In this article, Nur Najehah Jalaldin examines a company’s right to protection of trade secrets in Malaysia and the options available to it if its trade secrets are being divulged by its employees.
Introduction
Have you ever taken a sip of your favourite beverage and wondered how it was made? Take Coca-Cola for example – it is a unique and refreshing beverage which has become so well-known, yet little is known about how exactly it was made. It is precisely for that reason that the Coca-Cola Company is now a successful billion-dollar company.
However, it is not just the recipe that the Coca-Cola Company keeps secret, there is other information it keeps confidential that has helped maintain its edge over its competitors thus far. Such information, be it the recipe for its beverages, its sales strategies, list of suppliers and clients, or certain processes within the company, is commonly known as trade secrets.
So, how does the Coca-Cola Company protect its trade secrets? Can other companies do the same and to what extent can they do so?
What are trade secrets?
The World Intellectual Property Organization defines trade secrets as any confidential business information (for example, commercial information, such as sales methods, distribution methods, consumer profiles, advertising strategies, list of suppliers and clients and technical information such as information concerning manufacturing processes.) of significant commercial value to businesses and which provide an enterprise a competitive edge.
Article 39 of the Agreement on Trade-Related Aspects of Intellectual Property Rights defines a trade secret as information that:
• must not be accessible to the public;
• must offer real and/or potential benefits to the company in question; and • is subject to reasonable measures by its rightful owner to ensure the confidentiality of the information itself.
In Malaysia, there is no statutory definition of “trade secret”. The Malaysian courts have thus far relied on case law definitions in English cases and applied common law definitions in dealing with cases involving trade secrets and confidential information in employment disputes; one such dispute arose in the case of Faccenda Chicken Ltd v Fowler[1].
In Faccenda, a distinction was drawn between trade secrets and “mere” confidential information. It was held that in order to determine whether a particular item of information was a trade secret it was necessary to consider all the circumstances of the case including:
• the nature of the employment;
• the nature of the information;
• whether the employer impressed on the employee the confidentiality of the information; and
• whether the relevant information can easily be isolated from other information which the employee is free to use or disclose.
Is there a specific law protecting trade secrets?
In Malaysia, trade secrets and confidential information are protected by the common law tort of breach of confidential information and/or by contract. The three elements to be established to succeed in an action for breach of confidence are:
• the information sought to be protected has the necessary quality of confidence;
• the information was communicated in circumstances importing an obligation of confidence; and
• there must be unauthorised use of that information to the detriment of the party communicating it.
While there is no specific legislation that protects “trade secrets” per se, there are certain provisions that protect business information in different statutes. The Capital Market and Services Act 2007 (“CMSA”) refers to the protection of company information in a specific circumstance, that is, insider trading; the Companies Act 2016 (“CA 2016”) imposes a duty on directors as well as employees not to misuse company information during their tenure or employment in the company.
CMSA 2007
The CMSA is a statute that regulates capital markets in Malaysia. The CMSA creates an offence of insider trading, which requires employees to maintain the secrecy of defined non-public information that would tend to have a material effect on the price or value of securities of the employer company.
Pursuant to section 188, any person who has access to price sensitive information that is not generally available is prohibited from utilising such information in connection with the sale or purchase of securities of the company or from directly or indirectly disclosing it to any other person for the purpose mentioned earlier. Any individual found guilty of an offence may be subject to imprisonment for a term not exceeding 10 years and fine not less than RM1 million.
CA 2016
A duty of loyalty or fidelity on an employee originates from the common law and is embodied in statutory provisions, particularly the CA 2016. The CA 2016, in setting out directors’ duties under section 218(1) of the CA 2016, states that:
“A director or officer of a company shall not, without the consent or ratification of a general meeting-
…(b) use any information acquired by virtue of his position as a director or officer of the company … to gain directly or indirectly, a benefit for himself or any other person, or cause detriment to the company.”
