Scottish Court of Session Decisions

Champion Technologies v Raymond Smith Anor [2002] ScotCS 18 (22nd January, 2002)

OUTER HOUSE, COURT OF SESSION
	NOTE BY LORD EASSIE in the action by CHAMPION TECHNOLOGIES Pursuers; against (FIRST) RAYMOND SMITH and (SECOND) DUNLAW SUBSEA MARKERS LIMITED Defenders:   ________________

 

 

Pursuers: McBrearty; Paull & Williamsons

Second Defenders: Bartos; Murray Beith & Murray, W.S.

22 January 2002

1. On 20 December 2001 I began the hearing of a motion on behalf of the second defenders in this action for the recall of the four interim interdicts granted ex parte by the Hon. Lord Macfadyen on 17 December 2001. As subsequently explained, it was continued to the following day.
2. Put very shortly the first of those interim interdicts prohibited both defenders from copying or using confidential information, including in particular the pursuers' client contact list, obtained by the first defender - Mr Raymond Smith - in the course of his employment with the pursuers. The second and third interim interdicts also prohibited the copying of documents or records obtained by the first defender in the course of his employment, including the client contact list, on the respective bases of the pursuers' copyright and their database right in such documents. The fourth interdict, again put shortly, prohibited the defenders from entering into, or performing contracts with the individuals or companies named on the pursuers' contact list and from making any contact with such persons for the purposes of attempting to sell subsea markers to them during the period from the date of the interdict until 18 November 2002.
3. In light of what was said at the hearing of the motion for recall of the interim interdicts it appeared that much of the essential factual background was not in real dispute. The pursuers manufacture and supply subsea markers which are a specialist product used in the oil exploration and production industry to mark or signpost marine pipes and other underwater equipment so that divers who descend to carry out repairs, alterations or other operations to such pipelines or other equipment will be able to locate and identify the equipment or installations relevant to the diver's particular task. Subsea markers require to be made of materials which will not become obscured by the adhesion of marine life, such as barnacles.
4. I was told on 20 December 2001 by Mr Bartos, who appeared for the second defenders, that during the 1990s there were essentially three principal undertakings engaged in the manufacture and supply of materials for subsea signage namely the pursuers, Seamark Systems Limited, and Avon Technical Products Limited, the last of which produced coating materials known as "Avonclad" and "Avonmark" which, while suitable as subsea signs or notices, were also and principally, used for cladding underwater equipment. In the latter part of 1999, said Mr Bartos, Avon Technical Products Limited decided to stop manufacturing Avonclad. Two employees of that company, a Mr Williams and a Mr McNally, then resolved to form a new company - Dunlaw Engineering Limited - which is the parent company of the present second defenders and which obtained from Avon Technical Products Limited the right to manufacture the Avonclad material. I was further informed by counsel for the second defenders that in due course Dunlaw Engineering Limited were approached by the first defender - Mr Smith - with the proposition that Dunlaw Engineering Limited be involved in the particular market of the supply of subsea markers or signage. Since the supply of subsea markers or signage was not the principal business of Dunlaw Engineering Limited, agreement was in due course reached that the now second defenders be formed for the purpose of exploiting that business. The second defenders were thus incorporated on 15 August 2001 and I was told by counsel for the second defenders that its directors are Mr Williams and a Mr Ian McDougal. I was further informed that the first defender - Mr Smith - was not an employee of the second defenders but, according to the directors of the second defenders acted merely as its sales agent. The second defenders had been given by their parent company a client contact list which was derived in some significant measure from the original client contact list held by Avon Technical Products so far as relevant to the provision of coatings and subsea markings.
5. As I understand it there is no dispute that the first defender, Mr Smith, was employed by the pursuers until 19 May 2001 and while so employed, and although employed in the pursuers' purchasing division, he downloaded among other information a copy of the pursuers' client contact list onto a "zip" file on his own laptop computer, which file he subsequently transferred into the office computer system of the second defenders and from which hard copies were thereafter printed. The basis for the pursuers' suspicions that Smith had taken and used their client contact list is averred in Article 8 of the Condescendence annexed to the summons. The pursuers instituted proceedings under Section 1 of the Administration of Justice (Scotland) Act 1972 and the report of the Commissioners provided in the course of those petition proceedings are numbers 6/2 and 6/4 of process respectively. On the basis of what is reported as having been said by Mr Smith to the Commissioner, the pursuers aver, in Article 17 of the Condescendence, that the confidential information transferred by Smith into the zip file of his laptop and thence to the second defenders' computer includes other confidential information, such as the pursuers' pricing policy. The relevant terms of Smith's contract of employment with the pursuers are narrated in Article 9 of the Condescendence. The contract is produced as number 6/6 of process. The notion of confidential information is defined in Clause 15(a) of Appendix 6 to that contract.
6. In the course of the presentation of his motion on Thursday 20 December 2001 Mr Bartos indicated that it had not been the intention or policy of the directors of the second defenders that Mr Smith should use confidential information obtained from his previous employment with the pursuers for the purposes of advancing the commercial interests of the second defenders. Counsel stated that Smith had the only key to the office whence the second defenders operated and the directors themselves had no personal knowledge of what Smith had transferred into their computer. In light of that exposition of the second defenders' position there was an understandable view that an opportunity for discussion between parties might be useful. The hearing of the motion for recall of the interim interdicts was therefore, of consent, continued until the following day, Friday 21 December 2001.
