England and Wales Patents County Court

IN THE PATENTS COUNTY COURT

		Rolls Building 7 Rolls Buildings Fetter Lane London EC4A 1NL
		30th July 2013

Mr. Recorder Alastair Wilson QC:

Introduction

1. This is an action centred around the familiar allegation that a business's trusted employee has left the business's employ, wrongfully taking with him information about the business. The information is then alleged to have been wrongfully pressed into service for the benefit of a new employer.
2. The ex-employee in this case is the First Defendant. He had worked for some 15 years for the Claimant company. The Claimant, directed by its moving spirit, Mr. Semsarilar, specialise in the sourcing, purchase and sale (mainly to wholesalers) of stationery items.
3. The bulk of the information the First Defendant is said to have wrongfully copied and taken with him is the Claimant's entire Sage accounting database. This is said to have been copied by him onto a memory stick on the day of his departure from the Claimant, and then installed in a laptop computer supplied to him by the Second Defendant (which I will refer to as "the Defendants' laptop"). This Sage database constituted a comprehensive picture of all the business done by the Claimant over several years. For example individual invoices could be looked at, showing the goods bought by particular customers, and the prices they had paid for them. Prices paid varied from customer to customer; it is obviously potentially valuable to a competitor to know how much a particular customer can be persuaded to pay for particular goods, and what sort of quantities that customer is likely to buy. In addition to the Sage database, there were recent customer enquiries and email strings which represented developing business opportunities, as the Claimant negotiated with potential customers to achieve mutually agreeable supply terms for particular goods. In some cases the email strings represented what the First Defendant regarded as failed business opportunities, if the Claimant had been unable to reach agreement. Materials of this kind were in due course found on the Defendants' laptop.
4. The Second Defendant is a company formed by the Third Defendant for the purpose of entering the stationery business. The First Defendant and the Third Defendant have known each other for many years, since both were civil engineers working on the British Library project in the Euston Road. Though their paths had subsequently diverged, they met again in mid-2010. The First Defendant managed to interest the Third Defendant in the stationery business, and they agreed that the Third Defendant would provide finance to a new business, while the First Defendant would run the company using his experience of the stationery business. The Second Defendant was accordingly incorporated on 19 August 2010, with the Third Defendant as its sole director.
5. The First Defendant gave notice of his intention to leave the Claimant at some date in early September. He carried on working for a few weeks, until his departure on 27 September at the direction of Mr. Semsarilar. Strictly speaking his employment by the Claimant terminated on 30 September 2010, and on 1 October 2010 he started working as an employee of the Second Defendant (with unusually ill-defined payment terms, though not much turns on that).
6. The Claimant came to suspect that the First Defendant had been spiriting information away and contacting the Claimant's customers even while he was still employed by it. A letter before action was sent to all three Defendants dated 11 October 2010, which according to the First Defendant was received by him on 16 October 2010.
7. Shortly after receiving his copy of the letter before action, the Third Defendant visited Mr. Semsarilar to discuss what had occurred, and to assure him that the Second and Third Defendants had done nothing wrong. What occurred in the course of that visit is said to give rise to an estoppel defence in favour of the Second and Third Defendants, which I will deal with in due course below.
8. Despite the Third Defendant's visit to Mr. Semsarilar, these proceedings were started on 16 November 2010. On 22 November 2010 Henderson J. accepted undertakings from the First Defendant, which, among other things, required the First Defendant to hand back the Claimant's information, and also to permit an independent computer forensic expert to delete any such information from the First Defendant's computer systems, taking a "forensic image" of such computers before and after the deletions.
9. The Undertakings of 22 November did not immediately have the desired result so far as the recovery of the software was concerned: by the time the Order was made, the First Defendant had already handed the Defendants' laptop back to the Third Defendant, who was not a party to the Order. In due course, however, the computer was very sensibly delivered up voluntarily by the Third Defendant. It is not contended that he had made any alterations to it while it was in his possession, but it turned out that attempts had been made by the First Defendant to delete the Claimant's information. Some at least of it has been reconstituted by an independent firm of computer forensic experts called Computer Forensic Alliance. My attention was not drawn to a report from them, but I was told that their work confirmed that parts of the Claimant's database and emails had indeed been copied onto the computer, though the First Defendant contends that there is an innocent explanation for all this, and says that in any event he did not use the information to compete with the Claimant. The material which had been copied onto the Defendants' laptop and subsequently deleted has been reconstituted to some extent, though I was told that costs considerations meant that the exercise had not been comprehensive, and even what was recovered was to some extent garbled. In particular the dates shown on documents often varied considerably from their true creation or sending dates.

The Issues at the Trial

10. As the pleadings stood at the start of the trial, numerous causes of action were pleaded in the Particulars of Claim, including:

a. Breach of confidence (by all the Defendants)

b. Breach of database right (by all the Defendants)

c. Conspiracy to cause economic harm by breach of confidence or database right (by all the Defendants)

d. A claim (against the Third Defendant) that he was liable on the basis that the corporate veil of the Second Defendant should be pierced

e. A conventional claim of joint liability on various bases and

f. A claim against the Second and Third Defendants that they "wrongfully procured or induced the First Defendant to terminate his contract of employment with the Claimant".

