Protecting trade secrets under English law

A flexible approach

English law takes a distinctively flexible approach to the protection of trade secrets, treating it as part of the law of equity – a discretionary gloss over the common law which aims to address problems for which damages may not be adequate and maintain fairness where strict legal analysis might otherwise cause injustice.

Despite the lack of statutory provision, a range of remedies are available under English law where trade secrets have been improperly acquired, disclosed or used, which can be very effective. However, the flexibility of the current regime can be a drawback and the transposition into national statutory law of the upcoming EU Trade Secrets Directive (the Directive) will be welcomed.

How are trade secrets protected?

The principles of equity were first applied to confidentiality of information in a 19th Century case having more in common with today’s celebrity protests over invasions of privacy than disputes between businesses over commercial data. Prince Albert opposed the exhibition in a public gallery of etchings which he and Queen Victoria had made, including of their young family, passed by a rogue Palace employee to the aptly-named defendant, Strange.

Since then, the law has developed into two separate strands:

• a tort of misuse of private personal information (into which Prince Albert’s case would fall today); and
• the equitable remedy for breach of confidence in commercial or technical secrets.  

Both strands of the law remain entirely judge-made. There are no statutory provisions of any kind. In consequence, trade secrets are not classed as property in the United Kingdom, and there is no criminal sanction against disclosure or use. As a result, in English law, trade secrets cannot be “stolen”.

But that is not to say that deliberately taking and using a trade secret will not be severely penalised by the civil courts, provided that the claimant can demonstrate the significance, secrecy and value of what has been taken. English courts routinely order restrictions on the disclosure of information placed before them, and will hear parts of a case in private if necessary, in order to protect the confidentiality of the parties.

What can be protected?

There is no restriction as to the type of information that can constitute a trade secret. Anything beyond mere trivia can, in principle, be protected.

The courts have not always been sympathetic, however. In 2014 in Smith & Nephew v Convatec for example, the High Court refused Smith & Nephew’s request to maintain confidentiality over the information it had disclosed in a litigation relating to its handling of the regulatory procedures for obtaining marketing approval for a wound dressing, possibly failing to appreciate the complexity and nuance that goes into the regulatory approval process. The Court did, however, agree to maintain confidentiality over documents concerning Smith & Nephew’s manufacturing and testing work or commercial strategy.

When does an obligation of confidence arise?

Whilst most kinds of information are capable of being protected, to establish that there has been a breach of confidence, something more is needed: a situation or relationship which imposes on the recipient an obligation to keep the information confidential.

Many common relationships have been found to impose such an obligation: employer-employee, doctor-patient and solicitor-client to name but a few.

Even where there is no such relationship, a non-disclosure agreement or confidentiality clause in a commercial contract can impose such an obligation. Dependent on the terms of the contract, this could give rise to a separate action for breach of contract.

The existence of a duty of confidentiality will be more difficult to determine where:

• there is no written contract;
• the nature of the relationship has changed (for example, it can be more difficult to establish the extent of an employee’s obligations after they leave their employment); or
• the relationship or circumstances are more unusual.

In Vestergaard Frandsen A/S v Bestnet Europe, the High Court was prepared to imply an obligation of confidentiality on a consultant regarding information resulting from work he carried out for his client, despite the fact that the parties had not entered into a written contract (the contract was oral only). In the same litigation (but in relation to another defendant) the Supreme Court refused to imply into an employment contract a term that the employee would not assist another person to abuse trade secrets owned by a third party (her employer). The employee concerned had no access to the trade secrets and the effect of implying such a term would have therefore been to impose strict liability on her, which the Court felt would be wrong in principle. This decision accords with the draft Directive’s proposal to limit the liability of employees when they act without intent.

In some cases the obligation to keep information confidential may also arise even though no direct relationship arises, as long as the recipient is aware or ought to be aware in the circumstances of the confidential nature of the information. Of course, a person claiming that confidence has been breached will face more of an uphill challenge when there is neither a direct relationship nor a contract to point to, to demonstrate why the recipient ought to have known that the information was confidential.

What remedies are available?

Injunctive relief

Since the source of protection is equity, equitable remedies are available, which include injunctions preventing the use or disclosure of trade secrets.

These remedies may be available even after the information has become public, if the party who used the information while it was still confidential had obtained a “springboard” to market over others who waited to obtain the details legitimately. This might apply, for example, after a product which is capable of being reverse engineered reaches the market, if the infringing party had been developing the product while the technical information remained confidential.

However, the nature of equitable remedies carries some drawbacks. Unlike the common law, where a legal right survives bad behaviour by the claimant, in equity a claimant must come to the court “with clean hands” or risk the claim being rejected. Undue delay can also be a bar to obtaining equitable relief.

Damages

In the outrage of learning that a trade secret has been copied, businesses may be tempted to place unrealistically high values on their claims. As with any intellectual property action, the assessment of damages is fraught, but follows certain principles. Unless the information formed part of a package which was subject to an established licence fee (in which case the calculation of damages will be more straightforward), the court will look at a range of issues and factors to come to an assessment.

In Vestergaard Frandsen, which concerned the sale of a product made by the defendant to the claimant’s formula, so that the sales were directly competing, the High Court awarded damages based on loss of profit to the claimant. However, damages awarded for use of the claimant’s confidential information in order to produce a different second product, in which the defendant had invested significant further development, were based on a quasi-consultancy fee.

In Force India F1 v Aerolab the claimant received only £25,000 damages out of a claim for £13m, despite Aerolabs’ admission of copying. The Court of Appeal looked at what information had been used – a very small proportion of what had been copied – and awarded a figure which equated to almost all of Aerolab’s profit on its contract with a third party, in which it had actually used the information.

Deterrence?

In some EU Member States, the misuse or disclosure of trade secrets can attract penal (criminal or civil) measures, and the draft Directive includes provision for Member States to penalise any person who abusively brings a manifestly unfounded claim for infringement of trade secrets. The draft Directive specifically mentions damages to the accused, imposing sanctions on the applicant or ordering the dissemination of the information concerning the decision taken.

As the law currently stands, English courts have a wide discretion in the form of order which they can make and the manner of publication of their decisions. Likewise, the court can impose costs sanctions in respect of an abusive claim. However, the award of damages to the accused is not currently a remedy available under English law.

Forthcoming developments

Existing English law already affords a level of protection for most kinds of information, potentially covering a wide range of circumstances of disclosure. In terms of substance, the implementation of the Directive into national law may not make any immediate difference until the CJEU starts handing down decisions clarifying precisely how protection is meant to be understood.

However, the Directive may still lead to a change in one respect; the protection of trade secrets is likely to be given a statutory basis in English law for the first time. This should bring greater certainty to the law on misuse of trade secrets and, for that reason, may help improve compliance, in that it will be clearer to anyone tempted to misappropriate data why what they are contemplating is prohibited.