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Need for reasonable enquiries upon receipt of potentially confidential information

24 March 2021. Published by Carolin Mester , Associate and Chris Ross, Partner

The Court of Appeal recently held that a recipient of information will be bound by a duty of confidentiality if it was reasonable for them to have made enquiries as to the confidential nature of the information and they failed to do so (Travel Counsellors Ltd v Trailfinders Ltd [2021] EWCA Civ 38).

Background

Travel Counsellors Limited (TCL) appealed against a High Court decision that found it had acted in breach of its equitable obligation of confidence by obtaining and misusing a rival company's client information.

In 2016, a group of sales consultants left Trailfinders to join a competitor, TCL, which operates as a franchise. Trailfinders claimed that some of its former employees had taken clients' names and contact details from its computer system and disclosed them to TCL, in breach of implied terms in their contracts of employment and in breach of equitable obligations of confidence owed to Trailfinders. Trailfinders also argued that TCL acted in breach of an equitable obligation of confidence by adding that client information to its own computer system for use by Trailfinders' former employees in their new roles at TCL.

High Court decision

The High Court held that the individual defendants in the case (who were Trailfinders' former employees), had acted in breach of their contracts of employment with Trailfinders and that the individual defendants and TCL had each acted in breach of an equitable obligation of confidence.

TCL had encouraged new franchisees to bring their existing customer contact list with them and did not warn them about any risk of breach of confidence in doing so. TCL had added client information brought by Trailfinders' former employees to its own computer system. The judge held that at least part of that information was likely to have been copied from Trailfinders' customer database and that TCL knew or ought to have known that Trailfinders would have regarded the information as confidential. TCL had used client contact information that a reasonable person in a position of seniority at TCL would have been aware was likely to have been copied from Trailfinders' customer database and would reasonably have been regarded by Trailfinders as confidential.

Court of Appeal judgment

TCL appealed to the Court of Appeal. TCL’s most significant ground of appeal was that the High Court judge applied the wrong legal test in holding that TCL owed an equitable obligation of confidence to Trailfinders in respect of the confidential information received by it from the sales consultants.

The Court of Appeal dismissed the appeal. The High Court judge had articulated the correct test for an equitable obligation of confidence to arise. Specifically:

  • An equitable obligation of confidence will arise where confidential information is disclosed in breach of an obligation of confidence and the recipient knows, or has notice, that that is the case;
  • Whether a person has notice is to be objectively assessed by reference to a reasonable person in the recipient's position;
  • If the circumstances are such as to bring it to the notice of such a reasonable person that the information, or some of it, may be confidential to another, their response may be to make enquiries. Whether they would actually make enquiries, and if so what enquiries, inevitably depends on the context and the facts;
  • If the reasonable person would make enquiries, but the recipient of the information does not do so, then an obligation of confidentiality will arise;
  • There is no reason why an obligation of confidence should arise only if the recipient was on notice that the entirety of the information received was likely to be confidential. If the reasonable recipient was aware that some of the information was likely to be confidential, then they would make enquiries; and
  • By contrast, where the issue is not one of primary liability for misuse of confidential information, but one of accessory liability for misuse by another person, then actual or 'blind-eye' knowledge might be required.(see Vestergaard Frandsen A/S v Bestnet Europe Ltd [2013] UKSC 31, [2013] 1 WLR 1556 at [40]-[43]).

The quantity of client contact information disclosed by one of the former employees supported the conclusion that TCL was on notice that at least some of the information was likely to be confidential to Trailfinders. The Court of Appeal noted the High Court's comment that TCL must have appreciated that the employee could not carry all the relevant information in their memory, making it probable that they had copied at least some of it from Trailfinders' client database. Had TCL made enquiries in respect of this information, it would have discovered that some of the information disclosed to it by the former employees came from Trailfinders' client database and was confidential to it.

Comment

There has been little authority to date on whether a business is owed an equitable obligation of confidence by a competitor business that has received its confidential information through a third party.

This judgment imposes a burden on a recipient of potentially confidential information to make enquiries of the discloser as to the nature of the information where a reasonable person would do so. Whether the reasonable person would make enquiries and, if so, what the nature of those enquiries might be, will be context and fact dependant.

Businesses should beware of potentially confidential information which may have been disclosed to them by a third party, such as a new employee, as they risk themselves being liable for breach of equitable obligations of confidence if they fail to make enquiries as to the confidential nature (or not) of the information.

The full judgment for Travel Counsellors Limited v Trailfinders Limited [2021] EWCA Civ 38 is available here.