11. Had all these causes of action been the subject of full argument, it seemed unlikely that the trial could have been concluded even in the unusually long (for the PCC) allotted period of 3 days, particularly bearing in mind the uncertainties in the law relating to database right (and the absence of any decided case considering its applicability to the data contained in an accounting package) and the complexities of the laws of conspiracy and causing loss by unlawful means. There might also have been substantial argument as to what cause of action (if any) could sustain the claim referred to in paragraph 10.f above, let alone the underlying questions of fact.
12. It is not easy to see how in this case any database right in the Sage database could achieve anything for the Claimant beyond what the law of confidence could already achieve. Similarly, the law of conspiracy seems an unnecessarily elaborate way of establishing the liability of Defendants who could equally well, and more simply, be pursued on other pleaded bases.
13. It is not clear to me, therefore, why those who originally pleaded the Claimant's case thought it necessary to burden it with such troublesome allegations. At the outset of the trial, however, the current Counsel for the Claimant (who was not the original pleader) took a realistic view of the case, and abandoned several causes of action, including misuse of database right though not conspiracy. In closing, he did not pursue conspiracy. The upshot is that I am only called upon to decide the allegations of misuse of confidential information, together with the question of whether the Second and Third Defendants can be fixed with liability for the First Defendants' misuse of confidential information (if any). In addition to those issues, certain allegations of breach of duty of good faith were pursued at the trial because of the light they threw on the First Defendant's credibility, though no additional damage to the Claimant (or profit to any of the Defendants) was attributed to them.
14. At a very early stage in these proceedings (in their original defence dated 22 November 2010), the Second and Third Defendants proffered broad undertakings in relation to confidential information and database right, and the Second Defendant undertook to pay to the Claimant all net profits made by Second Defendant as a result of unlawful activity on the part of the First Defendant in the nature of diversion of business opportunities or breach of confidence (or database right or copyright). They did not, however, accept that there had been any such unlawful activity on the part of the First Defendant. Even if there had been, they did not admit liability for it, though their undertaking to pay anyway was not dependent upon a finding of liability.
15. The First Defendant has not admitted liability at all, contending that he did nothing wrong, and putting forward innocent explanations for the presence of the Claimant's confidential information on the computer which the Second Defendant had supplied him with.
16. I should say that the sum in issue is very small indeed. The parties are agreed that the maximum sum in issue is some £1,800, a sum resulting from business which was done by the Second Defendant with just two customers. These were:

a. Plasfab Products Ltd. ("Plasfab") an established customer of the Claimant in Ireland, and

b. The school attended by the First Defendant's children, Grange Park School in Enfield, which had never done business with the Claimant.

The Witnesses

17. The Claimant called as its main witness Mr. Semsarilar. He gave his evidence with remarkable good humour and fairness, considering his perception of the manner he had been treated by the First Defendant. His recollection of details, particularly dates, was not always entirely accurate, but I consider that he was doing his best to assist the Court. His evidence was, however, of much less importance to the outcome of the case than that of the First and Second Defendant, given the unshakeable fact that parts of the Claimant's Sage database and other potentially useful information had been found on the Defendants' laptop, so that the real issue in the case is what, if anything, was wrongfully done with it.
18. The Claimant also called a Mr. Egidijus Ruadys, who had been a porter and general factotum at the Claimant's offices and left to join the Defendants at the same time as the First Defendant. He was put out of a job when the Third Defendant closed down the Second Defendant very shortly after these proceedings started. In May this year he made a witness statement on the Claimant's behalf expressing surprise at evidence given by the Third Defendant that he had not heard of Pintorex before the letter before action was received by him. Mr. Ruadys said that he had often heard the First Defendant and the Third Defendant discussing Pintorex, but it became clear that he was hopelessly muddled about dates (indeed he said as much in the course of cross-examination) and I attach no weight to that evidence. In addition, however, Mr. Ruadys elaborated in cross-examination on the reason why he had left the Claimant's employ, saying that he had been "forced" to do so by representations from the First Defendant that he was going to take all Pintorex's business. His cross-examination by the First Defendant was revealing as to the First Defendant's conduct: the First Defendant did not put it to Mr. Ruadys that he had never said Pintorex would close, or would take its business, but only that he had not forced Mr. Ruadys to leave: he had left him to make his own mind up about it. I took that as an implicit admission that the First Defendant had gone rather further in persuading Mr. Ruadys than his obligations of good faith towards the Claimant would have allowed, but of course it is not direct evidence of misuse of confidential information.
19. Finally, the Claimant called Mr. Collier, who worked for the Claimant in parallel with the First Defendant. He gave evidence that he visited various customers of the Claimant in Ireland in October 2010. They told him, he said, that the First Defendant had told them that he (Mr. Collier) had left the Claimant and was going to work for the Second Defendant. He was extensively cross-examined by the First Defendant on the basis that the Irish customers might have misinterpreted remarks Mr. Collier made from time to time about retiring altogether. While Mr. Collier agreed that he might have occasionally intimated that he was contemplating retirement, he was adamant that this was neither the source nor the nature of the reports he received in Ireland, and stood by his version of the reports. I believed Mr. Collier, who gave his evidence clearly, thoughtfully, and fairly. Again, however, while this evidence throws a bad light on the First Defendant's behaviour generally, it was not directly relevant to the issues of whether confidential information had been misused or, if it had been, whether the Third Defendant was in any way implicated in such misuse.
20. The First Defendant was cross-examined at length. He evidently had a different idea of his duties of good faith from that which an employee of ordinary honesty would have. This enabled him to be quite frank in some of his responses admitting to what were clear breaches of his duty of good faith. He would nevertheless evade as long as he could giving an answer which he could see would damage his case on misuse of confidential information. His evasiveness often involved putting forward some alternative and often implausible explanation for otherwise inconvenient facts, usually preceded with the words "Well, maybe, …."
21. In addition to the witnesses called at the trial, written evidence was given by one Andrew Smith from another firm of forensic computer experts, called 7Safe. His evidence was that he had found records on the Claimant's computer system, which established that the Sage database had been copied, twice, onto memory sticks, around 17.00 hours on 27 September 2010, the day of the First Defendant's departure from the Claimant.
22. As a result (I assume) of the researches of Computer Research Alliance, the Claimants were able to rely upon traces of the Claimant's Sage accounting database found on the Defendants' laptop, together with evidence that someone had tried to delete information – including the Sage database – shortly after the letter before action was served on the Defendants. It had been possible to recreate a good deal of the deleted material, particularly sequences of emails, but I was told that for reasons of cost Computer Research Alliance did not recreate much of the Sage database once its presence on the Defendants' laptop had been demonstrated (by the finding on it of a set of the Claimant's bank statement reconciliations which had formed part of the database).

