Liability of ex-employees for breach of confidence: Vestergaard Frandsen v Bestnet Europe

May 27th, 2013 by Barry Sookman Leave a reply »

The UK Supreme Court just released a decision examining the scope of the common law (or equitable) duty of confidence. One of the main issues in the case was whether a person can be liable for breach of confidence by acting in common design with others who are in breach of confidence when the person is not aware that trade secrets are being used in violation of the duty of confidence. The Court in Vestergaard Frandsen A/S & Ors v Bestnet Europe Ltd & Ors [2013] UKSC 31 (22 May 2013) ruled that liability cannot be imposed in these circumstances.

The case involved an ex-employee of a company Vestergaard, a company in the business of selling insecticidal bednets. Mrs Sig was employed by Vestergaard in various sales capacities. By clause 8 of her employment contract, she agreed to “keep absolutely confidential all information relating to the employment and any knowledge gained in the course of the employment and which inherently should not be disclosed to any third party. The absolute duty of confidentiality also applies after [Mrs Sig] has terminated the employment …”.

She left her employer and went into businesses that competed with it. Unbeknownst to her the competing product was developed using confidential information of Vestergaard. She was sued. Vestergaard’s alleged that Sig was liable for breach of confidence on several basis. First, she was liable under her employment contract, either pursuant to the express terms of clause 8 or pursuant to an implied term. Secondly, she was liable on the basis that she was party to a common design, namely the design, manufacture and marketing of the new product, Netprotect, which involved Vestergaard’s trade secrets being misused.

The UKSC ruled she could not be liable on either of those basis for two chief reasons. First, Sig did not herself ever acquire the confidential information in question. Second, she was unaware that the Netprotect product had been developed using Vestergaard’s trade secrets.

On the first ground, the Court ruled that the duty of confidence was not breached and no term could be implied into her employment agreement that she would not unknowingly assist another person to breach her ex-employer’s trade secrets:

The express provisions of clause 8 of her employment contract are of no assistance to Vestergaard’s case. The confidential information wrongly used by Dr Skovmand to develop the Netprotect product was plainly neither “information relating to [her] employment” nor “knowledge gained in the course of [her] employment”. It was knowledge gained by Dr Skovmand in the course of his consultancy work for Vestergaard.

It is not seriously arguable that a term can properly be implied into Mrs Sig’s employment contract to the effect that she would not assist another person to abuse trade secrets owned by Vestergaard, in circumstances where she did not know the trade secrets and was unaware that they were being misused. To impose such a strict liability on Mrs Sig appears to me to be wrong in principle as it is (i) inconsistent with the imposition of the more limited express terms of clause 8, (ii) unnecessary in order to give the employment contract commercial effect, and (iii) almost penal in nature, and thus incapable of satisfying either of the well established tests of obviousness and reasonableness.

On the issue of liability based on common design, the court accepted that a person may be liable for breach of confidence based on that well known secondary liability doctrine. The Court also affirmed that a person may be liable for acting jointly with others in a manner that would infringe a patent without knowing that the acts would an infringement as direct liability for patent (and copyright) infringement is a strict liability action that is not dependent on knowledge or intention. However, as the UK liability for breach of confidence is based on the unconscientious use of confidential information, liability cannot be imposed where the defendant did not know (or have reckless disregard for the fact) that the information being used was confidential.

I turn, then, to the second, and most strongly advanced, ground upon which Vestergaard’s case rests, namely that Mrs Sig was liable for breach of confidence on the basis of common design. This argument proceeds on the basis that Dr Skovmand, Mr Larsen and Mrs Sig all worked together to design, manufacture and market Netprotect products, and as these products were designed by Dr Skovmand in a way which involved his wrongfully misusing Vestergaard’s trade secrets so as to render him liable for breach of confidence, Mrs Sig and Mr Larsen are liable together with him.

I accept that common design can, in principle, be invoked against a defendant in a claim based on misuse of confidential information; I am also prepared to assume that, in the light of the findings made by the Judge, Mr Larsen was liable on that ground (as he knew that Dr Skovmand was misusing, and had used, Vestergaard’s trade secrets when designing Netprotect). However, I cannot see how Mrs Sig could be so liable, in the light of her state of mind as summarised in para 22 above.

