Introduction
Facts
First instance decision
Appeal


Introduction

The Court of Appeal in Force India has provided some helpful guidance on breach of confidence in the commercial arena.(1) Clarification was provided on:

  • what should be protected when employees' own skills and knowledge have been enhanced by confidential information that they have been given;
  • whether a party can take advantage of the public domain defence when the party has not, in fact, obtained information from the public domain;
  • which party bears the burden when seeking to take advantage of exceptions to a contractual definition of 'confidential information';
  • when equity may assist where the parties have a contract in place; and
  • the scope of the confidential information to which the Wrotham Park hypothetical bargain(2) relates.

The decision also provides a useful reminder of the rules relating to repudiation of a contract, the admissibility of hearsay evidence and the narrow basis on which the Court of Appeal can revisit the underlying facts.

Facts

Force India (the claimant) designed and built Formula One racing cars. In 2008, in order to assist with its development of a new racing car, Force India entered into a development agreement with Aerolab to design and build scaled-down models for wind tunnel testing. Force India was to pay around €246,000 a month for Aerolab's services, which included those of aerodynamicists and computer-aided design (CAD) draftsmen (for further details on the facts of the case, please see "High Court sets out formula for breach of confidence claims").

Clause 5 of the development agreement contained a broad definition of 'information', which Aerolab undertook to keep confidential for the duration of the agreement and for two years afterwards. But certain carve-outs applied for the benefit of Aerolab:

  • Force India could give its written approval for Aerolab's use of the protected information.
  • The obligation did not extend to:
    • information in the public domain;
    • information that Aerolab obtained from third parties that were not similarly bound;
    • information that Aerolab already (independently) knew; and
    • information independently developed by Aerolab's employees, who were not given access to the protected information.

Although Aerolab's employees working under the agreement had to sign similar confidentiality provisions individually, should they have left employment at Aerolab, they could have sought a release from these provisions and Aerolab was not to withhold its consent unreasonably.

From the beginning of 2009 Force India fell behind with payment of Aerolab's invoices and also defaulted on a subsequently agreed payment plan. On July 31 2009 Force India made it clear that it would not pay outstanding sums and would also have no further discussions with Aerolab until after the "August shutdown". As a result of this, Aerolab transferred Force India's data to an external hard drive and on August 3 2009 it disabled Force India's connection to Aerolab's server, but did not make Force India aware of this until after the shutdown on August 19 2009; Aerolab instead led Force India to believe that this was only a "temporary" shutdown.

Once Aerolab stopped working for Force India, the intention was that the files containing the information should be contained and ultimately returned, but this process was not properly policed by Aerolab and some of the aerodynamicists and CAD draftsmen made copies of Force India's folders. On August 3 2009 Aerolab also began work for a competitor (Lotus).

Force India alleged that the confidential drawings that it had provided to Aerolab during the course of the development agreement had been used in the design of Lotus's rival car. Aerolab accepted that elements of Force India's design had been copied, but maintained that it had merely saved a small amount of time in producing a design for Lotus, which could be compensated by a modest payment of what it would have cost to appoint a freelance CAD designer to undertake this preliminary work.

It was also noted in the judgment that Aerolab did not possess Force India's most up-to-date confidential drawings from the wind tunnel tests, and that Force India's car was the slowest on the circuit in August 2009.

Despite all these factors, Force India sued Lotus, Aerolab and individual employees for breach of confidence, claiming in excess of £13 million (equivalent to the cost of developing virtually the entire aerodynamic package for a Formula One car from scratch). Aerolab counterclaimed for its outstanding invoices in the sum of around €850,000.

First instance decision

The judge found that although there had been many batches of unlawful copying by Aerolab during August 2009 and thereafter (33 separate instances of copying were admitted in the defence) and therefore there should be a remedy available against Aerolab, these were "opportunistic" and did not amount to "systematic copying", and the value to Aerolab had been small. In particular, he found that the copying related only to precise dimensions of component parts; the overall aerodynamic design, which was the real basis for obtaining a competitive advantage, had not been copied.

