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Trading Secrets A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

International Update: Recent Decisions by UK Courts Highlight Protection of Confidential and Proprietary Information in Employment Context — Part I

Posted in International, Non-Compete Enforceability, Trade Secrets

By Peter Talibart, Dan Hart, and Georgina McAdam

As many employers have experienced, guarding against misuse of confidential and proprietary information by former employees can be a challenge in an increasingly digitalized and globalized marketplace.  For companies with operations in the United Kingdom, recent court decisions provide some helpful guidance on protecting confidential and proprietary information in the international context.

Earlier this year, the relatively-new Supreme Court of the United Kingdom (which has been in operation since only 2009) addressed whether a former employee can be liable for breach of confidence for starting a competitive business with others who, unbeknownst to the former employee, have misused the former employer’s confidential information.  In Vestergaard Frandsen and others v. Bestnet Europe Ltd. and others, [2013] UKSC 31, the Supreme Court held that a former employee cannot be held liable for breach of confidence in such a scenario in the absence of evidence that the former employee was aware of the confidential information or its misuse.

The Vestergaard case involved a former employee of Vestergaard, one Mrs. Sig, who left her employment with Vestergaard (a manufacturer of insecticidal fabrics for mosquito nets) to start a competing business in Denmark with another former employee of Vestergaard, Mr. Larsen, and a former consultant for Vestergaard, Dr. Skovmand.  Although Dr. Skovmand had no formal service contract with Vestergaard, both Sig and Larsen were subject to employment agreements with Vestergaard containing covenants requiring them to maintain the confidentiality of Vestergaard’s confidential information and trade secrets.

After Vestergaard initiated legal proceedings in Denmark against Sig, Larsen, Skovmund, and their new company, Sig resigned from the board of the Danish company but immediately set up two new English companies to conduct the same business, through which Sig marketed a competing product designed by Skovmund that, unbeknownst to Sig, incorporated Vestergaard’s trade secrets.  Thereafter, Vestergaard initiated legal proceedings in England against Sig, Larsen, and the two new English companies.

Following a 16-day hearing, a judge in the Chancery Division of the High Court (one of the major courts for civil business litigation in England and Wales) ruled against the defendants.  Although Skovmund was not a party to those proceedings, the High Court judge (Arnold J) found that Skovmand had used Vestergaard’s trade secrets to develop the competing product and that Larsen was aware of Skovmand’s use of Vestergaard’s trade secrets.  Moreover, the High Court judge found that Skovmand and Larsen had put forward false evidence including forged documents.  In contrast, the High Court judge accepted Sig’s explanation that she did not have access to or knowledge of the trade secrets of Vestergaard that Skovmund misappropriated, did not know that Skovmund had developed the competing products using Vestergaard’s trade secrets, and had no involvement in the forged documents that Skovmand and Larsen had presented.  Nevertheless, the High Court judge still found Sig liable for breach of confidence, explaining that “[a] person can be liable for breach of confidence even if he is not conscious of the fact that what he is doing amounts to misuse of confidential information.”  Sig appealed to the Court of Appeal, which disagreed and reversed the judgment of the High Court judge, reasoning that Sig could not be liable for breach of confidence, as imposing liability on Sig in this situation would amount to strict liability.

On appeal by Vestergaard, the Supreme Court agreed with the Court of Appeal.  In an opinion given by Lord Justice Neuberger (with which four other justices agreed), the Supreme Court held that Sig could not be liable for breaching Vestergaard’s rights of confidence through the misuse of trade secrets because (i) she did not know the identity of the trade secrets and (ii) did not know that they were being, or had been used, let alone misused.  Although Sig’s employment contract contained a nondisclosure covenant, the Supreme Court reasoned that the nondisclosure covenant was irrelevant because the information in question was not information that Sig gained in the course of her employment with Vestergaard but, rather, was information that Skovmand had gained in the course of his consultancy for Vestergaard.  There was no implied term into Sig’s employment contract that she would not assist others to abuse Vestergaard’s trade secrets when she did not know the trade secrets and was unaware they were being misused.  This was wrong in principle, as it is (i) inconsistent with the express terms of Sig’s contract of employment, (ii) unnecessary to give the employment contract effect, and (iii) almost penal in nature.  Likewise, the Supreme Court reasoned that, although individuals can be liable for breach of confidence through a common design with others, Sig could not be liable under such a theory given her state of mind and lack of knowledge of the features of the design which make it wrong.  Moreover, although Vestergaard argued that Sig had “blind-eye knowledge” of the trade secrets and must have understood that she was “playing with fire” when her company employed Skovmand to design the competing product, the Supreme Court rejected this argument because there was no evidence that Sig had acted dishonestly. Accordingly, the Supreme Court dismissed Vestergaard’s appeal.

Because the Supreme Court is the highest court of appeals in the UK for civil matters, the Supreme Court’s decision in Vestergaard is particularly notable and is binding precedent throughout the UK, including Scotland and Northern Ireland (whose judicial systems are largely separate from those in England and Wales).  In the wake of the decision, it is now clear that employers in the UK who assert claims for breach of confidence against former employees based on misuse of confidential information must prove that the former employee either personally misused the confidential information in question or received confidential information from another person with the knowledge that the other person had obtained the information unlawfully. To provide a stronger platform for recovery against former employees, employers should consider inserting clauses in UK employment contracts (and restrictive covenants in US proprietary information agreements) that impose on employees an affirmative obligation to (i) inform new employers (or others with whom they are acting in concert) of their continuing obligations to their former employer and (ii) to refrain from assisting others in misusing their former employer’s trade secrets and confidential information.

In Part II of this post, we will focus on recent decisions from two lower courts in England and Wales that provide other helpful guidance to employers in protecting their confidential and proprietary information.

With its international platform and offices in the United States, United Kingdom, China, and Australia, Seyfarth Shaw’s experienced team of lawyers assists companies with large multi-jurisdictional employment law projects of a strategic, compliance and transactional nature, including issues involving noncompetes and trade secrets.  If you have any questions about the above, please contact Peter Talibart in the Firm’s London Office or your Seyfarth attorney.