The importance of securing confidential information in the course of conducting a business cannot be underestimated, particularly when dealing with commercially sensitive information. There are many circumstances in which the issue of confidential information may arise; for example, you might be contemplating selling shares in your business or partnering with someone, but you are concerned about disclosing trade secrets or other confidential business information. What happens if you don't reach an agreement and you have disclosed confidential information during negotiations?
It goes without saying that there are many reasons why businesses are concerned about protecting confidential information.
Confidentiality obligations can be imposed either contractually or pursuant to an equitable duty of confidence.
For information to remain confidential, the recipient must be subject to a confidentiality obligation and the information must be shared on the understanding that it is being shared in confidence and in circumstances that import an obligation of confidence.
This article will discuss contractual and equitable confidentiality obligations and the remedies for breach of such obligations.
Contractual confidentiality obligations
Obligations of confidentiality may arise from the terms of a contract.
Those obligations can be expressly stipulated or can be implied into the contract.
Implied obligations may arise from the nature of the relationship between the two or more parties, or from the circumstances in which the confidential information was disclosed. Implied obligations are often seen in an employment context. An implied obligation may apply on its own or may expand on an express term of confidentiality already stipulated in the contract. The tests for implication of an implied term will need to be satisfied in order for there to exist an implied duty of confidentiality.
A confidentiality agreement allows the parties to define the scope of the confidential information and control what the other party or parties may do with that information.
If a party to a contract breaches a confidentiality provision by misusing the confidential information, the party whose information was disclosed may be able to pursue a breach of contract claim.
Examples of contractual confidentiality agreements
- A confidentiality agreement between an employer and employee that imposes an obligation on the employee not to disclose confidential business information to third parties.
- A confidentiality agreement setting out that the employee may only use the company's trade secrets whilst employed by the company and not after they leave the company.
- A confidentiality agreement between a buyer and seller in a business sale transaction that imposes an obligation on the buyer not to disclose confidential information about the seller's business to third parties.
- A confidentiality agreement imposing an obligation on a party to a settlement agreement not to share details of the settlement.
When drafting a confidentiality clause, it is wise to define the "confidential information" adequately. It is important to give careful consideration to what it is that you are seeking to protect to ensure that the definition of confidential information adequately covers this.
The obligation (which imposes restrictions on disclosure) should also be clearly expressed, and you should consider whether to specify the duration of the obligation, for example, until the information enters the public domain.
An agreement may also set out the consequences for a breach of a confidentiality provision (however, this must, for example, adequately reflect the damage suffered; a penalty is not enforceable). Further if damages are inadequate, then an injunction seeking to restrain the breach may be the appropriate solution.
Equitable confidentiality obligations
Where you don't have a contractual obligation of confidentiality (whether express or implied), you may still be able to rely on an equitable obligation of confidentiality. Such an obligation can arise even if there is no written contract between the parties.
In 1984, the High Court of Australia recognised an obligation of confidentiality arising from principles of equity. In Moorgate Tobacco Co. Limited v. Philip Morris Limited and Another (1984) 156 CLR 415, the court held:
"It is unnecessary, for the purposes of the present appeal, to attempt to define the precise scope of the equitable jurisdiction to grant relief against an actual or threatened abuse of confidential information not involving any tort or any breach of some express or implied contractual provision, some wider fiduciary duty or some copyright or trademark right. A general equitable jurisdiction to grant such relief has long been asserted and should, in my view, now be accepted. Like most heads of exclusive equitable jurisdiction, its rational basis does not lie in proprietary rights. It lies in the notion of an obligation of conscience arising from the circumstances in or through which the information was communicated or obtained."
The confidentiality obligation found in equity, may be a useful alternative where contractual obligations are vague or too narrow, or where parties did not comprehend at the beginning of their relationship what information would be confidential.
In Smith Kline and French Laboratories (Australia) Limited [1990] FCA 206, the Federal Court set out the requirements for establishing an equitable obligation of confidence:
"A general formulation apt for the present case of an equitable obligation of confidence has four elements:
- the plaintiff must be able to identify with specificity, and not merely in global terms, that which is said to be the information in question, and must be able to show that;
- the information has the necessary quality of confidentiality (and is not, for example, common or public knowledge);
- the information was received by the defendant in such circumstances as to import an obligation of confidence; and
- there is actual or threatened misuse of that information without the consent of the plaintiff."
