Source: https://werkerlaw.com/trade-secrets-confidential-information-and-the-employment-relationship/
Timestamp: 2019-04-25 06:08:38+00:00

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This article deals with the employers need to ensure that their intangible business assets are protected, and employees need to be free to use their skills without fear of being sued by former employers.
There are no hard and fast rules to govern this, as such, this paper outlines general concepts and specific cases in which they are applied to help the reader understand how trade secrets and/or confidential information may be treated in their employee/employer relationship.
The decision of the British Columbia Court of Appeal in 57134 Manitoba Ltd v. Smith Paper Limited et al57134 Manitoba Ltd v. Smith Paper Limited et al (1989) May 9, 1989, 44 C.B.R. 94 (B.C.C.A)2 , is a reminder to both employers and employees about some of the pitfalls in dealing with trade secrets or confidential information.
The Court assumed the new employer was ignorant of the employee’s actions, but found it liable to pay damages based on the general principle that employers are vicariously liable for the actions of their employees.
Although such disputes are not new, the Smith Paper case has created renewed interest in this area of law. This paper will attempt to examine the obligations of employers and employees in relation to trade secrets and confidential information.
Part I will look briefly at the definitions of trade secrets and confidential information in the context of employment cases. This section also deals with the competing policy goals which Courts try to balance and which make the protection of employers’ trade secrets and confidential information such a murky area.
Part II reviews the legal foundation for the non-statutory obligations of employees, officers and directors in the area of trade secrets and confidential information.
Part III highlights some factors, which the Courts have considered when deciding whether there has been a breach of these obligations.
A process, tool, mechanism or compound known only to its owner and those of his employees to whom it is necessary to confide it.
Any formula, pattern, device, or compilation of information which is used in one’s business, and which gives [one] an opportunity to obtain an advantage over competitors who do not know and use itR.L. Crain Limited v. Ashton et al,  O.R. 303 (Ont. H.C.)5.
In most Canadian cases, one finds the expression “trade secrets” and “confidential information” used interchangeably.
A recent English Court of Appeal decision however, seems to have created a distinction which is important to employers seeking to protect commercial information, such as price lists and customer profiles. In Faccenda Chicken Ltd. v. Fowler et alFaccenda Chicken Ltd. v. Fowler et al,  1 All E.R. 617 (C.A.)6 , the English Court of Appeal distinguished between trade secrets and two degrees of confidential information: “highly confidential information” which will be protected after the termination of the employment relationship and “less confidential information” which will not.
On the facts of that case, the Court held that sales information was not “highly confidential” and not otherwise protectable. It went on to say that in other circumstances sales information could be of great importance and highly confidential. Depending on the facts any genre of information could fall into this “highly confidential” category.
Even though the Court found that the former employees had exploited confidential information, and found them responsible for damages, it held that the law pertaining to trade secrets did not apply. Rightly or wrongly, like the English Court of Appeal in Faccenda Chicken, the Ontario Supreme Court clearly saw a distinction between trade secrets and confidential information.
Quantum Management also raised issues arising out of the employees’ fiduciary duties – a significant difference from the situation in Faccenda.
It would appear that liability was based more on the breach of those duties than a breach of confidentiality. It is the mixing of such legal principles in employment cases that make the law difficult to rationalize.
In distinguishing “trade secrets,” “highly confidential information,” and “less confidential information,” the Court in Faccenda Chicken was wrestling with two competing interests in employment cases where disputes arise after the termination of employment.
This problem often arises when the former employee is competing directly with his former employer. Underlying the answers to these basic questions are two competing policy considerations, which the Courts must attempt to balance. On the one hand, employees should be free to use their general skills and knowledge freely for themselves or employers of their choice. In the absence of the misuse of confidential information or breach of a fiduciary duty, employees should be able to compete with their former employers.
On the other hand, employers should be able to protect their business assets, tangible or intangible, from being used without authorization and/or to their disadvantage. Employers should not be made to suffer from unfair competition from former employees who may be in business for themselves or employed by a competitor.
One would expect that research notes and copies of previous programs would indeed assist a programmer in creating completely new programs. They are, in a sense, what a hammer and saw are to a carpenterCanavest House Ltd v. Lett (1984),4 C.I.P.R 103 at p 10910.
