On 16 April, Starwood Hotels announced that it had brought a claim in the United States against two of its former employees and their new employer, Hilton Hotels. Starwood accuses the former employees, and Hilton, of misappropriating and misusing Starwood's confidential information. In particular, Starwood accuses Hilton of misappropriating information relating to Starwood's W brand and using that information to obtain an unfair advantage in the launch of its Denizen luxury hotel brand, allowing it to launch Denizen in only nine months instead of the usual three to five years. Hilton has now suspended development of the Denizen brand pending resolution of the dispute.
Starwood's dispute with Hilton is only at its earliest stages, and is being brought under US law. However, disputes of this type are commonplace in the UK too. By planning ahead in their employee relationships and the development of their business information, a prudent employer can put themselves in the best possible position should a dispute of this kind arise.
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On 16 April, Starwood Hotels announced that it had brought a claim in the United States against two of its former employees and their new employer, Hilton Hotels. Starwood accuses the former employees, and Hilton, of misappropriating and misusing Starwood's confidential information. In particular, Starwood accuses Hilton of misappropriating information relating to Starwood's W brand and using that information to obtain an unfair advantage in the launch of its Denizen luxury hotel brand, allowing it to launch Denizen in only nine months instead of the usual three to five years. Hilton has now suspended development of the Denizen brand pending resolution of the dispute.
Starwood's dispute with Hilton is only at its earliest stages, and is being brought under US law. However, disputes of this type are commonplace in the UK too. By planning ahead in their employee relationships and the development of their business information, a prudent employer can put themselves in the best possible position should a dispute of this kind arise.
Intellectual property, such as copyright, trade marks, patents, designs and database rights, is generally owned by the employer where it is created by their employee in the course of their employment. However, there are exceptions to this rule, and it is advisable to include an express provision in employment contracts that the employer will own any such intellectual property. In a dispute, this might swing the balance in your favour. It is also important to note that the general rule as to employee ownership of IP applies to employees and not to contractors. In most cases, IP in work created under commission will be owned by its creator. An IP ownership clause is therefore a must-have in any consultancy contract.
Most businesses also hold confidential information that is not the subject of any helpful IP rights. The material that Starwood alleges was misused by Hilton and its new employees includes development plans and financial information on its businesses, details of negotiation strategies with owners, developers and designers of its brands, information on converting a property to a lifestyle luxury hotel, and marketing and demographic studies commissioned by Starwood. The only enforceable IP rights likely to subsist in these are copyright and database rights. Copyright can generally be enforced to prevent a work from being copied, but it will not prevent confidential information from being misused. In a recent case, however, database right did provide a remedy where a breach of confidence claim failed, so it is worth considering this option.
The primary option for an employer seeking to prevent its business information being misused by former employees is a claim for breach of confidence. In addition to the general law of confidence and any express confidentiality provisions in their employment contracts, employees have an implied contractual duty to respect the confidentiality of their employer's business information, during and, in the case of trade secrets only, after the period of employment. It may also be possible to draft clauses into an employment contract that restrict the employee's freedom to use the employer's other confidential information even after their employment is terminated.
Implied and general duties of confidentiality
In the context of an employment relationship, there are several categories of confidential information, which are subject to differing levels of protection. The most sensitive information is known as "trade secrets". Trade secrets are information used in a trade or business, which, if disclosed to a competitor, would be likely to cause real or significant damage to the owner, and which the owner has sought to protect by limiting its dissemination, or at least not encouraging it or permitting it on a widespread basis. Whether a particular piece of information is a trade secret depends largely on the facts, but information typically regarded as a trade secret includes product formulae not capable of being obtained by analysis of the product, business plans and methods and computer source code. Trade secrets are subject to the widest protection: an employee can only use them in the course of his work for the employer, and may not use them even after his employment has terminated.
Less sensitive confidential information, often known as "mere confidential information", will not constitute a trade secret, but may still be confidential while the employee is in employment. However, a former employee is entitled to use for his own benefit and the benefit of others mere confidential information which has become part of his skill and knowledge during the period of his employment. The former employee is not, however, entitled to take away physical or electronic records of mere confidential information, or to deliberately memorise it in order to use it in a new job. Mere confidential information falling short of a trade secret might include, for example, customer details, which a former employee would be entitled to exploit in their new job.
Finally, trivial or easily publicly accessible information about an employer's business is not confidential, and can be disclosed by the employee at any time.
To bring a successful claim for breach of duty, it is not enough to show that the material was confidential. It is also necessary to show that the employee received it under an obligation of confidence. The simplest way to show this is to include a statement to that effect in the employee's employment contract. Other practical steps include marking confidential documents as such and taking steps to make employees specifically aware of their confidentiality obligations, such as through training.
Express contractual restrictions
Because mere confidential information cannot generally be protected after termination of an employee's employment, employment contracts often include an express restriction on the use or disclosure of confidential information after termination. There is conflicting authority on whether such clauses are enforceable, but the current view is that a properly drafted confidentiality clause should be effective to protect even mere confidential information post-termination. The clause should set out in detail the type of confidential information which the employer is seeking to protect, and should be tailored to the employer's business. Despite the implied confidentiality obligations described above, it is still advisable to include an express confidentiality obligation in employment contracts, to emphasise the confidential nature of the material to which the employee will have access and to show the court, in any dispute, that the employer takes steps to protect its confidential information.
Although an expensive option, garden leave can also be effective to prevent the disclosure of confidential information, as the employee remains employed through the period of garden leave and is therefore subject to express and implied contractual duties.
Remedies
Various remedies are available for a breach of confidence. If the owner of the information has suffered loss, it can seek damages. Alternatively, they can seek an account of the defendant's profits. Various forms of injunctive relief are also available, some of which, such as the search order, may assist the claimant in establishing the breach of confidence. Also available is the "springboard" injunction, which prevents the defendant from using the confidential information for a period that the court estimates it would have taken to gather the information without breaching confidence – often six to twelve months.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 19/05/2009.
