Are you confident about your confidentiality obligations? 

It’s every employer’s worst nightmare: employee leaves a company to go work for a rival company; the rival company encourages the employee to bring client contacts, client contracts and other business information across with them; and the employee compiles and transfers the information from one employer system to another on a USB stick. Immediately, this scenario may seem a morally questionable violation of employer trust… but how does the law of confidence treat it?

In the Trailfinders case, Trailfinders claimed that rival travel firm Travel Counsellors Limited (TCL) had breached its equitable obligations of confidence by receiving and using confidential information that was unlawfully transferred by their ex-employees in the manner described above.

Trailfinders won at first instance. In particular, the first instance judge had found (at [131]) that TCL, having specifically encouraged new employees to ‘feel free to bring your old customer contact list along with you’, should have known that the information subsequently given to it following this request did, at least in part, contain confidential information. Therefore, TCL was found to owe Trailfinders an equitable obligation of confidence, as TCL’s senior management would have been aware that the information was likely to have been copied from Trailfinders’s systems, but did not ask for details as to its source.

The employees were also found to be liable for disclosing the confidential information to TCL in breach of their implied employment contract terms, and all were liable for using the confidential information in their businesses. The employees did not appeal, but TCL gave it a go…

In the Court of Appeal, TCL tried to argue that the first instance judge had applied the wrong legal test in finding that the obligation of confidence would only arise if TCL had known or had notice that the information from the Trailfinders ex-employees was confidential. The waters were muddied further, TCL argued, by the fact that only some of the information was confidential, mixed into other non-confidential information. TCL also argued that the ‘reasonable person’ test had been wrongly and inconsistently applied; the High Court’s position, that a reasonable person would make enquiries as to whether some or all of the information received by them was confidential, was ‘insufficient’ for an obligation of confidence to arise.

TCL’s appeal was dismissed by Arnold LJ, who reasserted that if the reasonable person in the recipient’s position would make enquiries as to whether the information is confidential and lawfully provided, but the recipient does not make such enquiries of the discloser, an obligation of confidentiality will arise. Arnold LJ approved the first instance decision that TCL acted in breach of the equitable obligation of confidence (at [23]) and ‘[had] the impression that TCL did not wish to enquire’.

For Arnold LJ (at [28]), the answer to ‘what would the reasonable person do?’ depends on the facts and context of the case at hand. For example, where the issue is accessory liability for misuse of confidential information by another person, actual knowledge or ‘turning a blind eye’ may be required.

Where does that leave recipients of potentially confidential information?  

The Trailfinders appeal decision imposes a greater burden on the recipients of confidential information (with the knowledge or notice of the confidentiality of at least some of that information) to make enquiries of the discloser, in order to (1) ensure that it has a legal basis to receive and process that information, and (2) avoid a breach of confidence claim. If nothing else, if you have suspicions, you must try to find out! In an employment context, the risk could be mitigated by the employer/recipient’s inclusion of warranties in the employment contracts that information is being provided lawfully. In practice, however, such warranties would be limited to the financial resources of the particular employee.

This is the second important Court of Appeal judgment in recent times where Arnold LJ has tried to develop the law of confidential information.  As to the first, see our Lens post here on The Racing Partnership Ltd and others v Sports Information Services Ltd.

Many thanks to Alex Buchanan for his research assistance in preparing this post.