To the extent that information can be likened to a tool of the trade, it will probably not be considered confidential or a trade secret. In any given factual situation, it can be difficult to find where an employee’s general knowledge ends and where the employer’s confidential information begins. Perhaps this difficulty is the reason that the Courts have not defined, except in very general terms, what they will or will not protect.
In Canada, there is no statute law specifically governing trade secrets or confidential information. Obligations pertaining to trade secrets or confidential information flow from both the common law and equity both of which are discussed in the next section.
In addition to any contractual obligation, all employees, regardless of rank, owe a duty of good faith and loyalty to their employers. Unless enlarged by express terms in the employment contract, this duty requires respect for the employer’s trade secrets and confidentiality of customer lists. Employees, because of this duty of fidelity, may not use their general skills to the detriment of their employer while they are employed. This general obligation does not prevent employees from planning, on their own time and using their own resources, to go into business for themselves.
The obligation does not extend [after termination], however, to cover all information which is given to or acquired by the employee while in his employment, and in particular may not cover information which is only ‘confidential’ in the sense that an unauthorized disclosure of such information to a third party while the employment subsisted would be a clear breach of the duty of good faithFaccenda Chicken Ltd. V. Fowler et al,  1 All E.R. 617 (C.A) at p. 62511.
Assuming that the information would be considered a trade secret or “highly confidential”, there are three basis upon which employers generally seek protection.
[Protection of trade secrets] depends on thebroad principle of equity that he who has received information in confidence shall not take unfair advantage of it. He must not make use of it to the prejudice of him who gave it without obtaining his consentSee Intellectual Property: A guide for General Practitioners, Law Society of Manitoba, April 9, 1988; Seager v. Copydex Ltd.,  R.P.C. 349 (Eng. C.A.) at p 36812.
detriment of the party who disclosed the confidenceComputer Workshops Ltd. V. Banner Capital Market Brokers Ltd. (1988) 21 C.P.R (3d) 116 (Ont. H.C.)13.
Secondly, in employment cases, trade secrets and confidential information are protected by express or implied contractual obligationsMonarch Messenger Services Ltd v Houlding (1984), 2 C.P.R. (3d) 235 (Alta Q.B.)14.
Thirdly, in situations involving high-ranking employees and company officers, there are fiduciary obligations, which protect an employer’s trade secrets or confidential informationAlberts v. Mountjoy (1977), 16 O.R (2d) 68215.
Often, in actions over trade secrets or confidential information, parties base their claims on a combination of all three of these basis. However, it is the second and third categories which have the most bearing upon employment cases. For the purpose of this paper we will look at each of these in turn.
Where there are express terms of an employment contract governing disclosure and use of trade secrets and confidential information, the Courts will enforce such clauses provided they are not in restraint of trade.
In the absence of express terms, the Courts will imply terms into the contract of employment in order to restrict employees, regardless of rank, from using trade secrets and “highly confidential” information after the termination of their employment.
The duty of the employee to look after and preserve the employer’s property extends to the employer’s physical property and also to his intangible property such as his trade secrets, lists of customers and secret processes. The obligation exists while the employee is employed and continues after the employment has terminatedMonarch Messenger Services Ltd v Houlding (1984), 2 C.P.R. (3d) 235 (Alta Q.B.) at p. 24117.
If the information in question can fairly be regarded as a separate part of the employee’s stock of knowledge which a man of ordinary honesty and intelligence would recognize, to be the property of his old employer and not his own…, then the Court, if it thinks there is a danger of the information being used or disclosed by the ex-employee to the detriment of the old employer, will do what it can to prevent that resultMonarch Messenger Services Ltd v Houlding (1984), 2 C.P.R. (3d) 235 (Alta Q.B.) at p. 24218. ..
An employee can be in breach of his duty of good faith, if he makes copies or memorizes a list of his employer’s clients for use after the termination of employmentCline v. Don Watt & Associates Communications Inc. (1986), C.C.E.L 181 (Ont. Dist. Ct) at p. 19019. The important factor is that the Courts continue to imply the duty with respect to trade secrets and truly confidential information after the termination of the employment relationship.
In addition to the general duty of fidelity, high ranking employees, officers, and directors (apart from statutory obligations) owe their employer fiduciary duties that forbid them from deriving personal benefit from business opportunities which arise through their employment. Like other employees, they may not disclose or use trade secrets and highly confidential information belonging to their former employer. In addition, they may be prevented from using or disclosing less confidential information – that a low ranking employee could otherwise take advantage of – if doing so would put them in breach of their fiduciary duties.
