Legal Briefing

Former employee slips through the net in breach of confidence claim

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Dispute resolution | 01 September 2013

The recent decision of the Supreme Court in Vestergaard Frandsen A/S (now known as MVF 3 ApS) & ors v Bestnet Europe Ltd & ors[2013] provides a helpful discussion of the circumstances in which an employee can or cannot be held liable for a breach of confidential information. The Supreme Court said that, ultimately, liability for breach of confidence is based upon the conscience of the recipient of the confidential information. In unanimously rejecting the claimants’ claim against a former employee, the Supreme Court made the following points of general interest.

Absent an express term in her employment contract, a former employee could not be liable for misuse of confidential information which she did not herself acquire and which she did not realise was being misused (to further the interests of a new business with which the former employee was involved).

However, liability for breach of confidence would arise once the former employee was told, or should have appreciated (by not turning a blind eye), that the relevant information was confidential. At that stage, the recipient’s conscience is affected and they become liable.

The law has to maintain a realistic and 
air balance between the effective protection of confidential information and the maintenance of competition in the market.

FACTS

The claim was brought by three related companies, Vestergaard Frandsen A/S (Danish), Vestergaard Frandsen SA and Disease Control Textiles SA (both Swiss) (together, ‘Vestergaard’).

Vestergaard designed and manufactured insecticidal nets, branded as ‘PermaNet’, used to protect a sleeping individual from being bitten by mosquitos. The nets were treated with insecticide which had been specially developed to maintain the protection they afforded for a long period of time and even after repeated washing. The details of the design of PermaNet were considered to be confidential by Vestergaard. They were maintained in a database called the ‘Fence’ database and were known in the litigation as the ‘Techniques’.

In the spring of 2004, two employees of Vestergaard, Torben Holm Larsen and Trine Sig, decided to set up a new business selling insecticidal nets in competition with Vestergaard. Another individual, Dr Ole Skovmand, agreed to work with them. Dr Skovmand had been a consultant biologist at Vestergaard between 1998 and 2005 and had played a significant role in developing the Techniques there. From April 2004, Dr Skovmand began developing the nets, which were to be sold by the new business under the name ‘Netprotect’.

In mid 2004, Mrs Sig and Mr Larsen resigned from their jobs at Vestergaard and formed a Danish company, Intection, for the purpose of developing, manufacturing and marketing the Netprotect product. The product development was successful and Intection arranged a launch of Netprotect for October 2005. However, Vestergaard learnt of this proposal and took steps to stop the development and launch of the product by commencing an action in Denmark against Intection alleging a breach of their trade secrets.

The day before the Danish proceedings were due to be heard in October 2005, Mrs Sig resigned as a director of Intection which then ceased to trade. At the same time, an English company called Bestnet Europe Ltd (Bestnet) was formed in which Mrs Sig was the sole director and Dr Skovmand was a shareholder. Dr Skovmand continued to work on Netprotect for Bestnet. That work was successful and Netprotect was manufactured and marketed by Bestnet.

THE ENGLISH PROCEEDINGS

Vestergaard brought proceedings against Bestnet, Mr Larsen, Mrs Sig and others in England in early 2007 in which they sought damages (and other relief) for the misuse of their confidential information. At first instance, Mr Justice Arnold made the following findings:

  • 
Dr Skovmand was under a duty to Vestergaard not to use any confidential information which he had acquired in the course of his consultancy work for Vestergaard.
  • The contents of the Fence database constituted confidential information, namely trade secrets, owned by Vestergaard and Dr Skovmand was aware of this.
  • Dr Skovmand had used information about the Techniques in the Fence database as a starting point for the development of Netprotect.
  • By July 2004 at the latest, Mr Larsen was aware of the fact that Dr Skovmand was using confidential information in the Fence database to develop Netprotect.
  • Importantly, however, the judge also found that Mrs Sig did not, while she was employed by Vestergaard, have access to the Fence database and was not aware that Netprotect had been developed using Vestergaard’s confidential information.

