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Confidential information, trade secrets and knowhow

Protection of confidential information by contract

A trade secret, confidential information or "knowhow" may be protected by a contract. e,g, a confidentiality or non-disclosure agreement (NDA). It is important to define clearly the nature of the information which is to be treated as confidential in order to avoid argument as to the scope of the contract.

The information protected in the contract must be genuinely secret or confidential. In the case of a secret manufacturing process or secret recipe, the quality of secrecy may be obvious. Less obviously, a database of customers or suppliers which a firm has built up for its business needs may well be protected, even though some or all of the information can be obtained from other sources.

 

Case study

The Intellectual Property Office have published a Case Study on the Irn Bru trade secret.

 

 

On the other hand, information readily available in the public domain will not be regarded as confidential. If the information is defined too widely, the contract will be unenforceable as a restraint of trade.

Confidentiality clauses are frequently found in employment contracts. As far a practicable, the owner of the information should carefully describe which categories of information they regard as secret or confidential. If this is not defined, it may lead to argument and litigation.

An NDA is used in a wide range of business activities. For example, an inventor who has designed a new device, or an author or artist who has created a method of manufacture or a TV programme should require any recipient of the information to sign an NDA prior to disclosing it.

Implied term of confidentiality

It is possible that the law will ‘imply’ an obligation of confidentiality into a contract where there is no specific provision. The most common example is in a contract of employment.

The case of Faccenda Chicken Ltd v Fowler [1985] FSR 105 concerned an action against former employees for breach of an implied term in their contracts of employment not to use sales information acquired in the course of their employment. In his judgment, Goulding J divided information to which an employee may have gained access into three classes:

(i)           information which is not confidential;

(ii)          confidential information acquired during the normal course of employment which remains in the employee's head and becomes part of his own experience and skills;

(iii)         confidential information in the form of specific trade secrets.

It should be noted that in Faccenda Chicken and later judgments 'trade secrets' is a term which has been used narrowly to mean information having a high degree of confidentiality.

Goulding J ruled that the general duty of good faith restrains an employee from misusing his employer's confidential information, both classes (ii) and (iii), during the course of his or her employment. Such misuse would include the disclosure of the information to the employer's competitor. The duty of good faith comes to an end upon the termination of employment and with it the end of any restraint on the use of class 2 information. There is a further, narrower implied term, biting on class (iii) only, not to disclose or otherwise misuse confidential information even after the end of the employment

Equitable duty of confidentiality

In the absence of a confidentiality agreement, English law will to an extent protect information which a provider has given in confidence expressly or by implication. This protection was developed by the English courts as part of the "equity"  jurisdiction which focuses on a person's conscience as distinct from the common law jurisdiction protecting strict legal rights and remedies. In view of the uncertainties of relying upon the law of confidence, it will generally be preferable to protect information by means of a contract.

Protection by contract or the law of confidence has limitations. If a third party acquires the information by lawful means, or the information enters the public domain otherwise than by breach of contract or confidence by the recipient, the contract or confidentiality may no longer protect the information. This contrasts with the proprietary protection afforded by formal intellectual property rights including patents, registered design and trade marks, and to a lesser extent by unregistered intellectual property rights such as copyright and unregistered design rights. which are good against the whole world.

EU legal protection of trade secrets

Directive (EU) 2016/943 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition entered into force in 2016. The articles in Chapter II of the Directive set out the circumstances in which 'trade secrets' as defined in Chapter I may be lawfully acquired, used and disclosed and the circumstances in which they may not. Art.6 sets out the general obligation imposed on Member States, namely to ensure the availability of civil redress against the unlawful acquisition, use and disclosure of 'trade secrets'.

The Directive was implemented in the UK in June 2018 by The Trade Secrets (Enforcement, etc.) Regulations 2018, to the extent that was thought necessary. This did not include any change in the law to comply with either Chapter II or art.6. The explanatory note states: "A number of the provisions of the Directive, in particular the provisions in Chapter II and Articles 6, 7 and 16, have been implemented in the United Kingdom by the principles of common law and equity relating to breach of confidence in confidential information, and by statute and court rules."

What’s new on this topic [see What’s new page or archive for full item]:

12/03/2020: Trailfinders succeeds in breach of confidence claim against ex-sales consultants

Trailfinders Limited v Travel Counsellors Limited and four others [2020] EWHC 591 (IPEC)

High Court Intellectual Property Enterprise Court; Hearing dates: 29-30 January 2020

Trailfinders is a travel agent with 37 branches in the UK and Ireland, employing over 700 sales consultants. The Second, Third, Fourth and Fifth Defendants are former sales consultants at Trailfinders. In 2016 they left to join the First Defendant (TCL), as did about 40 others by the date of the claim.

Trailfinders alleged that when the Second to Fifth Defendants left they took with them the names, contact details and much other information about their clients  and further that after they left they accessed a Trailfinders' customer database to obtain further information. Trailfinders claimed that the Second to Fifth Defendants were thereby in breach of implied terms in their contracts of employment and/or were in breach of equitable obligations of confidence owed to Trailfinders. Trailfinders also

Claimed that TCL had been in breach of confidence through having received the other defendants' confidential customer information and having allowed those defendants to exploit the information for TCL's and their benefit. Alternatively, TCL was ‘vicariously liable’ for the acts of the other Defendants who were TCL’s employees.

The judge found that the implied terms of confidentiality in the contracts of employment between Trailfinders and its employees restrained the employees from using or disclosing the client Information except in pursuance of the business interests of Trailfinders. That duty ceased after the end of their employment. However, to the extent that any employee acted in breach of the implied term during the course of their employment, liability for breach remained. Such acts in breach would include copying or deliberately memorising any confidential parts of the confidential customer Information for use by the employee after leaving Trailfinders' employment.

The equitable obligation of confidence owed by Trailfinders' employees was similar, but differed in that the obligation did not cease once they left the employment of Trailfinders. That said, the obligation could not be enforced by Trailfinders in relation to information forming part of the experience and skills acquired during the normal course of their employment with Trailfinders. The latter covered only information that was held in the mind of the employees when they left Trailfinders' employment, and excludes any information which was deliberately memorised.

The judge ruled that the employees were each in breach of the term of confidence implied into their respective contracts of employment with Trailfinders and also in breach of an equitable obligation of confidence owed to Trailfinders. TCL was in breach of an equitable obligation of confidence which it owed to Trailfinders.

[Original case report provided by BAILII is acknowledged with thanks. Contains public sector information licensed under the Open Government Licence v3.0. Legaleze is solely responsible for the article or summary.]

[Page cupdated: 08/04/2020]

 

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