Burn before reading? Court of Appeal decision confirms the risks of receiving a competitor’s potentially confidential business information
On 19 January 2021, the English Court of Appeal handed down judgment in Travel Counsellors Limited v Trailfinders Limited [2021] EWCA Civ 38, dismissing Travel Counsellors Limited’s (TCL) appeal against a decision that it had breached its obligation of confidence in relation to customer details of a competitor. The case concerned whether TCL was liable to Trailfinders for its use of confidential information disclosed to TCL by ex-employees of Trailfinders for its own benefit.
The decision clarifies the circumstances in which a recipient of confidential information, in this case TCL, will be subject to an equitable obligation of confidence. It was held that a recipient of such information will ‘know or have notice’ that the information was disclosed in breach of confidence where a reasonable person, in the shoes of the recipient, would have made inquiries but failed to do so, thereby giving rise to an equitable obligation of confidence.
Background
Beginning in 2016, several employees of Trailfinders left the company to work for TCL. These ex-employees entered into franchise agreements with TCL, whereby they were expected and positively encouraged to bring with them considerable customer contact information from their former workplace. Prior to departing Trailfinders, these individuals used the company’s databases to collate client contact details and other relevant information, which they subsequently transferred to TCL’s system. TCL did not warn the individuals that their conduct might breach their duty of confidence to their former employer. Trailfinders subsequently brought proceedings in the High Court against TCL for misuse of its confidential information.
At first instance, the High Court held that senior management of TCL would have been aware that the information provided by the new franchisees was likely copied from databases belonging to Trailfinders. The court also found that TCL’s management knew, or ought to have known, that this information was reasonably regarded as confidential by Trailfinders, as TCL considered similar information it held to be confidential.
The High Court concluded that TCL neither asked, nor wanted to ask, about the source of the information provided by Trailfinders’ ex-employees, and had therefore breached its equitable obligation of confidence to Trailfinders.
Relevant law and grounds for appeal
TCL appealed the High Court’s decision on three grounds, the first being that the judge had applied the wrong test for determining whether an equitable obligation of confidence arose. The relevant test, as affirmed most recently in The Racing Partnership Ltd v Sports Information Services Ltd [2020] EWCA Civ 1300 (previously covered here) is an objective one, and provides that a recipient is only subject to an equitable obligation of confidence when they know or have notice of the confidential nature of the information, as assessed by reference to the reasonable person standing in the recipient’s shoes. TCL had argued unsuccessfully that the recipient must know (or have ‘blind eye’ knowledge) that the information is confidential – a subjective test.
TCL also appealed on the grounds that: a) the first instance court had applied this test incorrectly and inconsistently; and b) TCL ought not to be found liable where no express finding was made that it had misused the confidential information. TCL did not pursue the latter of these two grounds at trial, conceding that they had made limited use of the confidential information at issue.
Court of Appeal decision
Arnold LJ rejected the appellant’s submissions, citing his first instance judgment in Primary Group (UK) Ltd. v Royal Bank of Scotland plc [2014] EWHC 1082 (Ch). He also noted the surprising dearth of authority on the subject of the circumstances under which an equitable obligation of confidence will arise.
In his ruling, Arnold LJ held that if circumstances exist which would bring to the notice of a reasonable person standing in the recipient’s shoes that all or part of the information in question may be confidential, then the reasonable person’s response may be to make enquiries, depending on the context of the particular situation. If, in those circumstances, the reasonable person would make inquiries, but the recipient of the information has abstained from doing so, an equitable obligation of confidence will arise. Furthermore, it was held that if the reasonable person in the recipient’s shoes was aware that some of the information was ‘likely’ to be confidential, they would then make inquiries, which TCL failed to do.
However, Arnold LJ noted that where the issue was not one of primary liability for misuse of confidential information (as was the case against TCL), but of accessory liability (misuse by someone other than the recipient), actual knowledge of, or turning a blind-eye to, the confidential nature of the information may be required.
Comment
This case illustrates that businesses must approach with care information brought over by new staff which may have been obtained improperly. If that information, or part of it, is clearly confidential such that a reasonable person would inquire as to its origin, the business should do so prior to seeking to make use of that information. Whilst each case will differ on the facts, when a business receives information regarding one of its competitors, it is incumbent on that business to check whether any of that information is confidential and, if so, refrain from using it.
At a bare minimum, businesses should not encourage new hires to bring with them confidential information from their former workplace, both in order to avoid the consequences described above, and also to avoid liability for inducing a breach of contract as between the new hire and the business from which they are departing.
