Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2010] CSOH 143
A527/10	OPINION OF LORD TURNBULL in the cause (FIRST) EFH TECHNOLOGIES LIMITED and (SECOND) XYREX LIMITED Pursuers; against (FIRST) RYTIUM TECHNOLOGY FZC TRADING AS TRB RYTIUM and (SECOND) T.R. BONNYMAN, SON & COMPANY LIMITED Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuers: Summers Q.C.; Morisons LLP

Defenders: Haywood, Solicitor Advocate; Biggart Baillie Solicitors

29 October 2010

[1] This action for interdict and damages called before me on the pursuers' motion for interim interdict against the first defenders. Prior to the calling of the motion a discharge and undertaking was entered into between the pursuers and the second defenders by which the pursuers agreed to release the second defenders from the present action. The second defenders were accordingly not represented.

Background

[2] The pursuers manufacture and sell a product called "Prawnfresh" and "Prawnfresh+" to fishermen in Scotland and elsewhere. The first defenders ("the defenders") distribute a product called NaturAD Shrimp Treat ("Shrimp Treat") to fishermen in Scotland and elsewhere. The pursuers seek interim interdict against the defenders from manufacturing, distributing or selling this product.

[3] The products which both parties supply address a problem which has been present for many years in the prawn industry. Once caught, prawns and other crustaceans are susceptible to a process called melanosis, which results in them becoming blackened and unsightly. Historically products containing a sulphite solution have been available to assist in inhibiting melanosis. In 1997 authority was granted on a provisional basis by a directive of the European Parliament and Council to use a compound known as 4-hexiresororcinol ("4-HR"), in France only, as a replacement for sulphite treatment to prevent melanosis in crustaceans. After evaluation, an opinion of the European Commission Scientific Committee on Food was issued concerning the use of 4-HR and following on a request from a Member State, directive 2006/52/EC, dated July 2006, authorised its use as a food additive with crustaceans at Community level.

[4] I was informed that the use of 4-HR, which has the appearance of a powder, was imperfect for this purpose as it is not soluble in water and its use frequently left an unsightly residue. The products now marketed by both the pursuers and the defenders contain solubilised 4-HR, which has been achieved by a process during which 4-HR is mixed whilst being heated with monopropylene glycol ("MPG"). The resulting solution is applied to prawns after being caught and is successful in preventing the development of melanosis without leaving a residue. The market for products such as these is potentially very large indeed and, so far as was disclosed in the hearing before me, no other product utilising solubilised 4-HR is available from any other source.

[5] It will be helpful to set out a history of the interested parties by way of introduction. Xyrex Limited was incorporated in 2002 with a Mr Patrick McTurk originally holding 98% of the shareholding. I was told by the pursuers' counsel that the company's annual return for 2003 showed that by August of that year both Mr McTurk and a Mr Ruary McGregor were shareholders. The defences for the defenders state that Mr McGregor was a shareholder from December 2005. By a point in 2004 Mr McGregor was an employee of the company, the defenders' position being that up until that point he had been retained as a consultant by the company. By October of 2006 the company was in financial difficulties and it was purchased by Xytium Technology Group Limited. As part of that arrangement Mr McGregor sold all of his shareholding to Xytium Technology Group Limited and Mr McTurk sold them some of his shareholding. At that same time a deed of assignation was entered into between Xyrex Limited and Mr McTurk on the one hand and Xytium Technology Group Limited on the other hand. That document asserted that the assignors were the beneficial owners of the intellectual property defined in the assignation and purported to assign all rights therein to the assignees. As part of this whole arrangement Mr McTurk and Mr McGregor became employees of Xytium Technology Group Limited as of October 2006. Whilst Mr McTurk was required to enter into a restrictive covenant, agreeing amongst other things to a non-trading restraint and to a world wide restraint against working in competition with the business of his employers, no such requirement was made of Mr McGregor. On 2 April 2008 Mr McGregor was dismissed from Xytium Technology Group Limited for gross misconduct. By May of 2008 Xytium Technology Group was in administration and it was purchased by a company known as BKF Thirty-eight Limited. A sale and purchase agreement was drawn up and entered into on 20 May by which BKF Limited acquired all of the sellers' assets, including their intellectual property and on 26 September 2008, by special resolution, BKF Thirty-eight Limited changed its name and became incorporated under the name of EFH Technologies Limited, the first pursuers in this case. In November of 2008 Mr McTurk parted company with the pursuers in circumstances which were not explored at the hearing before me. By late 2008 Mr McGregor had become the Managing Director and owner of the defenders and by early 2009 they were marketing Shrimp Treat.

