Employment Contracts

Duty of Confidentiality

The purpose of this clause is to allow for certain information to be protected by the employer. A clause which is overly ambitious will run the risk of an adverse court finding that it is in restraint of trade and unenforceable.

Reasonable Restrictions

The Supreme Court of Canada stated in Elsley v J. G. Collins that reasonable restrictions as to the use of trade secrets, confidential information and trade connections will be upheld:

A different situation, at least in theory, obtains in the negotiation of a contract of employment where an imbalance of bargaining power may lead to oppression and a denial of the right of the employee to exploit, following termination of employment, in the public interest and in his own interest, knowledge and skills obtained during employment. Again, a distinction is made. Although blanket restraints on freedom to compete are generally held unenforceable, the courts have recognized and afforded reasonable protection to trade secrets, confidential information, and trade connections of the employer.

Context – Such as, Knowledge and Influence of Customers

To the same end is the decision of Atlam Holdings v Lazette, written by Lee J. of the Alberta Queen’s Bench in which the same latitude is given to confidentiality covenants, referring to the above Supreme Court decision:

  The courts have recognized and afforded reasonable protection to trade secrets, confidential information and trade connections of the employer. This is particularly so where an employee:

. . . might obtain such personal knowledge of and influence over the customers of his employer, or such an acquaintance with his employer’s trade secrets as would enable him, if competition were allowed, to take advantage of his employer’s trade connection or utilize information confidentially obtained.

Public Interest in the Test of Confidentiality Covenant Not The Same

The Supreme Court of British Columbia noted in 6180 Fraser Holdings Inc. v Ali that in assessing the merits of the confidential covenant, the same test as applies to the test of a restrictive covenant is not present as the public interest component does not arise:

In considering the enforcement of a restrictive covenant in an employment contract, the court must consider the public interest in limiting restraints on trade (Shafron, para. 16, Aurum, para. 14). A restriction against the use of confidential information acquired in the course of employment does not engage the same public policy considerations.

What Information May Be Confidential

The Supreme Court in Zoic Studios v Gannon, a case in which there was no contractual term in issue, nonetheless reviewed what information may be considered confidential for the purposes of the action before it. To pass the mustard of confidential information in the covenant, there must be the presence of confidence in the protected material. Russell J. stated:

The court in Foreman v. Chambers et al., 2006 BCSC 1244 (CanLII), 2006 BCSC 1244, var’d on other grounds, 2007 BCCA 409 (CanLII), 2007 BCCA 409, discussed the factors to bear in mind when considering the first element of breach of confidence - the information conveyed must be confidential - at para. 61:

[61] In Pharand Ski Corporation v. Alberta 1991 CanLII 5869 (AB QB), (1991), 80 Alta. L.R. (2d) 216 (Q.B.), Mason J. extensively canvassed the law of breach of confidence. With respect to whether information has the necessary quality of confidence to found an action for breach of confidence, he said as follows:

A list of factors to be considered to determine if the information has a quality of confidence about it ... are:

(1) the extent to which the information is known outside the owner's business

(2) the extent to which it is known by employees and others involved in the owner's business

(3) the extent of measures taken by him to guard the secrecy of the information

(4) the value of the information to him and his competitors

(5) [t]he amount of money or effort expended by him in developing the information

(6) the ease or difficulty with which the information could be properly acquired or duplicated by others [i.e. by their independent endeavours].

These factors are useful, but as Fullager, J. states in Deta Nominees [1979] V.R. 167 at p. 193 they are not exhaustive ...

[312]     On appeal, the court upheld the trial judge’s use of these factors, but noted at para. 33:

[33] ... At the same time, I do note the Court’s statement in Cadbury Schweppes to the effect that while the nature of the information may influence the appropriate remedy, the action for breach of confidence is “rooted in the relationship of confidence rather than the legal characteristics of the information confided.” ...

Trade Secrets

A preliminary hurdle is to define that which is a protected trade secret. The 1949 decision of the Ontario Court of Appeal in R.L. Crain v Ashton remains good law. The appellate court upheld the trial decision which defined a trade secret in the following terms:

1st. "A trade secret ... is a property right, and differs from a patent in that as soon as the secret is discovered, either by an examination of the product or any other honest way, the discoverer has the full right of using it. ...