7. No accommodation having been reached, at the resumed hearing of the motion on Friday 21 December 2001 counsel for the second defenders intimated that, overnight, the second defenders had severed their connection with Mr Smith. They had caused the locks on the door to their office to be changed. The directors were willing to give personal undertakings not to enter the office or to look at the material within the office computer or elsewhere. The directors were not however willing to deliver up any hard copies of the information taken by Mr Smith or to co-operate in any operation to ensure that the electronically stored information in question might be properly and effectively deleted from the second defenders' computer system.
8. Mr Bartos then went on to submit that since the directors of the second defenders had been unaware of the fact that Mr Smith had taken confidential information and since the directors of the second defenders were now personally prepared to undertake not to inspect the computer system or use its contents, the granting of any interdict was unjustified. Mr Bartos then proceeded to submit under reference to Meridian Global Funds Management Asia Limited v Securities Commission [1995] 2 BCLC 116 - also reported in [1995] 2 AC 500 - and Chapelcroft Limited v Inverdon Egg Producers Limited 1973 S.L.T. (Notes) 37, an argument relating to the extent to which knowledge on the part of an agent might be attributable to the principal. As best I could understand these submissions it appeared to be that prior to the bringing of the proceedings under Section 1 of the Administration of Justice (Scotland) Act 1972 the directors of the second defenders had been unaware that Smith was using confidential information purloined from his former employers. How that absence of earlier knowledge of the unlawful actings of Smith could relevantly affect the future use, with current knowledge, of that confidential information remained unexplained by Mr Bartos. Counsel for the second defenders next submitted that the terms of the interim interdicts granted were too broad and lacked precision. The essence of his objection was encapsulated in the rhetorical question as to what was meant by confidential information. A further submission was advanced respecting the interdict sought in the third conclusion of the summons, relating to database rights. Regulation 16 of the Copyright and Rights in Databases Regulations 1997 (S.I. 1997/3032) provided for infringement of a database right by extracting or re-utilising the contents of a database. However, said counsel for the second defenders, the contents in question were extracted from the pursuers' database by the first defender prior to the incorporation of the second defender. The scope of any right under the database regulations had therefore expired with the extraction by Mr Smith.
9. As respects the fourth interdict granted ad interim by Lord Macfadyen counsel for the second defenders advanced a perhaps more substantial ground of criticism, namely that as framed it prohibited the second defenders from approaching any client who might be on their own client contact list or be an obvious client in the market but who was coincidentally upon the client contact list of the pursuers, extracted from the pursuers' computer base by Mr Smith. By the simple inclusion of customers on their client contact list the pursuers could not claim a monopoly of those potential customers. Since the directors of the second defenders had decided personally not to view the contents of the files transferred to their computer by the first defender they would be at risk of unwittingly breaching an interdict by approaching clients otherwise known to them but fortuitously included in the pursuers' client contact list.
10. In opposing the motion for recall of the interdicts Mr McBrearty for the pursuers included in his opening remarks the observation that according to the interim report of the Commissioner, Mr Angus Stewart, Q.C., [6/2 of process] at page 8 the first defender clearly stated that he was employed by the second defenders; it was also, said Mr McBrearty, to be observed that the letter (6/7 of process) written by the first defender to Kvaerner Oil Field Products was on the second defenders' notepaper. It was further evident from what Mr Smith had said to the Commissioner that the pursuers' client contact list was not the only confidential information which he had transferred via his laptop zip file to the second defenders' computer. There were very strong grounds for believing that such information included information relating to the pursuers' pricing policy, it being of significance that the second defenders had been able to obtain the custom of one of the pursuers' established customers, namely, Aker Verdal A/S. The pursuers accordingly had a strong prima facie case of the abuse of confidential information.
11. As regards the terms of the fourth conclusion counsel for the pursuer stated that the pursuers had proposed a method which would enable the second defenders confidently to approach clients on their or the Dunlaw (Engineering) list without risk of infringement. In brief, the proposal was that a copy of each party's list of client contacts would be provided to the parties' solicitors who would compile a list of those firms or enterprises common to both and the prohibition on contact would apply only to those on the pursuers' list which were not common. Furthermore the prohibition on contact would apply for the limited period of six months. As respects those customers who were common, accounts of profit would be compiled, simply lest such be needed in the ultimate outcome of the dispute. As respects the Aker Verdal A/S contract the pursuers were willing, and wished it to be noted, that they consented to its being fully implemented by the second defenders.
12. Mr McBrearty went on to submit that an interdict in terms of the fourth conclusion was supported by the decision of the Court of Appeal in England in Roger Bullivant Limited and others v Ellis and others [1987] I.R.L.R. 491 in which, in relation to the contention that a former employee, having wrongfully taken confidential information in the shape of the employers' contact list might yet have made contact with persons mentioned on that list on the basis of other grounds and without use of it, Nourse L.J. said (para. 24) -

