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Protecting Knowledge Capital

Imagine the scenario: You hired a brilliant computer whiz to customise a commercial database and interfaces with your customers. The idea was to deliver a smarter system and better services. The whiz wanted to be a contractor not an employee… only to drop her contract with you for the same job with your closest competitor. You suspect she’ll use the ideas you paid her good money to develop. How did this happen? What can you do?

Lawyer, Toni Sherlock plots the pitfalls and the remedies…

In today’s economy knowledge clearly counts and it’s going to count more and more. Organisations are increasingly realising the value of information and ‘knowledge capital’ in obtaining a competitive advantage in the marketplace.

So how do businesses ensure they get the most out of the information and technology resources they have, and at the same time protect those resources from detrimental use and disclosure?

What is 'Knowledge Capital'?

There are different categories of knowledge capital. These range from exclusive patents and designs to ‘trade secrets’ like formulas and secret recipes, and include other less sensitive kinds of confidential information. At the bottom of the spectrum are the generalised ‘know-how’, systems and collations of information which assist in the day to day running of a business.

Businesses need to find ways to ‘own’ this brainpower even though they can’t actually own people. They need to adopt methods to protect that asset if it is put at risk.

Managing Confidential Information

If a company becomes aware that a former employee is using or disclosing to its detriment information the company regards as confidential, it will want to take some action. There is a range of legal options in this regard. But the number one defence to any action like this is that the information is not in fact confidential and is already within the public domain.

Companies that want to protect their confidential information and trade secrets must themselves act in a way that reflects the sensitivity of those assets. For example, it is a good idea to send periodic reminders, reiterating to users the proprietary nature of the company’s information. IBM Global Service Consulting Group ensures each new employee signs a conduct agreement spelling out the intricacies of the knowledge base (do’s and don’ts) and periodically a screen pops up over the knowledge application to remind users of the proprietary nature of the information.

Documents should be kept under lock and key physically and electronically if they need that sort of protection. Any information the company distributes should be marked with applicable proprietary and/or confidentiality notices.

Finally, conduct carefully documented exit interviews for every departing employee in which the company can reiterate its claims to proprietary information.

Legal Protection Measures

No matter how comprehensive a business’ information and human resource management systems are, there are important protections which can only be achieved through more formal legal techniques.

Ownership/Control of Intellectual Property

The legal measures available to regulate the ownership or control of an item of intellectual property depend on what type of intellectual property it is.

If the item is an original work covered by the Copyright Act (such as an original computer program, table, compilation, recording, plan, picture or script), the Act prescribes ownership. For important items of intellectual property, it is worth checking whether or not you are the copyright owner under the Act. For example, you may have assumed that you would own the copyright in all the programs created by the your computer whiz while they were contracted to you. But, that may not be the case if they created programs in the course of the engagement which you have not specifically commissioned or paid them to produce. To cover that scenario you would need to get the contractor’s agreement to assign to you the copyright and future copyright in anything they work on during the engagement.

If the item of intellectual property is simply information the business regards as confidential, there is no statutory framework for its ownership or control. If you can show that your confidential information is so sensitive it amounts to a trade secret, the Courts will agree that others must not use or disclose that information without your authority. It is harder to enforce rights over less sensitive material. But you can significantly improve your chances by getting good documentation in place.

Non-Disclosure Agreements/Confidentiality Clauses

The first and most crucial step is to ensure every employee, consultant and contractor signs an appropriate non-disclosure agreement (NDA). For employees, this will typically be covered by confidentiality clauses within the employment agreement.

The NDA should define as precisely as possible the information or data which is to be treated as confidential. It should prohibit use or disclosure of confidential information except for agreed purposes and in an agreed way.

Often, the real value of NDAs is their potential to discourage employees or third parties from acting in breach of a legally binding agreement which they have signed. But if a breach does occur, an NDA can also be the basis for action preventing any further or on-going breach. There is also the option of including within the NDA a liquidated damages clause. This specifies the amount which the parties agree is payable in case of breach based on a realistic estimate of the potential damage which might be incurred.

Restraints of Trade

Restraints of trade limit the post-employment activities of a worker. The Courts will not enforce a restraint of trade unless it is no more restrictive than is reasonably necessary to protect the employer’s legitimate business interests. The reason is that Courts are reluctant to stop employees from earning a livelihood by using their skills and knowledge.

An employer clearly has an interest in its relationships with clients. So a restraint which prevents an employee who deals closely with the employer’s clients from trying to persuade them to follow the employee is likely to be upheld. It will need to be reasonable in the scope of activities it restricts, the area in which it applies and its duration. Essentially, a restraint should be designed to give the employer a reasonable time to take steps to regroup and re-forge ties with its clients following an employee’s departure. This is so that the departing employee cannot take unfair advantage of the relationship they have developed with clients while acting on behalf of the employer.

Garden Leave

Another way of restricting a departing employee’s activities is to have an extended notice period (say 3 months) and to put them on ‘garden leave’ during that period before the employment ends. The employee can be required to remain away from the workplace, or to carry out different or reduced duties during the garden leave period. But they are still employed by the employer so their employment obligations prevent them from going to work for a competitor, or acting in any other way which conflicts with the employer’s interests.

Naturally, the employer will have to keep paying the employee during a period of garden leave. But, unlike a restraint of trade clause, there is little scope to challenge a properly drafted garden leave clause. So this can be an effective way for the employer to get the breathing space it needs to minimise the damage a departing employee may do. Correct drafting is important as Courts may decline to allow employers to take an employee out of their ‘industry marketplace’ if doing that would damage their reputation, ability to keep up to date, and thus employability.


There are a number of steps an organisation can take to manage and protect their knowledge capital. These range from the implementation of basic, practical systems and procedures to more technical, legal measures. Focussing on these issues is crucial for any business that wants to maintain and enhance their competitive edge in a knowledge economy.

This article was written for HRINZ publication by Toni Sherlock, who is a senior associate with the employment team at Phillips Fox Auckland, contacted at 09 303 2019 and


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Disclaimer: This information has been written for and submitted to HRINZ for publication and has been published in good faith for the general information of HRINZ Members of the Institute. HRINZ accepts no legal responsibility for the contents of the Knowledge Base and appropriate professional advice and assistance should be sought in particular cases.

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