Employment agreements often contain confidentiality clauses that prevent an employee from disclosing information obtained during their employment after it's ended. There are limits on the enforcement of these provisions. Most people know they will give way to the compulsory powers of a regulator or court. For example, a former employee cannot rely on a confidentiality obligation to refuse to answer a relevant question during cross-examination at trial or when they are being interviewed by a regulator.
But it is not so well known that these obligations may be challenged by a private litigant who is only preparing for a trial. The private litigant may argue that the obligation is unenforceable because it "would have an adverse effect on the administration of justice" (A v Hayden (1984) 156 CLR 532 at 556-557 (per Mason J)). It's important that employers and civil litigants are aware of this and of when a confidentiality obligation will and won't be unenforced.
Zantran and relieving employees of confidentiality obligations
In July 2019, the Federal Court relieved several former employees of confidentiality obligations in their employment agreements. This was done so that they could assist a private litigant prepare their case for trial. The decision was Zantran Pty Limited v Crown Resorts Limited [2019] FCA 641.
Zantran was an interlocutory decision for a shareholder class action brought against Crown Resorts Limited. The lead plaintiff in the class action wished to speak to several former employees of Crown as part of preparing its case for trial. This was likely to result in those former employees contravening confidentiality obligations owed to Crown. To address this problem, the lead plaintiff applied to the Federal Court for orders that the former employees be relieved of their confidentiality obligations for the limited purpose of conferring with the lead plaintiff's lawyers, providing an outline of evidence or affidavit and providing certain documents to the lead plaintiff's lawyers.
Justice Murphy granted these orders, but Crown appealed to the Full Court, which unanimously overturned the decision (Crown v Zantran Pty Limited [2020] FCAFC 1). So what did the Full Court say and where does that leave us with employee confidentiality obligations?
The dilemma in Zantran
Before we consider the Full Court Decision, it's helpful to look at why the lead plaintiff in Zantran asked the Federal Court to relieve the former employees of their confidentiality obligations.
In modern litigation, it is common for parties to file witness statements prior to trial and even prior to mediation. Witness statements are often used as an alternative to a witness giving their primary evidence (called "evidence in chief") orally. Giving evidence orally may be time-consuming and complicated for complex matters. This could hinder the efficient conduct of a trial. Also, filing a witness statement ahead of trial prevents the parties from being surprised by a witness's evidence. But the benefits of witness statements aren't limited to trials. They also assist mediations by allowing the parties to be better informed of the other side's case before they enter into settlement negotiations.
A confidentiality obligation may prevent a witness statement from being prepared if it forbids a potential witness from discussing certain matters. This gives rise to a tension between private contractual rights and the efficient administration of trials, mediations and, perhaps even, justice. This dilemma often rises in litigation.
So what options did the lead plaintiff in Zantran have when faced with this dilemma? The Full Court said it had three.
First, it could have used a compulsory process of the court, such as third party discovery, interrogatories or pre-trial examination of a witness, to obtain information from the former employees of Crown. Since these are all compulsory processes of the Court, a person can't refuse to respond to them simply because it would breach a confidentiality obligation. That said, the Court may establish a regime to make sure that only certain people have access to the confidential information, such as the parties to the litigation and their lawyers.
Second, the lead plaintiff in Zantran could have informed Crown that it was proposing to speak with the former employees and then left it to Crown to seek an injunction preventing it from doing so.
Third, the lead plaintiff could have applied to the Court for a declaration that the confidentiality obligations were void because they interfere with the proper administration of justice.
The lead plaintiff chose none of these options. Instead, it sought an order that the former employees be relieved of their confidentiality obligations because that would assist with the more efficient management of the proceeding. It sought to do this without showing that these obligations were void or unenforceable. This approach was approved by Justice Murphy at first instance but found to be incorrect by the Full Court.
Justice Murphy referred to the statutory requirement in the Federal Court of Australia Act 1976 (Cth) for the Court to exercise its powers in a way that "best promotes the overarching purpose of facilitating the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible". He concluded that relieving the former employees of their confidentiality obligations for the limited purpose of assisting the lead plaintiff prepare its case was consistent with this overarching purpose. The Full Court acknowledged that the Court, litigants and lawyers are required to conduct litigation consistently with this overarching purpose, but this does not give courts "some false warrant of authority to set aside, revoke or suspend substantive rights of parties to litigation". A court may decide that a confidentiality obligation is void or unenforceable if it "actually interferes adversely with the administration of justice" but it cannot make a "discretionary decision as to whether the obligation should be set to one side so as to achieve efficiencies in litigation".
Do public policy considerations trump confidentiality?
It is important to note that the lead plaintiff did not seek to prove that the confidentiality obligations were void or unenforceable on the basis that they were contrary to public policy by interfering with the administration of justice. Instead, it sought an order that the former employees be relieved of compliance with the confidentiality obligations without showing that the obligations were void or unenforceable. Had it sought to prove they were void or unenforceable, matters may have been different, but that ultimately depends on whether the lead plaintiff could have established this. The Full Court indicated that this was likely to be difficult by saying the following.
- "What must be found for a clause to be unenforceable is that it is contrary to a found [sic] public policy. There is no basis to consider that … a clause which has the effect of impeding or affecting the efficient preparation of litigation is against public policy".
- "[A] relationship of confidence and a confidentiality clause … will not be held to be unenforceable only on the basis that to enforce it will impede or interfere with pre-trial preparation of civil proceedings ..."
- A court "should use extreme reserve in holding… a contract to be void as against public policy, and only do so when the contract is incontestably and on any view inimical to the public interest."
- The "desirability of holding people to their bargains" is a relevant public interest consideration.
- The obligations of litigants and lawyers to conduct litigation efficiently are important, but "[t]hey do not … form an adequate foundation for a conclusion that it is against public policy for a party in litigation to seek to enforce a valid contractual confidentiality clause when to do so would or might impede the conduct of private civil litigation. This is especially so when there are pre-trial interlocutory procedures that may be availed of to extract the information from prospective witnesses prior to, or at an early and separate stage of, the trial."
Managing your former employees' confidentiality obligations
The Full Court decision provides greater assurance to businesses, who are being sued, that confidentiality obligations will prevent their former employees from voluntarily providing confidential information to the opposing side. But the former employees will still be required to divulge relevant information if faced with a compulsory court process, such as third party discovery or cross-examination at trial.
Although businesses have greater assurance that their confidentiality obligations will hold up, they should be careful not to tell a former employee that they are forbidden from speaking with another litigant about matters which are not confidential. This is due to the principle that no-one has "property in a witness", which means no-one owns a witness. This is particularly important for in-house lawyers who are subject to rule 23 of the Australian Solicitors' Conduct Rules which forbids a solicitor from discouraging a prospective witness from conferring with an opponent, but permits the solicitor to advise the prospective witness of relevant confidentiality obligations.