While it is a priority for your business’ intellectual property (IP) to be adequately protected from copycats and infringers, it is equally important to protect your business in the post-employment context. Employees come and go, and with it they take their knowledge and skills acquired from one business to the next. Fortunately, there are several strategies in which you can protect your business from the risk of confidential information getting into the hands of your competitors.
Employee’s post-termination obligations
A carefully drafted post-employment restraint that is reasonably necessary to protect the legitimate business interest of an employer may be acceptable in an employment contract. A restraint prevents former employees from sharing commercial and confidential information with a competitor, including any start up competitor business. A legitimate business interest consists of the need to protect confidential information and the exploitation of client and business connections. Restraints are generally considered void unless it can be shown not to exceed what is reasonably necessary to protect a legitimate business interest.
However, the recent case of Liberty Financial Pty Ltd v Jugovis  FCA 607 (Liberty) has highlighted the difficulties arising for businesses in preventing the misuse of their IP, confidential information, client base and strategies by former or new employees.
Liberty was a non-bank lender that provided loans in the residential, commercial and superannuation fund finance markets within Australia. Mr Jugovic, the senior manager of Liberty for over a decade, managed the sourcing of funding from clients (banks) and investment schemes. After resigning from Liberty, he signed an employment agreement with ORDE Financial Pty Ltd (ORDE), being Liberty’s new rival. In response, Liberty applied for interim orders to enforce the restraints in Mr Jugovic’s employment agreement that prevents him from engaging in the new employment contract for one year. The Federal Court found that if Mr Jugovic had not been restrained from engaging in employment with ORDE, there would be a “real risk” of him “inadvertently or subconsciously” breaching his confidential obligations to Liberty. Although Mr Jugovic and the managing director of ORDE gave undertakings that they would not solicit Liberty’s clients, the Court found that there was no way for Liberty to identify whether that undertaking has been breached and granted the injunction.
Significantly, where it is found that the restriction is unreasonable to protect the interests of the business and employer, a restraint may be void. In Commsupport Pty Ltd v Mulligan Mirow  QDC 134, the Court found an employee’s restraint clause to be unreasonable where it restrained the employee from the following:
- ”acting for any person or entity (natural or otherwise) that the employer had or has as a client during the six months immediately prior to the employment with the employer concluding; or
- contact or cause another to make contact with any person or entity (natural or otherwise) that the employer had as a client during the six month period immediately prior to the employee’s employment with the employer concluding, with the view to enticing that person or entity to use the professional services of the employee or a third party”.
The Court found that the restraints may have been reasonable had the employee been associated with forming relationships and holding influence with those clients, which was not the case. Mere contact with clients was not sufficient reason to impose the restraints, highlighting the importance of a carefully drafted restraint.
So, what else can businesses do to protect their IP more effectively?
Here are five key steps to better protect your IP:
- create an IP strategy that identifies, assesses, and protects IP. In the event of termination of employment, it allows the business to clearly set out which specific interests are to be protected;
- assess which interests require protection and what the business is willing to spend for that protection;
- identify the employees whose post-employment activities require restraints in the interest of the business. This includes identifying what contributions they have made to IP and how its ownership has been dealt with;
- require full disclosure from employees of any restraints they may be subject to through former employment, as this may affect their duties of performance within the business; and
- work with the guidance of commercial and legal principles rather than that of emotion.
At Cohen Legal we can provide assistance in navigating the best way to protect your business’ IP by:
- preparing and reviewing employment contracts and policies;
- carefully drafting restraint clauses within employment contracts;
- providing advice in relation to business strategies to protect your business; and
- assisting in employment disputes, such as restraint matters.
Our business is protecting yours.