Bestnet Bested Over Bug-Net Boosted from the Fence

Entomophobes, among others, will recall the clutch of cases that form the backdrop to this morning’s judgment of the Court of Appeal (Jacob & Jackson LJJ and Sir John Chadwick) in Vestergaard Frandsen & Ors v Bestnet Europe & Ors [2011] EWCA Civ 424. Mr Justice Arnold had originally decided the case in April 2009 (the “main judgment” – [2009] EWHC 657 (Ch), noted by tytoc collie here), but there followed three further decisions on remedies (the “remedies judgment” - [2009] EWHC 1456), liability for subsequent versions of the defendant’s products (“WHOPES I” - [2009] EWHC 1623 (Pat)) and, more recently, a judgment following remittal to consider additional questions of fact (the “remittal judgment” - [2011] EWHC 477 (Ch)).

Like the interconnected strands of a cobweb, the first instance judgments (all 1,007 paragraphs of them) disclose a complex tale of scandal and intrigue in the world of insecticidal fabrics manufacture. The Kat will attempt to summarise:

Vestergaard owned the rights to some technical trade secrets which, for the purposes of this tale, resided in a database called Fence. Fence was an extensive repository of ingredients and their proportions used to make long-lasting insecticidal nets (LLINs). It also contained the results of various tests that had been carried out on the nets. LLINs, as the name would suggest, are formulated so as to retain relatively long-term insecticidal properties. The insecticides are not simply sprayed on, or infused into, pre-made fabrics, they are incorporated into the plastic itself before it is extruded into filaments used to form the nets. The idea being that the insecticide gradually leaches out of the filaments ensuring an insecticidal surface remains over a protracted period even if the net is repeatedly washed.

In the summer of 2004 two of the individual defendants, Mr Larsen and Mrs Sig [Merpel notes that if you put them together you’re only a few letters and a typewriter away from a Swedish crime trilogy], left the employment of Vestergaard and entered into competition therewith. They did so in association with a scientist, Dr Skovmand, who was experienced in the field and who, although not previously employed by Vestergaard, had been engaged as a consultant by the company for a long time. As noted in the Court’s judgment (at [5]): he was, in effect, Vestergaard’s head of development.

As is typical in cases such as this, Mr Larson, Mrs Sig and Dr Skovmand were not entirely above board when disengaging themselves from Vestergaard – indeed, the Court of Appeal refers to their dishonesty and lack of truthfulness on more than one occasion (although it must be said that Mrs Sig attracts less criticism than the others – a point that becomes more relevant later). Vestergaard accordingly claimed that the defendants’ product, NetProtect – a long-lasting anti-mosquito bed net – had been developed using confidential information derived from Fence. Mr Justice Arnold, at first instance in the main judgment had held that Vestergaard was correct, and ordered an injunction. Thereafter, in the remedies judgment and in WHOPES I the Judge concluded that later variants of the NetProtect product should not be injuncted. He noted that despite their formulation being derived from misuse of the confidential information, the products in question differed in particular respects (see the remedies judgment at [107] to [110]). Moreover, they owed a lot to independent work carried out after the defendants’ disengagement from Vestergaard, and so an injunction would have been a disproportionate remedy in the circumstances.

Before the Court of Appeal, the defendants alleged that the Judge had been wrong to conclude that the Fence database had been used in the creation of NetProtect. Rather than extracting recipes from Fence, Dr Skovmand had simply relied on his general skill and knowledge which he was perfectly free to use for the benefit of a competing enterprise following his severance from Vestergaard. The Court of Appeal did not agree. Upholding the decision of the Judge, Jacob LJ (with whom the others agreed) explained (at [19] to [24]) that there were various “odd numbers” in the defendant’s formulation that bore a striking similarity to figures in the database: these needed explanation. The Judge had, “with considerable care and detail”, addressed these “odd numbers”, and concluded that Dr Skovmand had not just used his general skill and knowledge or matter in the public domain to arrive at the formulation for NetProtect:

[23] “It was a case of his using the detailed results in the Fence database so as to choose recipes for NetProtect which, based on those results, were likely to be successful, as indeed they were and were predicted to be from the outset. Indeed I cannot imagine any good reason why the defendants should have lied and forged to cover their tracks if the Fence database had not been used.”

Just because the defendants could have arrived at the formulation for NetProtect by their own research did not mean that they had done so. They had taken a short cut. The Judge had been correct in his finding.

The Court also upheld the Judge’s findings in the remittal judgment concerning the relative irrelevance of difference in the levels of LDPE (low-density polyethylene) in the NetProtect product when compared to the Fence database recipes. The Court noted that even though increasing the proportion of LDPE would have increased the migration rate of the insecticide in the nets, making it leach out more rapidly, there was no evidence that the differences were such that this would have a material effect in the current case.