The Alleged Misuse of Confidential Information

The Sage database

23. The amount of confidential information in the Sage database must be very large, but it is fair to say that nothing has been produced by way of evidence of actual misuse of that information. There is no evidence of wholesale – or any – circularisation of customers on the basis of data taken from the Sage database. There is other evidence that a few customers were approached by the First Defendant on the Second Defendant's behalf, but these seem to have been special cases of one kind or another, rather than the result of wholesale circulation of potential customers taken from data in the Sage database, which are dealt with below. Mr. Semsarilar produced a list of his 105 top customers, which he compared with the Second and Third Defendants' disclosure, and found only 8 to have been contacted by the First Defendant, at least 3 of which were part of the Office Depot Group.
24. Nevertheless there is no doubt that some information from the Sage database was found on the Defendants' laptop, in particular the bank reconciliations referred to above, from which it is reasonable to infer (and I do so infer) that it was all copied.
25. The First Defendant was severely cross-examined about the presence of the Sage database on the Defendants' laptop, and had a somewhat complicated explanation.
26. He told me that although he did not have the primary responsibility for making backups of the Sage database, he did do so on occasions. One such occasion was on 27 September 2010, his last day at the Claimant's. He acknowledged that it was possible that he made 2 copies, or rather attempted to do so, because the first attempt could have failed, and he would have left the copy on the desk of the employee who normally dealt with such matters. (I was told by Counsel for the Claimant that this copy had not been found, but no evidence to this effect was called, and I do not attach any weight to the point.)
27. This would not explain how the Sage database got onto the Defendants' laptop, but the First Defendant told me that he did have a backup copy at home which he had loaded into the Defendants' laptop for the purpose only of demonstrating to the Third Defendant the sort of software which it would be a good idea for the Second Defendant to adopt. Of course it was a clear breach of his duty of good faith to use the software in this way, but it is not easy to identify any misuse of confidential information, apart from the rather technical point that in the course of demonstrating the software it is likely that some of the Claimant's data would have been loaded and displayed momentarily. It is also worth noting that at another point in his evidence, the First Defendant told me that the back up memory stick he had at home with the Sage database on it had been defective, so he had thrown it away.
28. This seems at first sight an unlikely tale, but there was one circumstance which appeared to go some way to corroborating it: although the First Defendant was not pressed as to when exactly he would have been demonstrating Sage to the Third Defendant, the most likely time was around August 2010 when the Defendants' laptop would have been purchased. The Bank reconciliation documents I was shown, which were apparently prepared monthly, only went up to the June/July reconciliation, which was dated 18 August 2010. The bundle did not include one prepared in September 2010 for July/August. This suggested that the copy of the Sage database in the possession of the First Defendant did indeed date from August rather than 27 September, though the point is not conclusive, because the Bank reconciliations were sometimes produced later in the month than the 18^th; the April/May 2010 reconciliation, for example, is dated 29 June.
29. In the end, not without some hesitation, I have concluded that the First Defendant did load a 27 September 2010 copy of the Claimant's Sage database onto the Defendants' laptop. I arrive at this conclusion because

a. I did not consider the First Defendant to have been an honest witness when dealing with issues of breach of confidence,

b. He undoubtedly did copy other potentially useful email strings on other occasions,

c. His explanation for the making of two copies of the database on 27 September 2010 (namely that he might have started with a defective memory stick) did not have the ring of truth, particularly when added to his evidence that he had thrown away a defective memory stick which he had at home,

d. Making two copies would have given him the ability to claim (had it not been established that he made two copies) that he had just made one copy, in accordance with normal procedures, and had left it behind.

Assuming the First Defendant was not telling the truth about the making of the copies on 27 September 2010, I cannot see any reason to suppose that the source of material from the Sage database on the Defendants' laptop was anything other than the copy made on that date.