Pursuers' Submissions
[6] The pursuers contend that Shrimp Treat is a copy of their product and rely on a report which they commissioned from Professor Duncan Thorburn Burns, of the School of Chemistry at Queen's University Belfast, in which a comparison of the two products is set out.

[7] The know how which permits 4-HR to be solubilised using MPG is said to be the intellectual property of the first pursuer and utilised by the second pursuer under licence. A patent application relating to the composition and method of preparation of the pursuers' product was filed in December of 2009. The pursuers contend that when it was first set up Xyrex Limited marketed a range of products which included an early version of Prawnfresh which contained neither 4-HR nor MPG. They vouched this by reference to a document headed "Manufacturing Procedure for Xyrex Prawn-Fresh", apparently dated May 2004, which bore to specify its composition and by reference to a document headed "Note of Meeting Between Food Standards Agency and Xyrex Ltd 18 January 2008". Both Mr McTurk and Mr McGregor are noted to have attended this meeting at which Mr McTurk provided a history of the marketing of the Prawnfresh product.

[8] The pursuers contended that in the expectation of European Union legislation permitting community wide use of 4-HR as a melanosis inhibitor Mr McTurk had undertaken the work which enabled him to identify how to solubilise 4-HR with MPG and that in the aftermath of the European Directive Prawnfresh was marketed by Xyrex Limited using a solution of 4-HR. They pointed to the terms of the deed of assignation dated 17 October of 2006 which purported to assign the company's intellectual property to Xytium Technology Group Limited and to the definition of intellectual property in that document which was:

"all intellectual property of the Assignors relating to the Products including, without prejudice to the forgoing generality, any and all unregistered and registered design rights; research and development projects; secret processes; formulae; copyright, publication right and database rights; inventions and discoveries (whether patentable or not), trade marks (whether registered or unregistered), logos and trade names; domain names; rights in confidential information (including, without limitation, know how and trade secrets)....."

[9] The products were defined in the schedule to the agreement and included Prawnfresh. The pursuers drew attention to some e-mails sent by Mr McGregor on 26 May 2006 and on 5 and 6 October 2006. The e-mail of 26 May was to a company called Tan International which I was told was to manufacture the solution for Xyrex Limited which in effect than became the product called Prawnfresh. In that e-mail Mr McGregor drew attention to the need to maintain the confidentiality of the intellectual property owned by Xyrex Limited and set out a number of points which were to govern the relationship between the two companies. The first was as follows:

"1. All of the formulations that Xyrex has supplied to Tan International remain the sole and exclusive property of Xyrex Limited."

The communication concluded with the words:

"I trust that the above is clear and acceptable to everyone and if so we will then complete a manufacturing and secrecy agreement to reflect the above."

[10] The e-mail communications of 5 and 6 October were sent by Mr McGregor as part of the arrangements for the take over of the company by Xytium Technology Group Limited. In these he drew attention to the need to include Prawnfresh as one of the products to be included in the agreement with Xytium Technology Group Limited and emphasised what needed to be included in the definition of intellectual property.

[11] In the alternative the pursuers submitted that it was clear that the Prawnfresh product utilising soluble 4-HR was not available until around 2006 and that the process which rendered it soluble had been developed by Xyrex Limited whilst Mr McGregor was an employee of the company. They contended that the process is a trade secret and that Mr McGregor is bound by an implied term of confidentiality not to disclose that secret or to make use of this information for his own benefit. In presenting these submissions Counsel for the pursuers relied upon dicta in the following cases; In re Keene [1922] 2 Ch. 475, Bryson v Whitehead 1 SIM & ST
[1], Brown & Ors. v Hay 1898 25R 1112, Liverpool Victoria Legal Friendly Society and Ors. v Houston 1900 3F 42, Boardman v Phipps [1967] 2 A.C. 46, Faccenda Chicken Ltd v Fowler [1987] 1 Ch. 117, Amber Size and Chemical Co. Ltd. v Menzel [1913] 2 Ch 239 and Malden Timber Ltd. v McLeish 1992 S.L.T. 727.

