Confidential Information

Case Note: Ocular Sciences v Aspect Vision Care
Have Faccenda's Chickens had their Chips?

Jane Lambert

Sept 1997

Updated 23 Dec 2005

This article first appeared on the Lancaster Buildings website

Most would agree that entrepreneurs who provide much needed employment are entitled to protect their investment in new technology and business connections from unauthorized use or disclosure by unscrupulous employees.     On the other hand, nobody wants what Lord Templeman called "a new form of industrial slavery" that would prevent those working in certain industries from serving anyone other than their present employers.      Protecting innovation and goodwill without restricting the labour market is very difficult in practice.

The Faccenda Classification

In Faccenda Chicken Ltd. v Fowler [1984] ICR 589, Goulding J suggested a threefold classification of   information acquired by an employee in the course of his service that is not the subject of any relevant express agreement:

1. information which, because of its trivial nature or its easy accessibility from public sources of information, cannot be regarded as confidential at all;
2. information that the employee must treat as confidential (either because he is expressly told that it is confidential, or because from its character it obviously is so) but which once learned remains in his head and becomes part of his skill and knowledge; and
3. specific trade secrets such as the secret process that was the subject matter of Amber Size and Chemical Co. Ltd. v Menzel [1913] 2 Ch 239.

Goulding J said that information falling into the first category may be used or imparted to anyone at any time, even an employer's competitors while the employment subsists. Information in the second category, however, cannot be so used or disclosed while the employment relationship continues. Once the employment comes to an end, the employee can use such information such information or disclose it to whomsoever he likes unless restrained by a valid restrictive covenant. Information in the third category in the third category is so confidential that, even though it may necessarily have been learned by heart and even though the employee may have left his employer's service, it cannot lawfully be used for anyone's benefit but the employer's. The Court of Appeal substantially endorsed this classification on appeal in [1987] Ch 117 though it respectfully disagreed with the passage in Goulding J's judgment that suggested that an employer can protect information in the second category even though it does not include a trade secret or its equivalent.

Difficulties of the Faccenda Classification
Goulding J's distinction between trade secrets and other confidential information was never very satisfactory. In interlocutory applications around the country motions judges have had to decide whether price lists, the identity of suppliers and the ways in which individual traders prepared their products or promoted their business were trade secrets. In Ocular Sciences Limited and others v Aspect Vision Care Limited and others [1997] RPC 289  Laddie J reconsidered the obligations that employees owe to their employers and has proposed a much more viable formula.

The Facts of Ocular Sciences

The facts of Ocular Sciences are slightly more complicated than the usual case where former employees of a small high technology company set up a competing business. The first plaintiff was a private company incorporated in England and Wales which manufactured soft contact lenses. The third and fourth defendants were members of that company but they also controlled the first defendant (another private company) which distributed soft contact lenses. The fourth defendant had invented a mould for manufacturing such lenses for which he had obtained a patent. By a series of agreements made on or shortly after the 30th September, 1992:

	the second plaintiff, a Californian company, acquired the shares of the second and third defendants in the first plaintiff;
	the fourth defendant licensed the first plaintiff to work his patent;
	the first plaintiff agreed to supply minimum quantities of various soft contact lenses to the first defendant at a price to be calculated in accordance with an agreed formula; and
	the first plaintiff agreed to employ the third defendant as its managing director without requiring him to dispose of his shares in the first defendant.

Laddie J noted with hindsight that the network of obligations created by those agreements contained the seeds of friction in that the third and fourth defendants remained free to run the first defendant, which was a potential competitor of the first plaintiff, and in which neither the second plaintiff nor its principal shareholder had any financial interest. In August 1993 the first defendant advised the plaintiffs that it would require far more lenses than the first plaintiff had agreed to supply and that it was thinking of manufacturing those products. The principal shareholder of the second plaintiff objected very strongly. He threatened to cut off supplies of lenses to the first defendant, raise the prices of the lenses that the first plaintiff supplied and dismiss the third defendant from his job as managing director of the first plaintiff if the first defendant started to make lenses. Fearing that the plaintiffs would carry out their threats, the defendants set up manufacturing facilities with considerable alacrity. The principal shareholder of the second plaintiff instructed the third defendant to increase the unit price of the lenses that the first plaintiff supplied to the first defendant from £1 to £1.57. The third defendant observed that such a price increase would breach the first plaintiff's contract with the first defendant whereupon the principal shareholder of the second plaintiff caused the first plaintiff to sack him. On learning that the defendants were ready to manufacture lenses, the plaintiffs issued a writ alleging inter alia breach of confidence, conspiracy, infringement of copyright and design right and breach of fiduciary duty by the third defendant. The defendants argued that the plaintiffs had repudiated their patent licence and sought the usual remedies for patent infringement whereupon the plaintiffs counterclaimed for revocation of the patent. The judgment is very long and contains many interesting points on all those issues. This note is concerned only with Laddie J's analysis of employees' obligations to their employers.