So, to rely on an equitable obligation of confidence, you will typically need to prove the following elements:
- that the information can be precisely identified;
- that the information has a quality of confidentiality;
- that the circumstances in which it was received imported an obligation of confidence; and
- that there is an actual or threatened misuse or disclosure of that information.
Examples of equitable confidentiality obligations
Examples may include:
- A customer supplies confidential information about their business to explain their needs to a supplier. There may be an equitable duty on the supplier not to disclose that information to a third party.
- A patient supplies confidential health information to their doctor - the doctor has an equitable duty of confidentiality.
- A consultant engaged to provide advice on a confidential project may have a duty not to disclose project information to a third party.
Proving an equitable obligation is more challenging than relying on a contract, and protection is less certain.
What are your remedies if someone breaches their obligation of confidentiality?
If there is a contractual breach of a confidential obligation, the information specified in the contract is protected, and your remedies depend on the terms of the contract.
Common remedies include:
An injunction
You may prevent the other party from continuing to misuse your confidential information by obtaining an injunction against the other party (whether an interlocutory injunction or a final injunction). This remedy is particularly effective if you are aware of an anticipatory breach. As the other party has yet to disclose the information, an injunction is an effective way to protect yourself against an anticipated disclosure of confidential information.
The principles required to succeed with an injunction application were re-iterated in Howden Australia Pty Ltd v Minetek Pty Ltd [2019] FCA 981, where the court, referring to Samsung Electronics Co. Limited v Apple Inc, restated the following:
"In order to secure such an injunction, the plaintiff must show (1) that there is a serious question to be tried or that the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief; (2) that he will suffer irreparable injury for which damages will not be an adequate compensation unless an injunction is granted; and (3) that the balance of convenience favours the granting of an injunction".
In Howden, the injunction was denied because, amongst other reasons, the confidential information was not precisely identified.
Damages
If you can prove that you suffered damages because of an actual breach, you may be entitled to monetary compensation for the damages you suffered.
For a breach of confidence in equity you may also be able to seek an injunction, but other remedies can include an account of profits or equitable compensation.
Account of profits
In some cases, the party that suffered the breach may be entitled to an account of profits, meaning the other party must account for and pay over any profits that they made due to the breach.
In Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited [2018] HCA 43, an ex-employee and his new employer were ordered to pay the owner of the information the entire capital value of their new business based on an account of profits.
Equitable compensation
Equitable compensation is based on the fact the obligation was breached; there is no need to prove monetary loss.
In Giller v Procopets [2008] VSCA 236, the court held on appeal that a plaintiff could receive compensation for the distress caused by a breach of confidence in equity. The case involved compensation for distress caused by the unauthorised showing of a private sex tape.
After considering developments in Australian and international law, the court held that there was no reason why the appellant should not be able to recover damages for the distress caused by this type of breach of confidence and awarded her $40,000 in damages.
Takeaways
What we can distil from the case law is that specificity is important; it is essential to the enforcement of confidentiality obligations that:
- the obligation of confidentiality is clearly drafted and is sufficient to protect the confidential information in question
- confidential information is identified with certainty.
As discussed, in the absence of a contractual confidentiality provision, a duty of confidence can still arise in equity and may provide the basis for relief where there has been a breach or misuse of confidential information. However, the inclusion of a confidentiality clause in an agreement will provide greater certainty, because the parties can ensure that they adequately describe the confidential information they are seeking to protect and they can directly control or limit the circumstances in which that information may be used or disseminated.
Seek legal advice
If you are concerned about protecting your confidential information or have been accused of breaching a confidentiality obligation, you should seek legal advice as soon as possible.
If you are accused of breaching confidentiality, you might have a defence.
Defences can include that the information is public knowledge, or was not actually confidential (including for example, because it has already been disclosed without restriction to a third party), or if the accuser consented to disclosure of the knowledge.
Author - Simone Rees, Co-Founder and Principal
Contributor - Annabel Moore, Solicitor