30. Having said that, however, the fact remains that there is no evidence of further misuse of the information taken in this way, beyond the First Defendant's wrongful taking of it, and the rather technical point about his wrongful use of it for the purpose of demonstrating to the Third Defendant the sort of software which the Second Defendant ought to be equipped with (which he admitted in the course of cross-examination, though he did not apparently think of it as wrongful). Neither of those activities led to actual damage to the Claimant. Indeed for the whole period during which it traded, the Second Defendant appears to have done no more than 4 deals about which the Claimant could have any complaint, with the two customers mentioned above, from which the Second Defendant amassed the grand total of £1,813.32 gross profit (i.e. net sales less cost price). The question is whether that business resulted from a misuse of confidential information. In addition to the acts which did result in business for the Second Defendant, I heard about a few other unsuccessful attempts by the First Defendant to get business for the Second Defendant, one of which is discussed in detail below.

Grange Park School

31. One of the items of business which did materialise was a small order for paper placed on 12 October 2010 by (or on behalf of) Grange Park School in Enfield, the school attended by the First Defendant's children. This school had never been a customer of the Claimant. Although it may have been a breach of the First Defendant's duty of good faith (if, as seems likely, he had been negotiating this contract prior to 1 October 2010) to have kept this opportunity secret from the Claimant, it does not seem to me that the fact that the school was in the market for paper can be regarded, in these rather exceptional circumstances, as the Claimant's confidential information. This sale was not, therefore, based on misuse of confidential information.

Plasfab Limited

32. The other customer which provided actual business was Plasfab Limited. There are three invoices relevant to the period prior to 1 October 2010, which arose from Plasfab purchase orders dated 18 August, 14 September and 30 September 2010. Each of these more or less matches evidence of corresponding supplies from Hopax Europe Ltd^[1]. (Hopax is a stationery wholesaler which had supplied the Claimant in the past and was now supplying the Second Defendant. The goods, according to the Hopax invoices, were delivered by Hopax direct to Plasfab).
33. The First Defendant's explanation for this business being done by the Second Defendant was that his contact at Plasfab, "Noel", had been unable to agree satisfactory terms with the Claimant. The First Defendant told him of his own plans for a new business, which ought to be able to supply the same goods more cheaply. The first of the Plasfab purchase orders was preceded^[2] by an email from the First Defendant to Noel, the contents of which are consistent with the notion that Noel was indeed on good terms with the First Defendant, and that he had been told about the proposed new venture.
34. Clearly it was a breach of the First Defendant's duty of good faith to be setting up trades with Plasfab for the benefit of the Second Defendant which actually took place during the time when he was still employed by the Claimant. The fact that the First Defendant considered that the Claimant was unable to win the business does not excuse his conduct: his duty, while he was still employed by the Claimant, was to do everything he could to get business for the Claimant, and he could not effectively perform that duty if he was at the same time picking up business for the Second Defendant for delivery during the period of his employment by the Claimant.
35. The question is, however, whether this was also a misuse of confidential information. It is just possible that Noel, having been told in August of the First Defendant's imminent departure from the Claimant, and of the fact that the Claimant was about to be incorporated, took it into his head, unprompted by the First Defendant, to place some orders with the Second Defendant (through the First Defendant). Were that the case, it would be difficult to contend that there had been a misuse of confidential information.
36. There is, however, another possibility, namely that it was the First Defendant who solicited the business, basing himself on his knowledge (which was the Claimant's confidential information) that the Claimant had been asked to supply the goods in question and that Mr. Semsarilar was unwilling to supply them at a price acceptable to Plasfab.
37. I am satisfied on the balance of probabilities that the latter is what occurred, and that accordingly there was a misuse of confidential information. I say this because:

a. It was clear from what the First Defendant said in the course of cross-examination that he regarded a customer as fair game if the Claimant had been unable to put forward a price which was acceptable to the customer. From his perspective, therefore, there was no reason not to contact the customer in question.

b. Such conduct was consistent with other incidents in which the First Defendant's unscrupulous behaviour towards the Claimant during the final weeks of his employment, and in particular his misuse of confidential information relating to Office Depot, as described below.

