Trade Secrets Directive has not changed substantive English law principles protecting confidential information

12 minute read
03 April 2020


In a recent judgment of the Intellectual Property Enterprise Court (IPEC), Trailfinders Limited v Traveller Counsellors Limited & Ors [2020] EWHC 591 (IPEC), it has been held that the 'Trade Secrets Directive' has not affected the substantive principles governing the protection of confidential information under English law.

Terms of confidence implied into contracts of employment and equitable obligations of confidence in employment and business contexts remain governed by the English jurisprudence, although HHJ Hacon suggested that the Directive "shines an occasional light" on the relevant principles.

Common law breach of confidence and the introduction of the Directive

In England and Wales, the legal protection for confidential information, including trade secrets, has (until the introduction of the Directive) been governed exclusively by the common law: the UK had not legislated to create a statutory tort.

The common law protects information having the 'necessary quality of confidence' which is imparted or obtained in circumstances objectively importing an obligation of confidence, and which is used (or threatened to be used) in an unauthorised way to the detriment of the owner (Coco v A. N. Clark [1969] RPC 41, Attorney-General v Guardian Newspapers (No 2) [1990] 1 AC 109, Campbell v MGN Ltd [2004] UKHL 22 [2004] 2 AC 457). This is the equitable obligation of confidence.

As between a company and its employees and other workers, in addition to the equitable obligation of confidence, contractual terms - express and implied by the common law - govern obligations of confidentiality.

Directive (EU) 2016/943 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure (the Directive), came into force in 2016, with a deadline for implementation by Member States in June 2018.

In the UK, the Directive was implemented by The Trade Secrets (Enforcement etc.) Regulation 2018 (the Trade Secrets Regulation). The preamble stated that certain provisions of the Directive - those specifying where an acquisition, use or disclosure of a trade secret is lawful and where it is not - had not been included as they were implemented into UK law by the principles of common law and equity relating to breach of confidential information, amongst others. The Trade Secrets Regulation did, however, adopt the definition of 'trade secret' set out in Article 2(1) of the Directive, and so introduced such a definition for the first time:

"trade secret" means information which-

(a) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among, or readily accessible to, persons within the circles that normally deal with the kind of information in question,

(b) has commercial value because it is secret, and

(c) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret."

Arguably the requirement that the information has been subjected to 'reasonable steps' to keep the information secret may introduce a higher practical and evidential burden on the trade secrets holder, but to the extent this differs from showing that information has the 'necessary quality of confidence', as required under the equitable obligation of confidence as discussed below, this remains to be seen.

Scrutiny of the changes introduced by the Directive in Trailfinders v TCL

Trailfinders v Traveller Counsellors Limited (TCL) was the first determination by an English court of a dispute under the law governing the protection of confidential information, as it had been impacted by the Directive.

The factual background was that several individuals had left their employment at Trailfinders and joined TCL. Trailfinders complained that the individuals had taken certain Trailfinders client information with them and sued for breach of confidence. Trailfinders also sued TCL.

In the IPEC, HHJ Hacon noted the introduction of the Directive and reproduced in his judgment a large portion of it. However, he noted too the preamble to the Trade Secrets Regulation, saying ([9]):

"It is therefore to be assumed that the substantive principles governing the protection of confidential information under English law, including that afforded by terms implied into contracts of employment and by equitable obligations of confidence, are unaffected by the Directive."

HHJ Hacon then proceeded to consider and apply the English law principles governing the protection of confidential information to resolve the dispute before him.

The consolidation of English law principles in Trailfinders v TCL

HHJ Hacon succinctly captured the principles governing the equitable obligation of confidence (noted above) and the additional obligations binding employees.

In addition to the basic principles, HHJ Hacon explained that the equitable duty of confidence continues after employment has terminated, but does not apply in respect of the employee's own skill and experience acquired during employment. Confidential information which had been deliberately memorised would not count as an employee's own skill and experience.

As between a company and its employees, obligations of confidentiality are governed by both contractual terms and the common law (which implies terms of confidentiality), the leading cases being (the wonderfully named) Faccenda Chicken v Fowler ([1986] 3 WLR 288) and Vestergaard v Bestnet ([2013] UKSC 31).

