How to protect your business against confidential information falling in to the hands of a competitor and the poaching of your clients and staff
When employees or directors leave your organisation, they may do so to join a competitor. Those individuals could use unlawful means to compete with you and damage your business.
Confidential information - The majority of businesses hold their confidential information and trade secrets electronically. Even the most junior employee may have access to it on a daily basis. Occasionally, an employee or director will walk away from a business to join a competitor or start up a competing business and take confidential information with them. Some of that information might amount to the “crown jewels” of a business. Examples of confidential information that we frequently see falling into the hands of a competitor include:
- customer databases including contact information, contract renewal dates and pricing;
- profit margins;
- technical specifications;
- designs and drawings; and
- contact details of key individuals of clients and suppliers.
Team moves - Sometimes a team or part of a team will conspire to leave at the same time to join a competitor, creating a substantial and immediate problem for the employer. Your clients may be loyal to that team and may move their business to your competitor.
What can a business do to protect itself in these circumstances?
What a business can do to protect itself now
It is important to ensure that your business has written contracts of employment in place. Employment law changes over time and it is important that contracts are reviewed periodically and kept up to date for new employees or when promoting employees. It might be necessary to have different clauses in place for different employees depending on their seniority or role.
A contract of employment can include reasonable and proportionate restrictive covenants, including restrictions which apply for a period of time after the employment has terminated, such as:
- Non-compete clauses to prevent the former employee from working generally for any competing business.
- Non-solicitation clauses to prevent the former employee from trying to contact and entice your clients.
- Non-poaching clauses to prevent the former employee from attempting to poach your staff members.
An employment contract could include a confidential information clause to prevent an employee from using your confidential information and trade secrets for their own purposes, or disclosing them to any third parties.
Data protection policies and procedures can ensure that employees only have access to the data they need to carry out their role.
Having a robust contract of employment in writing can put the employer in a stronger position. However, even if there is no written contract there will still be an implied (unwritten) contract including a duty of fidelity, meaning that an employee must have regard to their employer’s interests. Directors and senior employees will also owe fiduciary duties, meaning that those individuals must act in the best interests of the employer.
What a business might have to do to protect itself after the event
If an employee uses confidential information or steals confidential documents, regardless of whether there is a written contract of employment, it may be unlawful and give rise to a claim.
If a team of employees leave and join a competitor at the same or a similar time and there has been unlawful activity (such as conspiring with their fellow team members to leave at the same time or taking confidential information) then there may have been an “unlawful team move” which may also give rise to a claim.
If you discover suspicious activity, you should begin an investigation immediately. If confidential information has been appropriated, it could be crucial that action is taken before it causes serious damage to your business.
If there are suspicions of a move to a competitor, it might be sensible to place the employee on garden leave where there is a contractual right for you to do so in their employment contract. An employer might remove access to the business systems and prohibit contact with clients and colleagues during the garden leave period. If the employee is continuing to work during their notice period, it might be reasonable to restrict their access to certain information and cease their dealings with clients and suppliers.
An employee could have been plotting their move for a long time, perhaps systematically forwarding files to a personal email account (often followed by a deletion of those emails) or saving files to a memory stick. An extensive search of your IT systems might be necessary.
If a client or employee has been approached by the exiting or former employee, collate evidence. Make detailed file notes of any conversations and collate emails.
If employees working together in a team hand their notices in at the same or a similar time, suspicious of collusion will naturally arise. It might be sensible to hold individual exit interviews to try to find out about their intentions and flush out any signs of collusion.
Where a team leader has left to join a competitor, employment contracts of those team members should be reviewed to ensure that appropriate restrictive covenants are in place.
It might be deemed necessary to report any appropriation of property belonging to the business to the police.
If you discover that confidential information has been taken, a team (of two or more individuals) is leaving to join a competitor or there has been any other apparent breach of the employee’s contract of employment (whether that is in writing or not), you may wish to consider legal action against those individuals and possibly their new employer.
It may be necessary to apply to the court for an injunction, which would compel an individual or company to do something or prohibit them from doing something. That injunction could be to return confidential information (including any copies) to you immediately and not to use anything taken from it in future. Alternatively, it could be to prevent your former team from working for a competitor, poaching your clients or poaching your staff. An injunction may include a search order to allow entry into your opponent’s premises to search for and remove evidence.
Initially, a letter of claim would usually be sent by solicitors to the employee seeking undertakings, which are legal promises.
Undertakings can be given contractually (without involving the court) or to the court (after court proceedings have been issued). A breach of contractual undertakings would usually strengthen a claim. A breach of undertakings to the court may amount to contempt of court, with the potential consequences being imprisonment and/or a fine.
If there is an unsatisfactory response to a letter of claim, a court claim may be required. That could include claims for:
- an injunction
- compensation for loss
- an account of profits for your opponent to surrender to you the profits they have made as a result of their wrongdoing
An “interim injunction” is frequently applied for in a claim arising out of the appropriation of confidential information or an unlawful team move. The court would be asked to grant an injunction urgently on an interim basis pending a final court hearing on the basis that greater damage would be done if you had to wait until a final court hearing for an injunction. Urgency is required for the court to grant an interim injunction. It is therefore important that you do not delay seeking advice.
• If you have concerns about your confidential information being taken or a team joining a competitor, you may wish to take legal advice. It would be sensible to weigh up at an early stage the potential damage that could be done to your business if you take no action at all.
• For more information, please contact our Commercial Litigation Senior Solicitor James Kinnaird on 01522 515977 or email@example.com, or our Employment Solicitor Tom Martin on 01522 515007 or firstname.lastname@example.org.