Practical tips for employers on protecting confidential information

Confidential information and trade secrets are increasingly valuable assets for any business in today's market. A recent judgment of the Hong Kong Court of First Instance, Dextra China Limited v Lam Wing Kit, highlights the difficulty employers face when trying to protect that information from misuse by disgruntled or overly ambitious employees. The decision serves as a reminder of the very real threat posed to employers by senior employees with ulterior motives and should encourage employers to consider some of the practical steps they can take to protect themselves.

The case

Dextra China Limited ("Dextra") is a leading manufacturer of construction products. Mr Lam Wing Kit had been employed by Dextra since 1992 and became its General Manager in 2000. In that role, he was responsible for overseeing Dextra's operations in the PRC. Part of Dextra's business involves the manufacture and sale of sonic tubes sold under the brand name "Sonitec". Sonitec tubes are made using a special type of push-fit assembly system which is a confidential trade secret and sets Sonitec tubes apart from those of Dextra's competitors.

In or around September 2009, Dextra's Managing Director suspected that Mr Lam was taking steps to set up a business to compete directly with Dextra. After inspecting Mr Lam's office in the early hours of the morning, he found a removable hard disk drive which contained a number of documents in a "Personal Doc" folder. The documents indicated that Mr Lam was in the process of setting up a company called "Agility" which would manufacture and sell steel tubes with the proprietary Sonitec push-fit assembly system. The documents also appeared to indicate that Mr Lam had induced the departure of some 15 employees from Dextra to join his Agility business between July and October 2009.

Mr Lam was accordingly summarily dismissed on 16 October 2009. It appears from the judgment that the grounds for his dismissal were that he had breached the:

• duties implied into his contract of employment of good faith, trust and confidence; and
• duties expressly stated in his contract of employment regarding the fiduciary duty he owed to Dextra and the obligation he had to not misuse its confidential information.

Following Mr Lams' dismissal, Dextra sought injunctions restraining Mr Lam from acting in breach of the express and implied duties contained in his contract of employment and from making any further use of Dextra's confidential information by manufacturing sonic tubes with the proprietary Sonitec push-fit assembly system. It also sought delivery up of the confidential information which Mr Lam had misappropriated and damages for loss of profits during the period he was employed by Dextra but acted in competition with it.

Mr Lam denied Dextra's version of events and issued his own claim for wrongful termination in response. However, the sheer weight of evidence which supported Dextra's position lead the Court to conclude that Mr Lam had not been wrongfully terminated and had instead acted in breach of the implied and express duties contained in his contract of employment. Of relevance to this finding were draft board minutes for the establishment of Agility, structure charts in which Mr Lam was identified as the major shareholder, detailed planning and timetable documents including details of the resignation of Dextra's personnel, spreadsheets detailing sales of Dextra's Sonitec sonic tubes and Dextra's confidential pricing information.

The Court accordingly ordered Mr Lam to pay Dextra approximately HK$ 5.1 million in lost profits, to return the confidential information which he had misappropriated from Dextra and injuncted Mr Lam from making further use of that confidential information in the future. 

Practical tips for employers

Not all employers will be as fortunate as Dextra in terms of the proof Dextra was able to find to support its claim that Mr Lam had misappropriated its confidential information, induced the departure of its employees and breached his contact of employment by competing with Dextra.

Nevertheless, there are a number of steps employers can take to give themselves the best chance of discovering this sort of misconduct and being able to impose disciplinary action in response. These include the following:

1. Educate employees about the importance of protecting the employer's confidential information and acting in the best interests of the employer.
2. Have in place a written policy which clearly sets out the employer's expectations of its employees and the consequences for engaging in misconduct.
3. Insert express provisionsinto employees' contracts of employment prohibiting employees from misusing the employer's confidential information, acting in competition with the employer or enticing away the employer's staff. Make clear that the consequences of engaging in such behavior may be termination of employment.
4. Ensure that employees (particularly senior employees or those with access to important confidential information) are subject to carefully drafted restrictive covenants, tailored to the particular circumstances of the employer and employee.
5. Limit access to key documents by way of password protection, encryption or approval processes. Create alerts to indicate when employees access critical documents.
6. Monitor internal grievances and pay attention to disgruntled employees, particularly those in senior or fiduciary positions. For example, in Dextra, it was recognised by both sides that Mr Lam and Dextra's Managing Director had fallen out about changes to the business. Unhappy employees are more likely to act other than in the best interests of the employer.
7. Be proactive rather than reactive, and take steps early to limit the potential damage a rogue employee can cause.

Please contact Gareth Thomas, Helen Beech or David Smail of the Employment Pensions and Incentives team if you have any questions.