As Lord Sumption pointed out in argument, in order for a defendant to be party to a common design, she must share with the other party, or parties, to the design, each of the features of the design which make it wrongful. If, and only if, all those features are shared, the fact that some parties to the common design did only some of the relevant acts, while others did only some other relevant acts, will not stop them all from being jointly liable. In this case, Mrs Sig neither had the trade secrets nor knew that they were being misused, and therefore she did not share one of the features of the design which rendered it wrongful, namely the necessary state of knowledge or state of mind. Accordingly, although she was party to the activities which may have rendered other parties liable for misuse of confidential information, she cannot be liable under common design.

A driver of the motor car who transports a person to and from a bank to enable him to rob it, would be liable in tort for the robbery under common design or some similar principle, but only if she knew that her passenger intended to rob, or had robbed, the bank. So, in this case, given the ingredients of the wrong of misuse of confidential information, and given that she never had any relevant confidential information, Mrs Sig cannot be held liable in common design for exploiting with others, on behalf of Intection and then Bestnet, a product which, unknown to her, was being and had been developed through the wrongful use of Vestergaard’s trade secrets.

We were taken to two decisions, which, it was suggested, are inconsistent with that conclusion. The first is Unilever Plc v Gillette (UK) Ltd [1989] RPC 583, 609, where Mustill LJ said that, in order to show that a defendant was secondarily liable for infringement of a patent, “there [was no] need for a common design to infringe”, as it was “enough if the parties combine to secure the doing of acts which in the event prove to be infringements”. I do not doubt the correctness of that statement, but it has no application here.

Patent infringement is a wrong of strict liability: it requires no knowledge or intention on the part of the alleged infringer, whose state of mind is wholly irrelevant to the issue of whether she infringes the patent. Thus, the fact that the alleged infringer did not know of the existence, contents or effect of the patent is completely irrelevant to the question of infringement, even if she had thought the invention up for herself. Accordingly, it is entirely logical that a person who, while wholly innocent of the existence, contents or effect of the patent, is nonetheless secondarily liable if she assists the primary infringer in her patent-infringing acts. It cannot possibly follow that the same approach is appropriate in a case for a person who assists the primary misuser of trade secrets, given that it is necessary to establish the latter’s knowledge and/or state of mind (as explained in paras 22-25 above) before she can be liable for the misuse…

The Court then confirmed that its ruling conformed with sound public policy regarding the scope of protection for intellectual property rights.

Looking at this case a little more broadly, I would add this. Particularly in a modern economy, the law has to maintain a realistic and fair balance between (i) effectively protecting trade secrets (and other intellectual property rights) and (ii) not unreasonably inhibiting competition in the market place. The importance to the economic prosperity of the country of research and development in the commercial world is self-evident, and the protection of intellectual property, including trade secrets, is one of the vital contributions of the law to that end. On the other hand, the law should not discourage former employees from benefitting society and advancing themselves by imposing unfair potential difficulties on their honest attempts to compete with their former employers.

In my judgment, quite apart from being inconsistent with legal principle for the reasons discussed above, it would be inconsistent with maintaining that balance to hold Mrs Sig liable to Vestergaard for misuse of their confidential information on the facts found by the Judge. Given that she did not learn of any relevant trade secrets owned by Vestergaard when she was employed by them, and did not appreciate that any such secrets were being used by an employee of the company of which she was a founder and director, it would be oppressive to hold Mrs Sig (as opposed to the employee or the company) liable to Vestergaard for breach of confidential information, whether or not she had previously worked for Vestergaard pursuant to a contract containing a standard sort of provision aimed at protecting Vestergaard’s trade secrets.

The Canadian common law provinces also protect trade secrets and confidential information based on common law principles. The Supreme Court of Canada has ruled that the jurisdiction is sui generis. However, UK decisions are often referred to approvingly by Canadian courts. Lac minerals ltd. v. International corona resources ltd., [1989] 2 SCR 574 , Cadbury Schweppes Inc. v. FBI Foods Ltd., [1999] 1 SCR 142. Accordingly, it is likely that the Vestergaard Frandsen case will be cited as a useful precedent in Canadian cases.

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