CONFIDENTIAL INFORMATION

posted in: CONFIDENTIAL INFORMATION | 0
CONFIDENTIAL INFORMATION
CONFIDENTIAL INFORMATION

SELECTED ASPECTS OF THE LAW RELATING TO CONFIDENTIAL INFORMATION

 

  1. SPRINGBOARDS AND HEADSTARTS

In essence, the rationale for the so-called “springboard” doctrine (which has more to do with trade secrets than personal information of a confidential nature) is that unlawfully obtained confidential information cannot be used to provide an advantage over the person from whom the information was obtained or, indeed, other potential competitors, by enabling the recipient to avoid the work, skill and time that would otherwise have been required but for the confidential information.

As was said by Lord denning in Seager v Copydex Ltd[1] a person:

“must take special care to use only the material which is in the public domain. He should go to the public source and get it: or, at any rate, not be in a better position than if he had gone to the public source. He should not get a start over others by using the information which he received in confidence.”

The word “springboard” was used for the first time in the judgment of Roxburgh J. in the case of Terrapin v Builders Supply Co (Hayes) [2]. At page 391 of the judgment the learned judge said:

“……a person who has obtained information in confidence is not allowed to use it as a springboard for activities detrimental to the person who made the confidential communication, and springboard it remains even when all the features have been published or can be ascertained by actual inspection by any member of the public.”

In Terrapin the information in question concerned the design of portable buildings that had been conveyed to the first defendant at a time when the defendant manufactured the buildings to the plaintiff’s design. At the time of the proceedings, buildings made to the design had been put on the market by the plaintiff and aspects of the design had been publishes in brochures. Roxburgh J. nevertheless held that the ‘springboard’ doctrine prevented the defendant’s use of the information, stating (at 392) that:

“It is, in my view, inherent in the principle upon which the Saltman case rests that the possessor of such information must be placed under a special disability in the field of competition in order to ensure that he does not get an unfair start; or, in other words, to preclude the tactics which the first defendants and the third defendants and the managing directors of both those companies employed in this case.”

The idea behind the doctrine did, however, precede Terrapin. In the case of Saltman Engineering Co Ltd v Campbell Engineering Co Ltd[3], Lord Greene M.R. (at 215) said:

“What the defendants did in this case was to dispense in certain material respects with the necessity of going through the process which had been gone through in compiling these drawings, and thereby to save themselves a great deal of labour and calculation and careful draughtsmanship. No doubt, if they had taken the finished articles, namely the leather punch, which they might have bought in a shop, and given it to an expert draughtsman, that draughtsman could have produced the necessary drawings for the manufacture of machine tools required for making that particular finished article. In at any rate a very material respect they saved themselves that trouble by obtaining the necessary information from the original drawings or from the tools made in accordance with them. that, in my opinion, was a breach of confidence.”

Application of the doctrine is well demonstrated in the case of Ackroyds (London) Ltd v Islington Plastics Ltd[4]. The defendants had been contracted to manufacture swizzle sticks for the plaintiff which had supplied them with a tool for this purpose. During the period in which a contractual relationship existed between the parties, the defendants supplied swizzle sticks manufactured with the plaintiff’s tool to the plaintiff’s principal customer.

In his judgment (at 104) Havers J. found that the plaintiff’s tool was entrusted to the defendants for the manufacture of swizzle sticks for reward and for no other purpose so that in equity there was an obligation on the defendants to use the tool solely for the plaintiff’s purposes and for no other purpose. The information obtained by the defendants was confidential and obtained in circumstances which made it confidential. The obligation of confidence had been broken by the defendants by manufacturing swizzle sticks with the plaintiff’s tool for their own purposes and in using the information to compete with the plaintiff without its consent.

