04 May 2012

Breach of Confidence: Force India Formula One Team Ltd v 1 Malaysia Racing Team SDN BHD and Others
















In Force India Formula One Team Ltd v 1 Malaysia Racing Team SDN BHD and Others   [2012] EWHC 616 (Ch) (21 March 2012), Force India sued  Aerolab and Fondmetal Technologies which had previously carried out wind tunnel tests and aerodynamic development work for Force India for breach of confidence.  Force India's allegation was that those companies had used information gained from such testing and development to help design a car for the first defendant,1 Malaysia and its British subsidiary.   Also sued was the former Chief Technical Officer of Force India who left to join 1 Malaysia.   There was also a counterclaim by Fondmetal for 846,230 euro for unpaid fees.Unusually for the Chancery Division, the master had directed the questions of liability and quantum of damages to be determined at the same hearing.  Force India had originally claimed damages of £15, 255,583 which claim was later reduced to £13, 771, 419.

The Issues
Aerolab admitted that there had been some copying of Force India's files.  The questions for the trial judge, Mr. Justice Arnold, were:
(1) How much copying had taken place?
(2) The extent to which such copying was actionable.
(3) Which, if any, of the defendants was liable for such copying?
(4) What sum (if anything) should be awarded to the claimant?
The only defence to the counterclaim was Force India's claim for breach of confidence.   His lordship dismissed all claims against Force India's former CTO. Save for a finding of copyright infringement in that it copied certain CAD files the copyright of which had belonged  to Force India he threw out the claim against 1 Malaysia.   He found that Aerolab and Fondmetal Technologies had breached obligations of confidence to Force India and awarded it 25,000 euro by way of damages but this sum was more than offset by the 846,20 euro payable by Force India to Fondmetal for unpaid fees.

The Facts
Briefly, Force India had engaged Aerolab and Fondmetal to help it design a racing car for Formula 1 racing, Those companies carried out tests in their wind tunnel and used the results to design parts that maximized the  ratio between downforce and drag.   Force India fell behind with payment of the fees charged by those companies fees for those services and the two sides eventually parted company.   1 Malaysia (then known as "Lotus Racing" or "Team Lotus") engaged Aerolab and Fondmetal and Force India's former CTO to help design a care for them.   A number of Aerolab's employees copied data that had been compiled for Force India to help design parts of their new customer's racing car.   This copying was stopped as soon as it came to the attention of the two companies' senior management but only after the data had been used to design several parts.

Significance of this Case
This case was decided principally on its facts but there were nevertheless some interesting points of law:

  1. The judge followed his approach in  Vestergaard Frandsen A/S and Others v Bestnet Europe Ltd. and Others  [2009] EWHC 657 (Ch) where he had onstructed a chronological account of the facts primarily by reference to disclosed documents and secondarily by reference to unchallenged evidence in order to test disputed evidence.
  2. He reviewed the law of confidence, particularly in so far as it related to "relative confidentiality" and what constitutes a trade secret.
  3. He considered the basis of compensation for breach of confidence.
Although this is a typical Arnoldian judgment with no less than 464 paragraphs of exhaustive consideration of every detail of the case, perseverance will be rewarded by the judge's incisive insights into those questions.

Relative Confidentiality
The judge's starting point was the well known and frequently endorsed summary of the law of confidence by Mr Justice Megarry in Coco v A.N. Clark (Engineers) Ltd [1969] RPC 41 at 47:
"First, the information itself ... must 'have the necessary quality of confidence about it'. Secondly, that information must have been communicated in circumstances importing an obligation of confidence. Thirdly, there must have been an unauthorised use of the information to the detriment of the party communicating it."
In considering what was meant by "quality of confidence" Mr. Justice Arnold opined that "confidentiality is a relative concept" for which proposition he cited Franchi v Franchi [1967] RPC 149 at 153, Schering Chemicals Ltd v Falkman [1982] QB 1 at 28, Stephens v Avery [1988] Ch 449 at 454, Spycatcher at 177 and Attorney-General v Greater Manchester Newspapers Ltd (The Times, 7 December 2001). The judge did not spell our exactly what he meant by that proposition but my understanding is that information that has been disclosed or acquired in confidence does not cease to be confidential merely because it can be accessed lawfully.   If a confidante saves himself time and money by using information that had been disclosed to him in confidence it is no answer to say that he could have achieved the same result by say reverse engineering.   In the words of Lord Greene Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) 65 RPC 203 at 215:
"What the defendants did in this case was to dispense in certain material respects with the necessity of going through the process which had been gone through in compiling these drawings, and thereby to save themselves a great deal of labour and calculation and careful draughtsmanship. No doubt, if they had taken the finished article, namely, the leather punch, which they might have bought in a shop, and given it to an expert draughtsman, that draughtsman could have produced the necessary drawings for the manufacture of machine tools required for making that particular finished article. In at any rate a very material respect they saved themselves that trouble by obtaining the necessary information either from the original drawings or from the tools made in accordance with them. That, in my opinion, was a breach of confidence."
Of course, once a secret has ceased to be a secret the obligation of confidence falls away as the House of Lords held in  O. Mustad & Son v Dosen [1964] 1 WLR 109, but there may still be aspects of a design that remain secret and thus subject to an obligation of confidence.   

