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UK Supreme Court Confirms That There Can Be No Liability for Misuse of Trade Secrets Unless and Until Confidential Information Is Acquired




by:
Ben Hitchens
Akash Sachdeva
Edwards Wildman Palmer LLP - London Office

 
May 24, 2013

Previously published on May 2013

The UK Supreme Court has issued its decision in the case of Vestergaard Frandsen A/S v Bestnet Europe Limited [2013] UKSC 31, dismissing Vestergaard’s appeal and holding that there can be no liability for misuse of confidential information unless and until that information has been acquired, together with reasonable knowledge of its confidentiality.

The Supreme Court's judgment also provides useful guidance on the extent to which terms of confidentiality will be implied into a contract, as well as the limits of invoking liability on the grounds of common design. Further, the court’s decision demonstrates a clear appreciation of the significance of intellectual property rights (including trade secrets) to the promotion of commercial enterprise and the need to balance this with the right of former employees to compete honestly with their former employers.

The Relevant Law

Under English law, a person may be precluded from disclosing/misusing confidential information through: (a) the terms of a contract to which he/she is a party; and (b) an equitable action for breach of confidence. Although as a cause of action breach of confidence has developed judicially over many years, its principal elements have remained essentially unchanged from those originally formulated in Coco v A N Clark (Engineers) Ltd [1969] RPC 41. In summary, to benefit from protection, the information in question must:

  • Have the necessary quality of confidence about it, i.e. it must be secret, identifiable and not trivial;

  • Be communicated in circumstances importing an obligation of confidence, whether contractual or merely through objective knowledge of its confidentiality; and

  • Be used without authorisation and to the detriment of the party communicating it.

If all three of these elements can be satisfied on the balance of probabilities, a person will be adjudged primarily liable for breach of the equitable right. In addition, the Supreme Court confirmed in its judgment that, in principle, where two or more defendants each share a common design to disclose and/or misuse information that is clearly secret, contrary to a duty of confidence, they may be deemed jointly liable for breach of confidence.

The Facts

Vestergaard Frandsen A/S (“Vestergaard”) develops, manufactures and markets mosquito nets, which are specially formulated with insecticide to help reduce the mosquito population. Vestergaard has invested considerable time and money in the development of mosquito nets, in particular to maintain the nets’ insecticidal resistance over a long period of time. Vestergaard explored various techniques in its quest to create such long lasting insecticidal nets (“LLINs”), including the incorporation of insecticide into molten polythene (the “Techniques”).

Two of the defendants in these proceedings were ex-employees of Vestergaard: Mrs Sig had worked for the company as a sales and marketing assistant and subsequently a regional sales manager; Mr Larsen was employed by Vestergaard as head of production. Both ex-employees’ contracts of employment contained confidentiality provisions. Mrs Sig was contractually obliged to “keep absolutely confidential all information relating to the employment and any knowledge gained in the course of the employment...the absolute duty of confidentiality also applies after [Mrs Sig] has terminated the employment”. Mr Larsen’s employment contract contained non-compete provisions and stipulated that he was obliged to maintain the confidentiality of Vestergaard’s trade secrets.

Although not a party to these proceedings, Dr Skovmand was nonetheless integral to Vestergaard’s case against Mrs Sig. Dr Skovmand was a biologist who had worked for Vestergaard on a consultancy basis without any formal service contract, during that period assuming an important role in the development of the above-mentioned Techniques. Information regarding the Techniques was stored in Vestergaard’s “Fence database”, to which Dr Skovmand had access.

In Spring 2004, prior to leaving their employ with Vestergaard, Mrs Sig and Mr Larsen elected to go into business together to manufacture and sell LLINs in direct competition with their employer. Mrs Sig and Mr Larsen then approached Dr Skovmand, who agreed to work with them and immediately began to devise a rival LLIN (“Netprotect”). On the basis of the parties’ evidence, the court found that in May 2004, Dr Skovmand had notified Mrs Sig that the LLIN he was creating could be developed more quickly through the use of polythene rather than polyester. Mrs Sig subsequently instructed Dr Skovmand to proceed on this basis.

