Knowledge test for duty of confidence – what is a sufficient state of mind to make an employer liable for breach of confidence when it receives a client list from a recruited employee?

June 9th, 2020

In my blog piece on 28 February 2020, I looked at the state of mind required to make an employer liable in tort for inducing a breach of contract when it employs a person subject to post-termination restrictions. I reported by reference to the recent case of Allen v Dodd that in order to be liable the employer must know that it was inducing a breach. Knowledge that it might be is not sufficient.

I now turn my attention to the state of mind required to make an employer liable for breach of confidence when it receives a client list from a recruited employee.

Objective Test

In the recent case of Trailfinders v Travel Counsellors & Ors [2020] EWHC 591 (IPEC) the court reiterated that the test was not subjective: the recipient of the client list did not have to know the information was confidential. It was objective: in equity the recipient is under a duty of confidence whenever he ought to know that the information received is fairly and reasonably to be regarded as confidential, irrespective of his actual state of mind. Further, this was now also the statutory position because under Art. 4 (4) of Directive (EU) 2016/943 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition:  “The acquisition, use or disclosure of a trade secret shall also be considered unlawful whenever a person, at the time of the acquisition, use or disclosure, knew or ought, under the circumstances, to have known that the trade secret had been obtained directly or indirectly from another person who was using or disclosing the trade secret unlawfully within the meaning of paragraph 3.”

In Trailfinders the recipient was a franchisor which had encouraged its recruited franchisees to provide it with customer contact lists upon joining the franchise. The defendant recruits, who were former employees of Trailfinders, were found to have unlawfully copied the information during their employment and to have unlawfully accessed the information after leaving, in order to compete. The recruits were found to have acted in breach of fidelity and the equitable duty of confidence. Travel Counsellors was also found liable for breach of confidence because it received the information when it ought to have known that the recruits had copied it from Trailfinders’ confidential customer data.

Selling honestly acquired customer information of the former employer may not be permitted use

In examining the general state of the law on confidential information, HHJ Hacon saw fit to highlight a potential qualification to the permitted use of lawfully obtained Faccenda class 2 information.

Ever since the CA gave judgment in Faccenda Chicken v Fowler [1987] Ch 117, the law has been clear that  an ex-employee is permitted to use, after his employment has ended, for his own benefit, or for the benefit of his new employer, information regarding the identity of his former employer’s customers, contacts, or pricing policies provided: (i) that information is part of his knowledge acquired honestly in the course of employment; (ii) it has not been deliberately memorised or derived from materials copied for intended competitive purposes; (iii) is not so confidential so as to amount to a ‘trade secret”, and (iv) is not the subject of a binding contractual post-termination restriction on its use. This is the case even though the information is regarded as confidential to the employer during the course of the employment (so called Faccenda class 2 information). As all practitioners know, the distinction between this class of information and real “trade secrets” is often hard to draw; even Lord Bingham regarded it as very hard to determine in Lancashire Fires. The principle behind the rule, necessitating the distinction, is that employees should not be unreasonably inhibited from using their skills and experience to make a living by their trade to the detriment of a competitive marketplace.

In a part of the judgment in Faccenda which is not often cited, the CA left open to question whether the employee’s liberty to use honestly acquired class 2 information after the employment has ended would permit the ex-employee to exploit his knowledge by selling it to a third party, rather than using it to earn his living. In Trailfinders HHJ Hacon felt it appropriate to give express recognition to this potential qualification to the permitted use of honestly acquired class 2 information after the end of employment.

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