In enjoining the defendants from manufacturing swizzle sticks using the plaintiff’s tool, Havers J. had relied on the springboard doctrine when he rebutted an argument put up on the defendants’ behalf that the information was generally available by saying (at 104) that:

“No doubt a time may come when information is generally available to the public. But the mere publication of an article by manufacturing it and placing it on the market, whether by means of work done in it or calculation or measurement which would enable information to be gained, is not necessarily sufficient to make such information available to the public. The question in each case is: Is such information available to the public? It is not, in my view, if work would have to be done upon it to make it available.”

On the other hand in O. Mustad & Son v Dosen and Another[5] the plaintiff failed in its proceedings for breach of confidence because it had applied for a patent over the very information which was the subject of the dispute. As the information was now in the public domain, the plaintiff could no longer obtain an injuncion restraining what was common knowledge. The springboard doctrine does not appear to have been considered in this case.

In Cranleigh Precision Engineering v Bryant and Another[6] it was argued by the defendants’ counsel (relying upon Mustad ) that the confidential information in question had become public property by the patent of a third party, the UK rights in which had been assigned to the defendants.

Roskill J. dismissed this argument and granted the plaintiffs a remedy on the basis that confidentiality existed, not in the contents of the patent,

Close up on a file tab with the word data and confidential, focus on the main text and blur effect. Concept image for illustration of company data protection.

but in the knowledge of the significance which the patent had on the plaintiff’s operations, which one of the defendants (Bryant) “….only became aware of because of his contractual and confidential relationship with the plaintiff.” At the time that he had acquired knowledge of the patent Bryant had been the plaintiff’s managing director, and the information regarding the patent had been imparted to him by the plaintiff’s patent agents. Bryant had, in turn, concealed this information from the plaintiff’s board.

Although the question of liability under the doctrine should not pose major problems, the same cannot be said for the granting of remedies which flow from such liability. In Coco v A.N. Clark (Engineers) Ltd[7] Megarry J. after referring to the dictum of Roxburgh J. in Terrapin (at 49) said as follows:

“Quite apart from authority, I would recognise the principle enshrined in those words as being salutary. Nevertheless, I am not entirely clear how it is to be put into practical effect in every case. Suppose a case where there is a confidential communication of information which is partly public and partly private; suppose that the recipient of the information adds in confidence ideas of his own improving the initial sheme; and suppose that the parties then part, with no agreement concluded between them. How is a conscientious recipient of the ideas to comply with the requirements that equity lays upon him?”

One of the solutions suggested to this problem by Megarry J. in his judgment was that an unconscientious recipient of the information could ignore the duty, use the   information and then pay damages. This appears to have been the course adopted by Lord Denning in his judgment in Seager v Copydex Ltd [8] when, after stating that the recipient should not get a start over others by using the confidential information, he said (at 932): “At any rate, he should not get a start without paying for it. It may not be a case for injunction or even an account, but only for damages, depending on the worth to him in saving him time and trouble.”

It is also clear that that the springboard does not last for ever. In Potters-Ballotini v Weston-Baker and Others[9] it was said by Lord Denning (at 206) that “…a time may come when so much has happened that he (the recipient) can no longer be restrained. That is another point of difficulty.”  In casu  the granting of an interlocutory injunction would have had the effect of closing the defendants’ factory and would have been highly damaging to them. People had been employed and the plant for the factory had cost a quarter of a million pounds. An appeal against the refusal to grant an interlocutory injunction was refused.

The limited duration of the springboard was also recognised in Harrison v Project & Design Co (Redcar) Ltd[10] where Graham J. after referring to Potters-Ballotini, did not grant the injunctions sought by the plaintiff, but instead awarded damages for the use of the plaintiff’s confidential information until the adoption by the defendants of their own design for the chair-lift. At page 87 of the judgment he said:

“What, however, is the position in regard to confidential information? It would, in my judgment, clearly be right that the defendants should pay for the privilege of using the plaintiff’s idea of a non-continuous chain, weight and slide tube for the “springboard” which they obtained from information which he gave them, although they undoubtedly later improved on his ideas and preferred embodiment.”

