How to protect your confidential information

If an employee leaves a business and discloses confidential information to a new employer who is a competitor, it can be very difficult to prove in court that confidential information was in fact disclosed. When dealing with confidential information, the age-old adage applies: "an ounce of prevention is worth a pound of cure."

Kroman believes that "many companies have confidentiality agreements in their files which are signed by employees but often they overlook the importance of employee entrance and exit interviews. During an entrance interview, each new employee should be reminded of his or her obligations regarding the company’s confidential information.

"The information which the company considers confidential must be clearly identified to the employee. A company policy regarding confidential information should be reviewed with the employee and a receipt obtained from the employee."

A wise employer also tells the employee during the initial interview that the employee must not disclose confidential information of former employers. The confidentiality agreement which is signed by the employee should contain a representation and warranty to this effect. Legal cases have shown that, if an employer turns a blind eye to the disclosure by an employee of confidential information of a former employer, the directors and officers of the employer may be held personally liable.

Kroman advises that "if an employee signs a confidentiality agreement after employment has commenced, it must be structured properly or else the agreement will be unenforceable. The courts like to see that the employee gave consideration for the agreement and the lack of consideration may make the agreement unenforceable."

It is imperative that employees who depart employment are given proper exit interviews where their legal obligations regarding confidential information are explained. Employees will likely be more reluctant to disclose confidential information to a new employer if they know that the former employer is serious about protecting its interests. It should be confirmed by the employee that no copies of confidential information remains in the hands of the employee.

If, after an employee departs, the employee will be employed with a competitor under suspicious circumstances, an appropriate letter should be sent to the new employer. This letter does not need to be adversarial but is intended to put the new employer "on notice" that the new employer must not use confidential information disclosed to it.

One of the best ways to protect confidential information is with a "confidential stamp" which is placed on each electronic or hard copy of a document. It is preferable that this stamp appears on each page. Many companies simply stamp "confidential" but the stamp is more effective if it includes the name of the owner of the confidential information, states that copying is not permitted without the express or consent of the owner, and confirms that the document and all copies of the document are the sole property of the owner.

It is common practice today for businesses to exchange confidential information in order to further the negotiation of a business deal. It is a typical practice that "standard form" non-disclosure or confidentiality agreements are signed. However, the fine print should be reviewed.

Some agreements require that confidential information, which is disclosed orally, must be confirmed in writing within a certain number of days. If it is not feasible to comply with this obligation, the agreement should be amended.

Kroman advises that "when a company discloses confidential information to a third party, the company should maintain a file which contains proof of the delivery of the confidential information including an exact copy of all information disclosed, the date of the delivery, and the identity of the recipient. The cover letter should list the enclosures and highlight the confidential nature of the information."

On the whole, it is important for a company to recognize that protecting confidential information is not simply a matter of adopting a "cookie cutter" approach. A protection plan should be customized to reflect the type of information and the commercial realities of the business.

Unfortunately, many companies do not focus upon a plan until after it is too late.

Mark Borkowski is president of Mercantile Mergers & Acquisitions Company. He can be contacted at mark@mercantilema.com.

Ralph Kroman is a lawyer with WeirFoulds, LLP. He can be contacted at rkroman@weirfoulds.com.