Mrs Sig resigned from her role with Vestergaard in June 2004, followed by Mr Larsen at the end of August 2004. In combination, Mrs Sig, Mr Larsen and Dr Skovmand jointly developed the Netprotect product and formed Danish and English companies to further their commercial efforts. During the course of 2006, the Netprotect product was made available for sale to the public; Vestergaard became aware of the trio’s activities and issued proceedings in the English courts in early 2007.

History of the dispute

In the High Court, Mr Justice Arnold made a number of factual conclusions, which had a significant influence on the Supreme Court’s ultimate reasoning. Of particular note, Arnold J found that:

  • Dr Skovmand was under an equitable duty of confidence precluding him from disclosing and/or misusing the confidential information acquired in the course of his work with Vestergaard;

  • The Techniques, which were stored on the Fence database, were sufficiently secret and original to constitute trade secrets;

  • Dr Skovmand only became aware of the Techniques as a result of his employment with Vestergaard, appreciating that this information was confidential and proprietary to Vestergaard;

  • Dr Skovmand subsequently employed the Techniques in the development of the Netprotect product;

  • Mr Larsen had become aware of Dr Skovmand’s use of the Techniques no later than July 2004;

  • During her employment with Vestergaard, Mrs Sig did not have access to the Fence Database and was not aware of the Techniques;

  • By September 2004 Mrs Sig had become aware that the Netprotect product was comprised of confidential information; however she believed that these trade secrets resulted from Dr Skovmand’s own work on the Netprotect product and did not consider that they may have originated from the Techniques themselves.

In view of the above, Mr Justice Arnold found that Dr Skovmand’s conduct constituted breach of confidence (although he was not a party to the proceedings). Notwithstanding his acceptance of Mrs Sig’s evidence regarding her innocent state of mind, Mr Justice Arnold held that Mrs Sig was also liable for breach of confidence on the basis that: (a) Mrs Sig’s contract of employment would be subject to an implied term preventing her from misusing the Techniques after termination of her employment; and (b) that a person can be liable for breach of confidence even if he is not conscious of the fact that what he is doing amounts to misuse of confidential information, pursuant to Seager v Copydex Ltd [1967] 1 WLR 923.

The defendants appealed Arnold J’s judgment to the Court of Appeal. Although Lord Justice Jacob dismissed the majority of the defendants’ arguments, he upheld their appeal on the issue of Mrs Sig’s liability. Jacob LJ considered that Mrs Sig had neither acquired nor used confidential information and could not therefore be liable for breach of confidence. In addition, Lord Justice Jacob contested Arnold J’s conclusion that Mrs Sig could be subject to an implied term imposing strict liability, as there was “no business reason to imply a term of that harsh extent”.

Vestergaard subsequently appealed Jacob LJ’s findings to the Supreme Court.

The Decision

The Supreme Court has now issued its decision, dismissing Vestergaard’s appeal and holding that Mrs Sig’s conduct could not amount to a breach of confidence in relation to the confidential information subsisting in Vestergaard’s Techniques.

In summary, the court distilled Vestergaard’s appeal down to three key issues, namely whether Mrs Sig was liable for breach of confidence:

1. Under the express terms of her contract or in the alternative an implied term;

2. On the grounds that she acted in concert with Mr Larsen and Dr Skovmand (both of whom were liable for breach of confidence) to pursue a common design which involved the misuse of Vestergaard’s trade secrets; and/or

3. On the basis that she turned a blind eye to Dr Skovmand’s use of Vestergaard’s confidential information and was therefore a party to the breach of confidence.

Having presented Vestergaard’s case, the Supreme Court promptly concluded that the appeal must fail because “Mrs Sig did not herself ever acquire the confidential information in question, whether during the time of her employment with Vestergaard or afterwards” and was “unaware that the Netprotect product had been developed using Vestergaard’s trade secrets”.

