UK: Confidentiality - Protecting Trade Secrets & Goodwill

Employment lawyers have a great deal to thank Michael Douglas for. Disclosure gave us an insight into sexual harassment in the workplace. Wall Street illustrated the damage that can be done when a key employee leaves and engages in competitive activity. And now his wedding to Catherine Zeta-Jones provides a masterclass on the law of confidence and privacy.

OK! magazine had undertaken to pay the couple a large sum for exclusive rights for a nine-month period to publish wedding photographs. OK! asserted that Hello! offered three times the contractual sum but that the couple trusted OK! to publish only the images they wanted published.

On 20 November 2000, two days after the wedding, Ms Zeta-Jones warned OK! that Hello! was about to publish unauthorised photographs. An interim injunction was obtained but Hello! appealed and on 23 November the Court of Appeal discharged the injunction. Hello! published its spoiling issue three days before OK!’s issue.

The decision is of considerable significance. It illustrates:

• the common law’s capacity to develop established doctrines and apply them to unprecedented situations;
• the growing importance of the law of privacy, often a close relation of the law of confidence;
• the importance of the Human Rights Act 1998 in relation to substantive rights, such as the right of privacy, and to the exercise of discretion whether to grant an injunction: this may involve a balancing exercise between Convention rights, particularly where the right of freedom of expression is engaged. The discharge of the injunction reminds us that, even where a claimed infringement of a right is well-founded, the balance of convenience may mean that an injunction is refused at the interlocutory stage.

The employer often has an exaggerated sense of what is confidential. Trade secrets and confidential information are identifiable objective knowledge which form part of the employer’s stock-in-trade but do not include the employee’s skill, experience, know-how and general knowledge.

The improbably named case of Faccenda Chicken Ltd v Fowler identifies three classes of information:

• Class 1 is trivial or easily accessible from public sources, and therefore not confidential.
• Class 2 is information which the employee must treat as confidential but which remains in his head and becomes part of his own knowledge. He cannot use it other than for his employer’s benefit during the employment, but he is free to do so after its termination.
• Class 3 is so confidential that, even if it is learned by heart, the employee cannot lawfully use it for anyone’s benefit but the employer, even after leaving that employment.

A test in deciding between class 2 and class 3 is whether a person of ordinary honesty and intelligence would recognise the information as the employer’s property, or as the employee’s own to do with as he likes. Applying the test requires examination of the nature of the employment and the information, whether confidentiality was impressed on the employee, and whether the information could be easily isolated from that which the employee was free to disclose.

This may be appropriate where the employee has given notice of resignation, and the employer believes that the employee intends to use confidential information to compete with the employer on his own or by joining a competitor before expiry of the notice period. However, garden leave is lawful only if the employer has a legitimate interest to protect (such as confidential information) and for no longer than reasonably necessary to protect that information (which may involve difficult questions as to the shelf-life of the confidential information).

This may state that the employee may not use or disclose confidential information other than for his employer’s benefit, during and after the employment, and frequently identifies items of confidential information. Since an employee is under a duty of confidence irrespective of the express contractual terms (either on the basis of an implied contractual duty or an equitable duty of confidence), it might be thought that an express covenant adds nothing to the common law position. It is certainly true that the mere mention in such a clause of an item of information as being confidential cannot of itself make the information confidential.

Express confidentiality covenants have two potential advantages. Firstly, they impress on the employee that some of the information is, or may be, confidential. Secondly, certain judges appear to be of the view that a wider range of information is to be treated as confidential for the purpose of an express confidentiality covenant than in the case of the implied duty of confidentiality.

The drawback is the difficulty an employer faces in policing the employee’s compliance. An employer is likely to face formidable difficulties in establishing that an employee has misused confidential information. The employer may decide to keep the employee out of the relevant market altogether for a limited period by means of a non-competition covenant.

This is a last resort, since the courts are reluctant to stretch the implied duty of confidence if an employer has not taken the trouble to incorporate an express restraint on the employee’s post-termination activities.

The "springboard principle" is applicable where confidential information has been used by an employee in a competing business but where the information is no longer confidential because it has entered the public domain or is no longer available to the employee. However, by his past misuse of the confidential information, the employee has unlawfully gained a springboard or headstart for his competing business. There is controversy about springboard remedies and the matter is ripe for examination by the court.

A number of problems arise in relation to enforcing the duty of confidence.

This might appear a mundane point, but if the claimant’s legal advisers get this wrong it can have catastrophic consequences. One pitfall is the temptation to plead confidential information with unacceptable generality. Thus, it might be alleged that "the claimant’s manufacturing process" was confidential, or that "the defendant had knowledge of the claimant’s confidential financial and other business affairs". That this sometimes occurs is not always without reason. The matter is urgent, the claimant needs to seek injunctive relief at short notice, and it is more convenient to plead in such general terms, at least at the outset. However, this may be not only generally impermissible but also dangerous to the claimant’s case.

There is another pitfall. Just as it may be an abuse of process to fail properly to identify information on which the claimant relies, so it can be an abuse to give particulars of information which is not, in fact, confidential. A case based even in part on wide and unsupportable claims of confidentiality could be used as an instrument of oppression or harassment against a defendant. It could be used to destroy an ex-employee’s ability to obtain employment or a competitor’s ability to compete. The wider the claims, the longer and more expensive the litigation. Furthermore, the more technology put before the court, the easier it could be to obscure the issues and there is a risk that the court will conclude that some, at least, of the technology must have been confidential. The court will not allow such an approach.

Where there is actual or threatened misuse of confidential information, conventional remedies are frequently sought. Thus a claim for damages might be appropriate although often an account of profits will be more beneficial to the owner of the information, especially where he has difficulty in proving actual loss. An account of profits is, in principle, available in cases involving breach of confidence (although it may also be available in certain cases involving mere breach of contract).

The decision in Douglas v Hello! highlights the importance of the Human Rights Act in such cases. Section 12 applies where the court is considering whether to grant any relief which might affect the exercise of the Convention right to freedom of expression. In such circumstances, section 12(3) provides that no such relief is to be granted so as to restrain publication before trial unless the court is satisfied that the applicant is likely to establish that publication should not be allowed. This may require the court to anticipate how at trial the balance might be struck between competing Convention rights, as it did here between the Article 8 right to privacy and the Article 10 right to freedom of expression.

In Douglas, Lord Justice Brooke stated that he was not sorry to refuse an interim injunction, because it appeared that OK! had in the past engaged in similar spoiling tactics directed at Hello! of the kind about which it was now complaining.

To conclude, Douglas v Hello! demonstrates the fluid nature of the law. Adapting well-established principles to a changing technological environment, coupled with the impact of the Human Rights Act, both substantively and procedurally, means that this field is ripe for development under the influence of creative and ingenious arguments from employment lawyers.