How are Businesses’ Confidential Information and Trade Secrets Protected?

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A thorny question which can arise on the termination of an individual’s employment relates to the individual’s ongoing duty of confidentiality to his or her former employer. A recent case brought by Trailfinders1 (a well-known UK travel agency) against its former employees and one of its competitors, Travel Counsellors Limited (“TCL”), is a welcome reminder of the issues which can arise in relation to confidentiality disputes in this area. The decision is significant since it was the first case in which the High Court considered the impact of the EU-wide Trade Secrets Directive (the “Directive”) (which was implemented into English law in 2018)2 and the interaction between the Directive and existing English common law principles.

Background

The case concerned two employees who left Trailfinders to join TCL. Trailfinders alleged that:

  • those employees took with them certain of Trailfinders confidential client information (which included customers’ names, contact details, passport numbers, frequent flyer numbers and details of past and provisional bookings) (the “Trailfinders’ Client Information”).
  • after their employment with Trailfinders had terminated, those employees had accessed a Trailfinders’ client database to obtain further Trailfinders’ Client Information for the benefit of TCL.

Trailfinders claimed that:

  • the employees were in breach of implied terms in their contracts of employment and/or were in breach of equitable obligations of confidence owed to Trailfinders.
  • TCL was in breach of an equitable duty of confidence to Trailfinders.
Implied Contractual Obligations

It is well established English common law that employees owe their employer an implied contractual duty of good faith and fidelity and an implied obligation not to misuse the employer’s confidential information (the “Implied Contractual Duty”).

English common law also recognises three distinct classes of information obtained by employees during the course of their employment, namely:

  • non-confidential information (class 1)
  • confidential information which is acquired during the course of employment which becomes part of the employee’s experience and skills (class 2)
  • confidential information in the form of specific trade secrets (class 3).

In Trailfinders, the Court reiterated the existence of the Implied Contractual Duty, but provided helpful clarity in relation to the application of the Implied Contractual Duty to these categories of confidential information. The Implied Contractual Duty restrains misuse of class 2 information during the period of employment, but that duty terminates when employment ends the Implied Contractual Duty restrains the use or disclosure of class 3 information both during and after the period of employment).

The Court also made it clear that this distinction does not mean that class 2 information can always be freely used or disclosed after the end of the relevant employment - it confirmed that copying a list of the employer's customers for use after the end of the employment, or deliberately memorising the list for such use, is liable to constitute an act in breach of confidence since that copying would have taken place during the period of employment.

Equitable Duty of Confidence

The High Court also confirmed that, together with the Implied Contractual Duty, there exists an equitable obligation of confidence on an employee where the individual receives information that he or she knows or ought to know is fairly and reasonably to be regarded as confidential and that this equitable duty continues to apply after the end of employment -with the exception of class 2 information held honestly in the mind of the employee at the time of leaving their employment.

The Directive

Those provisions of the Directive which have been incorporated into domestic law do not replace or amend the common law position with regard to duties of confidence but supplement it.

A "trade secret" is defined for these purposes as information which:

  • 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.
  • has commercial value because it is secret.
  • has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.
Judgment

Confidential Information

The Court had no doubt in finding that the Trailfinders’ Customer Information was confidential to Trailfinders as it had the characteristics set out in the definition of a ‘trade secret’ under the Directive. The Court rejected the employees’ argument that it could not be confidential as (i) it had not been sufficiently protected from public disclosure by Trailfinders or (ii) the employees were not sufficiently informed of the confidential nature of the relevant information.

Copying the Trailfinders Confidential Information

The Court also held that the employees had breached3 both their Implied Contractual Duty and equitable duty of confidence in copying the Trailfinders Confidential Information before their employment with Trailfinders had ended and subsequently providing that information to TCL. The fact that some of the customer information was available publicly was no defence. The Court confirmed that, where a defendant saves a significant amount of effort by obtaining information from documents taken or made during his employment, instead of sourcing the information from public sources, this still constitutes a breach of the Implied Contractual Duty and the equitable duty of confidence.

Accessing the Trailfinders’ database

In respect of the employees accessing a Trailfinders’ database after their employment had ended, the Court found that this constituted an equitable breach of confidence for one of the employees, but not the other. The reason for these contrasting findings was that this particular database was also accessible to Trailfinders’ clients - the employee found not to be in breach was able to prove to the Court that he had been given permission by the respective clients to access their data on that database.

Breach by TCL

Finally, the Court held that TCL ought to have known that they were in receipt of information which Trailfinders reasonably regarded as confidential. Consequently, equity imposed on TCL an obligation of confidence and it was in breach of that obligation.

Conclusion and Takeaways

From a legal perspective, the case provides a timely recap of the legal duties and obligations imposed on employees in respect of their employer’s confidential information. It also indicates how the Directive will work together in harmony with existing English common law moving forward – there is such an overlap between the two that there is unlikely to be any material change but as the Court said, the Directive will continue to shine an “occasional light on [existing common law] principles.

From a commercial perspective, the case serves as a helpful reminder that a company’s valuable confidential information will be a target for erstwhile employees (and that targeting is likely to begin before those employees have left). Existing employers must be alert to implementing strong and effective measures to protect their confidential information not only to safeguard it from opportunistic employees, but also to defend against any accusation by such employees that the information could not be protected as confidential, as it had not been sufficiently protected from public disclosure. From a practical perspective this should involve existing employers informing and educating their employees as to the confidential nature of its valuable information, limiting the number of employees to which it is disclosed and keeping highly sensitive material separate from other information. As express terms of an employee’s employment contract can extend and clarify the employer’s ability to protect its position, contracts for new and existing staff should be reviewed regularly to ensure that their confidentiality provisions are fit for purpose both by reference to the case law and the specific business context of the employer and the employee’s role.

Prospective employers must be alert for different reasons. They must guard against new employees bringing confidential information with them from their previous employer given the risk of thereby being exposed to claims for breach of confidence or inducing breach of contract on the part of those new employees. From a practical perspective, they should at least ensure that the employment contract with the new employee includes an undertaking from that employee that he or she is not in breach, or will not be in breach, of any obligations they owes to their former employer.

 

Footnotes

1) Trailfinders Ltd v Travel Counsellors Ltd & Ors [2020] EWHC 591 (the first UK judgment considering the impact of the Trade Secrets Directive).

2) Directive (EU) 2016/943, implemented in the UK in June 2018 by The Trade Secrets (Enforcement, etc.) Regulations 2018.

3) The Court also held that all breaches of the Implied Contractual Duty and the equitable duty of confidence by the parties in this case were equally unlawful acts under the Directive.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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