The Defensive Line: Defence Law Briefing – December 2022

For Your Eyes Only

Safeguarding Confidential Information and the Employment Relationship

Confidentiality in the employment relationship is likely more important in the Defence and Security Industry than any other sector of employment. Whether it’s the details of the employer’s contribution to a request for proposal, developing a new technology, or dealing with client and secret information, defence and security employers often have more on the line and, in turn, a far greater need to safeguard their information vis-à-vis other employers.

Though this is important throughout an employment relationship, the issue is often presented to employment lawyers when an employee leaves the workplace to take a new position with a competitor organization. For example, a defence organization may be in the middle of preparing an RFP with its partners when an engineering manager assigned to the RFP decides to join a consortium that is pursuing the same project. This raises obvious concerns for the former employer that the departing manager is now going to be in a position to share pricing, technical and partnership information with the competing consortium who may have just gained a significant competitive advantage in the RFP process as a result.

It is potential issues such as these which leave many defence and security employers keen to take what steps they can to protect their confidential and proprietary information from falling into the wrong hands. With this in mind, it is good to know that there are some automatic legal protections which may apply and also others that an employer can institute to try and better protect itself from these threats.

1- Every Employee has a Duty of Good Faith Not to Disclose Confidential Information

As a general rule, the common law implies a duty into the employment relationship that an employee cannot leave an employer and then go and use the confidential information gleaned from that relationship against their former employer.[1] This duty not use that information to the detriment of their former employer extends past the end of any employment relationship.[2] However, as with many implied terms and duties at common law, the scope and application of this duty of confidentiality is not always easy to define.

Ideally, a court will recognize information related to an RFP process, developing technology, or the like, as confidential; however, that is not always certain. Though having this baseline rule implied into an employment relationship is helpful, it is not always as easy to convince a court that a certain piece knowledge was a trade secret or that specific information related to a partnership was truly “confidential” versus being more benign. As such, it is generally a best practice for an employer to incorporate specific language into their employment contracts that seeks to further define what confidential information is and the consequences of using it against the employer both during and after employment.

2- Protecting Confidential Information with Enforceable Agreements

The most practical way for an employer to provide itself with extra protection against a current or former employee divulging secret information is by contracting against this disclosure at the outset of the employment relationship. Having a good written employment agreement can be good for an employer for a number of reasons, but in the defence and security sector one of the most significant benefits is including what are called ‘restrictive covenants’. These covenants often take the form of sections in employment contracts titled “Non-Solicitation”, “Non-Competition” and, of course, “Confidentiality”.

Non-solicitation provisions can be used as an indirect method of protecting an employer’s business interests after an employee departs and can be used, for example, in an effort to try and stop an employee from poaching other employees after their departure, at least for a period of time. This can help limit the flow of persons with confidential or sensitive information out of the business; however, they do not stop the initial employee from leaving in the first place or discussing what they know with others. Moreover, non-solicitation provisions can be difficult to have a court enforce if and when an employer finds itself asking.

Non-competition provisions, were they to be enforceable, can be a more effective way of limiting an employee’s ability to harm their former employer after leaving. However, even more so than non-solicitation provisions, non-competition provisions are virtually never enforced by common law courts. They are generally deemed to be an unacceptable restraint on trade, to use the court’s terminology, but simply put, courts tend to find them unfair to employees and refrain from enforcing them.

More than that, the Province of Ontario recently outlawed non-competition provisions by statute for all employees regulated by that province except the most senior. This is similar to the common law approach in that non-competition provisions with more senior employees, such as executives, tend to have a greater likelihood of being enforced.

All of this to say, though there are other ways to try and limit a departed employee’s ability to compete unfairly against the organization or to avoid a large “brain drain” as a series of employees leave to follow another, the most likely enforceable way to keep competitive information in house, particularly during RFP processes where employees may be more likely to be induced away, is by safeguarding the confidential information itself rather than trying to control employee movement after they depart.