The common law distinguishes between different types of information that become known by an employee, affording different levels of protection. The most secret information (class (iii)) will continue to remain protected after an employee's employment has ended. A lesser category of information (class (ii)) must be treated as confidential during the term of employment but once learned becomes a part of the employee's skill and knowledge, and so may be used by them after the termination of their employment. Information that is trivial or in the public domain (class (i)) cannot be treated as confidential.

As HHJ Hacon highlighted however, and which became relevant in Trailfinder on the facts of the case, this does not mean that class (ii) information can always be freely used once the employee has left his/her employment. For example, deliberately copying or memorising certain information during employment for use after employment, can still amount to a breach of confidence. Although the employee is not liable for breach of an implied term of his/her employment contract after the employment contract ends, the employee will remain liable for acts done in breach during the employment. Equally, the fact that the information could have been taken from public sources is no defence if this was not actually done.

With regard to differentiating between class (i) and class (ii) information, i.e. determining whether information is confidential or not, HHJ Hacon highlighted that the definition of trade secrets in Article 2(1) of the Directive, which has been adopted in the Trade Secrets Regulation, is the 'best guide'. Deliberate memorisation of information would not make it class (i) if otherwise it was not in that class. The term 'trade secrets' used in the Directive is broader that the definition of class (iii) information in Faccenda Chicken, encompassing class (ii) information also.

The outcome between the parties in Trailfinders v TCL

HHJ Hacon held that the client information taken by the defendants from their ex-employer was highly characteristic of information capable of being confidential and thus liable to be subject both to an equitable obligation of confidence and to an implied term of confidence (in the individuals' contracts of employment with Trailfinders). It had the characteristics set out in the definition of trade secrets in the Directive and it fell within the Faccenda Chicken class (ii) type of information.

Individual employees had variously both copied client information from Trailfinders' systems while still employed by Trailfinders (and subsequently used that information at TCL) and accessed a Trailfinders client-facing platform to obtain such information after their employment had terminated. The individuals were found to have breached both their contractual obligations of confidence and their equitable duty of confidence.

The business structure of TCL (which operated as a franchise) was such that it did not 'employ' the individual defendants and so was not vicariously liable for their acts. Nor were the defendants 'agents' of TCL, and so TCL did not acquire liability for the individuals' acts as their 'principal'.

However, on the facts, the judge found that TCL had encouraged the individual defendants to bring with them to TCL information regarding existing clients. TCL ought to have known that such information was confidential to Trailfinders. TCL therefore owed an equitable duty of confidence to Trailfinders, which it had breached.

What does this mean for trade secrets protection in the UK - some practical tips

The judgment in Trailfinders v TCL should bring comfort that, despite the possibility for uncertainty represented by the Directive, the law protecting confidential information (including trade secrets) remains settled in the UK. The judgment is a reminder that, at a time of widespread upheaval, English law provides clearly explained protection for confidential information.

Individuals, whatever their employment arrangements, should keep in mind that if the handling of information of a possibly confidential nature feels questionable, it probably is questionable and wrong. Stop, think through and apply the settled principles protecting confidential information before doing something that cannot be undone.

In case of dispute, the terms of the relationship between the parties, the relevant facts and the context of those facts will be relevant to determining the outcome. A company's contractual arrangements with employees and other workers should therefore be prepared with sensitivity to the individual's role and the level of confidential information likely to come into their knowledge.

For employees, best practice is to clearly define the scope of their role in their contract of employment. If the role is likely to include inventing and/or designing something, or making improvements, or generating or coming into confidential information, the contract should include a requirement for notification of new information, designs, inventions etc. Contracts and descriptions should be updated when duties change.

For some roles, a periodic review may be appropriate, to capture intellectual property rights (including confidential information) that are likely to have arisen or come within the individual's knowledge. As well as keeping the relationship between, and the positions of, the parties clear, the process may also support best practice in IP management by the business itself. Capturing what was created, when and by who underpins effective IP support for commercial success. And proactive engagement, recognition and reward for advancements can assist in maintaining positive relationships and avoiding messy disputes.

The judgment in Trailfinders Limited v Traveller Counsellors Limited & Ors [2020] EWHC 591 (IPEC) is available here.

For further practical suggestions on managing trade secrets risks in view of COVID-19 adaptions to working practices, please read on.

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