Three questions about confidentiality undertakings in Sweden
Introduction
This article is the second in a series dedicated to exploring the complexities of restrictive covenants in employment agreements in Sweden. This series covers a range of topics to be considered when drafting employment agreements, with the objective of providing our readers with a comprehensive overview of the essential restrictive covenants to consider when drafting employment agreements in Sweden, highlighting specific considerations to avoid potential pitfalls.
Our aim with this second instalment in this article series is to provide a brief overview of confidentiality undertakings, emphasizing their significance and enforceability, while also highlighting the relationship with the Swedish Act on Trade Secrets (Sw. Lag (2018:558) om företagshemligheter).
In Sweden, the employment relationship entails an inherent obligation for all employees to observe loyalty towards their employer. The employee is bound by this fiduciary duty of loyalty until the employment agreement expires, which includes an obligation to observe confidentiality regarding the employer’s activities, especially regarding such matters that the employer reasonably wishes to keep confidential. However, in order to compel the employee to continue to observe the confidentiality obligation after the expiration of the employment, this must be regulated separately, usually by way of entering into a separate confidentiality undertaking. This makes confidentiality undertakings in the employment agreement of utmost importance for the employer in order to safeguard sensitive business information.
* The information should not be seen as exhaustive or advisory in specific cases.
Why are Confidentiality Undertakings Important for Employers?
During the course of employment, employees will generally have access to and gain insight into critical information related to the company’s business and operations, such as business plans, client lists, trade secrets, and other confidential details. This sensitive information is in many cases integral to the company’s success and competitive edge. Due to the sensitive nature of this information, it should not be unauthorizedly disclosed to third parties, as doing so could cause damage to the company. Given the strategic value of this information, it is essential that employees understand the importance of maintaining confidentiality throughout the duration of their employment and beyond. The preservation of this confidentiality is key to safeguarding the company’s interests and ensuring its continued success in a competitive marketplace.
The fiduciary duty of loyalty prohibits employees from using and disclosing company-specific information regarding the business and operational circumstances that the company wishes to keep confidential outside the scope of their professional duties. However, since this duty expires upon the termination of the employment agreement, it is essential for employers to have employees commit to confidentiality obligations if there is a need for the employees’ continued obligation of confidentiality past the expiry of employment.
Furthermore, confidentiality clauses play an important role in safeguarding the company’s relationships with clients and partners. Employees who interact with and build relationships with clients may have access to sensitive information about them, such as financial data, marketing strategies, or other confidential business details. Unauthorized disclosure or misuse of such information could cause significant harm, not only damaging the company’s reputation but also undermining the trust between the company and its clients. This breach could lead to lost business, legal consequences, and a long-term negative impact on the company’s ability to attract and retain clients. Consequently, confidentiality undertakings ensure that such information is used exclusively for its intended business purposes.
Moreover, the unauthorized sharing of client or partner information could also expose the company to regulatory violations, depending on the industry and jurisdiction. Confidentiality undertakings ensure that employees handle such information responsibly, using it solely for its intended business purposes and in line with legal requirements. By securing these undertakings, companies demonstrate a commitment to protecting not only their own interests but also those of their clients and partners.
In light of the above, confidentiality undertakings provide a clear framework to protect the company’s interests by safeguarding sensitive information essential for maintaining a competitive advantage. Without proper confidentiality measures, there is a risk of sensitive business information being leaked to competitors or the public, causing significant damage to the business, undermining its reputation and market position, compromising client relationships, and providing competitors with an unfair advantage. By binding employees to confidentiality even after their employment ends, these undertakings ensure that confidential information remains protected, reducing the risk of sensitive information being leaked and mitigating the risk of damage to the company’s reputation, client relationships, and overall market position, preventing the misuse of confidential knowledge, which could harm both the company and its stakeholders.
How Does the Relationship Between Confidentiality Undertakings and the Act on Trade Secrets Work?
The protection of trade secrets is an area where confidentiality clauses intersect and strengthen the protection afforded under the Act on Trade Secrets (Sw. Lag (2018:558) om företagshemligheter). This Act provides a legal framework to address the misappropriation of trade secrets, thereby enhancing the effectiveness of confidentiality undertakings by offering legal recourse in cases of violation. It defines what constitutes a trade secret and outlines the legal remedies available to companies when their trade secrets have been compromised. This includes the ability to seek injunctions, claim damages, and pursue other forms of legal relief.
Despite the protections afforded by the Act on Trade Secrets, confidentiality clauses in employment agreements remain crucial. The Act primarily deals with the legal repercussions after a breach has occurred, whereas confidentiality clauses operate as a preventive measure, reducing the likelihood of unauthorized disclosures in the first place. By clearly defining the scope of what constitutes confidential information, including not only trade secrets but also other sensitive business data, these clauses set explicit expectations for employees regarding their obligations to maintain confidentiality.