The Office Depot Incident

38. Office Depot is a very large distributor of stationery products, some of which it has sourced from the Claimant. The First Defendant was naturally keen to attract business from Office Depot for the benefit of the Second Defendant.
39. Among the documents found on the Defendants' laptop were two spreadsheets, which listed a variety of goods required by Office Depot. One version of this spreadsheet was the Claimant's response dated 23 August 2010 to an invitation from Office Depot to quote for a variety of goods. In successive columns the spreadsheet identified the goods by type, code number and description, and stated the quantity of goods required. The final column was headed "Pintorex Quote", and listed the Claimant's prices for each of the relevant items. Clearly these prices were highly confidential to the Claimant.
40. The other version of the spreadsheet found on the Defendants' laptop was extremely similar, listing the same goods in the same font (though some of the column widths had been adjusted) but with different prices inserted in the final column. These prices had been inserted by the First Defendant, and were generally lower than the Claimant's prices for the same goods. There was not, however, any constant ratio between the prices, and one particular price was actually a little higher. Other documents establish that the First Defendant had obtained his own quotes for the various goods, and it seems to me likely that the primary basis for the prices he quoted would be the information he solicited from suppliers, rather than what the Claimant had been proposing to charge. It is tempting to suppose that the First Defendant therefore made no use at all of the Claimant's pricing information, but for the reason explained below, I consider on the balance of probabilities that he did, albeit to a rather limited extent.
41. In cross-examination, Mr. Semsarilar agreed that apart from the prices (which were of course the Claimant's own, highly confidential, information) the rest of the information on the spreadsheet emanated from Office Depot. It may even be, and it was the First Defendant's case, that the spreadsheet itself (without the prices) emanated from Office Depot.
42. It does not, however, follow from this that the document as a whole (omitting the prices) was something which the First Defendant was entitled to take from the Claimant and put to his own use.
43. This was not a public invitation to tender. Assuming the original spreadsheet (without the Claimant's prices) did come from Office Depot, and Office Depot was free to invite anyone it liked to tender for the goods, nevertheless the Claimant was lucky enough to have been requested to tender for these particular goods, and in my view it was entitled to regard the request, in its hands, as its own confidential information. It was therefore entitled to restrain its misuse by someone who had wrongfully extracted it from the Claimant's files. Suppose, for example, an industrial spy had entered the Claimant's premises and made away with a copy of this request to tender. In my view the spy would owe a duty of confidence to the Claimant to make no use of the document he had stolen. Similarly, the First Defendant must have taken a copy of the spreadsheet from the Claimant (because a copy of it was found on his computer), and he too thereby subjected himself to a duty, owed to the Claimant, to make no use of it.
44. As to whether it was misused, the fact that the Claimant's version of this spreadsheet was on the Defendants' laptop in itself raises a serious suspicion that the Defendants' parallel version had been prepared by a process of adapting (and thus misusing) the Claimant's version. On the other hand, it was at least possible that the First (or Second) Defendant had been sent a fresh copy of the spreadsheet by friends at Office Depot, knowing of his imminent departure, by way of an invitation from Office Depot to the Second Defendant to tender. Whilst it might have been a breach of duty of good faith to respond to such an invitation while still employed by the Claimant^[3], it could hardly be said to be a breach of confidence to respond (so long as the First Defendant had not turned to the Claimant's version in order to get guidance on prices).
45. So the issue is whether he used the Claimant's version of the spreadsheet, or worked entirely from a fresh copy supplied by Office Depot. The First Defendant was taxed in cross-examination with the fact that there was no trace on his laptop of any email by which the spreadsheet had reached him from Office Depot. His response was that maybe it had been sent to him in the post. Asked how a spreadsheet could be sent in the post, he responded that maybe it had been sent on a CD. To the question of why anyone would post a CD with a spreadsheet on it when they could perfectly well email it, there could be no satisfactory answer. In my judgment, the First Defendant did use the Claimant's version of the spreadsheet to send his own tender, and thereby misused the Claimant's confidential information. Given that he used the spreadsheet in this way, I find it impossible to suppose that he did not also at least use the pricing information on the Claimant's version to check that his prices were low enough to have a chance of winning the business. In the event, neither party got the relevant business, and accordingly it is not suggested that the Claimant suffered any damage from this incident, or that the Defendant made any profit. The incident is, however, powerful evidence that the First Defendant was unscrupulously misusing confidential information taken by him from the Claimant. There is no reason to suppose that it was a single isolated incident or that misuse would not have continued had the Claimant not taken action to prevent it.

The Liability of the Second Defendant

46. As to the liability of the Second Defendant, it was submitted on its behalf that it was not liable for any of the activities of the First Defendant prior to his starting employment with the Second Defendant. Anything he did for the benefit of the Second Defendant prior to 1 October 2010 was, it was submitted, a mere frolic of his own. I reject this submission. The Second Defendant was established in August 2010 as a vehicle for the First Defendant to provide his services in the field of stationery dealings, and for the Third Defendant to provide the necessary investment. Although the First Defendant was not formally employed by the Second Defendant until 1 October 2010, he was entitled (as against the Claimant) at least to make preparations for competition prior to his departure, and was in fact doing so^[4]. As an example of this, the First Defendant was investigating the availability of suitable warehousing for the Second Defendant's business, and was reporting to the Third Defendant on the results of his researches. Any expenditure (such as the purchase price needed to buy the goods from Hopax to satisfy Plasfab's Orders) needed to be cleared with the Third Defendant. It is clear, therefore, that the First Defendant was authorised by the Second Defendant (through its director the Third Defendant) to act on the Second Defendant's behalf well before 1 October 2010. I see no reason to suppose that this was not so as from the moment of the Second Defendant's incorporation in August 2010, particularly in view of the negotiations with Noel of Plasfab, the earliest of which took place shortly prior to that. Thus in my view, in so far as the First Defendant did anything which brought in business for the Second Defendant he did so in the capacity of agent for the Second Defendant.
47. Not every act of an agent in the position of the First Defendant necessarily gives rise to vicarious liability on the part of his employer. The point was discussed at some length in Dubai Aluminium v. Salaam [2003] 2 AC 366, and I found the following passage from the speech of Lord Nicholls of Birkenhead particularly helpful in the context of the present case:

31. In Hamlyn v John Houston & Co [1903] 1 KB 81, 85, one aspect of the business of the defendant firm of grain merchants was to obtain, by lawful means, information about its competitors' activities. Houston, a partner in the firm, obtained confidential information on the plaintiff Hamlyn's business by bribing one of Hamlyn's employees. The Court of Appeal held the firm was liable for the loss suffered by Hamlyn. Collins MR said that if it was within the scope of Houston's authority to obtain the information by legitimate means, then for the purpose of vicarious liability it was within the scope of his authority to obtain it by illegitimate means and the firm was liable accordingly. Collins MR rested his decision on the broad 'risk' principle: the principal having selected the agent, and being the person who will have the benefit of his efforts if successful, it is not unjust he should bear the risk of the agent 'exceeding his authority in matters incidental to the doing of the acts the performance of which has been delegated to him'.

