Did you know that intangible assets typically account for more than 80% of the value of most businesses? Despite this fact, they remain hidden for many companies because they are not identified and managed properly.

A failure to identify and manage intangible assets often flows from two situations. Firstly, it can arise from a lack of understanding of how these assets form and their associated value. Secondly, the lack of awareness around intangible assets may come down to the cost of identifying and managing intangible assets relative to their perceived value. In these two situations, intangible assets tend to have a more fluid construct, making misappropriation easier by employees or third parties. Even if an entity makes efforts to identify and securely manage its intangible assets, they can still be lost.

Irrespective of why intangible assets are not identified and managed, the identification process for intangible assets, such as confidential information, tend to occur once these assets are lost. A common example of this occurring is unauthorised access by former employees.

Generally speaking, intangible assets can be protected in two steps:

  1. Proper management, including personnel access controls and security systems.
  2. Contractual obligations for employees and third parties.

Proactively addressing step 1 helps to minimise the chance of confidential information being lost in the first place. Step 2 provides remedies should the first step fail and confidential information be lost. For companies that do not undertake step 1, step 2 may provide backstop protection. Accordingly, it is important to have clear contracts with employees, contractors, and any other third parties who may be privy to a company’s confidential information. It’s important to note that on balance, it tends to be more costly to rely only on step 2 as a protection mechanism because the costs to prove employees and third parties breached their contractual obligations can be significant.

Even in the absence of well-defined contractual obligations, avenues may exist for a company to pursue former employees and contractors for damages for misuse of confidential information. A recent example of this was in the case of Verix Pty Ltd v Williams [2021] FCA 748 which reminds us that employees have statutory and common law obligations to their employers – especially for an employer’s confidential information. Further, the more senior the employee’s position, the more likely fiduciary responsibilities apply.

Although the pursuit of ex-employees for misuse of confidential information in the absence of explicit contractual obligations is possible, it’s not necessarily straightforward. By having adequately written employment contracts and contractor agreements, you can help simplify the enforcement of these contracts and agreements, thereby reducing legal costs.

For companies, Verix Pty Ltd v Williams is encouraging. It shows the Court’s inclination to acknowledge and enforce explicit or implicit contractual obligation on employees and third parties regarding confidential information. However, employees and contractors need to understand their contractual obligations, both during and after employment or engagement.

As mentioned above, the costs to pursue workers for misuse of confidential information can be significant. That is why we always suggest that a company first identify and manage its intangible assets. After all, if it can’t be misused, you don’t have to worry about misuse consequences. In addition, having proper identification and management systems in place may also make it easier to de-risk these assets, such as through IP insurance.

If you would like to know more about intangible asset identification and management, please get in contact.

The above is designed and intended to provide general information, and does not constitute legal advice, is not intended to be a substitute for legal advice and should not be relied upon as such.