Similarly, if the court believes that the defendant’s head start has not yet expired, but is likely to do so in the near future, it may grant an injunction which is limited to the intervening period.[11]

Finally in relation to the springboard doctrine, it is submitted that in cases where there has been a breach of confidence, the aim should be to deprive the defendant of the benefits of his wrongdoing without imposing ‘an unfair advantage vis a vis the rest of mankind.’[12] It may well be that Megarry J. was correct when he stated in Coco (at 50) that the essence of the duty seems to be more that of not using confidentail information without paying than of not using it at all. In other words damages are to be preferred to an injunction.

  1. PERSONAL KNOWLEDGE, SKILL OR EXPERIENCE ACQUIRED AT WORK

It is established law that information having the necessary quality of confidence must be other than personal knowledge, skill or experience acquired at work. These collectively can be termed ‘know how’ which is not protectable by a former employer on grounds of public policy. A substantial proportion of breach of confidence litigation concerns actions by employers against former employees allegedly seeking to use trade secrets acquired during their employment.

As a starting point it should be noted that during the employment relationship the employee is subject to a duty of fidelity which is more stringent than the general equitable duty of confidence. Consequently, a careful distinction must be drawn between the employees obligations prior to and after the employment contract has been terminated.

The leading case on the topic of skill acquired at work is Faccenda Chicken Ltd v Fowler and Others[13] where Goulding J. identified three cadegories of information gained by an employee in the course of his service .

  1. There is information which because of its trivial nature or its easy accessability from public sources of information, cannot reasonably be regarded as confidential.The servant is free to impart this information during his service or afterwards to anyone he pleases even his master’s competitor. An example of this type of information is a published specification well known to people in the industry concerned. There are limits, however, to this type of information. Lord Greene M.R. in Saltman (at 415) provides the example of a confidential document which is the result of work done on publicly available materials but what makes the document confidential is the “….maker of the document has used his brain and thus produced a result which can only be produced by somebody who goes through the same process.”
  2. There is information which the servant must treat as confidential either because he is expressly told it is confidential or because from its character it is obviously so, but which once learned remains in the servants head and becomes part of his own skill and knowledge applied in the course of his master’s business. While still employed this information cannot be disclosed, but after leaving his master’s employ the servant, in the absence of a reasonable restraint stipulation, may use his skill and knowledge to compete with his former employer.
  3. There are specific trade secrets so confidential that even though they may have been learned by heart they cannot lawfully be used for anyone’s benefit but the master’s. An example of this is a secret process.

In the earlier case of Stephenson Jordan & Harrison Ltd v MacDonald & Evans[14] the defendant was a publisher who agreed with an author, Hemming, to publish a book Hemming had written on ‘flexible budgetary control’. Hemming died shortly afterwards. It subsequently became clear that the author’s former employer regarded much of what was in the book as confidential information and sought injunctive relief.

Insofar as the plaintiff relied on breach of confidence for its claim the court (at 15) found that this had not been made out. According to Evershed M.R. there was no evidence of any particular material which had been given to the plaintiff’s servants confidentially in the course of their employment. What had been learned by the servants had been learned by them as part of their business experience and in the course of earning their livelihood – the second cadegory referred to by Goulding J. in Faccenda Chicken. The learned Judge then went on to say:

“….. the putting together and the applying in a particular way of principles which were generally common to the profession of Management Engineers is the subject which is said to be confidential; and that is decribed as ……“know-how”. But if I understand the use of the language correctly “know-how” seems to me to indicate something quite essentially different fron secret and confidential information. It indicates the way in which a skilled man does his job, and is an expression of his individual skill and experiences.”

In the case of Gilman Engineering Ltd v Simon Ho Shek On[15] the Supreme Court of Hong Kong, following Faccenda Chicken refused to enjoin the defendant (reviously employed by the plaintiff) from inter alia, from disclosing “any confidential information acquired by him during the course of his employment…relating to the contracting business of the plaintiff.”