"While I recognise that it would have been possible for Mr Ellis [the defendant] to contact some, perhaps many, of the people concerned without using the card index, I am far from convinced that he would have been able to contact anywhere near all of those whom he did contact between February and April 1985. Having made deliberate and unlawful use of the plaintiff's property, he cannot complain if he finds that the eye of the law is unable to distinguish between those whom he could, had he chose, have contacted lawfully and those whom he could not."

In other words, said counsel, those who have obtained unlawfully the list of client contacts of another party cannot complain if there may be some potential clients on that list common to their own list or evidently available. In that case, recognising that the protection could not continue indefinitely but was restricted to the "spring board" effect, the court had limited the injunction to a period of one year. The interdict sought and granted by the Hon. Lord Macfadyen, before whom Bullivant had been placed, was similarly limited in time.

13. In regard to those factors respecting the balance of convenience, counsel for the pursuers also pointed to the fact that were the defenders permitted meantime to use the confidential information taken by Smith and currently in their possession to obtain business, assessment of damages suffered by the pursuers might be difficult. The pursuers were an established business with more than 30 years experience in this very specialised market and loss of business to them was not to be measured solely in terms of individual contacts but by reference to their general reputation. By contrast the second defenders had but recently started up, and according to the information advanced by their counsel had severed contact with Mr Smith, who was effectively running the business. The balance of convenience thus strongly favoured the pursuers.
14. In assessing these competing submissions I took the view that counsel for the pursuers was correct in saying that the pursuers had a relatively strong prima face case. It was plain that Mr Smith, although bound by obligations of confidentiality, had deliberately transferred confidential information via his laptop to the computer system owned by and under the control of the second defenders. Whatever the earlier state of knowledge of the directors of the second defenders, they were aware now that the information had been obtained unlawfully. Insofar as Mr Bartos suggested that the notion of confidential information was lacking in precision for the purposes of the grant of the first three conclusions of the summons I have to say that, so far as I am aware, and as counsel for the pursuers observed, court orders restraining the use or copying of "confidential information" are not uncommonly granted in such circumstances. Further, in the circumstances of the present case, in which the information derived from the pursuers' files has been transferred to the second defenders' files in apparently discrete format, it should not be difficult for the directors of the second defenders, having severed their contact with Smith, to identify the information within their computer which has its provenance with the pursuers. In regard to the third conclusion (database right) I was not persuaded by the limited argument which I heard on this point that the provisions of Regulation 16, read with the definitions in Regulation 12, were to the clear effect that the regulations were only infringed by an initial transfer from the original holder to the first extractor.
15. In light of those factors I considered that the pursuers were prima facie well entitled to interim interdicts in terms of the first three conclusions.
16. The fourth conclusion gave me more difficulty for the obvious reason that it would prevent the defenders from contacting customers who might be on the Dunlaw Engineering List or otherwise be obvious customers whom anyone engaged in this market would approach. I was however ultimately persuaded by Mr McBrearty that the reasoning of the Court of Appeal in Roger Bullivant Limited was apposite.
17. I have to say that I found the attitude adopted by the second defenders, through their counsel, to be somewhat difficult to understand. As I have already mentioned, it is effectively not in dispute that the second defenders hold, within their computer, in their office, confidential information unwarrantably taken by Smith from the first pursuers. The directors of the second defenders, as I understood it, disclaimed any intention on their part, as directors, to use that information. The directors are however unwilling, it appears, to take the obvious steps of returning that information to the pursuers and assisting in its removal from the second defenders' computer archives. The eighth conclusion of the action seeks such return and destruction. That obvious step would appear to me to be capable of resolving this unfortunate dispute, the pursuers having already minuted their agreement to the second defenders' proceeding with performance of their contract with Aker Verdal. I could only presume that the second defenders saw, and see, some benefit in their continuing possession of the information confidential to the pursuers but held within their computer and in that event it appeared to me that it was appropriate to continue to afford to the pursuers the protections of the first three interdicts.
18. As respects the fourth interdict it again appeared to me that return or destruction of the information transferred to the second defenders' computer by Smith would likewise resolve matters, it being again noted that the pursuers have consented to implement of the Aker Verdal contract. But not only do the second defenders decline to take that step, they also declined, despite all encouragement, to enter into the practical arrangement suggested by the pursuers. Since the second defenders were thus unwilling to return or destroy the confidential information and were not prepared to agree to any practical arrangement on the lines offered for the elimination of overlap between the respective client contact lists and since I regarded the reason in Roger Bullivant as apposite I came to the conclusion that the fourth interim interdict granted by Lord Macfadyen should also be maintained.