Entering into separate confidentiality agreements serves, in this sense, as a complement to the protection offered by the Act. This complementary protection is particularly important as the Act's protection after the termination of employment is very limited. Therefore, employers often need to rely on confidentiality undertakings in employment contracts to ensure continued protection, with confidentiality clauses providing more extensive protection than the Act alone. Confidentiality undertakings are also important to ensure protection under the Act, as taking reasonable measures to protect trade secrets, such as incorporating confidentiality clauses in employment agreements and implementing technical and administrative safeguards, are prerequisites for information to be classified as a trade secret and to be covered by the scope of the Act.
Further, confidentiality clauses can cover a broader range of information than what is classified under the Act on Trade Secrets. For example, certain information might not always meet the strict legal definition of a trade secret but is still critical to the company's success and needs protection from disclosure. Therefore, confidentiality clauses fill this gap by extending protection to all forms of sensitive and proprietary information.
Additionally, including confidentiality clauses in employment agreements creates a contractual obligation for employees, making it easier for employers to take swift action against breaches. This contractual obligation acts as a deterrent, as employees are made aware of the serious consequences, including potential legal action and claims for damages, that can result from breaching confidentiality. While the legal framework provided by the Act on Trade Secrets offers post-violation remedies, the presence of confidentiality clauses strengthens the employer’s position by ensuring preventive measures are in place. This dual layer of protection—through both statutory law and contractual agreements—ensures a more comprehensive safeguarding of a company's valuable information, underscoring the importance of these agreements in the broader legal context.
The interaction between confidentiality undertakings in employment contracts and the Act on Trade Secrets is complex but complementary. The Act provides a fundamental level of protection for trade secrets, while confidentiality undertakings in employment contracts can reinforce this protection, particularly after the end of employment. To ensure effective protection, employers should combine the statutory protection with clear confidentiality clauses.
What Should be Considered When Drafting a Confidentiality Clause?
A well-drafted confidentiality clause must consider several key criteria to ensure its enforceability and full protection for the company, which requires a careful balance between the employer's need to protect sensitive information and business secrets and the employee's right to utilise their professional skills and experience. Firstly, the clause should clearly identify the types of information deemed confidential. This includes, but is not limited to, technical data, client information, business strategies, and any other proprietary knowledge specific to the company. The categorisation of information reduces ambiguity and strengthens the clause’s enforceability by making it clear what is expected to be protected, thereby helping employees understand their obligations more precisely.
Confidentiality undertakings are generally considered less restrictive than other types of restrictive covenants usually found in employment agreements (such as non-competition and non-solicitation clauses) in the sense that they do not limit the employee's future employment prospects, but rather focus on the protection of company-specific and confidential information. Unlike these other types of restrictive covenants, confidentiality undertakings are typically valid without limitation in time, which is crucial for ensuring comprehensive protection. The obligation to maintain confidentiality often extends indefinitely, and the clause should provide clarity on the duration of the confidentiality duty concerning different types of information. Although the indefinite duration of a confidentiality clause has not been explicitly contested in the Labour Court, it is reasonable to infer that the enforceability of such an obligation may diminish over time as the company's interest in maintaining confidentiality wanes.
Additionally, it is essential that the clause includes safeguards to protect against inadvertent disclosure. This might involve procedural requirements for handling confidential information, such as marking documents as confidential and limiting access to authorised personnel only. Explicitly stating these procedures within the clause provides clear guidelines for employees and reinforces the seriousness of the confidentiality obligation.
Furthermore, the clause should outline the consequences of a breach. This typically involves combining the confidentiality obligation with a mechanism for liquidated damages to enable the company to immediately claim damages for the breach and to quantify and claim damages more efficiently. Including such a mechanism also serves as a deterrent, as the employee is made aware that there is no "price tag" for breaching the restrictive covenant. Given that actual damages caused by a breach may exceed the fixed amount of liquidated damages, the company should reserve the right to claim actual damages to seek full compensation if necessary. In the Swedish legal context, such remedies are further supported by the Act on Trade Secrets, which offers additional legal protections and grounds for claims in instances of trade secret misappropriation.
In conclusion, confidentiality clauses are indispensable in safeguarding a company's sensitive information. An effectively drafted clause, which is clear in scope, duration, and procedural safeguards, and aligns with the broader legal framework, such as the Act on Trade Secrets, can significantly mitigate the risks of unauthorized disclosure. Employers should, therefore, give meticulous attention when incorporating such undertakings into their employment agreements to ensure robust protection of their valuable information assets.
If you have any questions regarding confidentiality undertakings, the content of employment agreements, or other employment law issues, please do not hesitate to contact our employment law practice group.
Authors: Eric Leijonhufvud and Jonas Lindskog.
