Monday, 25 July 2011

Breach of confidence claim against ex-employees and consultants

Authors: David Cran and Paul Joseph (Reynolds Porter Chamberlain LLP)

Vestergaard Frandsen A/S and others v Bestnet Europe Limited and others [2011] EWCA Civ 424, 20 April 2011

Journal of Intellectual Property Law & Practice (2011) doi: 10.1093/jiplp/jpr121, first published online: July 23, 2011

The Court of Appeal for England and Wales has considered when a breach of confidence action arises against ex-employees and ex-consultants and the extent to which the ‘springboard doctrine’ can be used to restrain the sale of new products developed with the help of confidential information.

Legal context

The basic principles
A breach of confidence is committed when the following three conditions are met:

  • information is confidential in nature (ie not in the public domain);
  • that information is disclosed to a recipient in circumstances of confidentiality: The question is whether a ‘reasonable man standing in the shoes of the recipient of the information would have realised that upon reasonable grounds the information was being given to him in confidence’ (Coco v A N Clark (Engineers) Limited [1969] RPC 41, at 48) and
  • The information is used by the recipient to the detriment of the discloser.

The ‘springboard doctrine’
The third element will be satisfied if a recipient receives an advantage from the confidential information in question and so gains a head start over others who do not have the benefit of that information (Seager Limited v Copydex Limited [1967] RPC 349, at 368).

Breach of confidence and employment
Faccenda Chicken Limited v Fowler [1986] 1 All ER 617 is the leading case in relation to breach of confidence in an employment setting. In the absence of express contractual provisions, information obtained in the course of a person's employment falls into one of the following three categories:

  • Day to day business trivia—this information cannot be classed as confidential;
  • Information with some confidential element—this information can be protected by confidence during the course of a person's employment, but usually not afterwards; and
  • Truly confidential trade secrets—this information can be protected by the law of confidence for a period after a person's employment and, in some cases, indefinitely.

Notwithstanding this, a person is entitled to use information that is derived from his own acquired knowledge and skill, regardless of whether this information is a trade secret. The test for whether such information should belong to a person or his employer is an objective one based on what a man of ‘ordinary honesty and intelligence’ would believe (Printers & Finishers Ltd v Holloway [1965] 1 WLR 1).

Directive 2004/48/EC
The European Directive on the enforcement of IP rights, at Articles 8 and 10, requires Member States to issue proportionate remedies for the protection of IP rights.

Facts

Vestergaard had developed a polyester mosquito net, impregnated with insecticide, which they sold under the name ‘PermaNet’. Two ex-employees of Vestergaard (Torben Larsen and Trine Sig) set up a company called Bestnet and employed the services of Dr Skovmand who had previously been a consultant to Vestergaard and who had developed the PermaNet product. With Dr Skovmand's help, Bestnet developed a competing produce called ‘Netprotect’.

Larsen and Sig's employment contracts with Vestergaard had contained express terms preventing them from using confidential information after their employment came to an end.

Vestergaard alleged that Netprotect had been developed using confidential information relating to formulae and test results contained in a Vestergaard database. In December 2006, Vestergaard commenced proceedings in the UK against Bestnet, Larsen, Sig, and Dr Skovmand.

The defendants denied that any information from Vestergaard's database was used to develop their Netprotect product and that they had legitimately used Dr Skovmand's own expertise. In addition, they argued that the information was not subject to an obligation of confidence.

Analysis

In a unanimous decision, the Court of Appeal agreed with the High Court that information from Vestergaard's database had been used by the defendants to develop Netprotect and this was not just a case of Dr Skovmand using his general skill and knowledge. In addition, while there was no express contractual term preventing Dr Skovmand from using Vestergaard's confidential information, the Court of Appeal was satisfied that the information in the database amounted to a trade secret (for the purposes of the Faccenda categories) and therefore, it was capable of protection even after Dr Skovmand's contract with Vestergaard came to an end.

However, the Court allowed an appeal by Sig against the High Court's ruling that she was also personally liable for breach of confidence. The Court of Appeal held that she did not have knowledge of the technical information or the fact that it had been used and that, therefore, she received the information in circumstances where no obligation of confidence was present. Despite the claimant's attempt to rely on Sig's employment contract to fix her with liability, Jacob LJ rejected claims that the contract imposed strict liability in relation to confidential information.

Jacob LJ suggested in his judgment that it was possible to imply a term imposing strict liability obligations in respect of confidential information into an employment contract, but only in exceptional circumstances, which were not satisfied here.

The Court also refused to grant an injunction against the defendants’ later-developed products. The High Court had been correct to take account of the differences between the insecticide impregnated in these products and Vestergaard's formulae. Jacob LJ said that the defendants had not received a sufficient ‘head-start’ in producing the later products for the springboard doctrine to apply.

Practical significance

It seems right that the obligations of a consultant, as far as confidential information is concerned, should be analogous to that of an employee, notwithstanding the absence of an express provision in a contract. If consultants were somehow exempt from liability under breach of confidence, this would act as a severe deterrent against companies retaining the services of experts on a temporary or rolling basis.

The proper scope of the springboard doctrine is difficult to ascertain from this judgment. In Vestergaard, breach of confidence was established and an injunction granted against the defendant's earlier products, but not its later versions. The IP Enforcement Directive's guiding principle of ‘proportionality’ was used to justify the Court's view that in applying the springboard doctrine, a head start should be ‘substantial’ before an injunctive remedy is granted. Although the Court's reasoning was phrased in terms of enforcement and remedies, it is difficult to avoid the conclusion that the directive is now beginning to affect substantial law of member states—and the reliance on the European doctrine of ‘proportionality’ to inform effectively the scope of infringement is a clear indication of this.

1 comment:

  1. I don't believe its possible to read the judgment (at least the version on bailii) and conclude that Jacob LJ held that "it was possible to imply a term imposing strict liability obligations in respect of confidential information into an employment contract".

    The relevant passage is:


    "Nor do I consider that there can be an implied term imposing strict liability. There is no business reason to imply a term of that harsh extent. All the principles of implication of a term into a contract (which I do not set out here - they are too well known) militate against it."

    Which falls rather short of that proposition.

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