32. The limits of this broad principle should be noted. A distinction is to be drawn between cases such as Hamlyn v John Houston & Co [1903] 1 KB 81, where the employee was engaged, however misguidedly, in furthering his employer's business, and cases where the employee is engaged solely in pursuing his own interests: on a 'frolic of his own', in the language of the time-honoured catch phrase. In the former type of case the employee, while seeking to promote his employer's interests, does an act of a kind he is authorised to do. Then it may well be appropriate to attribute responsibility for his act to the employer, even though the manner of performance was not authorised or, indeed, was prohibited. The matter stands differently when the employee is engaged only in furthering his own interests, as distinct from those of his employer. Then he acts 'so as to be in effect a stranger in relation to his employer with respect to the act he has committed': see Isaacs J in Bugge v Brown (1919) 26 CLR 110, 118. Then the mere fact that the act was of a kind the employee was authorised to do will not, of itself, fasten liability on the employer. In the absence of 'holding out' and reliance, there is no reason in principle why it should. Nor would this accord with authority. To attribute vicarious liability to the employer in such a case of dishonesty would be contrary to the familiar line of 'driver' cases, where an employer has been held not liable for the negligent driving of an employee who was employed as a driver but at the time of the accident was engaged in driving his employer's vehicle on a frolic of his own.

48. It does not seem to me in the light of those observations that the First Defendant could be said to have been "on a frolic of his own" when soliciting business from Plasfab.
49. In addition to the conventional requirements of vicarious liability, in the case of alleged misuse of confidential information, the liability of the Second Defendant must further depend upon its having the necessary state of mind to establish liability, though this is not necessarily a difficult requirement to satisfy in a case of vicarious liability. Following the guidance of the Privy Council in Meridian Global Funds Management Asia v. The Securities Commission [1995] UKPC 5, it seems to me appropriate to attribute to the Second Defendant the First Defendant's knowledge of any relevant facts when acting as the Second Defendant's agent prior to 1 October 2010, just as it would be to do so after he formally became an employee of the Second Defendant.
50. Accordingly I consider that the Second Defendant is jointly liable with the First Defendant for the misuse of confidential information committed by the First Defendant.

The Liability of the Third Defendant

51. As to the Third Defendant, however, the position is different. He was a Director of the Second Defendant but that is not in itself sufficient to render him liable for misuses of confidential information for which the Second Defendant is liable. To establish liability it is necessary to establish that he personally had the requisite state of mind.
52. The Supreme Court recently considered the question of what state of mind is necessary to render a director liable for breach of confidence in Vestergaard Frandsen v. Bestnet [2013] UKSC 31. Apart from a contractual issue (which does not arise in the present case), the director in question was alleged to be liable on either or both or two bases, which are discussed by Lord Neuberger at paragraphs 32-43 of his judgment:

The second ground: common design

32. I turn, then, to the second, and most strongly advanced, ground upon which Vestergaard's case rests, namely that Mrs Sig was liable for breach of confidence on the basis of common design. This argument proceeds on the basis that Dr Skovmand, Mr Larsen and Mrs Sig all worked together to design, manufacture and market Netprotect products, and as these products were designed by Dr Skovmand in a way which involved his wrongfully misusing Vestergaard's trade secrets so as to render him liable for breach of confidence, Mrs Sig and Mr Larsen are liable together with him.

33. I accept that common design can, in principle, be invoked against a defendant in a claim based on misuse of confidential information; I am also prepared to assume that, in the light of the findings made by the Judge, Mr Larsen was liable on that ground (as he knew that Dr Skovmand was misusing, and had used, Vestergaard's trade secrets when designing Netprotect). However, I cannot see how Mrs Sig could be so liable, in the light of her state of mind as summarised in para 22 above.

34. As Lord Sumption pointed out in argument, in order for a defendant to be party to a common design, she must share with the other party, or parties, to the design, each of the features of the design which make it wrongful. If, and only if, all those features are shared, the fact that some parties to the common design did only some of the relevant acts, while others did only some other relevant acts, will not stop them all from being jointly liable. In this case, Mrs Sig neither had the trade secrets nor knew that they were being misused, and therefore she did not share one of the features of the design which rendered it wrongful, namely the necessary state of knowledge or state of mind. Accordingly, although she was party to the activities which may have rendered other parties liable for misuse of confidential information, she cannot be liable under common design.

35. A driver of the motor car who transports a person to and from a bank to enable him to rob it, would be liable in tort for the robbery under common design or some similar principle, but only if she knew that her passenger intended to rob, or had robbed, the bank. So, in this case, given the ingredients of the wrong of misuse of confidential information, and given that she never had any relevant confidential information, Mrs Sig cannot be held liable in common design for exploiting with others, on behalf of Intection and then Bestnet, a product which, unknown to her, was being and had been developed through the wrongful use of Vestergaard's trade secrets.

