Supreme Court rules on trade secrets case

Ex-employee not liable for damages for trade secret misuse where she did not know that the product developed by her competing business incorporated former employer's trade secrets.

Yesterday the English Supreme Court handed down judgment in the long running trade secrets case Vestergaard Frandsen (now MVF3 ApS) and others v Bestnet Europe and others.  The Court unanimously dismissed Vestergaard's appeal and held that its former employee, Mrs Sig, was not liable for breach of confidence as she did not know, and there was no reason why she ought to have known, that what she was doing amounted to misuse of confidential information.   

Background to the appeal

The case involves a familiar scenario to followers of trade secrets litigation.  Two ex-employees of Vestergaard decided to set up a rival company to produce long lasting insecticidal fabrics for mosquito nets.   Prior to leaving Vestergaard, Mrs Sig and Mr Larsen surreptitiously embarked on a project to compete with their employer in association with a Dr Skovmand.  Dr Skovmand had been a scientific consultant with Vestergaard and was, in effect, its head of development.  Unlike Dr Skovmand and her co-defendant, Mr Larsen, Mrs Sig had not been involved in product development at Vestergaard.  She had been a sales manager and had not had access to the Fence database which held the information in dispute (essentially recipes and techniques for production of the fabrics). 

Vestergaard's main complaint was that the Respondents' product, NetProtect, was developed using their confidential information.  In 2009, Arnold J concluded that Dr Skovmand (who was not a party to the UK proceedings) had used the information in the Fence database to devise the initial NetProtect recipes.  Arnold J found that Mrs Sig was liable for breach of confidence even though she had not been personally involved in devising the NetProtect recipes and did not appear to know until the proceedings were started that information in the Fence database had been used.  Arnold J reasoned that a person could be liable for breach of confidence even if he is not conscious of the fact that what he is doing amounts to a breach of confidence.  It was this issue that formed the basis of the appeal to the Court of Appeal (which reversed Arnold J's decision) and ultimately the Supreme Court. 

The Supreme Court's decision

The Supreme Court agreed with the Court of Appeal that Mrs Sig was not liable for breach of confidence.  Each of Vestergaard's three grounds for liability failed.

Contractual liability

The argument that Mrs Sig was liable under her contract of employment was dismissed in short order.  The express terms of the contract were of no assistance.  To imply a term to the effect that Mrs Sig would not assist another to abuse trade secrets where she neither knew the trade secrets nor that they were being misused would be "wrong in principle" as it was 1) inconsistent with the contract's express terms, 2) unnecessary to give commercial effect to the contract, and 3) "almost penal" in nature.

Common design

Vestergaard's main argument was that Mrs Sig was liable on the basis of common design.  Dr Skovmand, Mrs Sig and Mr Larsen worked together to design, manufacture and sell NetProtect  and as this product wrongfully used Vestergaard's trade secrets they were all liable.  However, to be party to a common design a person must share with the other parties each of the "features of the design which make it wrongful".  Mrs Sig lacked the necessary knowledge and so could not  be liable on this basis. 

Playing with fire

Vestergaard's final submission was that Mrs Sig had "blind-eye knowledge" of the use of the trade secrets or at least that she must have understood that she was "playing with fire" when the new company employed Dr Skovmand.  Since there was no finding that Mrs Sig had been dishonest, merely taking a risk was not sufficient to establish secondary liability.

Comment

The Supreme Court's decision is not surprising.  Had they found in Vestergaard's favour, this would have amounted to imposing strict liability for breach of confidence.  This would have radically changed the English law of confidence.  An action for breach of confidence is based on conscience.  As the Court acknowledged, for the conscience of the recipient to be affected, the recipient must be aware that the information is confidential. 

This decision does not mean that "innocent" recipients of confidential information cannot be prevented from making use of or disclosing the information.  Had Mrs Sig threatened to use or pass on the trade secrets once she appreciated, or ought to have appreciated, that they were confidential to Vestergaard an injunction would have been granted.

It is interesting to note that the Court expressly addressed the balance to be achieved between the protection of intellectual property rights and honest competition.  In order to take successful action against a former employee for misusing trade secrets, where there is no express contractual term, an employer must be able to show dishonesty or at least knowledge that the information in dispute is confidential.