As a result, the express terms of her employment contract would not act to render Mrs Sig liable; the confidential information subsisting in the Techniques and used by Dr Skovmand was neither “information relating to her employment” nor “knowledge gained in the course of employment”.

Further, the court considered that the imposition of a “penal” implied term into Mrs Sig’s contract of employment was “unnecessary to give the...contract commercial effect”, and in fact exceeded the scope of the express terms of that agreement.

Referring to the seminal case of Coco v A N Clark, the Supreme Court then observed that breach of confidence “is based ultimately on conscience” and that in order for her conscience to have been affected, Mrs Sig “must have agreed, or must know, that the information is confidential”. Distinguishing the present facts from those of Seager v Copydex on which Mr Justice Arnold relied, the Supreme Court noted that in the Seager case the defendants had acquired confidential information, albeit they had used it unconsciously.

Accordingly, in order to render Mrs Sig jointly liable, “she would normally have to know that the recipient was abusing confidential information”, which would include “blind-eye knowledge”.

While the Supreme Court accepted Vestergaard’s argument that if the parties “combine to secure the doing of acts which in the event prove to be infringements” there is strictly no need for a common design in order to infringe, it held that Mrs Sig was “honestly unaware” of Dr Skovmand’s misuse of Vestergaard’s trade secrets. Mrs Sig’s conscience had not, therefore, been affected, meaning that she could not be liable for breach of confidence, whether as a primary party to that breach or jointly.

Concluding its judgment, the Supreme Court also commented on Vestergaard’s claim that Mrs Sig had taken a significant risk contracting with Mr Larsen and Dr Skovmand, who she knew had been involved with the development of LLINs at Vestergaard. Absent a finding of dishonesty, the court held that simply because Mrs Sig could be said to have “played with fire”, this did not automatically translate to a breach of confidence: “if one plays with fire, one is more likely to be burnt, but it does not of itself mean that one is burnt”.

Impact

The Supreme Court's decision will be a blow to Vestergaard, who had pursued this litigation from Denmark to England over the course of eight years. However, under English law at least, the Supreme Court’s judgment is not controversial, particularly in light of the findings of fact made by the High Court. Indeed, a peculiar feature of Mr Justice Arnold's decision at first instance was to find Mrs Sig liable for misuse of confidential information despite his finding of fact that she had had no access to any confidential information and was unaware that any confidential information had, in fact, been used.

Unlike, say, patent infringement, which is a strict liability tort, the equitable laws governing confidential information require the defendant’s conscience to be affected in some way, even if it can only be said that the defendant possessed reasonable notice of the confidentiality of a document (i.e. a pedestrian finds a sheet of paper on the pavement stamped “TOP SECRET”). Accordingly, in view of the fact that Mrs Sig had not acquired any confidential information, it would, without additional special circumstances, have been unfair to categorise her conduct as infringing.

The Supreme Court does not say, however, that in every case a failure to acquire confidential information will be sufficient to escape liability. For example, there may be some instances in which the defendant’s reckless disregard of the commercial circumstances may lead the court to consider his/her behaviour to be dishonest, supporting a contention of wilful blindness.

In the present case, the fact that Mrs Sig elected to start her own business in order to compete directly with her ex-employer, recruiting ex-colleagues who she knew had been directly involved in the development of mosquito nets at that company in the process, would on its face seem to militate against a finding of absolute innocence. However, the court considered Mrs Sig’s testimony to be an honest account of her state of mind at the relevant time, in direct contrast to both Mr Larsen and Dr Skovmand, who no doubt further jeopardised their positions at trial by fabricating their accounts of the development of the Netprotect product and forging documents.

Finally, the Supreme Court’s concluding remarks regarding the need to strike an acceptable balance between the protection of intellectual property rights and the freedom of ex-employees to legitimately compete with their ex-employers, demonstrates a willingness on the part of the court to ensure that entrepreneurial activity is not stifled, particularly in light of current economic conditions.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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