Beyond Knowledge and Consciousness – The Development of Liability for Misuse of Trade Secrets in the UK

Beyond Knowledge and Consciousness – The Development of Liability for Misuse of Trade Secrets in the UK

On May 22nd, 2013, the Supreme Court of the United Kingdom ("UKSC") decided the case Verstergaard, and in doing so created an important precedent concerning the relevance of subjective aspects of personal liability when misusing trade secrets and confidential information.

In the case, Mrs. Trine Sig ceased her employment as a sales and marketing assistant at Verstergaard. Along with two other former employees of the company, she formed companies to manufacture and commercialize insecticidal bednets (a product made by her former employer). Within the suit filed by Verstergaard for misuse of trade secrets, the evidence demonstrated that Mrs. Sig, while contractually obligated to maintain the confidentiality of the information and knowledge acquired while working for the company, (i) did not have any access to technical information related to the production process of Verstergaard´s insecticidal bednets during her period of employment, and (ii) did not appreciate that the new companies misused Verstergaard´s trade secrets when developing their own products.

Given these facts, the first-instance judge held Mrs. Sig liable for misuse of trade secrets due to breach of confidence.  The judge reasoned that “a person can be liable... even if he is not conscious of the fact that what he is doing amounts to misuse of confidential information”. From this judgment, the subjective mind of the offender (actual knowledge of the trade secret and awareness of the infraction) plays little, if any, role in determining personal liability. Instead, objective knowledge of the infraction (the possibility of having access to the trade secret) in conjunction with strict liability terms implied in the contract were enough to find Mrs. Sig liable.

This decision was reversed by the Court of Appeals, which did not recognize an implied term imposing strict liability and held that there was “no business reason to imply a term of that harsh extent”. This appeal decision was upheld by the UKSC, which stressed the relevance of the previous knowledge of the trade secret by the offender and of his consciousness in the misuse of the trade secret:

Given that she did not learn of any relevant trade secrets owned by Vestergaard when she was employed by them, and did not appreciate that any such secrets were being used by an employee of the company of which she was a founder and director, it would be oppressive to hold Mrs Sig (as opposed to the employee or the company) liable to Vestergaard for breach of confidential information, whether or not she had previously worked for Vestergaard pursuant to a contract containing a standard sort of provision aimed at protecting Vestergaard's trade secrets”.

This decision by the UKSC raises questions about objective and subjective knowledge in cases of liability for misuse of trade secrets - the answers to which do not enjoy sufficient legal certainty in several countries. In fact, the regulations on trade secrets at the international level do not specifically cover the extent to which parties should know of a misuse. Article 39.2 TRIPS, for example, in which the protection of trade secrets is codified, does not provide details on the level of duty of care the offender would owe to escape liability. At the national level, the Uniform Trade Secrets Act in the USA and Canada does not specifically rule which are the cases where a person "has reason to know" that a trade secret has been misused. In view of this uncertainty, the legislature and the adjudicators are charged to form plausible solutions from general principles of justice, which may lead to discrepancies from the applicable provisions.

In my opinion, the decision of the UKSC is equitable and appropriate.

From a legal perspective, the decision does not allow the involuntary extension of objective knowledge of breach of contract to situations in which the potential offender did not have access to confidential information and is completely unaware of trade secrets being misused. If a party does not have any knowledge of the trade secret and of their misuse, then there is no duty of care with respect to confidentiality and, therefore, that party cannot be held liable. In this case, the implicit and explicit obligations under the contract are recognizable by all parties, fully observing basic contractual principles.

At an economic level, the different interests involved in the protection of trade secrets have to be balanced in order to achieve a fair solution. On the one hand, we can not ignore the importance of the protection of trade secrets for the purpose of encouraging innovation and maintaining competitiveness in small and mid-sized companies in the market, for which intellectual property rights (like a patent) might be too costly to manage. In this sense, the European Commission stressed in its public consultation on the protection of business and research know-how that “the protection of confidential business information as a trade secret is, for many businesses, often the only or the most effective way to protect their intellectual property” (see also here). Appropriate legal protection of trade secrets is therefore economically efficient and desirable.

On the other hand, the protection of trade secrets naturally restricts horizontal competition, since competitors may not use trade secrets obtained improperly to develop competing products and projects. An excessive protection of trade secrets may stifle competition unreasonably, which is contrary to the purposes of competition law, and induces economic inefficiency. This, in addition to imposing strict liability for misuse of trade secrets may have negative impacts on the economy. In view of this, the UKSC held in this decision that “the law should not discourage former employees from benefiting society and advancing themselves by imposing unfair potential difficulties on their honest attempts to compete with their former employers”.

Therefore, the subjective knowledge of the potential offender have to be considered, in order to observe the contractual principles of law and to achieve an fair economic balance of different interests when dealing with the protection of trade secrets.

Pedro Henrique Dias Batista is an IPilogue Editor and a PhD student at Ludwig Maximilian University of Munich.