By Ezra Steinhardt and Oliver Grazebrook

On 22 May 2013, the Supreme Court issued a ruling on the English law of confidential information.  The case represents a helpful guide as to how confidential information may be protected by a business after the end of an employment contract.

The case, Vestergaard Frandsen A/S (now called MVF 3 ApS) and others v Bestnet Europe Limited and others [2013] UKSC 31, deals with facts that may represent a fairly common business scenario.  In the case, one employee left a business, together with a consultant, to set up a rival business.  In the course of their work at the new business, the ex-consultant used what was, unbeknownst to the ex-employee, confidential information that the court deemed to be a trade secret from the prior business.

Considering these facts, the High Court found the ex-consultant liable for breach of confidence.  Expanding on that finding, the Supreme Court found that the ex-employee — in contrast to the ex-consultant — should not be liable for breach of confidence, because unlike the ex-consultant the ex-employee had had no knowledge of the trade secret when working for their former employer, and because the ex-employee hadn’t subsequently realised that the information had ever originated from their former employer when it was being used in the new rival business.

Summarising the Supreme Court’s logic, Lord Neuberger stated that “an action for breach of confidence is based ultimately on conscience”.  In other words, the ex-employee was not liable because she had no knowledge of the breach, so her conscience couldn’t have been affected – despite the fact that the ex-employee had arguably assisted in the use and misuse of the trade secret in the course of running a rival business.

By stressing the importance of the ex-employee’s awareness of the breach, the Vestergaard case highlights the way in which courts have tried to balance the need for businesses to protect trade secrets against the need for robust competition.

Under English law, information is generally protected as confidential if it is confidential in nature, and disclosed in circumstances that import an obligation of confidence.  This obligation can be expressly stated in a contract, or it can be implied through general circumstances, or through the relationship between the parties concerned (for example, employers can tell employees that information imparted is confidential).  In classic breach of confidence cases, confidential information may be disclosed and/or used in ways that are inconsistent with its confidential nature, by a defendant who has received the information and who knew (or ought to have known) that such information was confidential.  Defendants may also be secondarily liable if they assist in a breach of confidence, but again only if they are aware (or ought to have been aware) that a breach is occurring.

English law also distinguishes between different types of confidential information acquired by employees.  The first case to make the distinction between the different types of confidential information was Faccenda Chicken v Fowler [1987] Ch 117Faccenda Chicken distinguished between two classes of confidential information acquired by employees, being (A) information with some confidential element, and (B) information that is either “classed as a trade secret” or “is in all the circumstances of such a highly confidential nature as to require the same protection as a trade secret eo nomine”.  To decide into which category information should fall, English courts look at several factors, including the nature of the employment and the information in question, and the steps taken by employers to impress upon their employees the nature of confidentiality of the information.

There is a sharp difference in the level of protection granted to the different categories of information under English law.  In Faccenda Chicken, the Court of Appeal made clear that employees were obliged to treat information falling under category (A) as confidential under an “implied duty” of confidentiality for the course of their employment — but for no longer than that.  By contrast, information in category (B) was covered by an implied duty of confidentiality even after the end of an employment period.  The Vestergaard case illustrates this divide in practice:  in the case, the High Court ruled that the information in question fell into category (B), and that therefore the information was protected even after the consultant had left the business.

In his conclusion, Lord Neuberger stated that “in a modern economy, the law has to maintain a realistic and fair balance between (i) effectively protecting trade secrets (and other intellectual property rights) and (ii) not reasonably inhibiting competition in the market place”.  The Vestergaard judgments have maintained this balance, by providing some protection to IP rights such as trade secrets, but equally by not inhibiting an honest attempt to compete with former employers.