Defenders' Submissions
[12] The essential submission for the defenders was that contrary to the claim advanced by the pursuers, it was Mr McGregor who discovered the process through which 4-HR could be solubilised using MPG. The contention was that he did so long before he became an employee of Xyrex Limited and that the know how which he deployed to develop the process was based on information which was already in the public domain. Accordingly it was submitted that the pursuers had failed to identify any relevant intellectual property right in the process, that the combination of 4-HR with MPG is not a trade secret and that in the absence of any written contract of agreement between Mr McGregor and Xyrex Limited or Xytium Technology Group Limited no duty of confidentiality was owed by Mr McGregor.

[13] In developing these submissions counsel for the defenders relied upon an affidavit sworn by Mr McGregor on 1 October 2010 in which he set out his own employment history, the history of his involvement with Mr McTurk, the way in which he came to understand the benefits of 4-HR and the way in which he came to learn how to solubilise it with MPG. Counsel also relied upon documentation demonstrating that agreements were being entered into by Xyrex Limited and distributors in Ireland and Denmark in 2003 and 2004 which included arrangements for distribution of the product called Prawnfresh. The defences lodged on behalf of the defenders reflected the position set out in Mr McGregor's affidavit, namely that the formulation for Prawnfresh had been developed by him and that by the time he became an employee of Xyrex Limited Prawnfresh had already been developed and exploited commercially. Although it was not stated within the defences or the affidavit, I was informed by counsel for the defenders that Mr McGregor's position was that the only product ever manufactured and supplied by Xyrex Limited under the name Prawnfresh contained both 4-HR and MPG, despite the use of 4-HR not being permitted within the European Union for this purpose until 2006. His position was that Mr McTurk had lied in his presence about this at the meeting with the Food Standards Agency in 2008, that the 2004 Manufacturing Procedure for Prawnfresh relied upon by the pursuers was a misrepresentation and that the inclusion of 4-HR in the product prior to 2006 had been kept secret.

[14] Counsel for the defenders also submitted that the pursuers had been aware of the defenders' product since late in 2008 and until recently had taken no action against them. He submitted that there was no good reason for this lapse of time and that this factor alone demonstrated that the balance of convenience lay with the defenders. He also made submissions regarding the extent to which Shrimp Treat contributed to the defenders turnover, some seventy-five per cent I was told and suggested that it would be likely that the company would be unable to survive if I was to accede to the pursuers' motion. In support of his submissions counsel for the defenders referred to dicta within the following cases over and above those referred to by the pursuers; Vestergaard Frandsen A/S v Bestnet Europe Ltd. [2009] EWHC 657 (Ch) and William Grant and Sons Ltd. v William Cadenhead Ltd. 1985 S.C. 121.

Discussion
[15] Since this matter came before me as a motion seeking an interim order I have not of course had the benefit of hearing detailed evidence on the matters at issue between the parties. However each side supplemented and sought to support their submissions by reference to documentary productions of various sorts. The first question to resolve is what approach I should take to the arguments presented. I was not convinced that this was the sort of interim order which, if granted, would be likely to decide the dispute between the parties for good. The issue between the parties is not one which will in any event disappear in time. The defenders market a number of other products in addition to Shrimp Treat and if their claims as to the provenance of that product can be established then there will obviously be a strong incentive for them to do so. As I understand the position it might be possible for a proof to be heard in the case before the middle of next year. Nevertheless counsel for the defenders asked me to approach the matter on the basis that my decision might well determine the issue between the parties and I recognised of course the value to the defenders of their product. I also recognised the force of the observation quoted in Vestergaard Frandsen as to how breach of confidence actions can be used to harass competitors and ex-employees. In the end of the day it seemed to me that counsel for the defenders wanted me to take account of his submissions on factual matters in order to assess the question of whether or not the pursuers had established a prima facie case, or to assess the strength of any such case in order to then weigh that consideration in the balance of convenience test. Accordingly it seemed to me that I was being invited to follow the sort of approach set out in Lansing Linde Limited v Kerr [1991] 1 WLR 251 and to undertake at least a limited assessment of the merits of the respective positions being advanced.

[16] In the result then there are factual disputes between the parties which I must seek to make an assessment of at this stage. To that end contemporary documentary material may be of considerable value. The relevant questions of whether the pursuers own an intellectual property right in the process through which their product is produced and whether the defenders' owner and Managing Director owes a duty of confidentiality to the pursuers are each affected by the factual disputes between the parties.