Importantly, the judge found no evidence of wrongdoing by Lotus. However, the inclusion of Lotus's defendants had led to the claim being advanced by reference to the large sums that Formula One teams spend on the racing circuit, which was difficult for Force India to reformulate when the judge found no evidence of Lotus having been involved.

Also, there was no claim that Force India had suffered any loss; rather, it was claimed that Lotus had obtained a benefit from the use of the information and, notably, Force India had failed to make a claim that Aerolab had received any benefit (even though it had been paid around £130,000 by Lotus for its work).

After a long review of authorities in this area and of the evidence, the judge awarded damages to Force India against Aerolab (and not the other defendants), but assessed them at €25,000 by reference to how much Aerolab might have had to pay a consultant to produce drawings up to the level of those copied by Aerolab's employees. Force India appealed.

Appeal

On appeal, Lord Justice Lewison stressed at the outset that he was precluded from interfering with the primary findings of fact of the trial judge:(3)

"Specific findings of fact, even by the most meticulous Judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence. His expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualification and nuance… of which time and language do not permit exact expression but which may play an important part in the Judge's overall evaluation."(4)

Nevertheless, the appeal was successful on a number of points.

End of development agreement
Disabling Force India's connection to the Aerolab servers on or around August 3 2009 was not enough to end the agreement. It was a sufficiently clear act by Aerolab to constitute acceptance of Force India's breach (for non-payment of the outstanding invoices), but given the intervening summer break, it did not come to Force India's attention until August 19 2009, when Force India was informed that Aerolab had stopped work on its behalf. Added into the mix were comments and actions by Aerolab that had led Force India to understand that the agreement was continuing.

This was important in the context of the claim for breach of confidence, because Aerolab accepted that copying had taken place during August.

Enforceability of Clause 5 of development agreement
Given that the judge had wrongly found that the development agreement had been terminated on August 3 2009, he had focused on whether Clause 5 could be enforced against Aerolab and its employees after termination. In doing so, he had considered a number of authorities regarding employees' obligations and terms which could be implied into contracts. This was the wrong approach. The appropriate way to proceed was to begin with Clause 5 and interpret it correctly by reference to the ordinary words of the development agreement.

Additionally, the judge had considered Clause 5 unduly wide and, as a result, had placed the onus on Force India to show that the material which had been copied fell within the definition of 'information' and was not within one of the exceptions. Again, this was wrong. First, no one had challenged the enforceability of Clause 5 and so the task for the court, again, was to construe it properly. Second, where Aerolab was seeking to bring itself within exceptions to Clause 5, the onus was on Aerolab to prove this on the balance of probabilities.(5)

Finally, the judge had criticised Force India for failing to "identify… any features of modularity… or spatial relationship that were confidential". Again, this was irrelevant. Clause 5 defined 'information' and it was clear that the protected information (which the judge held amounted to trade secrets) had been misused by Aerolab many times.

Misuse of protected information known by Aerolab employees
The judge had been swayed by Aerolab's argument that employees could not lawfully be prevented from using the protected information in their daily duties that had been incorporated into their skills, knowledge and experience, on the basis that it should make no difference whether they remained employed by Aerolab or moved on to a third party.

The Court of Appeal disagreed and felt that the limits built into the development agreement (set out above) were acceptable and commercially negotiated. The proper question was whether the restrictive covenant limiting employees' use of the protected information was reasonable; this was a question of fact that had never been considered at the trial.

The appeal judge disagreed that if a particular dimension of the protected information imparted to the employee was memorable, that could (and should) be regarded as part of the employee's own skills, knowledge and experience and, therefore, not protected. Something may well be memorable, but the employee may still be lawfully restricted in its use. He accepted that it was "more problematic" to identify misuse of 'knowledge' than tangible pieces of information, but approved of the "eminently sensible" comments of Justice Roxburgh:(6)

"[W]hen I use the word "information" I mean something that can be traced to a particular source and not something which has become so completely merged in the mind of the person informed that it is impossible to say from what precise quarter he derived the information which led to the knowledge that he is found to possess."

