AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Whose information is it anyway? (Or, how to protect proprietary information from employees)

By Andrea Finn, Partner – Employment, and Angus McLean, Managing Associate - Intellectual Property, Simmons & Simmons LLP
 

Q4 2012 edition

 


 

In this article, for convenience we refer to “employees”. The same issues apply to members of an LLP and consultants/contractors.

A big trend within the hedge fund industry in recent years has been the increased emphasis on intellectual property (IP), particularly for the systematic trading community. In particular, the protection of program-based models is becoming an increasingly contentious issue. Indeed, almost every aspect of an investment manager’s business involves confidential information, including formally protected IP rights. Success and failure can hinge on a firm’s (confidential) trading strategies, (confidential) investor relationships and (confidential) business planning information. 

While the firm may take the view that this information is proprietary, the reality is that all information is in the hands of individuals, who may at some stage leave the organisation. What then can firms do to reduce the risk of an individual taking its proprietary information to competitors?  This note focuses on prevention rather than cure. However, we include a brief section on the steps which can be taken through the courts to prevent abuse of confidential information by former employees and competitors.

What is proprietary information?

Some proprietary information will take the form of formally protectable IP rights but a large proportion falls within the wider category of confidential information.

Copyright: The source and object code of any computer program developed by an employee will almost certainly be protected by copyright which should in most cases be owned by the employer. In principle, the overall structure, architecture and design features on which a program is based can qualify for copyright protection. In practice, there has only been one successful reported case in the UK protecting copyright in these wider features which did also involve copying of the underlying code.

Confidential information:  Track record and trading methodologies, models and algorithms are all theoretically protectable as confidential information. When determining whether information is truly "confidential" (and therefore capable of protection after the employment relationship has ended) the English courts look at up to seven factors: the nature of the employment; the nature of information itself; the attitude of the employer at the time; the steps taken to protect the information (see below);  separability of the information - i.e. – can it be separated from the employee’s general skill, knowledge and experience (which he cannot be prevented from taking with him); the commercial value of the information; and the usage and practices of the trade.

Contractual definition: Firms can create a contractual definition of what information is confidential and an obligation not to disclose it to any person. Such a list does not enable a firm to protect information which is clearly not confidential in practice. However, an express contractual obligation provides a far stronger starting point in discussions with employees (and former employees) and in taking action in the courts.

 

Culture and attitude
In assessing whether information can be protected by the courts as confidential information, it is necessary to consider the attitude of the employer and practices of the trade. In the asset management universe, market practice is evolving. Historically, many in the industry held the view that trading strategies developed by an individual while working for Manager A were his to take with him to employ on behalf of Manager B. Whilst it was clear that individuals should not take and copy underlying code, there was some acceptance that the departure of an employee would inevitably result in losing that strategy. 

Our observation is that this is changing, driven partly by trends from the US and partly by an increased recognition of the importance of certain types of information to the business, the cost of developing it and the cost of replacing it. For that reason, if a firm wants to protect this investment, it needs to make that attitude and culture clear upfront.

What steps can investment managers take to protect their proprietary information from misuse by employees?

Some examples of actions which may help minimise the risk:

  • Contract of employment / confidentiality agreement: The contract of employment offers an opportunity to clarify the position in relation to ownership of confidential information and IP, including a definition of what the firm considers to be confidential information. The contract of employment should also contain an express prohibition on disclosing confidential information (as defined), a garden leave clause and carefully drafted restrictive covenants, including a non-competition provision. The contents and effect of the formal contract should be emphasised to new joiners during the recruitment process.
  • Management: Internal working practices can have a significant impact on the employer’s ability to control the use and misuse of its confidential information. Helpful practices for this purpose include: clear management oversight of activities (not least for disaster planning purposes); block leave; clear communications and policies about cultural expectations and what is “ours”; robust exit procedures requiring return of hardware and software and consistent labelling of confidential material. 
  • Technology: There is an array of steps which employers can take to reduce the risk of employees taking proprietary information. Examples include: firewalls/technological systems to prevent import or export of software or data; filters to block and review all  emails sent to personal email accounts (subject to data protection requirements) and including “sleepers” in software and databases to enable easier tracking of copying.


Taking action

If a firm believes that an employee has taken proprietary information and is planning to misuse it, it should take action immediately. With appropriate evidence, it is possible to obtain an injunction against the former employee and their new employer to prevent this misuse and require the return of proprietary material. More commonly, negotiations lead to an agreed settlement, with appropriate undertakings.

Is there anything else to consider?
This issue cuts both ways! Firms also need to take more care that they do not find themselves on the wrong end of actual or threatened litigation from their new employee’s previous employer. The steps listed above in relation to the firm’s own information apply in reverse to new joiners: make expectations and culture clear, confirm these expectations in the contract of employment and take practical steps to prevent improper use of a third party’s proprietary information.

