Travel Counsellors Ltd v Trailfinders Ltd: breach of confidence and the reasonable person

What happens when ex-employees of a competitor bring client information with them when they go to work with a new employer? In Travel Counsellors Ltd v Trailfinders Ltd [2021] EWCA Civ 38, the Court of Appeal held that an equitable duty of confidence on the new employer arises if a reasonable person would make enquiries about whether it is confidential, but the recipient fails to do so. 

The appellant argued that the judge had applied the wrong legal test in holding that the appellant owed an obligation of confidence to its rival in respect of the relevant information. According to the appellant, the equitable obligation would only arise if the recipient knew or had notice that the information was confidential. Whether it had notice of the confidential nature of the information has to be assessed objectively, by reference to a reasonable person standing in the recipient's position. And just because a reasonable person would make enquiries about whether the information (or some of it) was confidential was insufficient for an obligation of confidence to arise.

Arnold LJ, with whom Lewison LJ and Asplin LJ agreed, noted that there was surprisingly little authority. He cited his own judgment in Primary Group (UK) Ltd v Royal Bank of Scotland plc [2014] EWHC 1082 (Ch), as well as the Court of Appeal's decision in Racing Partnership Ltd v Done Brothers (Cash Betting) Ltd [2020] EWCA Civ 1300. On the basis of these cases he decided that:

... if the circumstances are such as to bring it to the notice of a reasonable person in the position of the recipient that the information, or some of it, may be confidential to another, then the reasonable person’s response may be to make enquiries. Whether the reasonable person would make enquiries, and if so what enquiries, is inevitably context- and fact-dependent. If the reasonable person would make enquiries, but the recipient abstains from doing so, then an obligation of confidentiality will arise

On the other hand, where the issue is accessory liability for misuse by another person rather than primary liability for misuse of confidential information, it may be necessary to show actual knowledge or turning a blind eye.

Cases like this are always fact-dependent, but the decision seems to place a significant burden on the recipient of information - although it does seem from the judgment that anyone offered information about clients in these circumstances really ought to sense that something is not quite right.

Trade secrets directive becomes law (but will we have to implement it?)

The European Commission proposed a directive to harmonise protection of trade secrets throughout the European Union in 2014. The directive was unanimously adopted by the Council and three weeks later published in the Official Journal on 15 June 2016, and came into force on 5 July (Directive (EU) 2016/943 of the European Parliament and of the Council of 8 June 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure.) Between publication and entry into force, of course, the UK's referendum on EU membership reduced the importance of the directive to this country.
Being a directive, the new law has to be implemented by the Member States. In the general confusion about how the UK will effect its exit, no one knows whether the directive will be implemented. Member States have two years in which to do is that, and two years is also the interval after giving notice under article 50 of the treaty when the UK will leave. However long passes before the UK gives notice, will determine how long the UK will be required to comply with the directive. That could be only a few months.
As with other areas of intellectual property law, however, it does seem quite likely that the UK will continue to ensure that its laws are aligned with those of the European Union. Depending on the future relationship with the EU, the UK might be obliged to comply with the directive anyway. In any event, it is hard to imagine that Parliament could possibly find time to replace more than a tiny part of our EU-derived law. The trade secrets directive is likely to remain important. However, the detailed shape of the Directive is likely to emerge only once the Court of Justice is seised of some cases in which it can give its interpretation of the law – and its rulings will cease, at some point, to apply to the UK.
Article 2 defines a trade secret as information that

• Is secret in the sense that it is not generally known among or readily accessible to persons within the circles that normally deal with this kind of information;
  
• Has commercial value because it is secret; and
  
• Has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.
  

