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Two parties convicted for breach of the Trade Secrets Act

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Legal news
calendar 6 March 2020
globus Sweden

An employee’s disclosure of the employer’s customer database to a competing business during his employment constituted a breach of the Trade Secrets Act and the duty of loyalty. The subsequent usage of the customer database in the competing business was considered a separate breach of the Trade Secrets Act by the competing business.

For approximately 20 years, a company (Company A) had conducted business in chemical management administration. As part of the business, the company provided a digital chemical management system to a large customer base. In the spring of 2015, another company (Company B) was founded, whose business, like Company A’s, involves providing a digital chemical management system. During the summer and autumn of 2015, three of Company A’s employees started working or otherwise becoming involved in Company B’s operations. In the autumn of 2015, one of them resigned and became CEO of Company B. Shortly before he left Company A, he sent Company A’s customer database with names and price information etc. to Company B.

In the light of the above, Company A brought an action against a total of eight parties, including the three ex-employees as well as Company B, and claimed damages for violation of the Trade Secrets Act. In support of its action, Company A argued that the defendants had used the company’s trade secrets to quickly and inexpensively build up a competing business. This had been made possible by the three ex-employees who, through their employment with Company A, had had access to the chemical management system and the company’s customer database. The two who started working at Company B had together with the founders of Company B created a similar IT system, which Company B thereafter sold with the help of Company A’s customer database.

The defendants opposed liability for damages and claimed regarding the chemical management system that the information had already been disclosed to such a wide circle that it could not be considered a trade secret. Regarding the customer database, the ex-employees claimed that they had not accessed the information under such circumstances that they should have realized that they were not allowed to disclose it. Company B claimed that the company had not had access to the information in question and had not used it knowing that the information was obtained in violation of the Trade Secrets Act.

Bad faith by both the ex-employee and the competing business resulted in two separate liabilities

The Labor Court found that the structure and functionality of the chemical management system did not constitute a trade secret, since Company A’s customers who had full access to the system also had access to said information. Thus, building a similar system based on this information does not constitute a misappropriation of any trade secrets. Regarding the customer database, the Labor Court found that it had been kept secret in such a way that it constituted a trade secret. By consciously emailing the customer database to Company B, which the employee must have realized that he was not allowed to disclose, he violated the Trade Secrets Act.

By engaging in a competing business, which also explicitly was against his employment agreement, he had also violated the duty of loyalty. He was therefore liable for damages to Company A. Despite that he acted in Company B’s services when emailing the customer database from Company A, there were particular reasons for personal liability for damages. Since the same person was the CEO of Company B and involved in the company’s business, Company B had to have been aware of that the customer database had been misappropriated in violation of the Trade Secrets Act. It was also proven that Company B had contacted around 30 companies in the customer database. Therefore, Company B was also held liable for damages towards Company A.

IUNO’s opinion

This case is a clear example of the importance of that companies ensure through contracts, policies, and training that their employees, both during their employment and afterwards, understand the duties of confidentiality and the restriction from disclosing company secrets.

A common misunderstanding is that the employees are restricted from contacting any customers or using any know how from their previous employer after the termination of an employment, which is not completely true. The Trade Secrets Act only restricts the use of trade secrets, and – if the employment has terminated - only if there are particular reasons, which is a very high requirement.

Furthermore, the duty not to contact customers or engage in competing activities ceases when the employment terminates. It is therefore important to consider the use of non-solicitation and non-competition clauses when recruiting and promoting key employees in the company, as such clauses will more effectively protect the company from unfair competition.

[Labor Court Judgement no. 11/2020]

For approximately 20 years, a company (Company A) had conducted business in chemical management administration. As part of the business, the company provided a digital chemical management system to a large customer base. In the spring of 2015, another company (Company B) was founded, whose business, like Company A’s, involves providing a digital chemical management system. During the summer and autumn of 2015, three of Company A’s employees started working or otherwise becoming involved in Company B’s operations. In the autumn of 2015, one of them resigned and became CEO of Company B. Shortly before he left Company A, he sent Company A’s customer database with names and price information etc. to Company B.

In the light of the above, Company A brought an action against a total of eight parties, including the three ex-employees as well as Company B, and claimed damages for violation of the Trade Secrets Act. In support of its action, Company A argued that the defendants had used the company’s trade secrets to quickly and inexpensively build up a competing business. This had been made possible by the three ex-employees who, through their employment with Company A, had had access to the chemical management system and the company’s customer database. The two who started working at Company B had together with the founders of Company B created a similar IT system, which Company B thereafter sold with the help of Company A’s customer database.

The defendants opposed liability for damages and claimed regarding the chemical management system that the information had already been disclosed to such a wide circle that it could not be considered a trade secret. Regarding the customer database, the ex-employees claimed that they had not accessed the information under such circumstances that they should have realized that they were not allowed to disclose it. Company B claimed that the company had not had access to the information in question and had not used it knowing that the information was obtained in violation of the Trade Secrets Act.

Bad faith by both the ex-employee and the competing business resulted in two separate liabilities

The Labor Court found that the structure and functionality of the chemical management system did not constitute a trade secret, since Company A’s customers who had full access to the system also had access to said information. Thus, building a similar system based on this information does not constitute a misappropriation of any trade secrets. Regarding the customer database, the Labor Court found that it had been kept secret in such a way that it constituted a trade secret. By consciously emailing the customer database to Company B, which the employee must have realized that he was not allowed to disclose, he violated the Trade Secrets Act.

By engaging in a competing business, which also explicitly was against his employment agreement, he had also violated the duty of loyalty. He was therefore liable for damages to Company A. Despite that he acted in Company B’s services when emailing the customer database from Company A, there were particular reasons for personal liability for damages. Since the same person was the CEO of Company B and involved in the company’s business, Company B had to have been aware of that the customer database had been misappropriated in violation of the Trade Secrets Act. It was also proven that Company B had contacted around 30 companies in the customer database. Therefore, Company B was also held liable for damages towards Company A.

IUNO’s opinion

This case is a clear example of the importance of that companies ensure through contracts, policies, and training that their employees, both during their employment and afterwards, understand the duties of confidentiality and the restriction from disclosing company secrets.

A common misunderstanding is that the employees are restricted from contacting any customers or using any know how from their previous employer after the termination of an employment, which is not completely true. The Trade Secrets Act only restricts the use of trade secrets, and – if the employment has terminated - only if there are particular reasons, which is a very high requirement.

Furthermore, the duty not to contact customers or engage in competing activities ceases when the employment terminates. It is therefore important to consider the use of non-solicitation and non-competition clauses when recruiting and promoting key employees in the company, as such clauses will more effectively protect the company from unfair competition.

[Labor Court Judgement no. 11/2020]

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Anders

Etgen Reitz

Partner

Franziska

Brüggemann

Associate

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