Wish you were here? Protecting confidential information
After long months of lockdown, the mere mention of travel agents is enough to whet the appetite of anyone dreaming of escaping for a much-needed holiday. But His Honour Judge Hacon’s recent decision in Trailfinders Ltd v (1) Travel Counsellors (2)Andrew La Gette, (3)Laki Economos (4)Simon Clifford (6) David Bishop[1], is also a timely update on a problem which continues to exercise the English courts. When should they prevent an ex-employee or consultant from using their former employer’s confidential information and trade secrets, if their employment or consultancy contract does not have any written clauses prohibiting that use ?
The decision provides a timely update because come the straitened post-lockdown economic environment, salary cuts or redundancy will inevitably tempt some to use their employer’s confidential information to secure a new position, to advance themselves in that new position or simply to try to exact revenge.
Since the days of the industrial revolution these cases have presented the courts with a balancing exercise. Employers are entitled to protect their trade secrets as a legitimate business interest, yet the principle of open competition protects the right of employees to work wherever they can secure employment.
The Background
Trailfinders brought proceedings in the Intellectual Property Enterprise Court against 4 former consultants who had left it to work for the first defendant, Travel Counsellors. Trailfinders claimed that the individual defendants had breached implied terms in their Trailfinders employment contracts which prevented them from using its confidential information. Implied terms are terms which the courts can decide to include in a contract if the parties have not inserted them as written terms in that contract.
Trailfinders also relied on a separate equitable obligation of confidence against its former consultants. That obligation of confidence did not arise out of any contractual relationship. That is why it also pleaded the equitable obligation against Travel Counsellors which it had no contractual relationship with. Trailfinders asserted that Travel Counsellors had breached its equitable obligation of confidence. That was because Trade Counsellors’ new recruits had used Trailfinders’ confidential information in their work for Travel Counsellors.
The confidential information in the case included Trailfinders’ clients’ contact and passport information; their travel preferences; their details of earlier trips booked with Trailfinders and even their birthdays and anniversaries. Trailfinders stored this information in a system which was password accessible to its consultants.
Updating the Law on Confidential Information and Trade Secrets.
In 2018 Parliament adopted the Trade Secrets Directive[2] into English law. Judge Hacon confirmed the widely held academic and practitioner opinion that the English law on confidential information already reflected its provisions, although the Directive is helpful in elucidating some aspects of English law in this field. He analysed the English caselaw decisions on the duty of confidence owed by an employee to his or her employer which is one part of every employee’s implied term of fidelity and good faith in the employment relationship.
Judge Hacon considered the 3 categories of confidential information which the High Court had identified, and the Court of Appeal then refined in 1985, in the wonderfully named case: Faccenda Chicken v Fowler[3] . The significance of these 3 categories of information is that each one flags the extent (if at all) to which the employer can prevent the former employee from using the information both during the employment relationship and after it ends.
He then analysed how the separate equitable duty of confidence comes into the Faccenda confidentiality obligations in the employment context. Historically, the rules of equity were developed in separate courts in the middle ages. The idea was that they would moderate the harsh rules developed in the common law courts. As Judge Hacon explained, the law imposes the equitable duty of confidence irrespective of the circumstances:
“…whenever a person receives information he knows or ought to know is fairly and reasonably to be regarded as confidential”[4]
He then wove that equitable duty of confidence into the Faccenda employment contract’s 3 confidential information categories.
Class 1 is employer information which is not confidential. It cannot be considered the employer’s property. The employee can use it both during his employment and after the employment contract ends. The employer can never prevent him from using it.
Class 2 is confidential information which satisfies this test set out in Article 2(1) of the Trade Secrets Directive:
“… information which meets all of the following requirements: (a) it is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question.; (b) it has commercial value because it is secret; (c) it has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret;”
If the information in question does not satisfy this test, then it will be considered as Class 1 information and not capable of protection. But if it does pass muster, then the court can go on to consider the level of protection which the employer can expect for Class 2 confidential information.
During the course of his employment an employer can always prevent the employee using Class 2 confidential information. The position is more nuanced after the employment contract ends. In essence, the employer can enforce the equitable duty of confidence to restrain the use of the employee’s confidential information unless the information is part and parcel of the experience and skills which the employee picks up during the normal course of the employment, and which he retains in his mind at the end of the employment contract. That is the employee’s information and not the employer’s. The employer can take it with him and use it.
But if the employee removes, copies or memorises the confidential information during his employment contract so that he can use or disclose it after the employment ends then the employer can prevent him from using it afterwards.
Class 3 is what the court in Faccenda identified as trade secrets in the classic sense of that term. For example, a secret manufacture process where the employer has impressed on the employee the need to keep the information secret, the recipe for Coca Cola. Here, the employer can prevent the employee from using Class 3 information both during the employment and equally importantly, after his employment contract has ended.
The Decision.
Applying these principles, Judge Hacon ruled that the individual defendants had breached the confidentiality obligation in their employment contracts. The Trailfinder confidential information was Class 2 confidential information which the defendants had copied whilst they were still working for Trailfinders so that they could use it at Trade Counsellors. They had also breached the equitable duty of confidence which they owed to Trailfinders. Judge Hacon also found that Travel Counsellors was in breach of its own equitable obligation of confidence to Trailfinders. That was because of its recruits’ use of Trailfinders’ confidential information.
No doubt this decision will form the basis of many future claims to protect confidential information and trade secrets.
[1] [2020] EWHC 591 (IPEC)
[2] 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.
[3][1985] FSR 105
[4] Lord Nicholls in Campbell v MGN Ltd [2004] UKHL 22 [2004] 2 AC 457