36. We were taken to two decisions, which, it was suggested, are inconsistent with that conclusion. The first is Unilever Plc v Gillette (UK) Ltd [1989] RPC 583, 609, where Mustill LJ said that, in order to show that a defendant was secondarily liable for infringement of a patent, "there [was no] need for a common design to infringe", as it was "enough if the parties combine to secure the doing of acts which in the event prove to be infringements". I do not doubt the correctness of that statement, but it has no application here.

37. Patent infringement is a wrong of strict liability: it requires no knowledge or intention on the part of the alleged infringer, whose state of mind is wholly irrelevant to the issue of whether she infringes the patent. Thus, the fact that the alleged infringer did not know of the existence, contents or effect of the patent is completely irrelevant to the question of infringement, even if she had thought the invention up for herself. Accordingly, it is entirely logical that a person who, while wholly innocent of the existence, contents or effect of the patent, is nonetheless secondarily liable if she assists the primary infringer in her patent-infringing acts. It cannot possibly follow that the same approach is appropriate in a case for a person who assists the primary misuser of trade secrets, given that it is necessary to establish the latter's knowledge and/or state of mind (as explained in paras 22-25 above) before she can be liable for the misuse.

38. The second case relied on by Vestergaard is Lancashire Fires Ltd v S A Lyons & Co Ltd [1996] FSR 629. In that case, an injunction to restrain the misuse of the plaintiff's confidential information was granted against a Ms Magnall on the ground she had had "a common design with [another] to manufacture [certain products] and the process used was found to be confidential to the plaintiff" – p 677. It appears that, while she had been aware of the nature of the process, Ms Magnall had not been aware of the fact that the manufacture of those products involved a process which had been wrongly developed with the benefit of the plaintiff's trade secrets. Sir Thomas Bingham MR said at p 677, that it was "just that Susan Magnall should be precluded from disclosing the information to others" and therefore granted an injunction against her.

39. As already explained in para 25 above, I have no difficulty with the idea that a person who receives and uses confidential information, but does not appreciate that it is confidential, can be liable for using that information once she appreciates that it is indeed confidential. Accordingly, in this case, the grant of an injunction against Mrs Sig, if she was threatening to use or pass on Vestergaard's trade secrets, might well be justified, once it could be shown that she appreciated, or, perhaps, ought to have appreciated, that they were confidential to Vestergaard. However, I do not see how that can entitle Vestergaard to damages from Mrs Sig in respect of losses suffered from misuse of their trade secrets at a time when Mrs Sig was honestly unaware of the fact that there had been any misuse of their trade secrets. I note that in Lancashire, immediately after the short passage I have just quoted, Sir Thomas Bingham MR added that "[i]f the plaintiff seeks financial relief against Susan Magnall, we shall need to hear further argument before deciding the point." (I should add that it appears that Lancashire may not have been as fully argued as it might have been in one respect, in that, at least at first instance, it was apparently conceded that the principle in Unilever, as discussed above, applied to confidential information cases, whereas, for the reason I have given in para 37 above, this is wrong.)

The third ground: Mrs Sig's unusual position

40. In so far as I understand the third way of putting Vestergaard's case, (i) it involves saying that Mrs Sig had "blind-eye knowledge" of the fact that Dr Skovmand was using Vestergaard's trade secrets, or (ii) it amounts to contending that Mrs Sig should be liable for misuse of confidential information, as she must have appreciated that she was, to use a well worn metaphor, playing with fire, when she started up the new business with Mr Larsen, employing Dr Skovmand, in 2004.

41. These two alternative ways of presenting Vestergaard's third ground are quite close in their import, and in a sense they can both be said to involve an attempt to conflate the first and second grounds, albeit in a somewhat incoherent way. In the end they each must fail, essentially because of findings of fact made (or, in many respects, understandably not made) by the Judge.

42. So far as argument (i) is concerned, it cannot succeed without a finding against Mrs Sig of dishonesty of the sort characterised by Lord Nicholls in Royal Brunei, as discussed in para 26 above. There is no such finding, and it seems to me clear from the conclusions which the Judge did reach, as summarised in para 15 above, that there was no basis for his making any finding of relevant dishonesty on the part of Mrs Sig.

43. As to argument (ii), it is not enough to render a defendant secondarily liable for misuse of trade secrets by another to establish that she took a risk in acting as she did. The fact that she took a risk might often render it easier to hold that she was dishonest, but, by definition, it is not enough on its own. To revert to the metaphor, if one plays with fire, one is more likely to be burnt, but it does not of itself mean that one is burnt.

53. Lord Neuberger's reference to the Royal Brunei case in paragraph 26 was as follows:

26. Further, while a recipient of confidential information may be said to be primarily liable in a case of its misuse, a person who assists her in the misuse can be liable, in a secondary sense. However, as I see it, consistently with the approach of equity in this area, she would normally have to know that the recipient was abusing confidential information. Knowledge in this context would of course not be limited to her actual knowledge, and it would include what is sometimes called "blind-eye knowledge". The best analysis of what that involves is to be found in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, especially at pp 390F-391D, where Lord Nicholls approved the notion of "commercially unacceptable conduct in the particular context involved", and suggested that "[a]cting in reckless disregard of others' rights or possible rights can be a tell-tale sign of dishonesty".