The point of most interest, however, arose in the context of the third issue on appeal – the liability of Mrs Sig. An obligation of confidence had been imposed upon her by her contract of employment with Vertergaard. This obligation explicitly continued after termination, but was limited to Vestergaard’s trade secrets. The Judge had concluded that:

[23 of the remedies judgment] “…Although Mrs Sig was not personally involved in devising the initial NetProtect recipes or carrying out the trials, she was closely involved in setting up both Intection and Bestnet and in the commercial side of the development of NetProtect.”

He continued:

[24 of the remedies judgment] …A person can be liable for breach of confidence even if he is not conscious of the fact that what he is doing amounts to misuse of confidential information: see Seager v Copydex Ltd [1967] 1 WLR 923…. [Therefore, whilst] a person who is not otherwise subject to an obligation of confidence (e.g. by contract) will not come under an equitable obligation of confidence purely as a result of the receipt of confidential information unless and until he or she has notice (objectively assessed by reference to a reasonable person standing in the shoes of the recipient) that the information is confidential… [This does not apply where an obligation already exists].”

Accordingly, the Judge considered that Mrs Sig could be found liable for breach of confidence absent a finding that she knew that NetProtect was derived from the Fence database.

The Court of Appeal did not agree. Jacob LJ explicitly rejected Vestergaard’s argument that “once the law imposes an obligation of confidence, whether in equity or as a matter of contract, the obligation is broken where the obligee uses the information, even if unknowingly”. He explained that this argument was:

[47] “…far reaching. An obligation of strict liability is itself very serious. When one considers that the court can grant (and in the case of Mrs Sig has) grant an injunction restraining the individual from using confidential information which the individual does not have and never had, the extent of the suggested obligation is exposed with even greater effect.”

Seager v Copydex, relied upon by Vestergaard and the Judge, was distinguished on the basis that there the defendants were actually using the information, albeit unconsciously. Jacob LJ concluding that:

[50] “…the Judge was wrong to hold that Mrs Sig was guilty of breach of confidence. She behaved reprehensibly in a number of ways. But breach of confidence was not one of them.”

Vestergaard’s cross-appeal against the Judge’s findings that the defendant’s newer variants (WHOPES I and II) did not infringe was dismissed. The Court noted that proportionality was certainly a relevant consideration when deciding whether to grant an injunction to restrain a breach of confidence:

[57] “The passage of time is likewise relevant. After all what the defendants did was to cut a corner, getting on the market earlier than if they had not misused confidential information. Mr Gary Howe, in cross-examination, had accepted that scientifically the defendants could have developed their product independently – time was saved and perhaps not a very great deal of it. By the time of the WHOPES I product the head start had much less significance. That was a matter which the Judge was properly entitled to take into account.”

Mosquitoes here

Mojitos here

Losing litigant's hard drive to die, but her lawyers' computer stays safe

There was no stay of execution
of the court's order ...

Three weeks ago tytoc collie reported here on the litigation between Brandeaux Advisers and a former employee, Ruth Chadwick, who had cunningly but unlawfully helped herself to a large quantity of confidential information which she anticipated that she might need in the event that a pre-existing dispute between her and Brandeaux got to court. In the earlier decision the court ruled against her, since it was open to her to apply for disclosure (or 'discovery', as the Kat sometimes fondly thinks of it) of such information as she might actually need for that purpose.

In the second ruling, Brandeaux v Chadwick [2011] EWHC 58 (QB), not yet available on BAILII but efficiently noted by Lawtel, the court (Sir Raymond Jack, sitting in the Queen's Bench Division of the High Court, England and Wales, only a couple of weeks after he officially retired) had to decide on the precise form of the order. In his view

* No case could be made for a general injunction to stop Chadwick divulging the confidential information in her possession. Brandeaux had not made out any case that Chadwick had at any time intended to divulge the information to anyone except her lawyers -- or possibly to a regulatory authority (not surprising, since was was the company's compliance officer).

* An order for delivery up should do the trick, including destruction of Chadwick's data-laden hard drive,

* If Chadwick's solicitors were subject to the same delivery up process, they would lose their own computers while it was carried out -- which would obviously create a major problem. For this reason, it would be sufficient to accept the undertakings not to disclose the information which they had offered since there was no real risk that the solicitors would do anything with the information.

* Both Chadwick and Brandeaux had behaved unreasonably in relation to the claim for delivery up, standing their ground when commonsense would have dictated a solution. In terms of costs, this meant that Brandeaux, as victors, were entitled to their costs in relation to those issues upon which they were successful, but Chadwick's conduct was not so unreasonable as to justify the imposition of indemnity costs in Brandeaux's favour.

* Chadwick's work -- for which she had not been paid -- had a value to Brandeaux, which should be taken as the amount which Brandeaux was paying her. However, since the basis upon which Brandeaux's loss was to be assessed was capable of argument to the contrary effect with a real prospect of success, the company should be allowed to appeal on that issue.

This all seems sensible enough to tytoc collie, who is relieved to learn that law firms' computers are safe, at least for now, from delivery up for removal of confidential information the nature of which is of no direct concern to them.  But how far would this common sense extend? Would the court take the same view if the data was held by an independent company to which a legal practice subcontracts routine document storage and processing, for example?