While the first and third of these requirements are at least similar to English law, the requirement for commercial value narrows the scope of the definition – which is hardly surprising, as the Directive is seeking to define a narrower class of information than the broad class of confidential information which our law protects.
The acquisition of a trade secret is unlawful when it is carried out by unauthorised access to materials, or any other conduct which is considered contrary to “honest commercial practices”. Where the trade secret is acquired from a third party and the person who acquired it knew or should have known that the third party was acting unlawfully, that acquisition will also be considered unlawful. Using or disclosing a trade secret will be considered unlawful when it is in breach of a confidentiality agreement or some other duty not to disclose the trade secret or to limit its use.
Remedies are dealt with in Article 11. They include the usual remedies in intellectual property cases – damages, interim and final injunctions, destruction of unlawful goods. There are no criminal offences, but Member States remain free to introduce their own.
The Directive has been criticised as “a threat to public interest and democracy” because of the perceived threat it poses to whistle-blowers and the press. The Panama Papers scandal in 2016 highlighted these concerns. The Directive does provide some protection for whistle-blowers and the press, so the question is whether the exceptions are sufficient. They are set out in Article 5 and cover disclosure of a trade secret for:

• exercising the right to freedom of expression and information as set out in the [European] Charter [for Fundamental rights], including the respect for freedom and pluralism of the media;
  
• revealing misconduct, wrongdoing or illegal activity, provided that the respondent acted for the purpose of protecting the general public interest.
  

Recital 20 says that “the measures, procedures and remedies provided for in this Directive should not restrict whistle-blowing activity. Therefore, the protection of trade secrets should not extend to cases in which disclosure of a trade secret serves the public interest insofar as directly relevant misconduct, wrongdoing or illegal activity is revealed.” Nevertheless, critics argue that the burden for showing that disclosure is in the public interest will fall on the whistle-blower or journalist, and there have been calls for a further directive to give more extensive protection to them.
English law on breach of confidence, non-statutory as it is, gives narrower exceptions to protect whistle-blowers and the like. The changes demanded by the Directive would not be great, but some extension of the public interest rule (covering, remember, only trade secrets) might well be needed.

Protecting trade secrets: Max Planck Institute on Commission's proposals

I still haven't got my head round the proposed directive on the protection of trade secrets. I thought there wouldn't be much exciting in it - but whether that turns out to be a fair assessment or not, there is a lot in Max Planck's comments on it to excite me. (Yes, I know they are not actually Max Planck's comments - see the entry in my Dictionary about the institute, or more accurately institutes as there are as many as 80 of them under the auspices of the Max Panck Gesselschaft) named after the man, and indeed the entry in it for the man himself.) What excites me is the suggestion that the directive should extend protection to prevent reverse engineering.
What? This is the most outrageously protectionist idea I can recall ever hearing of. The MPI has often struck me as viewing intellectual property as a Good Thing without considering whether a lack of protection might be a better thing. So the Institute says:

The use without restrictions of trade secrets obtained through reverse engineering appears problematic, in particular in sectors where – other than in the case of software – no intellectual property protection is available, although considerable investments are made in the development of new products. Notable examples include the cosmetic industry, which regularly invests quite heavily in the development of perfumes, but where the know-how generated thereby can be decoded with relative ease through reverse engineering.

The unrestricted use of such know-how raises concerns that it could pose a substantial threat to the companies concerned, eventually leading to market failure whereby such goods would no longer be produced. Accordingly, it must be assessed whether the existing (quite problematic) prohibition on advertising such products as imitations or replicas should be replaced by other measures that are directly aimed at protecting the relevant interests.

Perfumes? What a lousy example to use. As Ian Connor of Pinsent Mason says in Out-Law's commentary on the MPI paper, the evidence in the smell-alike cases showed that it was impossible to achieve an identical fragrance by reverse-engineering (and the fact that a cheap imitation couldn't use the expensive ingredients no doubt contributes to that). If there is an element of unfair competition in imitating fragrances, then it has to be dealt with as unfair competition: for goodness sake, don't try to bring trade secrets law to bear on it. In so far as trade mark law is part of the law of unfair competition, that approach has been tried, but just because it has failed doesn't mean that we need to try something else. And just because something isn't protected doesn't mean that there is a hole in the system that needs to be repaired.

