Canada: For Your Attention January 2000: Supreme Court on Trade Secrets Remedies: Cadbury-Schweppes v. FBI Foods

By Mark W. Sajewycz , sajewycm@gowlings.com

Published 1/1/00

For Your Attention

Earlier this year, the Supreme Court of Canada, in Cadbury Schweppes Inc. v. FBI Foods Limited, took the opportunity to elaborate on the remedies available for the unpermitted use of a trade secret by a third party.

In 1979, the Plaintiff Cadbury’s subsidiary, Duffy-Mott, licensed its formula for making "Clamato", a confection of tomato juice and clam broth, to the Defendant’s predecessor, Caesar Canning. The license agreement prohibited the Defendant’s predecessor from manufacturing or distributing any product other than Clamato with clam broth and tomato juice. Nothing in the agreement prevented the manufacture and distribution of products containing merely tomato juice.

As an incident of entering into this relationship, Duffy-Mott communicated confidential information to Caesar Canning about the recipe for preparing the Clamato product. While the recipe for the Clamato product was unique to Duffy-Mott, the court held that the Clamato recipe was "not very special information" (as opposed to information which was "something special" or "very special indeed") given that the art of juice formulation was well known in the relevant industry. According to the Court, a competitive formulation could easily have been developed.

The licensing relationship between Duffy-Mott and Caesar Canning was terminated in 1983. Caesar Canning subsequently began manufacturing and distributing its own tomato juice product, "Caesar Cocktail", formulated using the Clamato recipe minus the clam broth. Caesar Canning made an assignment in bankruptcy in 1985. The Defendant, FBI Foods, subsequently purchased the assets of Caesar Canning and continued manufacturing and distributing the Caesar Cocktail product.

In 1988, five years after the termination of the licence agreement, Cadbury Schweppes commenced an action for breach of confidence against FBI Foods. Courts at both the trial and appeal levels found that FBI Foods was liable to Cadbury Schweppes for an actionable breach of confidence by virtue of its surreptitious use of the Clamato recipe in formulating its Caesar Cocktail product. Further, FBI was enjoined from using the confidential manufacturing specifications, technical information and technical advice provided by Cadbury’s under the licence.

The Supreme Court set aside the permanent injunction against FBI’s continued use of the confidential information. The Court noted that the grant of a permanent injunction would be unnecessarily prejudicial to the Defendant. The Plaintiff’s delay combined with the Defendant’s continued commercial activity in association with its "Caesar Cocktail" product and its detrimental reliance on the Plaintiff’s inactivity, militated against the granting of injunctive relief.

The Supreme Court also noted that the substantive character of the trade secret was very relevant in determining the scope of available remedies. In this case, the Clamato recipe contained "not very special information that could promptly have been replaced (had [Cadbury Schweppes] made a timely objection) by substitute technology accessible to anyone skilled in the art of juice formulation". In addition, FBI Foods could have been competitive using substitute techniques that would have produced a sufficiently close copy-cat tomato-based product to satisfy the ordinary customer within twelve months of being advised of the termination of the licence agreement.

The Supreme Court limited the financial compensation to be made available to Cadbury to Cadbury’s lost profits in the twelve months following the termination of the licence agreement, where such lost profits were attributable to the use by FBI Foods of the Clamato recipe trade secret. This twelve month period corresponds to the time required by FBI Foods to develop a competitive substitute beverage. The exact amount of the recovery is to be determined by reference.

With regard to contractual terms affecting confidentiality obligations, the Court noted that a contractual term that deals expressly or by necessary implication with confidentiality can supplant common-law rights. The Court also noted that a contractual term can function to put certain limits on what compensation is appropriate.

By explicitly indicating that use and disclosure obligations of trade secrets by contract can supplant common-law rights, the Court’s decision puts owners of trade secrets in a better position to protect their property by way of properly drafted agreements. As a practical matter, by including limiting provisions in an agreement, the party to whom the trade secret is disclosed is more likely to be aware and to appreciate the obligations concerning the trade secret, and therefore, less likely to proceed with surreptitious use of that trade secret. Any such agreement could further include provisions addressing remedies for surreptitious use and/or disclosure, thereby supplementing remedies otherwise available at common law and in equity.

Mark Sajewycz is an Associate in the Kitchener-Waterloo Gowlings office. He can be reached by e-mail at sajewyczm@gowlings.com.