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UK Supreme Court Confirms – No Breach of Confidence without a Breach… or Confidence

Posted in Case Comments, Contracts, Corporate Law, Intellectual Property, Manufacturing
Sam Rogers

Introduction

In a knowledge economy protection of trade secrets is critical to a corporation’s continued success and profitability. The misuse of trade secrets by competitors can be devastating to a corporation’s position in the marketplace. That is particularly true when it is ex-employees who are misusing trade secrets to compete against their former employer. In such circumstances, numerous remedies are available to employers including a civil action for breach of confidence.

But in what circumstances will former employees, not directly involved in the misuse of trade secrets, be held liable? That question was recently considered the UK Supreme Court in Vestergaard Frandsen A/S v Bestnet Europe Ltd. The Court held that a party cannot be held liable for breach of confidence unless they have either 1) personal knowledge of trade secrets; or 2) knowledge of another’s misuse of trade secrets. The case is important for Canadians for both its basic proposition and the Supreme Court’s comments concerning the need to protect trade secrets in a modern economy.

Background

The Appellants, Vestergaard, develop and manufacture insecticidal bednets. The Respondent, Ms. Sig, had been employed by Vestergaard as a regional sales manager for Europe and Latin America. Ms. Sig’s employment contract contained a provision which required her to keep confidential all information related to her employment and any knowledge gained in the course of her employment.

In 2004, Ms. Sig left Vestergaard along with Mr. Larsen, a chemical engineer employed by Vestergaard, to start a company to compete against Vestergaard. They partnered with a biologist, Dr. Skovmand. Dr. Skovmand was not employed by Vestergaard but had provided it with consultant services since 1998.

Dr. Skovmand was instructed to develop a new insecticidal bednet. He was successful and the new company began manufacturing and selling bednets in 2006. Unknown to Ms. Sig, but known to Mr. Larsen as of July 2004, Dr. Skovmand had used trade secrets owned by Vestergaard to develop the bednets.

Vestergaard successfully brought an action seeking damages and other relief for misuse of confidential information against, among others, Ms. Sig and Mr. Larsen. The trial judge found Ms. Sig liable for breach of confidence on the basis of the holding in Seager v Copydex Ltd 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 misused of confidential information.”

Ms. Sig successfully appealed on the basis that Seager was distinguishable because, unlike the defendant in Seager, Ms. Sig had never actually used the confidential information. Vestergaard appealed.

The Decision

Vestergaard put forward three different bases for Ms. Sig’s liability: 1) under her employment contract either expressly or implicitly; 2) by being a party to a common design which involved a breach of confidence; or 3) by being a party to the breach of confidence by virtue of having worked for Vestergaard and then forming and working for companies which were responsible for a breach of confidence.

The Court began by making some general comments concerning the nature of an action for breach of confidence:

It would seem surprising if Mrs Sig could be liable for breaching Vestergaard’s rights of confidence through the misuse of its trade secrets, given that she did not know (i) the identity of those secrets, and (ii) that they were being, or had been, used, let alone misused. The absence of such knowledge would appear to preclude liability, at least without the existence of special facts. After all, an action in breach of confidence is based ultimately on conscience. As Megarry J said in Coco v A N Clark (Engineers) Ltd [1969] RPC 41, 46, “[t]he equitable jurisdiction in cases of breach of confidence is ancient; confidence is the cousin of trust”. (para 22)

With that in mind, the Court rejected all three bases for Ms. Sig’s liability. Regarding Ms. Sig’s employment contract, the information in question was neither related to Ms. Sig’s employment nor knowledge gained in the course of her employment. Therefore the express provision was of no assistance. Nor could an implied term be a basis for Ms. Sig’s liability:

To impose such a strict liability on Mrs Sig appears to me to be wrong in principle as it is (i) inconsistent with the imposition of the more limited express terms of clause 8, (ii) unnecessary in order to give the employment contract commercial effect, and (iii) almost penal in nature, and thus incapable of satisfying either of the well established tests of obviousness and reasonableness. (para 31)

Nor was Ms. Sig a party to the breach of confidence. The Court distinguished a case concerning patent infringement on the basis that patent infringement is a wrong strict liability. In contrast, liability for breach of confidence is based on a person’s state of mind. Therefore absent both knowledge of the trade secrets and knowledge of the misuse of trade secrets, Ms. Sig could not be considered a party to the breach of confidence.

The Court quickly rejected the third ground noting that Vestergaard was, in effect, arguing Ms. Sig had “blind-eye knowledge” of the breach of confidence. The Court held that Ms. Sig could not be held liable on this basis absent a finding by the trial judge that Ms. Sig had acted in “reckless disregard of others’ rights or possible rights.”

Potential Significance

The case stands for the proposition a party cannot be held liable for breach of confidence unless they have either 1) personal knowledge of trade secrets; or 2) knowledge of another’s the misuse of trade secrets.

The case is also noteworthy for the Supreme Court’s comments regarding the need to balance the protection of trade secrets against fostering a competitive marketplace. As Lord Neuberger noted:

Particularly in a modern economy, the law has to maintain a realistic and fair balance between (i) effectively protecting trade secrets (and other intellectual property rights) and (ii) not unreasonably inhibiting competition in the market place. The importance to the economic prosperity of the country of research and development in the commercial world is self-evident, and the protection of intellectual property, including trade secrets, is one of the vital contributions of the law to that end. On the other hand, the law should not discourage former employees from benefitting society and advancing themselves by imposing unfair potential difficulties on their honest attempts to compete with their former employers. (para 44)

Case Information

Vestergaard Frandsen A/S v Bestnet Europe Ltd. [2013] UKSC 31

Docket: UKSC 2011/0144

Date of Decision: May 22, 2013