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contract terms restrictive covenants

limits to the extent of protection of confidential information

confidential

There are many cases concerning the alleged infringement of employers’ proprietary information, particularly following the termination of an employee’s employment. The classic counterpoint is between the protection of confidential information to which an employee has had access in the course of employment and need to avoid interference in commerce by restraint of trade unless protection is clearly required.

The case of Vestergaard Frandsen A/S and others v Bestnet Europe Ltd and others is significant because it is a decision of the Supreme Court and reveals what might an emerging trend that the balance may be tipping back towards former employees after years of findings very largely in favour of employers.

Vestergaard is a Danish company engaged in the manufacture of insecticidal mosquito nets. It sought to protect its trade secrets against Bestnet, a company set up by two of its former employees and a third party who had also worked for them on a self-employed basis. The three were Mrs Sig, who had worked for them in sales, a chemical engineer, and a biologist, Dr Skovgard, who had been involved in developing the crucial techniques. Mrs Sig was required, pursuant to her contract of employment to:

keep absolutely confidential all information relating to the employment and any knowledge gained in the course of the employment and which inherently should not be disclosed to any third party. The absolute duty of confidentiality also applies after [Mrs Sig] has terminated the employment…

Mr Larsen (the chemical engineer) was subject to contractual terms that prevented him from competing with Vestergaard for 12 months following the termination of his employment and to respect the confidentiality of Vestergaard’s trade secrets. Dr Skovmand (the consultant biologist) had no formal service contract.

In 2004 Mr Larsen and Mrs Sig set up a new business – Intection – in competition with Vestergaard. Mrs Sig and Mr Larsen both resigned from Vestergaard and Dr Skovlund agreed to work with them. They looked for manufacturers of their ‘new’ product, Netprotect, and told prospective manufacturers that any agreement would include confidentiality clauses. Vestergaard brought proceedings in Denmark alleging breach of trade secrets and the day before the hearing Mrs Sig resigned as a director of Intection, which then ceased trading. However Mr Larsen and Mrs Sig moved the business to England through a new company, Bestnet Europe Limited, according to the judge “with the express intention of trying to avoid the consequences of the Danish litigation”. Mrs Sig and Mr Larsen provided their services to Bestnet through a limited company, 3T Europe Limited and Dr Skovmand worked directly for the company.

Unsurprisingly in 2007 Vestergaard commenced proceedings based in misuse of their confidential information. Dr Slovmand was found liable in breach of confidence to Vestergaard (but he was not a pary to the proceedings). Mrs Sig was also liable for breach of confidence, although she was not involved in the relevant processes, because of her close connection with Bestnet. On appeal to the Court of Appeal all findings in the High Court were upheld save those in repect of Mrs Sig. the Court of Appeal took the view that Mrs Sig was not directly using information which had been imarted to her (while with Vestergaard) since she was not directly involced in the relevant processes. Vestergaard appealed this finding to the Supreme Court.

Lord Neuberger summarised the Court’s approach succinctly:

Vestergaard’s contention that Mrs Sig is liable for breach of confidence is, as I understand it, put on three different bases. First, she is said to be liable under her employment contract, either pursuant to the express terms of clause 8 or pursuant to an implied term. Secondly, she is said to be liable on the basis that she was party to a common design, namely the design, manufacture and marketing of Netprotect, which involved Vestergaard’s trade secrets being misused. Thirdly, she is said to be liable for being party to the breach of confidence, as she had worked for Vestergaard, and then formed and worked for the companies which were responsible for the design, manufacture and marketing of Netprotect.

In my opinion, each of these three arguments must fail because of the combination of two crucial facts. The first is that Mrs Sig did not herself ever acquire the confidential information in question, whether during the time of her employment with Vestergaard or afterwards. The second crucial fact is that, until some point during the currency of these proceedings (possibly not until Arnold J gave his first judgment), Mrs Sig was unaware that the Netprotect product had been developed using Vestergaard’s trade secrets.

He went on to provide a further and more general observation concerning such cases which those contemplating such proceedings should consider carefully, particularly before committing to what is invariably very expensive litigation:

Looking at this case a little more broadly, I would add this. Particularly in a modern economy, the law has to maintain a realistic and fair balance between (i) effectively protecting trade secrets (and other intellectual property rights) and (ii) not unreasonably inhibiting competition in the market place. The importance to the economic prosperity of the country of research and development in the commercial world is self-evident, and the protection of intellectual property, including trade secrets, is one of the vital contributions of the law to that end. On the other hand, the law should not discourage former employees from benefitting society and advancing themselves by imposing unfair potential difficulties on their honest attempts to compete with their former employers.

Martin Malone

By Martin Malone

I'm a solicitor and the chief operating officer at Canter Levin & Berg. I was formerly head of the employment department.
I maintain this website so if you have any suggestions, criticisms or recommendations please email me at martinmalone@canter-law.co.uk.
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