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Employment Law

Legal guidance - compliance - software

04 AUG 2014

Breach of confidence: A textbook case

Breach of confidence: A textbook case
In Personnel Hygiene Services Ltd and ors v Rentokil Initial (UK) Ltd (t/a Initial Medical Services) and anor [2014] EWCA Civ 29, the Court of Appeal had to consider whether to overturn final injunctions granted by HHJ Havelock-Allan QC in the Bristol Mercantile Court. While not breaking new ground in terms of legal principle, the case does provide a useful practical example of the operation of a breach of confidence claim, in the particular context of the misuse of customer details, which more commonly involves departing employees.

Facts

PHS bought a clinical waste business which was known as UK Hygiene (“UKH”). UKH had used Rentokil Initial as a sub-contractor to provide its services, but PHS intended to perform the service itself following the purchase. PHS thus gave Rentokil Initial notice to terminate the sub-contract, which prompted activity by Rentokil Initial consisting of systematically contacting PHS customers and making untrue representations with a view to encouraging the customers to switch their business from PHS to Rentokil Initial. That activity ceased when PHS applied for an interim injunction (in respect of which application Rentokil Initial gave limited undertakings).

Rentokil Initial had entered into a confidentiality agreement with UKH at the point of tendering for the sub-contract, in respect of confidential information provided for the purposes of assessing the merits of entering into the sub-contract. It was unlimited in duration. The sub-contract subsequently entered into was however silent on the issue of confidentiality.

High Court grants injunctions

At an expedited trial in the Bristol Mercantile Court, a final injunction was granted by HHJ Havelock-Allan QC restraining Rentokil Initial from misusing PHS’s confidential information, together with a “springboard” injunction restraining Rentokil Initial from dealing with the customers that had been contacted prior to the interim injunction application.

HHJ Havelock-Allan QC implied a term into the sub-contract equivalent to the relevant clause in the confidentiality agreement, in respect of new customers introduced pursuant to the sub-contract. Breaches of both the express and implied terms were restrained by the injunctions. Rentokil appealed to the Court of Appeal.

Appeal dismissed

On appeal, Rentokil Initial argued that it was an error of law to imply such a term into the sub-contract, relying on Caterpillar Logistics Services (UK) Ltd v Huesca de Crean [2012] IRLR 410 (CA). It was argued that the reason why an injunction restraining misuse of confidential information was refused in Caterpillar, was because Caterpillar had failed to secure an express term in the employee’s contract to that effect.

Lord Justice Rimer (giving the leading judgment of the Court in PHS v Rentokil) concluded that Caterpillar “said nothing that provides a shred of support” for Rentokil Initial’s submission. No injunction to restrain misuse of confidential information was granted in that case, because on the facts there had been no suggestion of any likelihood of any such misuse arising. If there had been, an injunction might well have been granted restraining misuse of confidential information. No express term was required. Where the Court of Appeal had decided (obiter) that an express term was required in Caterpillar, was in relation to a separate claim for “barring out” relief, preventing the employee from even being employed by a competitor. But that aspect of the decision in Caterpillar had nothing to do with the claims in PHS v Rentokil.

In this case, the reasonable man would have had no hesitation in concluding that the information relating to new customers should have been subject to the same confidentiality obligation as was set out in the confidentiality agreement. Any other conclusion would have been “extraordinary”. Use of the confidential information had been admitted, and the Judge had been perfectly entitled to grant the injunctions.

Comment

The breach of confidence action is primarily an equitable cause of action, which is not dependent on any terms of a contract, whether express or implied. However, there is nothing to stop parties from including express confidentiality clauses in contracts and seeking to enforce them: if they turn out not to be enforceable because the information said to be confidential is drawn too widely (for example), there is no reason why the same party should not be able to fall back on the equitable obligation of confidence and hold the former employee to it to the extent that the law allows.