Lui J. found that if highly confidential information cannot be easily isolated from the ordinary stock of knowledge and experience of an ex-employee, the courts would be reluctant to come to the ex-employer’s aid with an injunction. Consequently there is a need for an employer to stipulate for protection by an enforceable restrictive covenant against misuse of sensitive information, confidential in the general sense as well as in the sense of a trade secret.

In casu, the defendant in his capacity as one of the plaintiff’s directors had come to grips with a considerable amount of sensitive information and in his many years of service could not have faied to retain a considerable amount of such information. The plaintiff had sought relief which was ‘miserably vague’ and bearing in mind that that a claimant is required to adequately describe its interest as would assist the court in identifying the claim, the plaintiff had not done this and the application was refused.

 It is submitted that two principles emerge from all this.

Firstly, it seems that the Courts adopt the prima facie view that every person has the right to exploit for the purpose of earning a living all the skill, experience and knowledge at their disposal, including skill experience and knowledge acquired in the course of previous periods of employment. It would be wrong “…to impose a restraint which is effectively only going to operate to stop a man using his acquired skills rather than to stop him misusing information which he ought never to have taken into use at all”[16]

However, as was said by Marais A.J. in the South African decision of Northern Office Micro Computers (pty) Ltd v Rosenstein[17] :

“The dividing line between the use by an employee of his own skill, knowledge and experience, and the use by him of his employer’s trade secrets is notoriously difficult to draw.

Generally speaking, he (the employee) cannot be prevented from using his own skill and experience to attain a particular result which he has achieved before for a particular employer.”

Because of this difficulty, and bearing in mind the prima facie view adopted by   the Courts, it is notoriously difficult to enjoin ex-employees from using confidential information obtained during their employment. It is only in extreme cases, such as the use by an employee of the third cadegory of information mentioned by Goulding J. in Faccenda Chicken, that an employer can be reasonably confident of restraining the use of confidential information by an ex-employee.

Secondly, if an employer wishes to obtain some measure of protection, it would be well advised specifically to stipulate for such protection by way of a restrictive covenant at the commencementof or during the existance of the employment contract.

  1. CONFIDENTIAL INFORMATION AND THE EMPLOYMENT CONTRACT

We have seen that the common law rule is that personal skill and knowledge acquired at work does not have the necessary quality of confidence to be protected at the suit of a former employer. There are indeed very sound reasons for this principle.

We have also seen, however, that the first cadegory of information referred to Goulding J. in Faccenda Chicken is subject to some limitation and this raises the question of what information in this cadegory is protected or protectable. As stated above, this would depend, to some degree, upon whether there exists a covenant prohibiting disclosure or use of information upon leaving the covenantee’s employment.

These covenants will have to run the gauntlet of the restraint of trade doctrine and those covenants which fall foul of that doctrine will be held to be void. It is trite law that restraint clauses binding employees are far more stringently examined by the courts than are restraints agreed upon in arms length negotiations as for example those made between purchasers and sellers of businesses. If the effect of the restraint is merely to protect the employer from competition from his former employee it will be struck out.[18]

The case of Deacons v Bridge [19]had to do with a covenant which restricted a former partner of the plaintiff firm from acting as a solicitor in Hong Kong for a period of five years for any client of the firm. Lord Fraser of Tullybelton in his judgment (at 21) found that the covenant in question could not be cadegorised as one between employer and employee or as one between purchaser and seller although it had resemblance to both. In order to decide the matter the approach of Lord Reid in the Esso Petroleum[20] case was adopted where it was said (at 301) that:

“I think it better to ascertain what were the legitimate interests of the appellants which they were entitled to protect, and then to see whether these restraints were more than adequate for that purpose.”

Applying this principle, the Court in Deacons found that, having regard to the fact that the plaintiff was entitled to protect its legitimate interests by means of a restarint of trade imposed on outgoing partners and that the scope and duration of the restraint in question was not unreasonable, the covenant was capable of enforcement.

