The best kept secrets: restraint clauses in competitive industries
The issue of protecting trade secrets came to the fore recently with widespread news that the Colonel’s nephew had inadvertently disclosed KFC’s best kept secret: its recipe that has been guarded for decades. The KFC management has since denied that the disclosure is accurate and has said that the recipe is protected in a digital safe which is encased in concrete and monitored by 24hr surveillance.
Unlike KFC’s recipe which is heavily guarded, many employers depend on the integrity of their employees and ex-employees where trade secrets are concerned. This is more so true for companies in competitive industries, where trade secrets are largely to be credited for a company’s competitive edge. These trade secrets may include data on commercial strategies, products and pricing strategies and market analyses. Consequently, an employer’s worst nightmare may very well be an ex-employee who was privy to those trade secrets and is seeking employment with a competitor in the field.
The use of restraint and confidentiality clauses ought not to be underestimated in employment contracts. The restraint clause is a contractual term by which the employee covenants that he will not, after terminating his employment, work for a competitor in the field for a specified period of time and within a specific geographic region. The confidentiality clause prohibits the disclosure of confidential information to a new employer.
Our local courts recently provided guidance on the usefulness of these clauses. Within the past two years, our local courts have assessed their usefulness in at least two separate injunction applications involving professionals in the telecoms sector. Though the cases bore great similarities, in one case the injunction was granted to prevent the ex-employee from working for the competitor and in the other, the injunction failed. The lessons which can be gleaned from these cases are:
The clauses must be clearly drafted
As with any contractual document, courts will interpret the words and determine what they mean against the background of facts which existed at the time when the parties contracted. Where the words are very clear, it is easier for the court to interpret and apply the clause. Where the clause is poorly drafted and the words and their meaning are not so clear this may prove fatal to an application to enforce the clause. Since it is the employer who will seek to rely on the clause, he must ensure that the clause is properly drafted when inserted into the employment contract.
Restraint clauses do not protect all data
Restraint clauses only apply to trade secrets or confidential information akin to trade secrets. They do not apply to skills, expertise and the ‘know-how’ that an employee amasses during the course of his employment. Hence, in cases where an employer seeks to rely on the clause, he must convincingly prove that the employee was privy to certain trade secrets and is likely to disclose them to the competitor with whom he is now employed. It is not enough to show that the employee has acquired skills and expertise through working for him.
It follows therefore that there may be some employees for whom such clauses may be more useful. They are more useful for those employees who are privy to vast amounts of inside information, including customer lists, pricing data and information on processes and methodologies which have given the company its competitive edge.
The restraint clause must be reasonable
There is no one-size-fits-all restraint clause. It must be specifically drafted with the circumstances of the particular employment in mind. This was clearly demonstrated in the two local cases. The court found that the clause was unreasonable in one case because it was too widely drafted. It would have restrained the ex-employee from being employed in any capacity with any competitor anywhere in the world.
The court will determine if the clause is unreasonable by looking at all the facts of the case. This includes an assessment of the public interest, the time period for which the restraint would apply and the geographical restriction which it imposes. Of course, with the advent of technology and multinational corporations, more expansive geographical restrictions can now be valid once they are reasonable within the circumstances of the particular case.
Restraint and confidentiality clauses are twins
The usefulness of the restraint clause is supported and strengthened by a confidentiality clause. The confidentiality clause prevents the ex-employee from disclosing confidential information which he acquired during the course of his employment while the restraint clause seeks to prevent the employee from taking up employment with a competitor. Employers must therefore ensure that the contract includes a confidentiality clause if one may be useful to protect confidential information.
The cases illustrate that a restraint clause that is properly drafted can prove as equally as effective as KFC’s digital safe. Employers in fields where competition is high may wish to consider the usefulness of these clauses to protect their confidential information and trade secrets.
Christopher Kelman is a Partner in the Litigation Department at Myers, Fletcher & Gordon, assisted by Litrow Hickson, pending Graduate of the Norman Manley Law School. They may be contacted via email@example.com or firstname.lastname@example.org or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.