andrea.finn@simmons-simmons.com

angus.mclean@simmons-simmons.com

www.simmons-simmons.com

Main Menu

  1. Home
  2. About
    1. Our Core Objectives
    2. AIMA's Policy Principles
    3. Meet the team
    4. AIMA Council
    5. Global Network
    6. Sponsoring Members
    7. Global Partners
    8. FAQs
    9. Opportunities at AIMA
  3. Join AIMA
    1. Benefits of Membership
    2. Membership Fees
    3. Application form
  4. Members
    1. AIMA Annual Reports
    2. AIMA Governance
    3. AIMA Logo
      1. Policy note
    4. AIMA Members' List
    5. AIMA Review of the Year
    6. Committees and Working Groups
    7. Weekly News
    8. Update Profile
  5. Investors
    1. AIMA Investor Services
    2. AIMA Members' List
    3. Investor Steering Committee
    4. Update Profile
  6. Regulation
    1. Asset Management Regulation
      1. EU Asset Management Regulation
        1. AIFMD
        2. European Capital Markets Regulation
        3. MiFID / MiFIR
        4. UCITS
        5. European Venture Capital Directive
        6. Shareholder Rights Directive
        7. European Long Term Investment Fund Regulation
        8. Loan Origination Funds
        9. Capital Raising
        10. AIFMD-Related Events
      2. US Hedge Fund Adviser Regulations
        1. Registration and Reporting
        2. Incentive-Based Compensation
        3. JOBS Act
      3. Asia Pacific Asset Management regulation
      4. Other Jurisdictions’ Asset Management Regulation
      5. Systemically Important Financial Institutions ('SIFIs')
      6. Remuneration
        1. UK
        2. United States
        3. CRD IV and CRR
        4. AIFMD
        5. MiFID
      7. Shadow Banking
      8. Volcker Rule
      9. Other
      10. Systemic Risk Reporting
      11. Dealing Commision
      12. Corporate Governance
    2. Markets Regulation
      1. Bank/Capital Regulation
        1. Capital Requirements Directive
        2. EU Bank Structural Reforms
      2. Derivatives/Clearing
        1. EMIR
        2. MiFID II / MiFIR - Derivatives
        3. MAD / MAR
        4. Dodd-Frank Act Title VII
        5. Hong Kong
        6. IOSCO
        7. Singapore
      3. High Frequency Trading
        1. ESMA Guidelines
        2. MiFID II / MiFIR - HFT
        3. MAD / MAR
        4. Flash Crash
        5. IOSCO
        6. Germany
        7. CFTC Automated Trading
      4. Insurance Regulation
        1. Solvency II
      5. Market Abuse
        1. MAD / MAR
        2. Indices as Benchmarks
      6. Position Limits
        1. MiFID II - Commodities
        2. CFTC Position Limits
      7. Resolution of Financial Institutions
        1. Europe
          1. EU Bank Recovery and Resolution Directive
          2. EU Non-Bank Recovery and Resolution
        2. CPSS-IOSCO
        3. Financial Stability Board
        4. UK
        5. USA
      8. Short Selling
        1. EU Short Selling Regulation
        2. Hong Kong Short Selling Regulation
        3. US Short Selling Regulation
        4. Short Selling Bans
      9. Securities Settlement
      10. Shadow Banking
        1. International Shadow Banking
        2. EU Shadow Banking
      11. Trading
        1. Dodd-Frank Act
        2. MiFID Portal
    3. Tax Affairs
      1. Automatic Exchange of Information (AEOI)
        1. FATCA
        2. EU - AEFI
        3. OECD - Global Standard on AEFI
      2. Australia - Investment Manager Regime (IMR)
      3. Base Erosion - Profit Shifting (BEPS)
      4. FAIFs and FINROFs
      5. FIN 48 and IAS 12
      6. Financial Transaction Tax (FTT)
      7. UK Investment Management Exemption (IME)
      8. UK Offshore Funds Regime
      9. Other
    4. AIMA's Policy Principles
    5. Search
    6. Resources
      1. Guidance Notes
      2. Jurisdictional Guides
      3. Noticeboard
        1. AIFMD
        2. BEPS
        3. CFTC Registration and Exemptions
        4. Corporate Governance
        5. Dealing Commission
        6. Derivatives
        7. FATCA
        8. FTT
        9. High Frequency Trading
        10. MiFID / MiFIR
        11. Other Hot Asset Management Topics
        12. Other Hot Markets Topics
        13. Other Hot Tax Topics
        14. Position Limits
        15. UK Partnership Tax Review
        16. Trading
        17. Volcker Rule
      4. Hedge Fund Manager Training
      5. Quarterly Regulatory Update
      6. Webinar Programme
      7. Regulatory Compliance Association
        1. About the Regulatory Compliance Association
        2. RCA Curricula and initiatives for alternative investment firms
        3. Meet the regulators and Sr. Fellows
  7. Education
    1. "The Case for Hedge Funds"
      1. Global Hedge Fund Industry Paper: The value of our industry
      2. The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy: Research commissioned by AIMA and KPMG
      3. The Evolution of an Industry: KPMG/AIMA Global Hedge Fund Survey
      4. Contributing to Communities: A global review of charitable and philanthropic activities by the hedge fund industry
      5. Beyond 60-40: The evolving role of hedge funds in institutional investor portfolios
      6. The Cost of Compliance: Global hedge fund survey by AIMA, MFA and KPMG
      7. Capital Markets and Economic Growth: Long-term trends and policy challenges
      8. Apples and Apples: How to better understand hedge fund performance
      9. The Extra Mile: Partnerships between hedge funds and investors
      10. Key articles by AIMA on the case for hedge funds
    2. AIMA Journal
      1. Recent issues
      2. Search AIMA Journal articles
      3. AIMA Journal Archive
    3. AIMA Guides to Sound Practices
    4. AIMA guides for institutional investors
    5. CAIA Association pages
      1. FAI
    6. Regulatory Compliance Association pages
      1. About the Regulatory Compliance Association
      2. RCA Curricula and initiatives for alternative investment firms
      3. Meet the regulators and Sr. Fellows
    7. Certified Investment Fund Director programme
    8. Services to Start-up Managers
    9. Useful Websites
    10. Glossary
  8. Events
    1. AIMA Events
    2. AIMA webinars
    3. Industry events
  9. Media
    1. Press Releases & Statements
    2. AIMA's blog
    3. Media Coverage
      1. Articles by AIMA
        1. Archive
      2. AIMA in the news
      3. Video interviews
      4. Industry news
    4. Media Contact
    5. Press Materials
    6. Photos of Jack Inglis