Trade secrets in the workplace

Trade secrets in the workplace

Yair Aloni, Adv.
August 31, 2016

Many employers have their employees sign employment agreements that include strict stipulations regarding the maintaining of the confidentiality of information received by the employee during employment with the employer and prohibit any use of such information after the termination of employment. However, many employees wish to make use of skills, knowledge and experience acquired in connection with the previous workplace in the new workplace, sometimes even in competition with the former employer. Where does one draw the line between fair competition and misappropriation of a trade secret and breach of fiduciary obligations to the previous employer?

Labor courts have more than once held that an employee may use for personal benefit personal skills and knowledge acquired in connection with the work and even compete with the former employer after termination of employment. However, all provided that the employers’ confidential information will not be usurped by the employee and without any breach of fiduciary duty or breach of the duty to act in good faith.

The Israeli Commercial Torts Law defines "Trade secret" as any business information of any kind that is not generally known and may not easily be legally gathered by others, the secrecy of which gives its owner an advantage over competitors and the owner of which takes reasonable measures to protect its confidentiality. The Israeli Commercial Torts Law provides for compensations without proof of damage in the event of unlawful use of a trade secret, which may reach up to ILS 100,000. The law also provides for preventive orders and other reliefs. However, Courts are less than hasty in awarding high compensation or other remedies without proof of actual damage.

An employer may sue an employee who unlawfully used a trade secret, such as price lists, customer lists, know-how and other work methods and “secrets” of similar nature. Courts have held that it is not sufficient to point in a general description the existence of 'secret' but one need prove that such information is not freely accessible to the public and consists of information gathering of which requires investment of effort, time and funds (e.g. a list of customers with commercial information in relation to each client such as discounts, special payment terms, special trade arrangements, etc.). The Courts held that the employer need show that reasonable measures were taken to ensure the confidentiality of the trade secret. It is generally noted that on June 8, 2016 the European Parliament issued a new directive concerning the protection of trade secrets which comprises arrangements similar to those existing in Israel.

We note, however, in a case discussed in the National Labor Court it was held that the fact that a contact list of customers has not been saved in a "safe" and the employee could have reached it by logging into a workplace computer does not constitute an indication that the customers list has no commercial value worthy of protection.

It is important to note that an employment agreement with extreme limitations on use of any information or knowledge gathered while working or with a high liquidated damages in case of breach of the employment agreement will not necessarily be enforced by the Courts. Thus, although it is important to set protection of trade secrets in employment agreements it is important to formulate an enforceable agreement using a lawyer knowledgeable in the field. In case there is concern that an employee breached fiduciary duties it is advised to promptly consult with a lawyer knowledgeable in the field to examine the proper manner of action for minimizing the damage.