How to kill your computer here and here

Brandeaux stars in Last Tango with Chadwick

In general, since breach of confidence is an equitable tort, disputes involving the protection of trade secrets are heard in England and Wales in the Chancery Division of the High Court -- the old "home" of equity and the current home of the Patents Court. However, many confidentiality disputes, whether involving technical information in the form of know-how or merely commercially valuable data such as lists of customers and suppliers, actually turn on the nature of a contractual relationship between the party which claims ownership or control of the information and the party who allegedly misuses it. If a matter is seen as contractual rather than equitable, the court hearing it may well be the Queen's Bench Division of the High Court. That court, while it now (since 1873) has the power to dispense equitable relief too, is home to a large range of common law-based litigation. Contract disputes are part of its staple diet. One such case is Brandeaux Advisers (UK) Ltd and others v Ruth Chadwick [2010] EWHC 3241 (QB), a decision of Mr Justice Jack late last year but only recently spotted by this Kat.

In short, Brandeaux (a group of companies involved in investment fund management) sought the delivery up of confidential information held by Chadwick, a former employee, as well as repayment of some of her salary. Chadwick counterclaimed for damages for wrongful dismissal.

What caused this distressing state of affairs? While employed by Brandeaux, Chadwick -- telling no-one but her trusty solicitor -- had sent a vast number of confidential documents relating to Brandeaux's affairs to her personal email account. While she didn't make any actual use of the information contained in those documents, in the course of redundancy meetings she allegedly threatened to make a report to Brandeaux's industry regulator if Brandeaux did not offer her another position. Brandeaux was not very happy about this and, taking the view that Chadwick had been threatening it, placed her on "garden leave". It was only after having done so that Brandeaux found out about the mass transfer of confidential information and dismissed Chadwick for gross misconduct.

Brandeaux then (i) obtained an ex parte interim injunction to stop Chadwick divulging the material and to deliver it up and (ii) brought a claim against her for the repayment of salary monies paid to her from the point at which she should have reported her wrongdoing.

Jack J, in these proceedings, had to decider (i) if transferring Brandeaux's confidential material to Chadwick was a breach of her employment contract; (ii) if Brandeaux was entitled to an order for delivery up; (iii) whether Brandeaux was entitled to dismiss Chadwick summarily and (iv) whether Brandeaux was indeed entitled to a refund of some of Chadwick's salary. Chadwick argued that she should be allowed to hang on to the information because she might need it if any question arose in respect of her performance of her duties as the executive in overall charge of compliance and in connection with her wrongful dismissal claims. She also contended that, when it went for its ex parte relief, Brandeaux had failed to give full disclosure -- something that incurs the courts' displeasure -- and that this failure should be reflected in any future order.  In any event, she maintained, the way Brandeaux behaved towards her in the course of her employment was such as to constitute a repudiatory breach of contract: since Brandeaux had effectively repudiated it, they couldn't at a later stage terminate it and ask for their money back.

Jack J gave judgment in part for Brandeaux, but dismissed Chadwick's counterclaim.

* He doubted that the possibility of litigation against an employer would ever justify an employee in transferring or copying specific confidential documents for her own retention, in breach of her employment duties: if an employee needed documents for that litigation, she could apply to the court for disclosure of them [assuming, says Merpel, that the employer is so gentlemanly that he would never destroy documents that might attract criticism -- or worse -- from a regulatory body];

* While there were some "failures of substance" in the way the interim application had been made, these were the result of unnecessary haste, not intention to mislead the court.  With one exception, these failures of substance had no impact on the outcome of that application anyway.

* Chadwick had not established that there had been a repudiatory breach by Brandeaux. 

* The amount of confidential information which Chadwick transferred to herself was vast and, if it had been made public, Brandeaux's reputation among its investors would have been badly damaged.  This being so, Chadwick must known that Brandeaux would have objected very strongly if it knew what she was doing. It was simply impossible that she could have thought she was entitled to act as she did -- she committed a major breach of trust and demonstrated that she could not be relied upon to perform an important part of her duty in relation to confidential material.

* Brandeaux had failed to show any loss and had the benefit of the salary it had agreed to pay her.

The judge was not keen on unnecessary sophistry in the construction of plain words used in their normal context in the employment context:

"16. Byzantine arguments can be advanced whether or not what Ms Chadwick did in e-mailing the confidential documents was in breach of the obligations not to 'divulge to any person whatever or otherwise make use of' any confidential information'. It is, however perfectly clear that the transfers were not for her employer's purposes but for her own purposes. ..."

One wonders how many Chancery judges would be as quick to discourage Byzantine arguments on the meaning of 'divulge to any person whatever or otherwise make use of' any confidential information' as this Queen's Bench judge was.  Jack J won't get another chance to do this though -- he retired on Monday.

How to pronounce -eaux here
How to pronounce Chadwick in English here and in Strine here
Last Tango in Paris, starring Marlon Brando and Maria Schneider, and missing a golden opportunity for product placement by Lurpak, here
Brandeaux here
Brand X here