54. In cross-examination, the Third Defendant was not challenged as strongly as the First Defendant had been. It was not put to him that he had conspired with the First Defendant to commit his various wrongdoings. On the contrary, the burden of the cross-examination (and of the Claimant's Reply) was the Third Defendant had been careless in his dealings with the First Defendant, and that he ought to have realised what was going on.
55. The Third Defendant told me that he had trusted the First Defendant, and in essence that he had given him a free hand in a market which he, the Third Defendant, was not familiar with.
56. I accept that with the benefit of hindsight the Third Defendant may be said to have been somewhat careless. It is easy to say now that he should have asked whether the First Defendant was making use of an opportunity which rightfully belonged to the Claimant when he successfully solicited Plasfab for business. Equally, it is easy to say now that he could have been alerted to the possibility of some sort of wrongdoing when, in relation to some rubber band business which the First Defendant was chasing, the Third Defendant was asked by the First Defendant to send a rather discrete enquiry to a potential supplier which was intended to avoid alerting the supplier to the fact that the First Defendant was involved in the transaction. (The First Defendant had an alternative explanation for this, though there is no suggestion that it was passed on to the Third Defendant: he said that the Claimant was not a welcome customer to the supplier in question because it had not paid some bills on time, and he was concerned that the supplier would not want to do business with the Second Defendant if it knew he was involved.)
57. On the other hand, the Third Defendant was not aware of the precise nature of the First Defendant's obligations to the Claimant. In any case even if, with a little more alertness, the Third Defendant might have appreciated the real risk that the First Defendant was in breach of his duties of good faith towards the Claimant, there was no strong enough evidence to satisfy me on the balance of probabilities that he "dishonestly" (in the Royal Brunei sense referred to above by Lord Neuberger) turned a blind eye to or ignored the possibility that the First Defendant was also misusing the Claimant's confidential information. Still less was there any sufficient evidence that the First Defendant's relatively limited misuses of confidential information were part of a common design with the Third Defendant to misuse confidential information.
58. Accordingly I acquit the Third Defendant of liability for the First Defendant's wrongdoings.

The Estoppel Defence

59. In view of my findings that the Second Defendant is liable, but the Third Defendant is not liable for the First Defendant's misuse of confidential information, the estoppel defence is only of potential value to the Second Defendant.
60. The Second and Third Defendants' Amended Defence alleged that at the meeting between Mr. Semsarilar and the Third Defendant shortly after the service of the letter before action, Mr. Semsarilar had accepted that the Second and Third Defendants were honourable and had acted without any intention of behaving unlawfully, and that Mr. Semsarilar had represented that he would tell his solicitors to take no further action against them. It was further alleged that the Second and Third Defendants had acted to their detriment as a result by not taking steps to avoid proceedings. (What in fact they did was to send short letters denying liability and also denying any liability on the part of the First Defendant.)
61. I do not consider that this alleged detriment is sufficient to found a defence of estoppel. If the underlying facts were established, they might be relevant to costs, but in my view it would be wrong to hold that they could extinguish a cause of action. The detriment, such as it was, was minimal, and non-existent if taken account of by an appropriate award of costs.
62. In any case, however, the underlying facts were not established to my satisfaction on the balance of probabilities. Although the Third Defendant in cross-examination stood by what was said in the Defence, it became clear that he had read too much into what he recalled being said to him by Mr. Semsarilar. This was to the effect that Mr. Semsarilar would be satisfied with the terms of the letters which the Third Defendant was intending to send, and that Mr. Semsarilar would pass them on to his solicitors "who were reasonable people". Although I accept that the Third Defendant left the meeting under the impression that the Second and Third Defendants would not be sued, I consider that this impression was mistaken, and was not induced by what Mr. Semsarilar had in fact said. I entirely believed Mr. Semsarilar when he said that it was far too soon to make any such commitment and that he would not have done so: he needed to know more about the facts and would have wanted to consult his solicitors first.
63. Accordingly I reject the estoppel defence.

Conclusion

64. For all the above reasons, therefore, I conclude that the Claim should succeed in relation to the First and Second Defendants. I will hear argument as to costs and the appropriate form of order at a further hearing (if that matters cannot be agreed), though I would be happy, with the consent of all parties, to deal with the outstanding points on the basis of written submissions only.

Note 1    Rather strangely, the amount purchased by the Second Defendant in order to supply Plasfab did not exactly match what was invoiced to Plasfab. The reason for these disparities was not explored in the cross-examination of the First Defendant.     [Back]

Note 2    It is not possible to determine the exact date of this email (like a lot of the documents recovered from the Defendants’ laptop) because the process of recovery had the effect of changing the sent date. It can nevertheless be dated to some time in early August, because it refers to a holiday being taken in the next week by the First Defendant, which in fact started on 16 August, 3 days before the Second Defendant was incorporated. At the time the email was sent, the First Defendant evidently did not know what name the Second Defendant would be given, and asked Noel not to name a supplier on his order.    [Back]

Note 3    An issue I do not have to decide.    [Back]

Note 4    Actually, as became clear in cross-examination, he was doing a lot of this work in the Claimant’s time, which was another breach of his duty of good faith.    [Back]