Unsurprisingly, Mr Justice Arnold found that Dr Skovmand was liable in breach of confidence to Vestergaard (but there was no judgment against him as he was not a party to the proceedings). Perhaps more surprisingly, he also found that Mrs Sig was in breach of the express obligation of confidentiality contained in her contract of employment despite the fact that she did not know that the Techniques were derived from the Fence database. He said that a person can be liable for breach of confidence even if they are not conscious of the fact that what they are doing amounts to misuse of confidential information.

The Court of Appeal overturned this aspect of Mr Justice Arnold’s decision and Vestergaard appealed to the Supreme Court.


GENERAL COMMENTS ON BREACH OF CONFIDENCE CLAIMS

Before dealing with the specific arguments raised by Vestergaard (see below), Lord Neuberger, who delivered the sole judgment of the Supreme Court, made some general comments about breach of confidence claims. He said that the ‘classic case of breach of confidence’ involves the claimant’s confidential information, such as a trade secret, being used inconsistently with its confidential nature by a defendant, who received it in circumstances where they had agreed, or ought to have appreciated, that it was confidential. Thus, in order for the conscience of the recipient to be affected, they must have agreed, or must know, that the information is confidential.

However, liability for breach of confidence is not limited to situations such as this. A defendant who learns of a trade secret in circumstances where they reasonably do not appreciate that it is confidential, may nonetheless be liable to respect its confidentiality from the moment they are told, or otherwise appreciate, that it is in fact confidential. From that moment, it can be said that their conscience is affected in a way which should be recognised by equity.

While a recipient of confidential information may be said to be primarily liable in a case of its misuse, a person who assists them in the misuse can be liable, in a secondary sense. However, for there to be such secondary liability, the defendant would normally have to know that the recipient was abusing confidential information. Knowledge in this context would not be limited to actual knowledge, and it would include ‘blind-eye knowledge’. Lord Neuberger said that the best analysis of what constitutes blind-eye knowledge was to be found in Royal Brunei Airlines Sdn Bhd v Tan [1995], where Lord Nicholls approved the notion of ‘commercially unacceptable conduct in the particular context involved’, and suggested that: ‘… acting in reckless disregard of others’ rights or possible rights can be a tell-tale sign of dishonesty’.

Furthermore, even a person who does not know that the information which is being abused is confidential could nonetheless be liable if there are ‘relevant additional facts’.

For example, if a person who directly misuses a claimant’s trade secret does so in the course of their employment by a third party, then the third party could (at least arguably) be liable to the claimant for the breach of confidence on the basis of vicarious liability.

This case, however, was different from all of those situations for two reasons. The first was that Mrs Sig never actually acquired the confidential information in question and the second was that it was only during the litigation (and possibly even as late as the judgment of Mr Justice Arnold) that Mrs Sig became aware that Netprotect had been developed using Vestergaard’s trade secrets. Given that a claim for breach of confidence is ‘based ultimately on conscience’, it would be surprising, Lord Neuberger said, if Mrs Sig could be held liable for a breach of confidence through the misuse of trade secrets in circumstances where she did not know those secrets or if they were being used (or even misused).


APPEAL DISMISSED

Vestergaard made three arguments as to why Mrs Sig was liable to them for breach of confidence, namely:

  • Under the terms of her employment contract on either an express or an implied basis.
  • For being party to a common design which involved the misuse of Vestergaard’s confidential information.
  • For being party to a breach of confidence by virtue of the fact she had worked for Vestergaard and then for Intection and Bestnet (via a related company) while they were developing the Netprotect product. Or, to put it another way, that she turned a blind eye to the misuse of the confidential information.

As explained in further detail below, Lord Neuberger rejected all these arguments and dismissed Vestergaard’s appeal.

