Business protection

Introduction

As almost any CEO of a professional or financial services firm will tell you, the greatest asset of its business is its employees. It is the employees that run the business; conceive new products and services; develop business and pricing strategies; manage relationships with customers and suppliers; and have access to highly sensitive trade secrets and confidential information. However, for all these reasons, they can also constitute one of its greatest threats.

In the current economic climate, businesses operating in professional and financial services are holding a ticking time bomb if they fail to take sufficient steps to mitigate the potentially catastrophic effects that can result from an employee disclosing confidential information to a competitor or a key employee (or a team of employees) leaving to join a competing business.

This article summarises the key concepts that you need to consider, along with the steps that should be taken to protect your business.

Misuse of confidential information

All employees owe their employer an implied duty of good faith and fidelity, meaning that an employee is prohibited from misusing confidential information. However, once the employment has terminated the employee is only prohibited from misusing a very narrow type of confidential information known as a “trade secret”. The vast majority of the information that a business will regard as being sensitive commercial information will not amount to a trade secret. Therefore, it is imperative that businesses ensure that the employment contracts of its employees (especially those with access to sensitive confidential information) contain express confidentiality clauses which specify that all confidential information (not just trade secrets) continue to be protected after the termination of employment.

Restrictive covenants

A further risk posed by departing employees is that they may go on to damage your business’ legitimate interests; for example, by joining a competitor business or by approaching your customers or staff. A way of reducing this risk is to include well drafted post-termination restrictive covenants in employment contracts and service agreements.

Common types of post-termination restrictive covenant include:

• A non-compete covenant: this is generally regarded as the most powerful weapon in a business’ armoury as it prevents an employee joining a competing business for a defined period after termination.

• A non-solicitation covenant: this prevents an employee from approaching your customers and suppliers for the benefit of his new employer.

• A non-dealing covenant: this prevents an employee having any dealings with your customers and suppliers. The practical advantage of a non-dealing covenant is that it can often be easier to police than a non-solicitation covenant because it is not necessary to evidence the fact that the ex-employee made the first move to contact the customer or supplier.

• A non-poaching covenant: this prevents an employee from poaching your employees.

The general position is that post-termination restrictive covenants are void on public policy grounds as being in restraint of trade unless they protect a legitimate business interest and are drafted as narrowly as possible in protecting that interest. The main legitimate interests of a professional or financial services business which covenants may protect include: client connections; connections with suppliers; confidential information (including trade secrets); and the stability of a business’ workforce.

A covenant which is drafted more widely than is reasonably necessary to protect a business’ legitimate interests is likely to be unenforceable. Clearly, the types of covenants that are appropriate to a particular business will depend on the specific interests that need to be protected (for example, non-solicitation/non-dealing covenant may be sufficient to protect a business where the interest that requires protection is customer contact lists). Non-compete covenants are the most onerous covenants as they may severely limit the ability of an individual to make a living for the duration of the restricted period and, for this reason, non-compete covenants are also the most difficult to enforce (although enforcement is nonetheless possible in certain circumstances).

It is common practice for restrictive covenants to last between six and 12 months (a period of restraint in excess of 12 months will usually be unenforceable), but the precise duration of the covenant really depends upon what is appropriate in the particular circumstances of the case.

It is important to note that the reasonableness of restrictive covenants is assessed as at the point at which the covenants were entered into (which is normally at the time the employee signed the employment contract or service agreement). Therefore, restrictive covenants need to be reviewed periodically (perhaps prior to salary reviews and promotions) to ensure that they provide suitable protection, having regard to any changes in the role and level of seniority of employees. This will ensure that restrictive covenants are fit for purpose and have the best possible chance of being enforced by a court if necessary.

Steps you can take if you suspect or discover competitive activity

As a professional and financial services business, if you suspect or discover competitive activity on the part of a current or former employee, you should consider taking the following steps:

• Gather information about the potential threat.

• Assemble an internal management team to deal with the threat.

• Instruct solicitors (and potentially other advisers, such as forensic IT experts and public relations advisers, etc.).

• Consider suspending the employee.

• Identify and secure evidence of wrongdoing (for example, incriminating emails, CCTV, printing records, evidence of data being downloaded to a USB drive, approaches made to customers, etc.).

• Consider whether legal action should be threatened or issued against the current or former employee and/or the new employer.

The most common legal remedy sought by businesses who believe that a current or former employee has acted in breach of a duty or restrictive covenant is for an interim injunction to be granted by a court. If granted, an interim injunction will stop the unlawful competitive activity (for example, preventing a departing employee from taking up employment with a competitor or requiring an ex-employee to return confidential information, etc.) pending a full trial at a later date (although the granting of an interim injunction will often deal with the matter once and for all without the need for a full trial).

Whilst the litigation required to obtain an interim injunction is costly and time consuming, in certain circumstances this is outweighed by the potentially catastrophic damage that could be caused to a business by a current or former employee acting in an unlawful manner.

How we can help

We provide bespoke contractual provisions (confidentiality clauses, enhanced duties clauses and restrictive covenants) to be included in employment contracts and service agreements. We also provide comprehensive policies (such as IT, communications systems and social media policies) that supplement these contractual provisions.

We review existing contractual provisions and produce a ‘gap-analysis’ report setting out the areas where the business is exposed to the activities of current and former employees due to insufficient contractual protection being in place. We then provide guidance and support on how to plug any gaps through the implementation of appropriate contractual changes.

We design and deliver line-management training on confidentiality obligations as well as the rules and procedures to which staff must adhere when dealing with confidential information.

We advise businesses on undertaking urgent investigations into potential unlawful behaviour by current or former employees (such as the misuse of confidential information, the solicitation of customers or the poaching of staff).

We help businesses to decide what action should be taken in order to protect their interests and, if legal action is necessary having regard to our clients’ commercial objectives, we manage the litigation process, liaising with specialist experts (such as barristers and forensic IT service providers) as required, in order to achieve a successful commercial resolution.