In summary, therefore, a post-employment covenant will be unenforceable unless the employer is seeking to protect trade secrets or other confidential information[21], or to prevent the solicitation of established customers. The covenant must also be no wider than is reasonably necessary to protect the employer’s interests.

The decision of Printers and Finishers Ltd v Holloway[22] is important for two reasons. In his judgment Cross J. attempted a formulation of information which  could reasonably be the subject of protection. At page 735 he said:

“The mere fact that confidential information is not embodied in a document but is carried away by an employee in his head is not, of course, a reason against the granting of an injunction to prevent its use or disclosure by him. If the information can fairly be regarded as a separate part of the employee’s stock of knowledge which a man of ordinary honesty and intelligence would recognise to be the property of his old employer and not his own to do as he likes with, then the court, if it thinks that there is a danger of the information being used or disclosed by the ex-employee to the detriment of the old employer will do what it can to prevent the result by granting an injunction. Thus an ex-employee will be restrained from using or disclosing a chemical formula or a list of customers which he has committed to memory.”

Cross J. also stressed the need for covenants if an employer wished to protect itself adequately. At page 736 of the judgment he said:

“If Mr. Elliot is right in thinking that there are features in his process which can fairly be regarded as trade secrets and which his employees will inevitably carry away with them in their heads, then the proper way for the plaintiffs to protect themselves would be by exacting covenants from their employees restricting their field of activity after they have left their employment, not by asking the court to extend the general equitable doctrine to prevent breaking confidence beyond all reasonable grouds.”

The last dictum was approved of by the Court of Appeal in Faccenda Chicken.[23]

The Esso Petroleum case is the leading case on covenants in restraint of trade. In  that case the appellant purported to hold the respondent to an agreement not to sell petrol other than the appellant’s for a period of 21 years. The Court held that the agreement in question was within the scope of the doctrine of restraint of trade, that a tie of 21 years went beyond any period for which developments were reasonably foreseeable and in the absence of evidence of some advantage to the appellants for which a shorter period would be adequate, the agreement was void.

  1. INFORMATION IMPARTED UNDER CIRCUMSTANCES IMPORTING AN OBLIGATION OF CONFIDENCE

This is the second of the three requirements stated by Megarry J. in Coco for a successful breach of confidence action. There can clearly be no binding obligation of confidence, if, as Magarry J says, the information is blurted out in public or is communicated in other circumstances which negative any duty of keeping it confidential.

After stating the requirement, Megarry J. (at 48) made the following obiter observation:

“It seems to me that if the circumstances are such that any 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, then this should suffice to impose him the equitable obligation of confidence.”

The importation of the reasonable man test into an equitable enquiry may well have motivated the Law Commission (United Kingdom) to attempt (unsuccessfully) to replace that test with a test of express or implied acceptance of the information in question.

Another motivation would also have been concern about unsolicited, valuable information being placed in the hands of a recipient who did not want the information to begin with, and certainly did not wish to be bound by any confidence. The example provided in paragraph 16.3 of the outline is a good one.

The question which then arises is whether the fact that the courts have disregarded the UK Law Commission’s test and opted rather for Megarry J.’s reasonable man test mean that innocent recipients of unsolicted information may be exposed to the situation outlined in the example? In other words, if the reasonable man test is the operative test, could firm B be enjoined by firm A from marketing its drug breakthrough.

The decision of Fullagar J. in the Victorian Supreme Court case of Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd [24] may wel have resolved this issue at least as far as Australian law is concerned.

In a well reasoned judgment Fullagar J.stated (at 190) that all cases on “breach of confidence” in relation to information fell into two classes. The first class was composed of those cases where, by contract, express or implied, a person has for valuable consideration agreed not to use or publish certain information.

The second class is composed of those cases where, whatever the position at common law might be, the court has to protect information which is confidential. This class is in turn sub-divided into cases where equity will intervene to protect what it regards as the property of a person and cases where the analogy of property is not available, but where the circumstances are such as to make it unconscionable for the recipient of information to publish or use the information.

