Every business has confidential information that must be kept secret. For example, recipes, clients-list, source code, and so on.
However, sometimes, business owners not only need to guard against competitors who may want to get their hands on this valuable information but also their own employees who may wish to steal and take advantage of it for their own benefit.
In previous articles, we have addressed an employee’s duty of fidelity & loyalty towards the employer, what amounts to unlawful interference with trade, and non-compete clauses which are all relevant to protecting the company from employees turned competitors.
This article addresses the protection of the company’s confidential information, by introducing the concept of “breach of confidence”
Causes of Action for A Breach of Confidence
If an employer finds himself, unfortunately, a victim of a breach of confidence, i.e. finding out that his employee has stolen the company’s confidential information and is misusing the company’s confidential information, the employer may:
- Sue for breach of contract;
- Sue under the tort of breach of confidence; and/or
- Dismissing the employee for misconduct.
Suing for Breach of Contract
Usually, in a well-drafted employment contract, employee handbook, or appointment letter, there will be provisions that impose an obligation on an employee to protect and maintain the confidentiality of the company’s confidential information, he acquired during and after his employment.
A sample clause may look like this:
“The Employee agrees to:
A. Hold the Confidential Information received from Company in strict confidence and shall exercise a reasonable degree of care to prevent disclosure to others;
B. Not disclose or divulge either directly or indirectly the Confidential Information to others unless first authorized to do so by Company;
C. Employee will not reproduce the Confidential Information nor use this information commercially or for any purpose other than the performance of his/her duties for Company;
D. Employee will, upon the request or upon termination of his/her relationship with Company, deliver to Company any drawings, notes, documents, equipment, and materials received from Company or originating from its activities for Company.“
Credit: Sample Confidentiality and Non-Disclosure Agreement
In fact, in the Federal Court case of Dynacast (Melaka) Sdn Bhd & Ors v Vision Cast Sdn Bhd & Another [2016] 6 CLJ 176 held that confidentiality clauses can be perpetual, meaning, an employee can be contracted to make sure he protects and does not misuse the confidential information of the company “forever”.
In these circumstances, it is then possible for the employer/company to sue the employee who has misused confidential information for breach of contract, and seek compensation and other reliefs accordingly.
Thus, it is advisable for employers and HR personnel to re-look at their company’s employee handbook and employment contracts to see whether a clause of confidentiality exists and whether it is accurately drafted to sufficiently protect the interest of the company.
Suing Under the Tort of Breach of Confidence
However, it does not mean that just because an employee’s contract is silent on confidentiality, an employer cannot sue for breach of confidence; the employer may sue under the tort of breach of confidence.
In the widely adopted case of Coco v AN Clark (Engineers) Ltd [1969] RPC 41, the English Court laid down three elements essential to prove a case of breach of confidence, namely:
- that the information was of a confidential nature,
- that the information was communicated in circumstances importing an obligation of confidence; and
- that there was an unauthorised use of the information.
Thus, if an employer can prove that a piece of information that was confidential in nature, that was communicated to the employee in a situation that imported an obligation of maintaining its confidentiality and that the employee has then used the information without authorisation, then the employer would succeed in claiming that the employee has committed a breach of confidence. The employer can then obtain monetary compensation and/or injunction against the employee from using the information.
Breach of Confidence in An Employer-Employee Relationship
Breach of confidence in the context of a relationship between employer and employee is best demonstrated in the case of Faccenda Chicken v Fowler [[1985] 1 All ER.
The case laid some specific principles relating to a breach of confidence in the employment setting. They are as follows:
- information which because of its trivial character or easy accessibility from public resources cannot be regarded by reasonable persons or by the law as confidential. The employee is at liberty to disclose it during his service or afterwards as he pleases, even to a competitor;
- information which the employee must treat as confidential (either because he is expressly told it is or because from the character it is obviously confidential) but which once learned necessarily remains in the employee’s head and becomes part of his own skill and knowledge applied in the course of his employer’s business. So long as the employment continues, he cannot otherwise use or disclose such information. But when he is no longer in the same service, the law allows him to use his full skill and knowledge for his own benefit in competition with his former master; and
- specific trade secrets so confidential that, even though may necessarily have been learned by heart and even though the employee may have left the service, cannot lawfully be used save for the employer’s benefit.
In Malaysia, these principles were applied in Schmidt Scientific Sdn Bhd v Ong Han Suan [1997] 5 MLJ 632.
In Schmidt, the Court held that trade secrets are not limited to manufacturing processes or secret formulae but extend to information relating to the list of names and addresses of the customers and suppliers, specific questions sent to the customers, costs prices, specific needs, and requirements of the customers and status of the ongoing negotiation with the customers.
In the light of the particular trade setting of the plaintiff’s (employer) business, such information would have the necessary quality of confidentiality. The first, second, third, and fourth defendants (employees) were therefore not entitled to make use or make copies of such information for the benefit of the fifth defendant (the employee’s new company) in competing with the plaintiff’s business.
Remedies Available to Employers
When a case of breach of confidence is proven (either in contract or in tort), below are the common remedies sought by, and may be obtained by, employers from the Court:
- Injunction
Employers may obtain an injunction against the employee from using or disclosing confidential information.
A permanent injunction was granted Ecooils Sdn Bhd v Raghunath Ramaiah Kandikeri [2014] 7 MLJ 309.
In Juris Technologies Sdn Bhd & Anor v Foo Tiang Sin & Ors [2020] MLJU 157, the Court exercised its discretion to grant a Springboard Injunction under Section 37(1)(a) Contract Act 1950, Section 50 and 51(1) Specific Relief Act 1950 (SRA) to restrain the defendants from developing and exploiting commercially the plaintiffs’ Confidential Information for a period of 3 years. Springboard Injunction will be discussed in future articles.
- Account of profit
The court may order the employee to hand over the profit obtained by the employee through the breach of confidence to the employer. This was granted in the case of MRA International Sdn Bhd v SPC Diatech, LLC [2021] MLJU 1052.
- Damages
The Court may order the employees to pay damages to the employers to compensate for any loss they have suffered. Damages were granted in Schmidt and Ecooils mentioned above.
Breach of Confidence as a Form of Misconduct
Lastly, it is worth stating that breach of confidence is a form of misconduct that can warrant dismissal (S Components v Irwin [1974] 1 All ER 41)
In fact, a breach of confidence is a very serious misconduct that has the effect of destroying the relationship of mutual trust and confidence which is essential in an employment relationship. Therefore, it may warrant a summary dismissal (see Motilal v Guthrie Agency (M) Ltd [1968] 1 MLJ 211)
Conclusion
In conclusion, an employer can find some comfort in that he is not without recourse if he so unfortunately becomes a victim of a breach of confidence.
If the breach is discovered when an employee is still under employment with the employer, the employer can first suspend the employee pending investigation and disciplinary proceedings, or if the evidence is sufficient, dismiss the employee summarily. The employer can then, as suggested above, sue the employee and seek the necessary orders against the employee.
However, that being said, prevention is better than cure. Below is a diagram of the things which can be done by the employer to reduce the risk of such unwanted incidents.
If you’d like to know more, please feel free to Contact Me.
Authored with the kind assistance of my able interns, Zhi Yi and Genevieve