Vestergaard Frandsen A/S & Ors v Bestnet Europe Ltd & Ors [2013] UKSC 31

A former employee who co-founded a rival business was not liable for misuse of her ex-employer's trade secrets. She never knew the secrets and was unaware a consultant had used them. The Supreme Court held that breach of confidence turns on conscience and knowledge.

Facts

Vestergaard developed confidential techniques for making long-lasting insecticidal bednets (LLINs). Information about these techniques was held in its “Fence database”. Mrs Sig worked for Vestergaard in sales from late 2000. Clause 8 of her contract required her to keep confidential information relating to her employment and knowledge gained in the course of it, including after termination. Mr Larsen, head of production, was also under confidentiality and non-compete obligations. Dr Skovmand, a consultant biologist without a formal service contract, played a major role in developing the techniques.

In 2004 Mrs Sig and Mr Larsen set up a competing business with Dr Skovmand, who developed a polyethylene-based LLIN called Netprotect. It was marketed first through a Danish company, Intection, and later through an English company, Bestnet. Mrs Sig was sole director of both. Arnold J found that Dr Skovmand had used Vestergaard’s trade secrets as a starting point for Netprotect, and that Mr Larsen knew this by July 2004. Mrs Sig never had access to the Fence database and never knew the secrets. She believed the Netprotect technology came from Dr Skovmand’s own work, and she was not involved in the false evidence and forged documents put forward by the others at trial.

Procedural history

Arnold J held Mrs Sig liable for breach of her own obligation of confidence ([2009] EWHC 1456 (Ch)). He relied on Seager v Copydex Ltd [1967] 1 WLR 923 for the view that a person may be liable without being conscious of misuse. The Court of Appeal ([2011] EWCA Civ 424, Jacob LJ) reversed on this point alone. It distinguished Seager and refused to imply a term imposing strict liability. Vestergaard appealed.

Issues

The issue was whether Mrs Sig was liable for misuse of Vestergaard’s trade secrets on any of three bases:

• under the express or implied terms of her employment contract;
• as a party to a common design to design, manufacture and market Netprotect; or
• because of her particular position, including through “blind-eye knowledge” or having knowingly taken a risk.

Judgment

Lord Neuberger gave the only judgment, with which Lord Clarke, Lord Sumption, Lord Reed and Lord Carnwath agreed. The appeal was dismissed.

Two crucial facts and the governing principles

Each argument failed because of two facts. First, Mrs Sig never acquired the confidential information. Second, until some point during the proceedings she was unaware that Netprotect had been developed using Vestergaard’s trade secrets. Lord Neuberger observed:

“It would seem surprising if Mrs Sig could be liable for breaching Vestergaard’s rights of confidence through the misuse of its trade secrets, given that she did not know (i) the identity of those secrets, and (ii) that they were being, or had been, used, let alone misused.”

He stressed that “an action in breach of confidence is based ultimately on conscience”. He cited Coco v A N Clark (Engineers) Ltd [1969] RPC 41 and Attorney-General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109. For the recipient’s conscience to be affected, she must have agreed, or must know, that the information is confidential.

Seager was an orthodox application of that approach. The defendants there had received the information in confidence, so their state of mind when they unconsciously used it was irrelevant. Lord Neuberger then set out three further points:

• A person who receives information without appreciating its confidentiality may become bound from the moment she appreciates that it is confidential.
• A person who assists in misuse may be secondarily liable, but would normally need to know of the abuse. Knowledge includes “blind-eye knowledge” as analysed in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378.
• Vicarious liability may also apply, but it was not contended against Mrs Sig.

Ground 1: the contract

Clause 8 did not help Vestergaard. The information was knowledge gained by Dr Skovmand in his consultancy, not information relating to Mrs Sig’s employment or gained in its course. An implied term making her liable for assisting misuse of secrets she did not know, without awareness of the misuse, was “not seriously arguable”. Such a term would be inconsistent with the narrower express terms, unnecessary to give the contract commercial effect, and “almost penal in nature”. It therefore failed the tests of obviousness and reasonableness.

Ground 2: common design

Lord Neuberger accepted that common design can in principle apply to misuse of confidential information. He was also prepared to assume that Mr Larsen was liable on that basis. Adopting a point made by Lord Sumption in argument, he held:

“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.”

Mrs Sig did not share the necessary state of knowledge. He illustrated the point with a getaway driver, who is liable only if she knew of the robbery.

Unilever Plc v Gillette (UK) Ltd [1989] RPC 583 was distinguished. Patent infringement is a strict liability wrong, so an innocent assister may logically be secondarily liable. That reasoning cannot apply to trade secrets, where knowledge or state of mind must be established. Lancashire Fires Ltd v S A Lyons & Co Ltd [1996] FSR 629 supported at most an injunction once a defendant appreciates that information is confidential. The Court of Appeal in that case had expressly reserved the question of financial relief. Lord Neuberger also noted that a concession there that the Unilever principle applied to confidential information was wrong.

On the facts, an injunction against Mrs Sig might well be justified if she threatened to use the secrets after appreciating, or perhaps after she ought to have appreciated, their confidentiality. That would not justify damages for losses incurred while she was honestly unaware of any misuse.

Ground 3: blind-eye knowledge and “playing with fire”

A blind-eye knowledge argument required a finding of dishonesty of the Royal Brunei kind. There was no such finding, and no basis for one. Nor is risk-taking enough on its own:

“if one plays with fire, one is more likely to be burnt, but it does not of itself mean that one is burnt.”

Policy

Lord Neuberger emphasised the need for a realistic and fair balance between protecting trade secrets and not unreasonably inhibiting competition. He said that

“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.”

Holding Mrs Sig liable, as opposed to the employee or the company, would be both unprincipled and oppressive.

Implications

The decision confirms that liability for breach of confidence is grounded in conscience. A defendant who never received the information and did not know of its misuse will not ordinarily be liable in damages, whether primarily, as an accessory or through common design, absent special facts such as vicarious liability.

Secondary liability normally requires actual or blind-eye knowledge, and the latter involves dishonesty in the Royal Brunei sense. For common design, each participant must share every feature that makes the design wrongful, including any required mental element. The strict-liability approach in Unilever for patents does not transfer to trade secrets.

The decision has limits. It turned on findings that Mrs Sig was honest and ignorant, and the court left open injunctive relief against a defendant who later appreciates confidentiality. It also did not displace Seager, where a recipient of information in confidence is liable even for unconscious use. Its practical importance lies in protecting honest former employees and co-founders of competing businesses from strict liability for others’ misuse of secrets. It also shows the limited reach of standard confidentiality clauses, which do not extend to information the employee never acquired.

Verdict: The Supreme Court unanimously dismissed Vestergaard’s appeal, upholding the Court of Appeal’s decision that Mrs Sig was not liable for breach of confidence or misuse of Vestergaard’s trade secrets.

Source: Vestergaard Frandsen A/S & Ors v Bestnet Europe Ltd & Ors [2013] UKSC 31