Often the true value of a business (and its greatest risk) lies in its non-physical assets that are difficult to quantify. The nature of those assets, which include trade secrets, are notoriously difficult to protect from both internal and external threats.

In this article, we explore the law behind the protection of vulnerable assets and potential strategies to mitigate risk.

‘Trade secrets’ are the secret sauce that allows your business to flourish. However, unlike in the United States of America, ‘trade secrets’ are not subject to legislative protection in Australia. This means that businesses need to consider carefully how they can protect their secret sauce, especially in the event of a key employee leaving the business.

As ‘trade secrets’ are not defined in Australian law, it is difficult to categorise exactly what they are. However, functionally, ‘trade secrets’ can be categorised into:

• intellectual property;
• confidential information; and
• know-how.

Intellectual property

Intellectual property refers to creations of the mind. An entity cannot misuse intellectual property unless intellectual property subsists in a material form. These creations can be protected as property in the form of:

• copyright;
• trade marks;
• patents;
• design rights;
• circuit layout rights; or
• plant breeder’s rights.

Ownership of intellectual property is complicated and depends on the particular material. In general, however, intellectual property is owned by the creator, except if the creator is an employee. If the creator is an employee, the intellectual property is owned by the employer if it was created in the course of employment. Intellectual property can also be assigned and ownership transferred to different parties.

The owner of intellectual property has, subject to certain exceptions, the exclusive right to use and reproduce that intellectual property. If the intellectual property is used or reproduced by another person without consent, then this constitutes infringement of that intellectual property, and the owner has a cause of action against the infringer.

In the case of ‘trade secrets’ the relevant intellectual property will often be copyright. Copyright is governed by the Copyright Act 1968 (Cth), which provides that ‘copyright subsists in an original literary, dramatic, musical or artistic work‘.¹ This means that copyright does not subsist in an idea but only in the expression of that idea,² so the concept, ideas, or algorithms that underlie a business are unlikely to be intellectual property.

Practically, protecting ‘trade secrets’ that are intellectual property relies on being able to restrict access to that intellectual property and prove that somebody used or reproduced your intellectual property. In respect of employees who leave your employment, this can be implemented by including off-boarding procedures that ensure that the employee does not take your intellectual property with them. These procedures could include wiping laptops, requiring all provided material to be returned, and monitoring the emailing or downloading of files.

Confidential information

Courts have found that ‘trade secrets’ (which is not a defined term in Australian law) can be confidential information if they are not in the public domain.³

Confidentiality is typically imposed contractually however, especially in relation to employees, such an imposition will be void as a restraint of trade unless the restraint is reasonable.⁴ Reasonableness, in this context, means that the clause is not ‘greater than is needed to give adequate protection to the person for whose benefit the restrain is imposed‘ considering both the parties’ interests and the public interest.

This means that confidentiality obligations concerning information that is in the public knowledge or that are unreasonably long may not be enforceable. For example, confidentiality obligations that protect how a business is structured would not be considered reasonable if that information would have been identifiable by individuals with appropriate background knowledge in the relevant discipline.⁵ However, customer lists, pricing information, costing information, and profit and loss figures would likely be reasonable if they are not public information or identifiable to individuals with appropriate background knowledge in the relevant discipline.⁶

Confidentiality obligations can also arise at common law if the relevant information is confidential in nature and communicated in circumstances importing an obligation of confidence. However, this may not always protect ‘trade secrets’. For example, in NP Generations Pty Ltd v Feneley (2001) 80 SASR 151, the Supreme Court of South Australia held that an address book containing a customer list was confidential but that a diary which contained notes on an employee’s activities was not confidential. This decision was made on the basis that a considerable degree of work would be required to obtain the customer list from the diary.

When protecting confidential information, it is important to ensure that the confidentiality of the information is maintained. This can be done by including confidentiality clauses in your employment contracts and ensuring you have procedures in place to protect that confidentiality on a practical level, such as by ensuring that all relevant records are owned by the company and not taken with employees when they leave employment.

General know-how

Courts have generally formed the view that employees cannot be restricted from retaining or using ‘know-how’ developed over the course of the employment relationship, even if it has been shared on a confidential basis. This is on the basis that:

‘Employees… necessarily acquire knowledge of the relevant technology. They become associated with technological advances and innovations. Their experience, built up during their years of employment, naturally equips them to be dangerous competitors if and when their employment ceases. The use of confidential information restrictions in order to fetter the ability of these employees to use their skills and experience after termination of their employment to compete with their ex-employer is, in my view, potentially harmful.’ ⁷

Accordingly, to the extent there is knowledge that arises as part of the ‘know-how’ gained in the course of employment, this is outside of the obligations owed under the confidentiality provisions in an employment contract.

Protection strategies

Traditional strategies (eg contractual restraints of trade alone) to protect these assets have significant flaws that make them ineffective to provide businesses with the protection required. Those flaws are exacerbated by the speed with which information and data can be utilised against or in competition with an employer.

The disclosure of an employer’s information to a competitor (or its use by an employee establishing a new competitor) can cause significant, ongoing harm to a business momentarily. If protection is limited to contractual restraints that might result in an injunction or, subsequently, damages, it will often be ineffective.

In particular:

• the burden of proof falls on an employer to prove a contractual breach – often made more difficult by employee attempts to conceal such activity;
• employers face a prima facie presumption that many restraints are unenforceable;
• if these issues can be overcome, employers are required to expend significant time and costs to enforce their protections;
• even if successful, consequences are likely limited to those able to be quantified at the time of enforcement; and
• in many circumstances, irreparable damage may have already occurred (eg reputational, relationship, and opportunity cost).

In those circumstances, employers sensitive to these risks must look beyond traditional strategies to prevent the misuse of their information – or, failing that, delay its use so as to limit the damage caused.

We work closely with clients to implement such alternative strategies, including:

• workforce mapping to identify roles that carry the greatest vulnerability, and ensure that restrictions are deployed only where necessary (and thus increase their enforceability);
• identification of opportunities to implement protection strategies before employees commence in roles with sensitive data or relationship access;
• extended notice periods and garden leave periods to delay competitive conduct;
• deferred, staggered, and conditional incentives that provide employers with financial leverage, disincentivise misuse of employer assets, and increase costs to aggressive competitors;
• contractual mechanisms to reduce evidentiary requirements in establishing restraint breaches; and
• forensic measures to protect sensitive information and/or identify its misuse.

Next steps

HWLE Lawyers’ IP/IT and Workplace Relations & Safety teams have extensive experience in advising businesses regarding protecting their trade secrets. Please contact us for further information on how we can assist you.

This article was written by Luke Dale, Partner, Chris Shelley, Partner, and Max Soulsby, Associate.

¹ Copyright Act 1968 (Cth) s 32.
² IceTV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458, [33].
³ Robb v Green [1895] 2 QB 315.
⁴ Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269.
⁵ Liberty Financial Ltd v Scott (No 2) [2005] VSC 26.
⁶ Prime Creative Media Pty Ltd v Vranjkovic [2009] FCA 1030; Consolidated Paper Industries Pty Ltd v Matthews [2004] WASC 161; Gasweld Pty Ltd v Wright (1989) ATPR 40-957.
7 Balstone Ltd v Headline Filters Ltd [1987] FSR 330.