Safeguarding innovation: prevention and enforcement of IP misappropriation by former employees

February 2025 | SPOTLIGHT | INTELLECTUAL PROPERTY

Financier Worldwide Magazine

February 2025 Issue

The success of any business hinges on its ability to protect and leverage its intellectual property (IP).

However, this fundamental principle is often challenged when former employees, who were once responsible for developing, protecting and exploiting IP, use that same IP without permission for their new ventures or employers, often in direct competition.

Such behaviour, despite infringing on various rights, is not uncommon. A series of high-profile disputes in the Federal Court of Australia (FCA) highlights the risks posed by employee mobility and underscores the importance of proactive measures to safeguard business rights.

A wide range of IP may arise in works created by employees, including copyright, designs, trademarks, patents, plant breeders rights and confidential information. Among these, confidential information can be particularly vulnerable. Its misappropriation can cause irreparable damage, is difficult to pursue remedies against innocent third parties and can undermine the value of other IP rights.

Where misappropriation by a former employee is detected, businesses must consider commercial, legal and practical factors to assess appropriate action. These include the relationship with the former employee and the business using the IP, the strength of the evidence of improper access and use of the IP, the significance of the IP in question and ease of replacing it, and the extent of use of the IP by the former employee.

Where the misappropriation spans multiple jurisdictions, this adds cross-jurisdictional complexity.

Initiating legal proceedings, although expensive, can sometimes be an effective way to achieve a desired resolution. Strategically, it can provide immediate remedies and send a strong message that such behaviour will not be tolerated, thereby deterring future breaches. In many instances, it may be the only viable option to secure the outcome sought.

Available causes of action

In Australia, there are several legal avenues to pursue IP misappropriation. Breach of contract claims, statutory actions and general law remedies are available.

Statutory claims for breach of copyright or patent infringement may be available depending on the nature of the IP in question. Several recent cases in Australia concern claims against former employees for copyright infringement in connection with misappropriation of source code and supply of software development services. Patent infringement claims may arise in relation to a variety of technologies where patents have been obtained.

It is also common to see a former employer’s IP being used as the basis of new patent applications filed. This can provide grounds for an employer to oppose the grant of the relevant application or seek assignment of patent rights that rely on the employer’s IP.

Confidential information is protected under common law, equity and statute, including section 183(1) of the Corporations Act 2001 which prohibits improper use of information gained as a director, officer or employee of a corporation to gain an advantage or cause detriment to the corporation, even after their employment ends. Confidential information is often also protected, in the case of employees, under their employment agreement.

Other potential actions include misleading and deceptive conduct, where a misrepresentation is made in connection with the IP in question.

Successful applicants may obtain a variety of remedies. It is typical to see injunctive relief, damages representing loss of profits or other lost opportunity, or an account of profits of the infringer and specific performance to deliver up IP, as well as payment of legal costs. Urgent interlocutory injunctions may be available at the commencement of proceedings to prevent imminent harm.

The ongoing proceedings brought by Fortescue Ltd, a green technology, energy and metals company, in the FCA, against its former employees and Element Zero Pty Ltd, a company they founded after leaving Fortescue, illustrates the issues arising in such cases. Fortescue alleges that the respondents have commercialised green iron technology based on its IP, including confidential information arising from research and development (R&D) work undertaken during the former employees’ employment.

Fortescue brought various claims including breach of confidence, breaches of fiduciary duties, knowing receipt of confidential information in breach of fiduciary duties, contravention of section 183(1) of the Corporations Act 2001, copyright infringement, breach of employment contracts, and misleading or deceptive conduct. It seeks injunctive and pecuniary relief, and specific performance to deliver up IP. Additionally, Fortescue seeks orders ensuring that all rights related to patent applications filed by Element Zero are assigned to it.

Fortescue has been clear about its approach to enforcing its IP rights. A Fortescue spokesperson has noted that “as a first mover, our intellectual property is critical to our ongoing success in this pursuit and must be protected at all times”.