The above extract states a director or officer of a corporation is not permitted to use corporate information for personal advantage or benefit or to divulge such information to third parties unless such use or disclosure was approved in a general meeting.
According to the CA 2016, the term “director” includes the chief executive officer, chief operational officer and any other individual who has primary responsibility for the management of the organisation. Any “director” found to have contravened section 218 shall, upon conviction, be subject to imprisonment for a term not exceeding five years or a fine not exceeding RM3 million or both.
Does an employer have any option besides what is referenced above to prevent employees from stealing its trade secrets?
Yes, companies or employers typically enter an employment contract and they can
include a clause or provision in the employment contract that prohibits the misuse or
disclosure of the company’s information.
In Ecooils Sdn Bhd v Raghunath Ramaiah Kandikeri[2], the manager of the company’s
Engineering and Project Services department was found to have breached his terms of employment by misusing and disclosing to third parties confidential information of the
company, ie, its trade secrets. In determining whether the employee breached the duty of confidentiality, the Court had to consider whether the confidentiality clause in his contract of appointment imposed a duty of fidelity and confidence.
The High Court ruled in this case that the confidentiality clause in the employee’s contract of appointment imposed an express obligation of faithfulness on him. According to the Court, “this specific obligation of faithfulness imposed by the letter of appointment is over and beyond his implied duty to act toward his employer in good faith”.
The question then arises as to whether this duty of fidelity only subsists during the term of the employment or after such employment has ended. The Court in the case of Schmidt Scientific Sdn Bhd v Ong Han Suan[3] considered this point and held that such a duty subsists even after the term of employment has ended.
This was further affirmed in the case of Dynacast (Melaka) Sdn Bhd v Vision Cast Sdn Bhd[4] (“Dynacast”) when the Federal Court upheld the decision in Svenson Hair Center Sdn Bhd v Irene Chin Zee Ling[5], which ruled that the protection of confidential information did not have a time limit and that whether the confidentiality could be for a specific period or perpetual would depend on the terms of the agreed contractual obligation. As such, non-disclosure agreements or confidentiality clauses may be drafted in a way that an employee is perpetually bound by his obligations of confidentiality even after his employment ceases.
In essence, what amounts to trade secrets would be dependent on the specific facts and circumstances of each case; once that information is classified as a trade secret by the Court, an employee owes his employer a duty of fidelity and good faith to maintain the confidentiality of such information while he is employed. Such a duty extends beyond the cessation of the employment relationship, as former employees are prohibited from using confidential information obtained during employment for their own or someone else’s use without the consent of the former employer.
Would such confidentiality clauses be void for being in restraint of trade?
Section 28 of the Contracts Act 1950 sets out that any clause which is in restraint of trade shall be void. There are, however, three exceptions to the general rule of restraint of trade under that section, namely:
• where a party who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer or any person deriving title to the goodwill from him carries on a like business therein;
• where partners may upon or in anticipation of a dissolution of the partnership, agree that some or all of them will not carry on a business similar to that of the partnership within such local limits that are reasonable, having regard to the nature of the business; and
• where partners may agree that someone or all of them will not carry on any business, other than that of the partnership, during the continuance of the partnership.
In addition, section 28 does not prohibit an employer from requiring his employee to provide his services on an exclusive basis during the employment contract.
The High Court in Polygram Records Sdn Bhd v The Search[6] held that section 28 is only applicable in cases where a person is restrained from carrying on his/her trade or profession in the traditional sense of the doctrine, that is, in the post-contract period and not while the contract is still in effect.
While the employee’s right to practise his skills and expertise after termination of contract or resignation is guaranteed, the law also confers reasonable protection to the employer’s legitimate business interest in the form of any trade secrets or confidential information which the employee may have access to during their tenure of employment.
Such obligation may be express or implied and they are bound not to disclose or exploit such information even if the employment contract is silent on this matter. The prohibition is strict such that the protection is conferred with no time limits as discussed above in the Federal Court case of Dynacast.
