31/08/2012

Employers are using confidentiality obligations in employment contracts to hard wire into the agreement a Clayton's restraint – the restraint you have when you don't really have a restraint.

We recently had a query from an adviser who had served out the 12 month restraint in his employment agreement and now wanted to know whether there was any reason he couldn't try to sell his services to clients of his former employer.  After all, he reasoned, he’d done everything required of him under the restraint clause and that period had come to an end so surely there was no reason he couldn't promote himself to whoever he pleased.

We reviewed his previous employment agreement and found a ferocious little confidentiality obligation that the agreement said the employee owed to the employer not only during the term of the employment agreement and not even just for the 12 month restraint period but FOREVER.

The clause classified any information about the clients including their identity and contact details as confidential information and banned the employee from using that information indefinitely after the agreement ended.

Was that clause enforceable? 

It is important to note that the court decisions emphasise that each case is decided on the specific circumstances as to whether a breach of confidence has occurred.

In Commercial & Accounting Services (Camden) Pty Ltd v Cummins [2011], Mr Cummins sold his accounting practice and subsequently opened a new practice and used a client list to write to his former clients.  He was found to be a breach of his contractual duty of confidentiality.  The Court approved the following statement:

"The employee cannot remove, whether by using paper or using memory, a material part of the former employer’s business records; but the employee can approach a particular customer or client whom that employee can recall without a list or deliberate memorisation."

Similarly in Forkserve Pty Ltd v Pacchiarotta [2000] the Court considered whether two former employees contacting clients was the result of notebooks being taken from the employer or not.  The Court held there was no a breach of confidential information on the evidence, stating:

"I would note that normally, lists of customers and their requirements may constitute confidential information … such information is not necessarily confidential, or may be at a low order of confidentiality, depending on the particular circumstances …..

[There is a] distinction between a written list of customers and an employee remembering who the customers were.  There is some doubt in the authorities as to how far an employee can make use of his or her memory of customers as distinct from a list. 

In the absence of it being established that the defendants removed notebooks or other documents, the mere fact that the defendants called on some people who were customers of the plaintiff would not of itself be sufficient to constitute a breach of confidential information.

There is no evidence to enable me to come to the conclusion that there was a deliberate memorisation of any records of the plaintiff."

Similar issues were also considered in the case of Weldon & Co Services Pty Ltd v Harbinson [2000], which involved a claim against an employed accountant who started up her own practice and contacted clients.  The claim for breach of confidentiality by the employer was denied as there was no evidence that a client list had been taken.  The Court held:

"Information relating to the names and contact details of the clients [is]: 'information which the employee must treat as confidential (either because he is expressly told it is confidential, or because from its character it obviously is so)' but which he is free to use after his employment has terminated….
…. in my view there is no room for the implication of any contractual term restricting competition or use of that information.

For the purpose under consideration there was no confidentiality to be protected; that is to say, the plaintiff was entitled to use her general knowledge of the identity of clients and their likely need for future accounting work for her own advantage after leaving employment [as there was no substantive evidence that she had copied or downloaded any client list]. 

The employee had created a list of clients after her employment ceased and the Court stated:

"The defendant’s lists appear to be consistent with her account of how they were prepared, being lists which she wrote down progressively on the basis of recollection and inquiries."

In summary,

• each case will depend on the specific circumstances but both employers and employees

• each case will depend on the precise terms of the specific contract

• normally employees cannot take with them client lists in any format

• normally employees cannot take an employer’s client list by memorising it

• normally employees will not breach the confidentiality provisions if they simply remember some information about a client that they use to find the contact details for that client (subject to any other restraint).
  

If you have any questions in relation to this article, or want legal advice on the issue for you or your business please contact David Nicoll at TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.