Similarly, Aristocrat Leisure Limited, a global gaming and technology company, has commenced action in Australia and the US against former employees and their new employer, Light & Wonder. Aristocrat alleges that the respondents stole confidential information or trade secrets in relation to Aristocrat’s popular pokies game Dragon Link in the development of their own game Dragon Train.

In the US case, Aristocrat was successful in obtaining a preliminary injunction to stop Light & Wonder from selling its game in the US, which had already been installed in casinos across the US.

Amid this dispute with Light & Wonder, Aristocrat has also recently settled an action with its former long-term employee Dr Dinh Toan Tran, which commenced in January 2024, as an urgent ex parte application resulting in injunctions and search and seizure orders against Dr Tran.

Dr Tran has acknowledged that prior to his resignation in December 2024 he copied a substantial volume of Aristocrat’s IP, including trade secrets, onto a USB. As part of the settlement, Dr Tran has provided court enforceable undertakings and agreed to pay financial compensation to Aristocrat.

Obtaining evidence of wrongdoing

Effective enforcement of IP rights depends on the ability to gather evidence of misuse. In addition to technological means of evidence gathering, several legal mechanisms can be utilised in this process.

In the FCA, a party can obtain preliminary discovery before issuing infringement proceedings, to identify a potential defendant or assess whether there are enough facts to support a cause of action. Aristocrat successfully obtained preliminary discovery in its FCA proceedings.

Search orders, otherwise known as Anton Piller orders, may also enable a party to enter a respondent’s premises to inspect, remove or make copies of documents. The order can be made ex parte to avoid the prospect of the defendant destroying relevant materials.

To obtain this order an applicant must demonstrate a strong prima facie case, serious likely harm, clear evidence of incriminating documents or things, and there must be a real possibility that the defendant might, if it becomes aware of the application, destroy the material. Given the potential risk of harm to the defendant arising from the order, the plaintiff is required to give an undertaking to damages.

In the Fortescue proceedings, ex parte search orders were obtained against the respondents to access personal devices and Google accounts for evidence gathering.

To mitigate the risk of IP misappropriation and effectively enforce IP rights, companies should implement robust IP management controls, such as those outlined below.

A clear IP policy is essential. This policy should define the company’s IP, outline protection strategies and address the consequences of misuse. It must integrate with existing policies such as privacy, confidentiality, and code of conduct, and should prioritise high-value IP assets such as R&D-intensive technologies.

Employment contracts. These should explicitly assign IP ownership to the employer, and include confidentiality clauses and specific obligations for returning company property upon termination. Post-employment restraints may be necessary to prevent knowledge transfer to competitors. Gardening leave can also be effective to ringfence the flow of information out of a business by a departing employee.

Employee training on IP. This should occur at onboarding and regular intervals. This can include induction programmes and linking IP awareness to performance metrics. Exit procedures must ensure return of assets, IP assignment confirmations and reminders of ownership obligations.

Technological support. Companies should bolster IT security, track employee IT activities and maintain an IP register, as well as ensuring the use of development logs and IP notification forms. Tools like non-disclosure agreements, IP clearance forms and confirmatory assignments support these measures.

Leadership support. This is crucial for fostering a culture that values IP protection and collaboration. In some instances, being proactive in taking enforcement action can send a strong signal to those in the organisation that employee theft will not be tolerated.

Protecting IP is vital for maintaining a competitive advantage. We urge all business leaders to review their current IP protection strategies and take immediate steps to strengthen them. Implementing robust IP management controls, training employees and fostering a culture of IP protection is crucial. Do not wait for a breach to occur – act now to safeguard valuable IP and secure a competitive edge.

Katrina Crooks and Mark Vincent are principals and Nadine Martino is a senior associate at Spruson and Ferguson Lawyers. Ms Crooks can be contacted on +61 2 9393 0300 or by email: katrina.crooks@spruson.com. Mr Vincent can be contacted on +61 2 9393 0100 or by email: mark.vincent@spruson.com. Ms Martino can be contacted on +61 2 9393 0300 or by email: nadine.martino@spruson.com.

Katrina Crooks, Mark Vincent and Nadine Martino

Spruson and Ferguson Lawyers