Further, the Federal Court in Dynacast warned of the harmful effects of the potential abuse of the doctrine of confidential information by employers if there is no clear case before its invocation. The Federal Court quoted Scott J in Balston Ltd v Headline Filters Ltd[7]:
“The use of confidential information restrictions in order to fetter the ability of these employees to use their skills and experience after determination of their employment to compete with their ex-employer is, in my view, potentially harmful. It would be capable of imposing a new form of servitude or serfdom, to use Cumming-Bruce LJS words, on technologically qualified employees. It would render them unable in practice to leave their employment for want of an ability to use their skills and experience after leaving. Employers who want to impose fetters of this sort on their employees ought in my view to be expected to do so by express covenant. The reasonableness of the covenant can then be subjected to the rigorous attention to which all employee covenants in restraint of trade are subject. In the absence of an express covenant, the ability of an ex-employee to compete can be restricted by means of an implied term against use of disclosure of trade secrets. But the case must, in my view, be a clear one. An employee does not have the chance to reject an implied term. It is formulated and imposed on him subsequently to his initial entry into employment. To fetter his freedom to compete by means of an implied term can only be justified, in my view, by a very clear case. The present is, to my mind, a long way from that.”
The former employer in the Dynacast claimed that confidentiality clauses had been breached by the former employee respondent. The Federal Court dismissed the claim on account of vague and insufficient pleadings as well as evidential inadequacies and held that the employer should have specified the particulars of the alleged misappropriation of the confidential information.
Based on the Federal Court decision in Dynacast, it is fair to conclude when handling confidentiality obligations, companies and/or employers must consider the following factors:
• although a clause that restraints an employee from disclosing or exposing confidential information or trade secrets of the company upon termination of his employment contract has been held to be enforceable as a matter of principle, the scope of an employee’s confidentiality obligations are heavily dependent on the terms of the agreed contractual obligations;
• In a claim for breach of confidentiality, employers must be able to identify and specify the confidential information allegedly misappropriated or misuse; and
• if a former employee establishes a competing business, the former employer
must assess whether the former employee abused confidential information and
the sufficiency of evidence to that effect.
What can you do if an ex-employee is discovered to have breached the confidentiality clause/ agreement?
There are various remedies available following a breach of confidentiality. An injunction is typically used to prevent former employees from exploiting trade secrets acquired in the course of their former employment.
In reference to Dynacast, Hamid Sultan JCA in the Court of Appeal case Ganesh Raja a/l
Nagaiah v NR Rubber Industries Sdn Bhd[8] stated that the courts, whether considering a claim in contract or in equity relating to confidential information, will place emphasis on the nature of information whereby such information will only be protected if it could properly be classed as a trade secret or as material which, while not properly to be described as a trade secret, is in all the circumstances of such a highly confidential nature as to require the same protection as a trade secret eo nomine[9].
Conclusion
The best tool to effectively protect trade secrets is a robust employment contract where the nature of the trade secrets and confidential information is clearly spelt out. That will reduce the risk of disputes as to whether the information misused by the employee is in fact confidential or not. The common law right to confidentiality and the various statutory provisions referenced above are often insufficient to provide quick and effective relief for the employer by way of injunctive relief to immediately restrict the access to and use of confidential information. This is important as once the information is made available publicly, the confidentiality is lost forever.
For further information, please contact:
Sivabalah Nadarajah, Partner,Shearn Delamore & Co.
sivabalah@shearndelamore.com
1.[1987] Ch. 117.
2.[2014] 7 MLJ 309.
3.[1997] 5 MLJ 632.
4.[2016] 6 CLJ 176.
5.[2008] 8 CLJ 386.
6.[1994] 3 MLJ 127.
7.[1987] FSR 330.
8.[2017] 2 MLJ 396.
9.Eo nomine means an item is “identified by name”.
