In the recent dismissal of the Travel Counsellors Ltd appeal against the High Court decision in favour of Trailfinders (Travel Counsellors Ltd v Trailfinders Ltd [2021] EWCA Civ 38), the Court of Appeal has provided further guidance on the equitable obligations of confidentiality where a business has found its confidential information being misused by a competitor who has received the confidential information by virtue of that business’ ex-employees.
This decision is welcomed as it gives authority as to whether a business is owed a duty of confidentiality by a competitor via a third party on whom an obligation of confidentiality was never imposed or whether the duty remains only with that third party initially receiving any confidential information/ trade secret from a business.
What happened?
In summary, ex-employees of Trailfinders found themselves entering into franchise agreements with Travel Counsellors. Travel Counsellors consistently invited franchisees to bring their old customer contract lists with them without any warning of the risks associated with a breach of confidence. Subsequently, these ex-employees transferred a list of Trailfinders’ customer information (including email addresses and contact numbers) which they had collated prior to leaving Trailfinders’ employment.
When Trailfinders brought action against Travel Counsellors, the High Court found that the equitable duty of confidence was still in existence and Travel Counsellors had breached this duty by using the confidential information disclosed to it by Trailfinders’ ex-employees for its own benefit. The High Court stated that an equitable duty of confidence arises “whenever a person receives information he knows or ought to know is fairly and reasonably to be regarded as confidential” and therefore it was held that Travel Counsellors would have been aware that at least some of the information provided to them by the ex-employees was Trailfinders’ confidential information, in particular noting that Travel Counsellors would have maintained that its own equivalent information was confidential.
The Appeal
In Travel Counsellors’ appeal, they argued that they could not be liable simply because a ‘reasonable person’ would have made enquiries as to whether a part of the information provided to them by the ex-employees was confidential. The appeal was unanimously dismissed by the Court of Appeal, whereby Arnold LJ cited the test as to whether an equitable obligation of confidence has arisen (Primary Group (UK) Ltd v Royal Bank of Scotland plc [2014] EWHC 1082 (Ch)). This test being that confidential information must have been communicated in circumstances importing such an obligation and that the recipient must know, or be on notice that, at least some of the information is confidential to another party. Therefore if on the facts, a reasonable person would make enquiries as to whether the information was confidential and its source, but the recipients does not, then there is an equitable duty of confidentiality. The Court of Appeal concluded that it isn’t essential that the recipient knew the information was confidential or even intentionally turned a blind-eye as to whether to information was confidential; the lack of reasonable enquiries may be sufficient to breach the equitable duty of confidence.
An additional point to note is the consideration by the High Court that this case fell within the definition of Article (4) of the Trade Secrets Directive (Directive 2016/943), being that the use or disclosure of a trade secret shall be considered unlawful when the recipient know or ought to have known in the circumstances that the trade secret had been obtained unlawfully or, in breach of any contractual duty or, any other duty to limit the use of the trade secret. The Court of Appeal did not address this any further considering that the events which occurred did so prior to the Directive’s implementation but it is an indication that the relationship between the Trades Secrets Regulations and the common law of confidentiality will inevitably crop up in future case law.
TL;DR
This ruling serves as a clear authority in situations where a business receives information that relates to a competitor; emphasising the importance in considering the source of that information. A few practical steps would be to:
- Impress upon employees that they do not use information which they have obtained from a competitor’s business without express consent. Ideally, this principle should be built into an IP and IT security policy which they should all sign on joining and which should be linked to their obligations in their employment contract. Such policies should not just be left for them to find for themselves on the company intranet;
- Always confirm with potential employees at the interview stage what their employment contract with the employer they are leaving contains in terms of confidentiality, IP ownership and restrictive covenants; and
- In instances where they receive any information from employees/ third parties, be aware that there is potentially a duty upon them to make reasonable enquiries as to whether such information is confidential and, where it is, not to use it.
Employers would be well advised to take all these measures. Otherwise, what looks like the dream employee could turn out to be a nightmare.