[17] In his affidavit Mr McGregor explained that his background of working in the chemical industry was as a salesman, leading up to appointment as sales director. He explained that during these years he gained useful chemical knowledge in a variety of different companies through working with those who were qualified in chemistry. He explained that he became involved with Mr McTurk and that the pair decided to set up a company to market products for use in the fishing industry. In paragraph 17 he explained that through research conducted on the internet he became aware of the value of 4-HR and quickly realised that it would be soluble with an alcohol. He explained that he knew from previous experience that glycols were alcohols but that the ethylene glycols which he had previously worked with would not be suitable for use in food. This paragraph of his affidavit concludes with the following two sentences:

"I considered the propylene glycols and from the internet I was able to confirm that there was a food grade propylene glycol available and that was, in fact, already being used in the preparation of hundreds, if not thousands, of foodstuffs and beverages. I also discovered various reports confirming the use of MPG and 4-HR to form aqueous solutions."

Mr McGregor's affidavit continued by explaining that armed with this information he then set about the work of developing the prototype product in the kitchen of his home at Troon, using nothing more than ordinary kitchen equipment such as a blender, scales and measuring jugs.

[18] This description of events did not sit easily with the content of the report from Professor Burns. He pointed out that considerable research had been conducted on additives to produce improved formulations of 4-HR for use on a commercial scale in the prawn fishing industry. He conducted targeted internet research but was unable to find any public data which indicated how to produce a concentrated aqueous based solution resulting in homogeneous solutions of 4-HR. The research which he conducted resulted in him expressing the opinion that the means to produce concentrated solutions of 4-HR suitable for use with foods is not generally available and that knowledge of the effect of MPG on 4-HR is neither in the public domain nor available to the scientific community at large. Furthermore, his opinion was that to produce such a solution from first principles would require chemical knowledge, along with scale up and formulation skills, at least the equivalent of a good honours graduate degree level.

[19] Counsel for the defenders' submission was that the combination of 4-HR and MPG was not a secret and was in the public domain. He sought to advance this by reference to an article published in 1942 and a patent granted in the United States of America in 2003. It did not seem to me that either of these documents supported his submission in an obvious way. In any event counsel made it clear that he was not suggesting that these documents had been seen by Mr McGregor. What struck me as of interest was that despite lodging a significant volume of documentary productions none of the material referred to by Mr McGregor in the last sentence of paragraph 17 of his affidavit appeared to be available. When I raised directly the question of which reports Mr McGregor was referring to in this sentence counsel consulted with him and responded by informing me that this sentence was incorrect and that no such reports had been discovered. I was accordingly asked to ignore this sentence and no further explanation was offered.

[20] On the basis of the limited information before me I found it impossible to reconcile the explanation provided by Mr McGregor in his affidavit as to how he came by the knowledge that 4-HR could be solubilised with MPG with the information provided by Professor Burns. In this connection I took account of the fact that a particular claim was made in the affidavit which was directly in conflict with the Professor's research and opinion and was then withdrawn when attention was drawn to it. As counsel for the pursuer observed, this was not simply a matter of deleting that sentence but rather of seeing it as an untrue, or at least incorrect, claim made on oath for the purposes of the present hearing.

[21] My assessment of this matter was reinforced by an examination of certain of the other documents relied upon. In the defences lodged for the defenders it is averred that Mr McGregor became an employee of Xyrex Limited in November of 2004 by which time Prawnfresh had already been developed and exploited commercially. In his affidavit he states that he became an employee in April 2004. Accordingly this earlier date is the one to which I had regard. In an e-mail exchange in January of 2005 between Mr McGregor on behalf of Xyrex and an agent offering to source 4-HR, the following sentence was written by Mr McGregor:

"Our requirements for the 4 Hexylresorcinol are at the moment a little vague as we are in the development stage for our product, however the market has already been established and so we know what the potential volumes could be."

This struck me as being quite inconsistent with the notion that prior to Mr McGregor being an employee, in other words prior to April 2004, Prawnfresh containing solubilised 4-HR had been developed and exploited commercially. On the other hand there was information to support the pursuers' contention that Prawnfresh with 4-HR had not been marketed until around 2006. This was contained in the notes of the meeting at the Food Standards Agency. In any event it would have been contrary to the regulatory regime then in place to have marketed a product containing 4-HR prior to the European Directive of 2006. In the absence of any support I did not find the defenders' assertion that a deliberate deception had been perpetrated to be persuasive.

