Contract Drafting Tips Series: Confidential Information Clause

Wednesday, 21 November 2007 16:41 Mike Clarke

This article is part of a series on drafting tips for contract clauses.

Under confidential information law a legal right exists for a person who in circumstances of confidence gives (or permits access to) confidential information to another person ("user") who then, without permission, uses it or discloses it to a third party. In those circumstances the first-mentioned person may obtain certain legal remedies against the user.

Confidential information law is a branch of equity law. A contract, preferably written, can bolster protection of confidential information. This is because the aggrieved person can then rely on two legal grounds, contract law as well as equity law. Numerous practical steps can be taken to further enhance enforceability under such laws.

For a breach of confidential information law, the affect person has three main remedies. They are damages, an account of profits and an injunction. In court actions one or more of these remedies are sought. Damages in this area of the law are assessed on the basis of reasonable compensation for the unauthorised use of the confidential information

Breach of confidentiality can arise in many situations. Particularly serious instances arise in the sale of a business when sale news is leaked or in intellectual property licensing relationships when valuable information is passed on to third parites.

In recent decades there has been a stream of cases against ex-employees. Typically the former employer has sought to restrain the former employee from using the former employer's trade secrets with a new employer.

Legislation

Confidential information law principles also exist in specific legislation, for example:

• Privacy Act 1988 (Cth) - due to the Privacy Amendment (Private Sector) Act 2000.
• Telecommunications Act 1997 (Cth). Part 13 of this act provides for the confidentiality of personal information and the contents of communications, including restrictions on how telecommunications carriers and carriage service providers may use and disclose certain personal information.
• Telecommunications (Interception) Act 1979 (Cth). This Act has two key purposes. Its primary object is to protect the privacy of individuals who use the Australian telecommunications system by making it an offence to intercept communications. The second purpose of the Interception Act is to specify.
• Professional ethics regulation. Legal obligations of confidence (eg are imposed on lawyer/client confidentiality, patient/doctor confidentiality and the banker’s duty of confidence).

Cases

• Drake Personnel Ltd v Beddison (1979) VR 13: The court ruled that it would determine the nature of the information in question by looking to the actual information itself, not the label used, to determine if at law it had protection. In this case, the use of the label “trade secret” was incorrect at law and the information was not protected.
• Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd (1967) VR 37: In determining what constituted confidential information, the court considered:
  • the extent to which the information was known outside the plaintiff’s business;
  • the extent to which the trade secret was known by persons engaged in the plaintiff’s business;
  • the measures taken by the plaintiff to guard the secrecy of the information;
  • the effort and money spent by the plaintiff in developing the information; and
  • the use or difficulty with which others might acquire or duplicate the secret.

Drafting Tips

• Assess if the information satisfies the legal definition of what is “confidential”.
• Avoid uncertainty, precisely identify the information to be protected.
• Avoid being void, precisely identify the information capable of being legally protected.

• Use policies and procedures to protect confidential information, eg institute sign-out procedures for library borrowings and sign-in procedures for those who access a confidential database.

Sample Clause

76.2 The Employee shall not divulge to any person, firm or company any information in respect of the company business, or the business of any company associated with the company, or make use of any information acquired in the service of the company or any company nominated by the company, for his private advantage.

The above clause was ruled to be invalid and unenforceable in Heine Bros (Aust) Pty Ltd v Forrest (1963) VR 383 because it was not restricted to confidential information, and essentially cast its net “too wide”. To attempt to deny a former employee use of “any information acquired in the service of the company” is far too broad, and attempts to consider personal knowledge and experience.

Further reading

Contract Drafting Tips Series: Service Level Agreement Clause
Contract Drafting Tips Series: Confidential Information Clause
Contract Drafting Tips Series: Dispute Resolution Clause
Contract Drafting Tips Series: Rights Granted Clause
Contract Drafting Tips Series: Restraint of Trade Clause

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