I first encountered the idea of reverse-engineering in the context of the good old Morris Marina exhaust pipe - in other words, in the dispute that eventually gave us BL v Armstrong. Copyright was used to try to stop reverse engineering, because (unlike a smell-alike) you could  make a perfectly serviceable and accurate copy of an exhaust pipe by measuring the relevant dimensions. Did the House of Lords say "oh, here's something that isn't protected, let's see if we can find a way to make the law apply?" Not at all. In fact the starting point was the opposite: here was something that copyright did protect, even against reverse engineering, and their Lordships were pretty clear that they thought this was wrong. (Lord Templemann and Lord Bridge, as I recall, to the fore: two judges who for several years resisted every attempt to expand the scope of intellectual property protection, whether in exhaust pipes, bottle shapes (as trade marks: Re Coca-Cola), sound recordings (CBS Songs v Amstrad), plastic toy bricks (Lego v Tyco), or television show formats (Green v Broadcasting Corporation of New Zealand). The majority in the House of Lords (Lord Griffith going about it in a different way, if I remember correctly) resolved the problem in the consumer's favour by reference to the "non-derogation from grant" principle known to landlord and tenant law - an even more egregious example, it has to be said, of using one law to solve a deficiency in another than the MPI's wish to use trade secrets law to solve an unfair competition problem.

The law should only give protection where there is a good reason for it. That, I think, is the "evidence-based policy-making" that Hargreaves was so keen on, and which the government seems to have forgotten about even before the ink was dry on the Professor's work (hence the increase in copyright term for sound recordings, and perhaps likewise the latest bunch of copyright "exceptions", or permitted acts as they ought properly to be called). There are limits to intellectual property protection for good reason. Some matter remains unprotected deliberately - for the simple reason that there is no justification for protecting it. There would be no incentive for anyone to do anything that they were not already doing, just a supernormal profit to be taken at the expense of the consumer. Consumer welfare in the strict economic sense is not the be-all and end-all of the matter: when you analyse this stuff as property, human rights become engaged, and a property owner should not lightly be deprived of it. But in the case of reverse engineering we are talking about matter which is not protected by property rights, and which is in the public domain where anyone can use it. It is not confidential, and to impose a confidentiality-style obligation on would-be users would be a huge retrograde step and one that takes absolutism in intellectual property to new heights.

Supreme Court on trade secrets

In Vestergaard Frantsen A/S (now called MVF3 ApS) v Bestnet Europe Ltd and others [2013] UKSC 31 (22 May 2013) the Supreme Court took a narrow view of a former employee's duty of confidence. It did not extend to stuff that she did not know was confidential, or to abuses of the information of which she was unaware.

Trine Sig, the former employee, had worked for the claimants and then set up the defendant company in competition with them. The co-founder of the new company, unknown to Ms Sig, had some of the claimant's trade secrets which he was misusing. At first instance, Arnold J held her liable for breach of confidence. Seager v Copydex [1967] 1 WLR 923 established that one can be liable for breach of confidence even if not aware of the breach. He relied on the confidentiality obligations in her contract of employment, and on her close involvement in setting up the defendant company and in its activities.

The Court of Appeal, where the leading judgment came (naturally) from Jacob LJ, overturned part of the first instance judgment, and the Supreme Court (Lord Neuberger giving the leading judgment) upheld the Court of Appeal.

Before the Supreme Court, the claimants argued that obligations of confidentiality arose under Ms Sig's contract of employment, as a result of her 'common design' with her business partner, and because she either turned a blind eye to his activities or played with fire. None of these lines of reasoning impressed the Supremes.

Lord Neuberger was not prepared to imply into the contract of employment a term that Ms Sig would not assist another person to abuse the claimant's trade secrets where she knew of neither the trade secrets nor the abuse. To accept that argument would be almost to impose strict liability, and would be wrong.

The claimant's most strongly-argued line was that there was a common design. Lord Neuberger drew a comparison with a driver who conveys a robber to a bank. Only if the driver knew why the robber wanted to go to the bank would there be a common design: ignorance would be a defence, and again to hold otherwise would be to impose strict liability.

The absence of dishonesty on the part of Ms Sig defeated the "blind eye" argument, while the "playing with fire" scenario might help to show that there was dishonesty, but merely taking the risk of bringing in the co-founder did not make her liable.