31 May PAST EMPLOYEE ORDERED TO GIVE UP ELECTRONIC FILES WHICH MAY CONTAIN CONFIDENTIAL INFORMATION

The Supreme Court in Georges Apparel Pty Ltd v Giardina [2017] NSWSC 290 has ordered an employer’s former business development manager to hand over digital files to it after it was alleged that she had taken confidential information with her when she left the employer’s business to start her own.

Background – The Facts

The manager was employed by a school uniform importer and manufacturer. The manager’s contract of employment (the “Pre-Employment Contract”) provided that she was required to perform her duties, including protecting and promoting the interests of the employer, not to misuse or disclose confidential information during or after her employment and that she was prevented (by a restraint of trade clause) from competing with the business in any way for up to six months after leaving her employment. This included canvassing or soliciting the employer’s customers and inducing the employer’s customers, suppliers or employees to end or terminate their relationship with the employer.

The manager decided to leave the employment of the employer and set up her own sales agency business (selling uniforms) in competition with the employer’s business. She discussed this with a general manager of the employer who suggested that the Pre-Employment Contract’s non-competition provision could be negotiated, and that it might be sufficient if the manager did not approach the employer’s customers for six months.

After giving notice of her resignation, the manager was sent a post-employment contract (the “Post-Employment Contract”) which she considered to be “unacceptable”. The manager discussed this with the general manager and agreed with the general manager’s statement to “stick to our original plan, no competition with our customers for six months“. The manager further prepared a revised version of the Post-Employment Contract which included the same provisions as previous, but did not include any non-competition agreement.

In the proceedings brought by the employer, the employer accused the manager of starting to set up her business while she was still an employee and alleged that in doing so, she had appropriated or copied for her own use, confidential information of the employer, which included, computer files which tell a computerised embroidery machine how to embroider the school’s logo and other details on uniforms. It argued that the Post-Employment Contract obligations were void because they were “procured in bad faith, or against good faith, or by misrepresentation, or by misleading or deceptive conduct”.

The employer submitted that “a restraint against competition was justified because it was the only realistic way of protecting the [employer] from abuse of its confidential information” and sought an order for delivery up and examination of all “computers, tablets, mobile phones, electronic storage devices and the like” to determine whether she had breached her obligations.

The Decision of the Supreme Court

Justice McDougall found the post-employment restraints could be enforced and ordered the manager deliver up digital files for examination.

In reaching this decision, His Honour considered whether “sufficient protection” could be afforded to the employer by enforcing the restraints and by making an order for delivery up of computer devices “so that the [employer] can assess the extent to which (if at all) the [manager] holds any confidential information”.

His Honour discussed that although such an order is necessary, it would expose the manager to “very real” financial hardship because she needed the devices to run her business. Therefore, His Honour said to balance the competing interests of the manager and the employer, inspections would need to be undertaken “very expeditiously” and once completed, the devices be returned to the manager “on the basis that she will not delete, amend or overwrite any of the data on them”.

His Honour also commented that unless the employer is able to find out what confidential information (if any) the manager has in her possession, the manager and her family would be damaged financially if she is not able to work.

His Honour concluded by saying, “balancing the competing interests as best I can, I have come to the conclusion that the proper measure of protection of the [employers] interests, with legitimate protection of the interest of the [manager] and her family, does not require that there be an absolute prohibition on the [manager] working in competition with the [employer]. I am satisfied that enforcing the post-employment obligations agreement and giving the employer the ability to assess, from analysis of the [manager’s] electronic devices, what if any confidential information she has in her possession, will achieve substantially all that is necessary to protect the [employer] whilst minimising the unavoidable harm to the [manager].”

What does this mean for employers?

This case should be viewed as a win for employers.  It means that employers may be able to gain access to past employees’ electronic files when they are suspected of stealing confidential information to determine whether they have breached their post-employment obligations.

If you have any concerns about your employees, or former employees, using your businesses confidential information to compete against your business, contact the team at HR Law for advice.