2nd. "A trade secret is a plan or process, tool mechanism or compound known only to its owner and those of his employees to whom it is necessary to confide it……..

3rd. "The term 'trade secret', as usually understood, means a secret formula or process not patented, but known only to certain individuals using it in compounding some article of trade having a commercial value, and does not denote the mere privacy with which an ordinary commercial business is carried on…….

4th. "A trade secret may consist of any formula, pattern, device, or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. A trade secret is a process or device for continuous use in the operation of the business. The subject matter of a trade secret must be secret. …..

The Supreme Court of Canada in Merck Frosst Canada v Canada in its 2012 decision in interpreting the Access to Information Act referred to R.L. Crain as good law and summarized its ratio as follows:

  I turn to discuss a few of the leading authorities. One often-cited case is the decision of Chevrier J. in R. I. Crain Ltd. v. Ashton, 1949 CanLII 111 (ON SC), [1949] O.R. 303 (H.C.J.), aff’d 1949 CanLII 81 (ON CA), [1950] O.R. 62 (C.A.).  In the context of an action against a former employee to restrain disclosure of the former employer’s trade secrets, several characteristics of a trade secret are set out.  These include that it is a plan or process, tool, mechanism or compound known only to its owner and his employees to whom it is necessary to confide it and that it usually is understood to mean a secret formula or process not patented but known only to certain individuals using it in compounding some article of trade having a commercial value (pp. 308-9).

Non-Public Intellectual Property

The Ontario Court of Appeal in Martin v ConCreate agreed that the confidentiality covenant, in the context of a sale of shares, was reasonable and enforceable as it protected “non-public intellectual property”:

As I understand it, the crux of Martin’s argument on the confidentiality argument is that the prohibition in s. 2.3 of the Agreements on his use of “know-how” prevents him from using the wisdom he accumulated over his 20 some years with ConCreate for an unlimited period of time and is therefore unreasonable. I am not persuaded that this is the effect of s. 2.3. While “know-how” is not specifically defined in the Agreements, it is a type of the respondents’ non-public intellectual property (“all non-public intellectual property including trade secrets, unfiled patents....and know-how...). It is reasonable for the respondents to seek to protect their proprietary interests.

A Dynamic Process

The agreement should be careful to except information which, at the time of making of the agreement, is, or subsequently has become, part of public information.

Test is the Substance, Not the Words

It is clear that the definition of certain information as proprietary, confidential or a trade secret does not necessarily make it so. Price J. of the Ontario Superior Court in Ford v Keegan stated that the agreement which defines certain information as worthy of protection will be “closely scrutinized” to be sure that such a protection is worthy and enforceable:

  If an employer alleges that an employee’s work involved its trade secrets and confidential information, the Court will closely scrutinize the assertion.  Simply because the covenant states that a certain type of information is a trade secret or confidential will not prevent the court from examining the nature of the information to determine whether it is indeed of such a character to be considered proprietary. The mere acknowledging that something is confidential or the property of the employer does not necessarily make it so.

Know-How to be Excluded

In conducting this analysis, the court will protect the employee’s professional body of skill and experience and not allow the employer to contract such a protected benefit:

  “Know how” cannot be protected.  An employer does not have proprietary interest in an employee’s professional skill and experience, even if it was acquired by the employee while working for the employer.  In Mercury Marine Ltd. v. Dillon, a regional sales manager who left with knowledge of his former employer’s share of the market, sources of supply, costing, incentive bonus plans, and know-how concerning the dealer/customer’s requirements and preferences was held not to possess information that permitted his former employer to enjoin him by a restrictive covenant from working for a competitor.[92]

In this instance the trial judge found that the training materials given to the defendant could not qualify as a trade secret or confidential information by a contractual protection:

Training Services asserts a proprietary interest extending well beyond its customer lists and program material.  It claims a proprietary interest in Training Services’ pricing strategies, performance standards, administrative procedures, its marketing techniques, such as sending four newsletters each year to its customers, its practice of customizing program material with photographs of a customer’s premises or equipment, and even the publically available information contained in the Power Point presentations that its associates use in their training.  I am not satisfied that any of these qualify as proprietary information