To do this, the most straightforward method will be to ensure that employees have either agreed to well-drafted confidentiality provisions in their employment agreements or that a separate confidentiality agreement is entered into as part of the onboarding process. If an employer’s practice tends to be to hire employees to work on specific projects, versus employing them indefinitely, then the use of Non-Disclosure Agreements (“NDAs”) may make sense as well. NDAs for specific projects, or the like, can be used with indefinite employees also, but issues related to consideration in exchange for their agreement to those NDAs can begin to complicate matters and threaten the future enforceability of the NDA in the event that the company is ever in the unenviable position of having to take legal action to protect its confidential information.

3- Taking Legal Action to Protect Confidential Information

If an employer is concerned that confidential information has been or will be misused by a former employee, then there are options. If the employer is only at the stage of being concerned about a potential future breach, for example if an employee has resigned and the company knows that the employee is going to work for a competitor organization or consortium bidding for the same project, then the company can pre-emptively send the departing employee a letter reminding them of any common law duties or restrictive covenants that survive their employment. The idea will be to ensure that the employee is aware of any obligations they may have to the employer and that these obligations survive the end of their employment before it becomes a problem.

However, if the employee has already started with the new employer and there is a concern that they may be misusing confidential information, then a good first step will often still be to send a letter to the former employee. Often times, the employer will not be sure if, indeed, a breach has occurred. With this in mind, sending a letter in advance may provide an opportunity for the organization to learn more about the situation and help it determine if, in fact, action is warranted. This can help avoid commencing unnecessary legal actions and incurring those costs.

On the other hand, where the matter is too time sensitive to wait for letters to be exchanged or the company is more certain that a breach has occurred, then it can seek to protect its sensitive information and enforce its rights by way of a legal action. This often occurs in the form of seeking commencing a lawsuit for damages, but also asking the court for an injunction as soon as possible to stop the offending behaviour and limit any damage. Following a trial or a negotiated settlement, which generally occurs after injunction proceedings, employers can receive compensation for their loss and seek to prohibit the former employee and their new organization from benefiting from the misdeeds.[3] This can be the case with any former employee and, prior to commencing any legal action, the employer will want to ensure that it will be able to point to the loss caused by the employee or former employee’s conduct.

However, if the employee or former employee was sufficiently senior or important, then the question of whether the organization suffered any loss is no longer determinative of whether or not action ought to be taken. Instead, liability can be imposed on certain senior or important employees as a result of their position as “fiduciaries” and as a sanction for their breach of what is referred to as a “fiduciary duty”.[4] That said, the employer will always want to be able to explain how the confidentiality breach impacted their business in order to receive compensation.

Important Takeaways

If an employer is concerned about future confidentiality breaches or other related matters, then the best line of defence is often to draft the organization’s expectations in this regard directly into its employment agreements so that it is clear at the outset and throughout the employee’s employment that they have these obligations to the employer. Though common law duties exist irrespective of this, employees will often not realize this before violating the duty and, by then, the competitive advantage may already be lost. Further, outlining expectations directly into a contract can assist in making sure that it is the organization that determines what is and is not confidential versus hoping that a court will see it the way the organization would like in the future. Though never fool proof, an employment agreement or separate confidentiality agreement will often provide the organization with the most certainty it can expect in these scenarios.  

If you or you’re your organization have any questions related to safeguarding company secrets, non-solicitation agreements, or anything else to do with human resources, contact Emond Harnden LLP’s Defence & Security Team using the details below. We are dedicated exclusively to labour and employment law in support of employers.

[1] 309925 Ontario Ltd. v. Tyrrell (1981), 127 DLR (3d) 99 ; Valley First Financial Services Ltd. v. Trach (2004), 2004 CarswellBC 1252 (BCCA).

[2] R. v. Fuller (1968), [1968] 2 OR 564 (ONCA).

[3] Calian Technology Ltd. v. Fredrickson, 2005 CarswellOnt 1776 (ONCA).

[4] Canadian Aero Service Ltd. v. O’Malley (1973), 11 CPR (2d) 206 (SCC); Edgar T. Alberts Ltd. v. Mountjoy(1977), 16 OR (2d) 682.

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