The Issues

The plaintiffs claimed that their designs and specifications for soft contact lenses together with procedures for their manufacture and processing including engineering drawings, testing procedures, computer programs, manuals and formulae were confidential. They alleged that the defendants had set up the first defendant to manufacture soft contact lenses to precisely the same designs and specifications thereby using information that had been disclosed to the third defendant in confidence. The defendants replied that such information had become part of the third defendant's skill and knowledge which he was entitled to use for another employer.

The Judgment

Laddie J said that the identification of those items of technology, if any, which the defendants were entitled to use as part of their acquired skill and expertise had raised particular difficulties.     He noted that the law on the subject had been considered in detail by the Court of Appeal in Faccenda Chicken  Ltd. v Fowler [1967] Ch 117 but dissented from its analysis.        He started from the premises that an employee is entitled to deploy his skill and expertise for any employer though an employer may restrain unauthorized use or disclosure of his confidential information like anyone else.     He acknowledged that it is public policy that an employee should use and put at the disposal of new employers all his acquired skill and knowledge no matter where he acquired it or whether it was secret at the time.     Where the employer's right to restrain misuse of his confidential information collides with the public policy it is the latter that prevails.     He rejected the notion that there exists any class of information that is so trivial or commonplace that an employee is free to disclose to anyone including a competitor.     Such disclosure would breach an employee's implied duty of fidelity as postulated in Hivac Ltd. v Park Royal Scientific Instruments Ltd. [1949] Ch 169.    The judge stressed that this duty of fidelity was quite distinct and separate from the duty of confidence.     He warned of the danger of confusing the two concepts:

"….. there is a risk of slipping into thinking that what an employee can be restrained from using while in employment is likely to be secret when, in truth, that restraint has little to do with secrecy but a lot to do with the employee's obligation to act in the interests of his employer. Once one slips into thinking that because a piece of information cannot be disclosed to a competitor, therefore it is secret, it is but a little step to assuming that it is secret for the purposes of the law of confidence."

For that reason he found difficulty with the first Faccenda category.
Analysis of the Judgment
It is possible to quibble with the details of Laddie J's judgment but not with the thrust.

As for the detail, Hivac was concerned with moonlighting employees and not with the disclosure of information.    His lordship cannot possibly have meant that a chemist would breach his duty of fidelity by publishing a scientific paper that refers to his employees' patent specifications or other information in the public domain.     On the other hand it disposes of the distinction between trade secrets and other confidential information.     An item of information is either secret or it is not and, if it is not, its use or disclosure after the employment comes to an end cannot be restricted by a covenant in the employee's service contract (see the speech of Lord Parker of Waddington in Herbert Morris Ltd. v Saxelby [1916] 1 AC 709).    Such a covenant can be enforced only if it is reasonably necessary to protect the employer's secret and, even then, only for so long as such protection remains necessary.    Such temporary protection may be necessary where the skills and knowledge that the employee develops include trade secrets but only until the rest of the industry catches up.

Properly negotiated and drafted restrictive covenants can be useful purpose in that they strike a balance between the interests of the employer in protecting his investment and the public interest in a free labour market.

Summary
The implied duty of fidelity prevents employees from working for competitors or discussing their employers' private business with strangers without permission for so long as their employment subsists. Thereafter the employer can only protect genuine trade secrets and, only then, for so long as they remain secret. Tight and documented procedures for regulating the disclosure of information to those who need to know rather than draconian covenants are the proper way to protect such secrets.

 

Important