Courts apply Alberts v. Mountjoy in situations where the ex- employee is of sufficient rank and where the nature of the business makes the employer particularly vulnerable. For example, this occurs where a large portion of business flows from repeat business or policy renewals and where there is an emphasis on the personal relationship between the client and the employees who service them. In such cases, it is not necessary for the ex-employee to have physically removed documents containing the sensitive information, which is a factor that Courts will examine in cases dealing with “regular employees”.
Fiduciary obligations apply to directors, officers and “top employees” with respect to all degrees of confidential information. They may also apply to less senior employees in a particular position of trust. It is, of course, a question of fact whether an employee will be considered a “top employee” with fiduciary duties.
In Ontario, Alberts v. Mountjoy was distinguished in, an R.W. Hamilton Ltd. v. Aeroquip Corp. et alR.W. Hamilton Ltd. v. Aeroquip Corp. et al. (1988), 22 C.P.R (3d) 135 (H.C.)21. The Court found that, although the defendant employees had been “managers” in a business of selling hydraulic hose, they were not fiduciaries since they did not guide the affairs of their employer. Consequently, they were free to establish a competing business in the same geographical area. The decision contains an interesting observation by Mr. Justice Smith, underlining the difference between “top management” and “mere employees”.
and freedom of trade. They should be made to conform to a high standard of ethical behaviour even if by doing so the Courts may appear to be encroaching upon the requirements of freedom of trade. Not all managerial positions should lead to the imposition of the very high duty of a trustee lest the law commit a high proportion of employees in this province to slavery.
Employers are protected from the faithlessactions of top management by the law of trusts and, failing that, in respect of lower level employees by certain elementary rules of decency that will prevent theft of confidential information and of customer lists. Beyond this the law dare not go, preferring that the business community rely on contractual arrangementsR.W. Hamilton Ltd. v. Aeroquip Corp. et al. (1988), 22 C.P.R (3d) 135 (H.C.) at p 14322.
In Coin-A-Matic (Pacific) Ltd. v. Saibil et alCoin-A-Matic (Pacific ) Ltd. v. Saibil et al (1986), 13 C.C.E.L. 59 (B.C.S.C.)23 , the defendant employee had been the Western Region Vice President in the plaintiff’s coin-operated machine business. After leaving the plaintiff’s employ the defendant did not take any documents but did retain copies of leases and other contracts. He then set up a competing business and solicited a number of his ex-employer’s clients. There had been no breach of his duty of fidelity as neither customer information nor standard form contracts, which the defendant used were confidential according to the tests in Faccenda Chicken. Then, following White Oaks Welding Supplies v. TapWhite Oaks Welding Supplies v. Tapp (1983), 42 O.R. (2d) 445 (H.C.)24 , the Court held, that while there had been a solicitation of the ex-employer’s clients, this solicitation was part of a permissible general solicitation. In the result there had been no breach of the defendant’s fiduciary obligation.
The preceding cases show that there is a limit to how far the fiduciary principle can be stretched. Employers will resort to fiduciary duties to prevent a former employee from using information acquired during employment – information that would not be considered a trade secret in the strictest sense. However, if the information is a trade secret or “highly confidential”, it will be protected by the general obligations owed by all employees.
An employer seeking to protect information has the onus of proving its secret or confidential nature. As indicated previously an employer’s ability to protect a trade secret or confidential information will depend on the circumstances of the particular case.
d.	employee has, after the termination of employment, made improper use of the knowledgeInternational Tools Ltd v. Kollar et al,  1 O.R. 669 (Ont. C.A.); Computer Workshops Ltd. V. Banner Capital Market Brokers Ltd. (1988) 21 C.P.R (3d) 116 (Ont. H.C.)26.
Looking at each of these four elements will provide the factual backdrop against which one can measure the extent of the obligations of employers and employees in this area.
• whether the holder of the secret and the taker treat the information as secret.
Probably the most important of these considerations concerns the employer’s ability to satisfy the Court that it took positive steps to maintain the secrecy of the information in question.