Employment contract

The express terms of Mrs Sig’s employment contract covered only ‘information relating to [her] employment’ and ‘knowledge gained in the course of [her] employment’. The confidential information wrongly used by Dr Skovmand fell into neither of these categories. Furthermore it was ‘not seriously arguable’ that a term could be implied into the contract, that she would not help another person to breach the confidential information of Vestergaard, in circumstances where she did not know what the confidential information was or that it was being misused. Lord Neuberger stated that to imply such a term was inconsistent with the express terms of the contract, unnecessary and almost penal in nature and thus incapable of satisfying either of the ‘well established tests of obviousness and reasonableness’.

Common design

This argument was based on the premise that Dr Skovmand, Mr Larsen and Mrs Sig all worked together to design and manufacture Netprotect. Since, Dr Skovmand designed Netprotect using Vestergaard’s confidential information, Mr Larsen and Mrs Sig must, according to Vestergaard, be liable along with him.

Lord Neuberger accepted that common design could in principle be invoked against a defendant in a claim of misuse of confidential information. He also conceded that Mr Justice Arnold was right to hold against Mr Larsen on this ground, given his knowledge of Dr Skovmand’s acts. However, given the lack of knowledge of Mrs Sig, he could not see how she could be held liable under common design.

In order to be liable, Mrs Sig must have shared with the other parties the features of the design of Netprotect that made it wrongful. In this case, Mrs Sig did not have the confidential information of Vestergaard or knowledge that it was being misused. Therefore, she did not share one of the features of the design that made it wrongful, namely the necessary state of mind.

By way of analogy, Lord Neuberger gave the example of a person who drove someone else to and from a bank robbery. That person would be liable in tort for the robbery under common design, but only if the driver knew that their passenger intended to rob, or had robbed the bank.

This situation could be contrasted with a case of patent infringement, which is a case of strict liability and requires no knowledge or intention on the part of an alleged wrongdoer. In that type of situation, the fact that the alleged infringer does not know of the existence, contents or effect of the patent is irrelevant to the question of infringement, even if they had thought the invention up for themselves.

Finally, Lord Neuberger said that he had ‘no difficulty’ with the idea that a person who receives and uses confidential information, but does not appreciate that it is confidential, can be liable for using that information once they appreciate that it is indeed confidential. Accordingly, in this case, the grant of an injunction against Mrs Sig, if she was threatening to use or pass on Vestergaard’s trade secrets, might well be justified, once it could be shown that she appreciated, or ought to have appreciated, that they were confidential to Vestergaard. However, that did not mean that she was liable to damages for misuse of confidential information at a time when she was unaware that there had been any such misuse.

Mrs Sig’s unusual position

Vestergaard argued that Mrs Sig either had blind-eye knowledge of Dr Skovmand’s misuse of Vestergaard’s confidential information or that Mrs Sig was liable for misuse of confidential information on the basis that she was ‘playing with fire’ when she decided to start a new business with Mr Larsen, which involved employing Dr Skovmand.

Lord Neuberger said both ways of stating the argument must fail given the findings of Mr Justice Arnold. The first required a finding of dishonesty against Mrs Sig which did not exist on the facts. The second argument failed as it was not enough to render Mrs Sig liable simply because she took a risk. As Lord Neuberger said, ‘if one plays with fire, one is more likely to be burnt, but it does not of itself mean that one is burnt’.


PUBLIC POLICY

On a slightly different note, one of the most interesting aspects of the judgment was Lord Neuberger’s comment that the law is required to maintain a balance between the protection of confidential information (and other intellectual property rights) on one hand and not unreasonably inhibiting competition in the marketplace on the other. He said that, while it was clear that the law must protect commercial innovation, it must also not serve to discourage former employees, such as Mrs Sig, by making it unduly difficult for them to compete with their former employers. In this case, it would have been inconsistent with maintaining this balance to have found Mrs Sig liable. Indeed, it would have been oppressive to do so.

By Geoff Steward, partner, and Ross Brown, solicitor, Macfarlanes LLP.

E-mail: geoff.steward@macfarlanes.com; ross.brown@macfarlanes.com.