In PHS v Rentokil, the claims had been argued at first instance on an equitable footing in the alternative, but since the Judge was happy to imply the necessary contractual term (which the Court of Appeal upheld) the Judge did not consider it necessary to elaborate on the equitable alternative.

The utility of the express confidentiality agreement or clause

If an express confidentiality clause is used (whether in a commercial or an employment contract), its utility is likely to stretch beyond facilitating its own enforcement, in making it easier to imply an equivalent term where necessary in the circumstances of the case, as occurred here. The terms of an express confidentiality clause may also help to form the basis of a conclusion by the court as to whether or not the information in respect of which protection is sought, falls within the protectable category of confidential information.

Of course, there will not be carte blanche simply to use an express term or agreement to try to convert otherwise trivial or public information, or an employee’s acquired skill and knowledge, into confidential information: confidentiality only applies to matters which are not in the public domain, and the doctrine of restraint of trade will apply where the effect of the clause is unreasonably restrictive resulting in such a clause being unenforceable.

But in borderline cases, if (for example) an employee is effectively told in his or her contract, and agrees, that certain pieces of information are being imparted in circumstances where they are to be regarded as confidential, then this will certainly help, even if it only turns out to be of evidential value in that it determines what information the parties considered to be truly confidential and to fall within the Faccenda Chicken “class 3” (“trade secrets”) category. The wording of the express term will also assist in drafting the terms of the proposed order that the employer will be asking the Court to make. In this way, an express confidentiality clause may continue to be of some use even in a case where the claim is being considered on equitable principles because the express contractual clause is unenforceable in contract for some reason.

The trick will be in the drafting of such clauses: if identified information is not realistically likely to fall within “class 3”, it would be wise to attach some temporal limit and not to seek to prohibit its use indefinitely.

If the worst happens and the court takes the view that the clause was too widely drafted, equitable principles can be relied on in the alternative so that at least the level of protection that the courts will imply will remain, even if the attempted contractual prohibition which went further, is not allowed to stand.

Confidential information: customer details

“Class 3” information is of course a reference to the categories identified in Faccenda Chicken v Fowler [1987] Ch 117 (CA). The Court famously considered that information will fall into three categories:

1. Trivial or public information which is not confidential.

2. Information that the employee must treat as confidential during his employment because he is expressly told that it is confidential, or because it is obviously so, but which once learned remains in his head and becomes part of his own skill and knowledge which he is free to use after he leaves.

3. Specific trade secrets that are so confidential that though they may have been learned by heart, cannot lawfully be used for anyone’s benefit other than the employer.

It is clear that “class 3” information may never be used post termination. The real issues are as to the precise scope of “class 3”, or alternatively the extent to which the law implies a duty (either by way of an implied term or in equity) preventing the use of information that might be said to fall under “class 2”, post-termination.

In Herbert Morris v Saxelby [1916] 1 AC 688, Lord Atkinson made it clear that “tabulated information as to the requirements of existing customers and probable requirements of prospective ones” were highly confidential. But at that time, the House of Lords did not regard them as a trade secret capable of protection (in that case by a post-termination covenant). However, the law has moved on.

In more modern times, in Lansing Linde Ltd v Kerr [1991] 1 WLR 251 (CA), it was recognised that a customer list containing information not available or not readily available in the public domain is capable of being treated as a trade secret, the use of which could be prevented by injunctive relief.

In Norbrook Laboratories (GB) Ltd v Adair [2008] IRLR 878, Elizabeth Slade QC relied on Staughton LJ’s judgment in Lansing Linde, where he said that a trade secret:

“can thus include not only secret formulae for the manufacture of products but also, in an appropriate case, the names of customers and the goods which they buy. But some may say that not all such information is a trade secret in ordinary parlance. If that view be adopted, the class of information which can justify a restriction is wider, and extends to some confidential information which would not ordinarily be called a trade secret.”

