In the first column in this series we introduced the awareness of intellectual property as a key strategic differentiator in a knowledge-based economy and the importance of taking steps to reduce the risk of these valuable assets falling into the hands of competitors.

We discussed the importance of differentiating between knowledge or information that the employer can legitimately claim as its own, and knowledge or information employees can legitimately take with them when they leave the company. Finally, we set out a series of simple steps that businesses can take immediately to begin protecting these key strategic assets from competitors.

In this column we want to put some meat on that framework. We will attempt to answer the following three questions:

•    What is “confidential information” and how is it different from “trade secrets”?

•    What steps can employers take to reduce the risk of losing key intellectual property to their competitors? and

•    How can employers protect themselves from the legal risk and resulting damages of inadvertently acquiring and using intellectual property of their competitors?

What is “confidential information” and how is it different from “trade secrets”? 

To begin, let’s eliminate the mystery surrounding these terms: For all practical purposes, the terms “confidential business information” and “trade secrets” are synonymous.

While it can be argued that the term “trade secret” has a narrower technical meaning, what really matters is that both terms refer to information that derives its value from not being generally known. American authorities and businesses tend to use the term “trade secret” whereas Canadian authorities tend to use the terms “confidential information” or “confidential business information”.  So the next time you hear the words “trade secret”, think confidential business information.

Okay, but what is “confidential business information”? What the law means by confidential information or confidential business information is information that can be legally protected and  provides a business advantage to the owner of that information by virtue of the fact that it is kept secret. Suffice it to say that it can encompass almost anything, including manufacturing and business processes, business plans, presentations, financial data, market intelligence, customer, supplier and pricing information, new innovative ideas, methods and technologies, to mention some of the most common forms. The two underlying requirements are: the information must have value by virtue of being kept secret and it must be capable of being legally protected.

What steps can employers take to reduce the risk of losing key intellectual property to their competitors?

There are two principal sources of “leakage” of confidential information to competitors or other third parties: disclosure and departure. Let’s flesh out each of these a little more.

Disclosure - Confidential business information (or “trade secrets”) can be leaked – advertently or inadvertently – to competitors or third parties through careless or deliberate disclosure by company representatives. For example, a sales representative or account manager meets with a potential supply chain about pooling resources to go after a new market or business opportunity. During the meeting, proprietary and confidential information are disclosed.

The business purpose of the disclosure or exchange of information might be quite legitimate, but the legal effect of disclosing confidential information without the benefit of a confidentiality or non-disclosure agreement could be disastrous. For one thing, if the information disclosed is a new technology or invention, the unprotected disclosure could result in the substantial loss or curtailment of patent rights; for another, the onus of proving that the information disclosed in the negotiations is confidential and entitled to legal protection would fall to you – the disclosing party – should the receiving party elect to make unauthorized use of that information after negotiations have broken off. This issue is addressed at length by the Supreme Court of Canada in the famous Lac Minerals case.

Tip:  Make it both a corporate policy and business practice not to engage in commercial negotiations with third parties (whether direct competitors or not) without first ensuring you have a signed Confidentiality or Non-Disclosure Agreement in place. A measure of discretion must be exercised, of course. A routine high-level PowerPoint presentation, for example, to a potential customer or conference attendees, that does not disclose sensitive or proprietary information, would not require an NDA.

Departure – The other source of leakage of confidential business information is the exit of executives or key employees from the organization. The question in such cases revolves around what knowledge or information executives or employees can legitimately take with them and use, and what knowledge or information they must leave behind. The fundamental distinction, as discussed in the first column in this series, is between knowledge (which employees can generally take and use) and information (which they generally must leave behind). This kind of over-simplification carries its risks, but might help clarify the essential distinction.

Tip:  While confidential business information can be protected at common law without written employment agreements incorporating confidentiality obligations and restrictive covenants (such as non-competition and non-solicitation clauses), the hurdles for establishing protection in such cases are almost always substantially higher when there are no explicit obligations in a written contract than when there are. And the onus to do so is on you. Ensure that your employment and contractor agreements have enforceable covenants in them requiring on-going confidentiality not only during employment but for a reasonable period after termination of that employment, as well as reasonably limited non-solicitation or non-competition provisions designed to protect the legitimate business interests of the employer. You will be glad you did.

How can employers protect themselves from the legal risk and resulting damages of inadvertently acquiring and using the intellectual property of its competitors?

This is the reverse side of what we have been examining thus far. The question here is what information a new employer can legitimately use from employees who have just been hired away from another employer (often a competitor)? The general rule, briefly stated, is that restrictions imposed on an employee’s right to use his or her knowledge, skills and experience in the service of the new employer are generally unenforceable (even if those restrictions are incorporated in a signed agreement), while restrictions relating to confidential information of the kind identified above are generally enforceable if the former employer can show it has a legitimate business interest in protecting that information without unduly circumscribing the ability of the employee to earn a livelihood at what he or she is trained most to do. These restrictions generally appear in a non-competition or confidentiality agreement signed by the employee with the former employer, or in clauses to that effect in the employment agreement.

Tip:  If you are the hiring employer, include a clause in your offer letter or employment agreement requiring the new employee to represent or warrant that he or she does not have and will not make use of any confidential information of his or her former employer or of any other third party in the course of his or her new employment with you. This will go a long way toward securing your peace of mind.
 

Next Time

In our third and final installment in this series we will examine the yet more troublesome aspect of calculated and deliberate breaches of confidence by recipients of confidential information – customers, business partners or other third parties - and what remedies might be available to businesses harmed by such breaches.

Robert Nadeau is partner at the firm of Kerr & Nadeau, Barristers & Solicitors, Patent & Trademark Agents, Halifax. Mr. Nadeau can be reached at (902) 422-6376, or visit their website at www.kerrnadeau.com.