Australia: For your eyes only - the use and abuse of confidential information

Last Updated: 12 May 2012
Article by Mary Still, Dean Gerakiteys and Timothy Webb

Most Read Contributor in Australia, October 2017

Key Points:

The duty to keep trade secrets confidential can extend well beyond the traditional employer/employee relationship to include third party contractors.

In Force India Formula One Team Ltd v 1 Malaysia Racing Team SDN BHD & Ors [2012] EWHC 616 (Ch) the English High Court ordered Italian aerodynamics company Aerolab to pay €25,000 to the Force India Formula 1 team for misuse of confidential information relating to the design of a half-size wind tunnel model of a Formula 1 racing car.

While the value of the misused confidential information was not significant, the decision serves as a timely reminder of the importance of always ensuring that appropriate processes are in place to protect what can amount to very valuable information.

The incidents of misuse

In 2010 Aerolab was retained by the Team Lotus Formula 1 team (now known as Caterham), soon after having already undertaken similar work for Force India. Force India alleged that Aerolab's work for Lotus in developing some parts of the Lotus team car had involved the use of Force India confidential information – information that had been gathered during Force India's own earlier works with Aerolab.

At no point did Aerolab dispute that its employees had engaged in the copying of some computer files containing Force India designs in the development of parts for Lotus. There was however a dispute as to both the exact nature and extent of the copying, and the quantifiable loss Force India had suffered as a result.

The Court's decision

Justice Arnold accepted that Aerolab had misused confidential information otherwise belonging to Force India during the development of parts for team Lotus. However, he concluded that, taken as a whole, Aerolab's conduct fell short of the systematic copying of data alleged by Force India. While the use of such data enabled Lotus to take a number of short cuts in relation to wind tunnel modelling of certain car parts by providing a more advanced model from which to build, the use of this data did not lead to a total replication of the Force India designs.

He noted that in the absence of an enforceable restrictive covenant, an employer cannot prevent an employee from using information which forms part of his own skill, knowledge and experience, even if confidential and learnt during the course of employment. An employer is however entitled to the law's protection of confidentiality in respect of information that might otherwise amount to a trade secret.

Importantly, Justice Arnold also accepted that the principles of confidentiality otherwise attaching to trade secrets and arising by virtue of an employer/employee relationship should be extended to third party independent contractors who have been retained to undertake works on behalf of a principal in a capacity similar to that of an employee.

The value of secrecy

As to the assessment of appropriate damages for breach of confidence, Justice Arnold concluded that Force India would be entitled to recover such moneys as would otherwise have been negotiated between a willing licensor and a willing licensee acting reasonably as at the date of breach, for permission to use the confidential information which had been misused.

Justice Arnold concluded that the amount of €25,000 was sufficient recompense for the value of the confidential information that was misused. This amount represented the time and cost Aerolab would otherwise have had to expend to design and draw the relevant Lotus parts had Force India's confidential information not been misused.

The value of confidential information will however depend upon the circumstances of each case. In this instance, the inherent value of Force India's confidential information was diminished by a number of factors, including the poor aerodynamic performance of the Force India car to which the data related and the limited nature, extent and purpose of each misuse. Accordingly, had the misuse been more extensive or had it resulted in more significant detrimental ramifications to Force India, the sum awarded would likely have been higher.

Practical implications

Justice Arnold provides a valuable overview of the way in which claimants can claim damages where there has been a provable breach of confidence, whether at law (ie. under contract) or in equity (ie. where there is no applicable contractual provision). The types of cases and bases for recovery include where a claimant:

  • sells products for profit and those profits are diminished by the breach – they can recover that loss of profit;
  • licences others to use such information, and that revenue is diminished by the breach – they can recover that lost revenue;
  • would have "sold" the information but for the breach – they can recover the market value of the information; or
  • cannot prove a financial loss in accordance with any of above – they can recover that sum which would otherwise have been negotiated between a willing licensor and a willing licensee acting reasonably for the use of such information.

Businesses should however bear in mind that not all information connected with a business will necessarily be regarded as confidential information. Unless there is an express restrictive covenant, an employer may not necessarily be safeguarded against an employee, or a third party contractor for that matter, disclosing information if the information in question:

  • falls short of being a "trade secret"; and
  • is information which forms part of the employee or contractors own skill knowledge or experience.

Accordingly, it is important to ensure that appropriate measures and safeguards are in place to restrain both employees and independent contractors from divulging or otherwise misusing confidential information. This can ordinarily be best achieved by the execution of an appropriately worded confidentiality agreement, or the inclusion of an appropriately worded restrictive covenant to this effect in all relevant employment contracts or retainers.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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