This must be correct, given that the basis of the law of confidence is to prevent a party from obtaining an "unfair advantage"(7) in its business dealings.

In any event, again, this did not assist with the central question of what Clause 5 meant. Also, it was no defence that material was available from a public source if the confidant had not obtained the material in that way.(8)

Furthermore, the unauthorised use of material as a starting point for a new design constitutes 'misuse', even if the "design wholly or partially discards the information from which it was originally built up".(9)

Given the extent of the copying by Aerolab and the uncontested evidence that one of the principal aerodynamicists had instructed another employee to adapt the Force India profiled foot for Lotus, the appeal judge found it "difficult to describe" Aerolab's conduct as "opportunistic". He considered the suggestion of Force India's counsel that "everything is to be presumed against wrongdoers",(10) but made it clear that this had little relevance in a case where both sides had provided lengthy disclosure and witness evidence.

Scope of confidential information to which Wrotham Park bargain applies
The trial judge had decided in the context of quantum of damages that the subject matter for the hypothetical bargain (how much should Aerolab pay for its hypothetical licence to use the protected information?) should be limited to the material that was in fact misused, rather than all of the information that was available to Aerolab. To find otherwise would be "contrary to principle, authority and basic fairness".

However, no questions had been put to Aerolab's employees as to whether they considered themselves "free to use [the protected information] as they thought fit" and no finding of fact was made on this question. Importantly, the appeal judge held:

"If the judge had made that finding, then it seems to me that compensation should have been assessed on the basis of the value to Aerolab of the whole corpus of information. After all, if A wrongfully retains B's dictionary, it does not matter that he only looked up a few definitions."

Equity versus contract
The appeal judge held that equitable remedies might be important here only in two narrow areas:

  • where work had been carried out by a third party that had not signed a contract with Force India; or
  • where a contractual obligation was unenforceable as being in unreasonable restraint of trade.

Assessment of damages by reference to cost of consultant
Despite these criticisms, the Court of Appeal upheld the judge's decision to assess damages by reference to what it would have cost Aerolab to commission a CAD consultant to reproduce the early Force India designs and would not interfere with the sum awarded.

This was a perfectly reasonable and proper basis for assessment, based on valuing material in Lord Denning's first category of confidential information(11) – information that was "not very special… involved no particular inventive step, but was the sort of information which could be obtained by employing any competent consultant".

Finally, it was commented that there was no expert witness evidence before the court which complied with the Civil Procedure Rules or which properly dealt with how long it might have taken a CAD draftsman to prepare drawings of this nature. Instead, a qualified CAD draftsman gave some limited information regarding market rates in Germany exhibited to the statement of another lay witness, who himself estimated the number of aerodynamicist hours that would have been spent. This was very unsatisfactory, but without it, there would have been no basis for any award for Force India.

For further information on this topic please contact Abigail Silver at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (abigail.silver@rpc.co.uk).

Endnotes

(1) Force India Formula One Team Limited v Aerolab SRL [2013] EWCA CIV 780, July 3 2013.

(2) Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798.

(3) Relying on Piglowska v Piglowski [1999] UKHL 27, which in turn cited Biogen Inc v Medeva Ltd [1997] RPC1.

(4) The inference to be drawn is that, at first blush, and based on the material in the trial judge's decision, the appeal judge felt that he might have reached a different conclusion.

(5) Munro Brice & Co v War Risks Association Limited [1918] TKP 78 at 88.

(6) In Terrapin Ltd v Builders' Supply Company (Hayes) Ltd [1967] RPC 375 at 391.

(7) Seager v Copydex 1967 1 WLR 923 at 931.

(8) Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) 65 RPC 203 at 215.

(9) In Terrapin at 390.

(10) Brown v Rolls Royce Ltd [1960] 1 WLR at 210

(11) In Seager v Copydex (no 2) 1 WLR 809 at 813.

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