This approach was adopted in JN Dairies Ltd v Johal Dairies Ltd & Singh [2009] EWHC 1331 (Ch), which involved a claim of breach of confidence against a former employee who was alleged to have taken copies of the claimant’s invoices and given them to the new employer, who then made use of the customer information and pricing details. The claim (against both the former employee and his new employer) succeeded, despite there being no express term in his contract prohibiting the conduct described.

In PHS v Rentokil itself, at first instance HHJ Havelock-Allan QC had little difficulty with the idea that customer contact details, details of their requirements and (most importantly) the fact of their being customers of the claimant, constituted confidential information. The Court of Appeal did not have to deal with any challenge to that conclusion, which had been reached below despite the fact some elements of the information were available in the public domain on websites which would facilitate a degree of “reverse engineering”. The confidentiality of the information derives from its being collected together within the knowledge of the defendant, in such a way as to avoid the need to go through the reverse engineering process. The avoidance of that labour is what constitutes the illegitimate competitive advantage.

The modern approach is therefore something of a departure from the strict stance taken in Faccenda Chicken itself, to the effect that customer details and pricing information did not constitute a trade secret within “class 3”. Faccenda Chicken now has to be modified in light of Lansing Linde and the subsequent cases. Drawing the distinction between classes 2 and 3 is not easy however, as pointed out by Sir Thomas Bingham MR in Lancashire Fires Ltd v S A Lyons & Co Ltd [1997] IRLR 113 (CA):

"It is plain that if an employer is to succeed in protecting information as confidential, he must succeed in showing that it does not form part of an employee's own stock of knowledge, skill and experience. The distinction between information in Goulding J's class 2 and information in his class 3 may often on the facts be very hard to draw, but ultimately the court must judge whether an ex-employee has illegitimately used the confidential information which forms part of the stock-in-trade of his former employer either for his own benefit or to the detriment of the former employer, or whether he has simply used his own professional expertise, gained in whole or in part during his former employment."

Of course in PHS v Rentokil, which was not an employment case, the issue of whether the customer details had become part of an employee’s skill and knowledge did not arise. But the utility of the express confidentiality agreement that existed in that case nonetheless provides a salutatory lesson for employment cases in that they can provide a fast route to drawing the distinction identified by Sir Thomas Bingham MR above.

Indeed, there is support for the notion that “class 2” information may nevertheless be treated effectively as “class 3” information, where the parties have expressly agreed that it is to be protected. In Towry EJ Ltd v Bennett [2012] EWHC 224 (QB)¸Cox J indicated that a court is likely to reject an argument that part of the customer information cannot be confidential if an employee would naturally remember it, if it is within the ambit of what the parties have agreed (see paras.416-421). Essentially, in determining whether information is part of the employee’s stock of skill and knowledge, or confidential information, it is the nature of the information that is important and not simply whether the employee has been able to memorise it.

And finally …

It is also worth noting that the European Commission has published a draft Trade Secrets Directive, with a view to harmonising the law in this area across Member States. The proposed Directive will protect against the unlawful acquisition, use or disclosure of trade secrets (Art.1). “Trade secrets” are defined in Art.2 as information that:

• is secret, in that it is not generally known among or readily accessible to relevant persons in the field;

• has commercial value because it is secret; and

• has been subject to reasonable steps to keep it secret.

The acquisition of a trade secret will be unlawful in a range of circumstances including where it is the result of breach of a confidentiality agreement or other practice “contrary to honest commercial practices”. Thus, express confidentiality agreements are likely to take on an additional importance. However, overall the proposed Directive is likely to lead primarily to changes of form rather than substance in this country.

The final version of the Directive could be promulgated by the European Parliament and Council by the end of the year. Of course, it is likely to be some time thereafter before we see Regulations implementing the Directive in domestic law.

This article was first published in the Guildhall Chambers Commercial Team Newsletter (Summer 2014). Hugh and Douglas represented PHS at first instance and in the Court of Appeal.
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