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18 May 2015

Using confidential information in a new job

The law provides protection for a business’ confidential information. This protection is often strengthened through formal confidentiality provisions in contracts or specific non-disclosure agreements. However, there can often be considerable uncertainty as to whether knowledge that an employee develops is confidential information protected in law, or whether it is the employee's own knowledge that he is free to exploit elsewhere after his employment.

In this article, we explores an interesting case that reached a conclusion at the end of last year, which illustrates some of the challenges.  Although the case relates to a self-employed consultant, the same issues apply in respect of employees.

The case concerned a consultant who had initially worked with one company developing mosquito nets and then moved to another company where he was involved in the development of competing mosquito nets.  The consultant used certain recipes and test results that he had access to in his first role to assist him in developing products for the new company.

Although the consultant was engaged by the first company for over five years and was paid substantial fees in this role, there was no written consultancy agreement in place.  However, the court had no difficulty in finding that an obligation of confidentiality was an express term of the verbal contract.  Even if it wasn’t an express term, the judge said that he would imply one in any event as it was necessary and obvious that there was an intention for an obligation of confidentiality to exist in relation to the relevant information.

The judge distinguished between trade secrets that the consultant could not use and information forming part of the consultant’s own skill, knowledge and experience which he could use in the future, even if it was learnt during the course of his consultancy.

In the circumstances, the judge found that there had been misuse of trade secrets, as the consultant had used certain recipes and test results from the first company as the starting point for his developmental work at the new company.  Some products were sold using the confidential recipes but most products sold did not include any of the original confidential information.  However, the confidential information should not have been used in the development process and it was claimed that the use  of this sped up the development process.

Even after the breach of confidentiality had been determined, there was considerable debate as to how the compensation should be calculated, particularly as much of the claim related to the nets now being sold by the second company, which did not actually use the confidential formula.  The court finally determined that compensation was payable for:

  • Nets sold using the confidential formula – Compensation for these was based on a mixture of the profit that would have been made by the first company if it had sold those nets and a theoretical royalty that would have been charged for the use of the confidential information.
  • Nets sold using the new formula – Compensation was based on a lump sum as a “quasi-consultancy fee” for the development process and a further payment would have been awarded if it could have been established that the use of the confidential information had accelerated entry to market by the new company.

Interestingly, the case was brought against the individual consultant, the company that he moved to work for and the directors of that company personally.  One of those directors was eventually released from liability, as it could not be established that she knew of the breach of confidentiality or had colluded in the breach.

The case is extremely complex and this article is only a very brief summary of some of the issues arising.  To highlight the complexity of these cases, the breaches of confidentiality occurred in 2004 and 2005.  Proceedings were first issued in 2006 and the first judgment was delivered in 2009 after numerous interim applications.  Since then there have been appeals to the Court of Appeal and Supreme Court and the High Court had to make further decisions at the end of 2014.  There have also been related proceedings in France, India and Denmark.  The costs of such action to the businesses concerned, in terms of management time and business disruption alone, will have been significant even without taking into account the likely substantial legal costs.

So, what can you do to avoid being drawn into such complex and expensive litigation?  Certainly the starting point is not to misuse confidential information that you have obtained from a previous employer!  However, the company could also have improved its position with a formal written agreement in place, which would at least have eliminated one of the legal debates as to whether there was any duty of confidentiality.  It would also have been possible to have added extra protection in such an agreement through restrictive covenants to limit the consultant’s activity working on a competing product immediately on his departure.  The new employer can also protect his position by taking steps to ensure that confidential information from previous employers is not misused.

If you would like to discuss any issues arising from this articles, please contact us.