At paragraph [218] the Mr Justice Arnold said:
"This principle [that confidentiality is a relative concept] may apply differently to different categories of confidential information, and it has come to be particularly recognised in cases involving private personal information, but it is not restricted to such cases."
He amplified his proposition at [222]:
"In cases concerning design drawings like Saltman v Campbell, Terrapin and Alfa Laval v Wincanton, much will depend on the level of generality of the information asserted to be confidential. If the claimant contends that information relating to the shape and configuration of the article depicted in the drawings is confidential, but the shape and configuration of the article can readily be ascertained from inspection of examples of the article which have been sold or are otherwise publicly accessible, then the claim will fail. If, on the other hand, the claimant contends that detailed dimensions, tolerances and manufacturing information recorded in the drawings are confidential, that information cannot readily be ascertained from inspection, but only by a process of reverse engineering and the defendant has used the drawings as a short cut rather than taking the time and effort to reverse engineer, then the claim will succeed."
This doctrine is, of course, related to the springboard principle first expressed in Terrapin v Builders Supply [1967] RPC 375 that a person who has obtained information in breach of confidence is not allowed to use it as a springboard for activities detrimental to the person to whom the obligation of confidence is owed.

Trade Secrets
In determining what is and what is not a trade secret Mr Justice Arnold relied on Sir Robert Megarry V-C's dicta in Thomas Marshall Ltd v Guinle [1979] Ch 227 at 248E-H and Sir Thomas Bingham MR's in Lancashire Fires Ltd v S.A. Lyons & Co Ltd [1996] FSR 629 at 668-669.  In Thomas Marshall, Sir Robert said:
"If one turns from the authorities and looks at the matter as a question of principle, I think (and I say this very tentatively, because the principle has not been argued out) that four elements may be discerned which may be of some assistance in identifying confidential information or trade secrets which the court will protect. I speak of such information or secrets only in an industrial or trade setting. First, I think that the information must be information the release of which the owner believes would be injurious to him or of advantage to his rivals or others. Second, I think the owner must believe that the information is confidential or secret, i.e., that it is not already in the public domain. It may be that some or all of his rivals already have the information: but as long as the owner believes it to be confidential I think he is entitled to try and protect it. Third, I think that the owner's belief under the two previous heads must be reasonable. Fourth, I think that the information must be judged in the light of the usage and practices of the particular industry or trade concerned. It may be that information which does not satisfy all these requirements may be entitled to protection as confidential information or trade secrets: but I think that any information which does satisfy them must be of a type which is entitled to protection."
In Lancashire Fires, Sir Thomas added:
"In Faccenda Chicken (at page 137) the Court of Appeal drew attention to some of the matters which must be considered in determining whether any particular item of information falls within the implied term of a contract of employment so as to prevent its use or disclosure by an employee after his employment has ceased. Those matters included: the nature of the employment: the nature of the information itself: the steps (if any) taken by the employer to impress on the employee the confidentiality of the information: and the case or difficulty of isolating the information in question from other information which the employee is free to use or disclose. We have no doubt that these are all very relevant matters to consider. In the ordinary way, the nearer an employee is to the inner counsels of an employer, the more likely he is to gain access to truly confidential information. The nature of the information itself is also important: to be capable of protection, information must be defined with some degree of precision: and an employer will have great difficulty in obtaining protection for his business methods and practices. If an employer impresses the confidentiality of certain information on his employee, that is an indication of the employer's belief that the information is confidential, a fact which is not irrelevant: Thomas Marshall Ltd v Guinle [1979] Ch 227 at 248. But much will depend on the circumstances. These may be such as to show that information is or is being treated as, confidential; and it would be unrealistic to expect a small and informal organisation to adopt the same business disciplines as a larger and more bureaucratic concern. 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."
Compensation for Breach of Confidence
The judge observed at paragraph [374] that 
"It is very difficult to find a clear, accurate and comprehensive statement of the principles applicable to the assessment of damages or equitable compensation for breach of confidence. The case law is very confused, and none of the existing commentaries deal entirely satisfactorily with it."
His lordship approached the task by sketching the contours of the problem.   He then examined the authorities and draw some general conclusions before finally addressing specific issues which arose in this case.  From his review of the authorities between paragraphs [374] and [423] the judge concluded at [424]:
"Where the claimant exploits the confidential information by manufacturing and selling products for profit, and his profits have been diminished as a result of the breach, then he can recover his loss of profit. Where the claimant exploits the confidential information by granting licences to others, and his licence revenue has been diminished as a result of the breach, he can recover the lost revenue. Where the claimant would have "sold" the confidential information but for the breach, he can recover the market value of the information as between a willing seller and a willing buyer. Where the claimant cannot prove he has suffered financial loss in any of these ways, he can recover such sum as would be negotiated between a willing licensor and a willing licensee acting reasonably as at the date of the breach for permission to use the confidential information which has been misused in the manner in which the defendant has used it."
This passage is likely to be cited in skeleton arguments, text books and students' essays for years to come. 

Further Information
Should any reader wish to discuss this topic with me further, he or she should call me on 0800 862 0055 or contact me through Facebook, Linkedin, twitter or Xing, or through my contact page.

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