For example, in Robin Nodwell Mfg. Ltd. v. Foremost Developments Ltd. and NodwellRobin Nodwell Mfg. Ltd. v. Foremost Developments Ltd. and Nodwell (1966), 52 C.P.R. 244 (Alta S.C.) Annotated27 , the defendant, Nodwell, assisted the plaintiff in the development of a four-track vehicle, which he later perfected while working for another employer, Foremost Developments Ltd. Since there was no written contract of employment, the plaintiff sought an injunction on the grounds that Nodwell had breached an implied term of his employment contract not to disclose trade secrets. The Court found that the vehicle was not a trade secret because it was not developed in secrecy.
By that I do not mean to say that he was running out and telling his competitors from the housetops but he was not running a very tight security proposition and this he continued while in the employ of the plaintiff…[It] is significant that no documentary warnings were went out to anyone as to any change in policy and I am satisfied on the evidence that during the course of the development, there were, notwithstanding restrictions, a large number of people who would come into the shop an see the [vehicle] in various stages of developmentRobin Nodwell Mfg. Ltd. v. Foremost Developments Ltd. and Nodwell (1966), 52 C.P.R. 244 (Alta S.C.) Annotated at p. 25028.
This case makes it clear that the employer has a responsibility to take active steps to guard what it views as its trade secrets or confidential information.
The very nature of trade secrets and confidential information makes it difficult for an employer to satisfy the onus in litigation. Secrets will lose their special status once they have been revealed, a point well illustrated by R.L. Crain Limited v. Ashton and Ashton Press Manufacturing Company LimitedR.L. Crain Limited v. Ashton and Ashton Press Manufacturing Company Limited,  O.R. 303 (Ont. S.C.), aff’d  O.R. 6229. In that case, the defendant, Ashton, was a former machine shop foreman of the plaintiff, Crain. Crain alleged that Ashton had become familiar with trade secrets and confidential information and used them to produce his own machine.
Unlike in Nodwell, the Court was prepared to accept that the information had, for a while, been a trade secret. However, it held that the information had ceased being confidential by the time Ashton had left the plaintiff’s employ. The Court refused to protect the information by granting an injunction to prevent Ashton from making and selling his own machines.
Where an employer has actively guarded its confidential information or trade secrets by restricting access to the sensitive work areas and warning employees of the confidential nature of the information, it should be able to prove that its former employees were aware of the confidential nature of particular information.
The employer must also prove that the employee learned the secret during his employment – a question, which touches on the skills and knowledge of the employee at the time his employment commences. It is in essence, a restatement of the first criterion concerning the employer’s possession of a trade secret. This will be a problem in cases where the employee developed a trade secret before or after joining the employer. The case, Dyform Engineering Ltd. et al v. IttupHollowcore International Ltd. et al Dyform Engineering Ltd. et al v. IttupHollowcore International Ltd. et al (1982), 71 C.P.R. (2d) 72 (B.C.S.C.)30 illustrates this point well.
Assuming that the employer can satisfy the first three criteria, it still has to prove unauthorized use. It is not enough to prove only the possibility of misuse, even where the ex-employee has physically taken or copied secret or confidential documents, surreptitiously or otherwise.
Montour Ltee v. JolicoeurMontourLtee v. Jolicoeur (1988), 19 C.I.P.R. 25 (Que. S.C.)32 , concerned an employee whom the Court found had taken or copied commercial cooking recipes and used them with his new employer. The employee was a junior employee with no managerial responsibilities. There was no term of the employment contract restraining the employee from going to work for a competitor and no term on the non-disclosure of trade secrets or confidential information. Nevertheless, both the employee and his new employer were found jointly and severally liable in damages for the plaintiff’s losses. The Court simply could not believe that the defendants could have developed so many products without using the plaintiff’s recipes.
• a general knowledge of the former employer’s business practices.
Trade secrets and confidential information raise difficult questions for employers and employees.
On one hand, employers need to ensure that their intangible business assets are protected. On the other hand, employees need to be free to use their skills without fear of being sued by former employers. In attempting to balance these competing policy interests, Court decisions have not precisely defined the type of information that will be protected – perhaps because of confusion over the various applicable legal principles. The result is uncertainty for both employers and employees who, for their own purposes, may wish to assess the nature of particular information.
However, where information may be categorized as either a trade secret or highly confidential, then employees of all levels are bound by equitable and implied contractual obligations that prohibit them from using the information without authorization – even after the termination of employment. In addition, the law prevents employees with fiduciary obligations from using and benefitting from less confidential information derived from their positions.

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