Beware Receiving Confidential Information From A Competitor

The Court of Appeal decision in Travel Counsellors Ltd v Trailfinders Ltd (2021) highlights how important it is for businesses to consider whether commercial information brought to them may be confidential, particularly where the information comes from new employees joining from competing businesses.

The judgment makes clear that a legal obligation of confidentiality will arise in relation to information if a reasonable recipient would have made enquiries as to whether it was confidential, but the actual recipient did not do so.

Background

The law governing the protection of confidential information arises independently of contract, from an equitable obligation of confidentiality. This is often the only or main form of protection for commercially sensitive information where contractual or intellectual property rights cannot assist.

Trailfinders brought an action against two former employees who joined a competitor, Travel Counsellors Ltd (TCL). It alleged that, when the employees left, they took with them confidential client information, in breach of implied terms in their contracts of employment and equitable obligations of confidentiality owed to Trailfinders. It also claimed against TCL, alleging that, by using the information, TCL had also acted in breach of an equitable obligation of confidentiality owed to Trailfinders.

High Court Decision

At trial, the High Court found in favour of Trailfinders, deciding that:

• The employees had acted in breach of their employment contracts and equitable obligations of confidentiality when they took confidential client information belonging to Trailfinders to their new roles at TCL.
• TCL had also acted in breach of an equitable obligation of confidentiality when it misused the information for the benefit of its business.
• The Court noted that a reasonable person in the position of TCL’s senior management would have been aware that at least part of the information was likely to have been copied from Trailfinders’s systems. They knew, or ought to have known, that Trailfinders would consider the information to be confidential. A belief that TCL was therefore receiving confidential information could only have been reversed if the employees had given TCL convincing reasons why this was not the case. They were not asked, and TCL did not wish to enquire. An obligation of confidentiality therefore arose.

TCL appealed, arguing that the Court had applied the wrong test to determine whether it owed an equitable obligation of confidentiality.

Court Of Appeal Decision

The Court of Appeal dismissed the appeal in January 2021.

The decision clarifies the test that the courts will apply to determine whether a third party recipient of information owes an equitable obligation of confidentiality to the owner of that information. In summary:

•  An obligation of confidentiality arises if a third party recipient of information knew or was on notice that it was confidential (the latter will be objectively assessed by reference to a “reasonable person in the recipient’s position”).
• If a reasonable person in the recipient’s position would have been on notice that the information, or some of it, was likely to be confidential, the court will consider the enquiries that a reasonable recipient would have made in the circumstances. If a reasonable recipient would have made enquiries, but the actual recipient did not, then an obligation of confidentiality will arise.

Applying the above, the Court of Appeal ruled that TCL was on notice that at least some of the information was likely to be confidential. A reasonable recipient would have made enquiries, but TCL did not, so an obligation of confidentiality arose. TCL acted in breach of that obligation when it misused the information, so it was liable.

What Are The Practical Implications?

The judgment makes clear that a recipient of potentially confidential information who fails to make enquiries, when a reasonable person would do so, may find themselves subject to an equitable obligation of confidentiality in any subsequent litigation.

This decision highlights how important it is for businesses to consider whether information brought to them may be confidential, particularly where that information comes from new employees joining from competing businesses.

How Can We Help?

If you would like advice in relation to litigation and disputes concerning confidential information, including trade secrets and intellectual property rights, please speak to a member of our Commercial Dispute Resolution Team.