We are here concerned with the first sub-division of the second class of breach of confidence case referred to by Fullagar J. in his judgment, who states (at 191) that “…for hundreds of years equity has intervened by injunction to resrain the use or despoiling or conversion of another’s property without his consent, and also to restrain breaches of trust (and of course there cannot be a trust without there being some trust property).”

Then (at 191) Fullagar J. makes the following observation:

“The ultimate question in all this one-half of the cases can be expressed as asking whether a reasonable man in all the circumstances would recognise the information in question as being the property of the plaintiff. That of course is not an unhelpful way of putting it, but it should not however be used in any sense which conjures up the familiar if bewildered man from the seat of the Clapham omnibus, dragged this time out of his seat to give a judgment in the Court of Chancery. If the question conjures up that picture, then it is better to ask instead whether an equity lawyer, observing the analogies so far drawn from the produce of labour, would in all the circumstances recognise the information in question as being the property of the plaintiff.”

Fullagar J. is clearly trying to reconcile the use of the reasonable man test in an equitable enquiry and suggests an alternative, equaly viable test, that of the equity lawyer who, no doubt, would not be seen dead on the Clapham omnibus but is capable of making as reasoned an assessment as any of its passengers.

It is submitted that the enquiry is really one of common sense and, it is submitted, this is recognised by Fullagar J. when he states that the ultimate question that judges must direct their enquiry to is “…would a person of ordinary intelligence, in all the circumstances of the case, including, inter alia, the relationship of the parties and the nature of the information and the circumstances of its communication, recognise this information to be the property of the other person and not his own to do as he likes with?”

To return to the example in paragraph 16.3 of the outline, applying Fullagar’s (common sense) test, it can hardly be imagined that in those circumstances firm B can successfully be sued by firm A for breach of confidence. Even though the letter is confidential, the circumstances under which the information (the research findings) was imparted by firm A to firm B is such that equity will not come to the assistance of firm A. In order to obtain equity one must do equity and by no stretch of the imagination was the conduct of firm A equitable. On the contrary, it was scurrilous and underhand and entitles firm A to no legal protection whatsoever.

[1] Seager v Copydex Ltd [1967] 1 wlr 923

[2] Terrapin v Builders Supply Co (Hayes) [1967] RPC 375

[3] Saltman Engineering Co Ltd v Campbell Engineering Co Ltd [1948] 65 RPC 203

[4] Ackroyds (London) Ltd v Islington Plastics Ltd [1962] RPC 97

[5] O. Mustad & Son v Dosen and Another [1963] RPC 41

[6] Cranleigh Precision Engineering v Bryant and Another [1964] 3 AER 289

[7] Coco v A. N. Clark (Engineers) Ltd [1969] RPC 41

[8] Seager v Copydex Ltd [1967] I WLR 923

[9] Potters – Ballotini v Weston – Baker and Others [1971] RPC 202

[10] Harrison v Project & Design Co (Redcar) Ltd [1978] FSR 81

[11] See Fisher-Karpark Industries Ltd v Nichols [1982] FSR 351

[12] Aquaculture Corp v New Zealand Green Mussel Co Ltd (1985) 5 IPR 353

[13] Faccenda Chicken Ltd v Fowler and Others (1985) 1 AER 724

[14] [1952] RPC 10

[15] Gilman Engineering Ltd V Simon Ho Shek On (1987) 8 IPR 313

[16] Per Whiford J. in Fisher-Karpark at 354

[17] Northern Office Micro Computers v Rosenstein [1982] FSR 124

[18] Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 713

[19] Deacons v Bridge [1984] 2 AER 19

[20] Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269

[21] Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472 at 1484

[22] Printers and Finishers Ltd v Holloway [1964] 3 AER 731

[23] (1985) 6 IPR 155 at 165

[24] [1979] VR 167

Leave a Reply