the passage of the Directive and it is not clear how it will be interpreted by European courts in the future and what influence this may have in the UK (with or without Brexit). This is a point to watch in relation to confidentiality clauses in employment contracts.

Final comments

Invista was successful on some aspects of its claims. Among other things, a claim against Dr Botes based on a non-solicitation clause and a claim based on breach of the employees’ duty of fidelity whilst they were employed succeeded.  However, Birss refused to order an inquiry as to damages as there was no evidence that any of the defendants’ activities caused substantial or quantifiable loss to Invista. Nevertheless Invista is understood to have incurred £1million in costs.  This perhaps underlines the emotional nature of such disputes.

Case: Invista Textiles (UK) Ltd, Invista Technologies SARL v Adriana Botes, Achuhanunni  Chokkathukalam, Changlin Chen, Viderabio Ltd, Videra Services Ltd [2019] EWHC 58 (Ch)

 

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