[22] The defenders' submissions as to whether the pursuers owned any intellectual property in the process concerned and the submission as to how Mr McGregor came to invent the process overlapped. However the documentary information leads to a consistent conclusion. The assignation of October 2006 was entered into between Xyrex Limited and Mr McTurk on the one hand and Xytium Technology Group Limited on the other. Documentation was available which demonstrated that Mr McGregor had been actively involved in the process leading up to the takeover by Xytium Technology Group Limited. By e-mail of 5 October 2006 he referred to a list of products which had been prepared for the purpose "of putting into the agreements". He himself attached a list of other products to be added to this list which included Prawnfresh. The following day he sent a further e-mail headed "Assignations and licences". In this e-mail he included the sentence:

"Please remember with the IP to include all formulations, distribution and supply agreements trading names, product names, websites, trademarks etc."

Furthermore, in the copy e-mail of 26 May 2006 Mr McGregor specifically drew attention to the need to maintain the confidentiality of the intellectual property owned by Xyrex Limited and asserted that that all of the formulations supplied remained the property of Xyrex Limited. I recognised, as counsel for the defenders urged me to do, that it can be dangerous to rely upon documentation which is incomplete and might be taken out of context. On this point though I noted that no competing explanations were offered by way of interpretation of the particular e-mails relied upon by the pursuers.

[23] On the agreed position between the parties Xyrex Limited was manufacturing and supplying Prawnfresh containing 4-HR solubilised with MPG by the date of the takeover by Xytium Technology Group Limited. It is clear that the deed of assignation was intended to convey whatever intellectual property rights the assignors had in the products which Xyrex Limited supplied. It is consistent with the understanding which the pursuers say they had that Mr McTurk was a party to this document whereas Mr McGregor was not. It is also consistent with the understanding which the pursuers say they had that Mr McTurk was required to enter into a restrictive covenant whereas Mr McGregor was not. There is no obvious sense to Mr McTurk being party to these documents unless he was the person who was responsible for the development of the company's products. By the same token it is difficult to understand why Mr McGregor contributed to the preparation of the take over documents in the ways set out if he considered himself to be the owner of any intellectual property in the process through which Prawnfresh was produced, or did not intend that any such intellectual property should be conveyed to the purchasing company.

[24] Accordingly, on the basis of the information set out above and for the reasons given, I was persuaded that the defenders' contention that Mr McGregor invented the process concerned was unlikely to be established. On the contrary, that same information led me to conclude that the pursuers had set out a good prima facie case to demonstrate that Patrick McTurk had been responsible for the work which led to the understanding of how to create a solubilised product and that this product was developed by Xyrex Limited at a time when Mr McGregor was an employee of that company. I am further satisfied that the pursuers have set out a good prima facie case to demonstrate that the defenders' product is a copy of the one developed and marketed by them. The report form Professor Burns provides sufficient to vouch this proposition. As he stated, the key to producing a concentrated solution of 4-HR is the knowledge of the effect of MPG in solubilising this compound. However in the absence of any other explanation the obvious conclusion would be that a former employee of the company whose product was created through solubilising 4-HR with MPG was using knowledge acquired at that company to produce his own product created through the same process. The question then is what is the effect of having reached these views on the factual differences between the parties.

[25] It appears to me to be correct, as counsel for the pursuers argued, to say that "know how" or a trade secret is capable of being viewed as property (In re Keene, Boardman v Phips). On the basis of the material referred to I was satisfied that the pursuers had established a prima facie case to demonstrate that the intellectual property in the knowledge as to how 4-HR is solubilised by mixing with MPG was originally owned by Xyrex Limited, was assigned by virtue of the October 2006 assignation and by subsequent events is now the property of the first pursuers.

[26] I also accepted that an employee was bound by an implied term of his contract of employment not to use or disclose, either during his employment or thereafter, information which was not merely confidential but which was properly to be described as a trade secret (Faccenda Chicken v Fowler). A secret process of manufacture would be an obvious example of a trade secret. Information private to an employer concerning his trade practices and processes which would be harmful if it fell into the hands of competitors would also be defined as a trade secret (Malden Timber v McLeish)

[27] As Professor Burns had noted in his report, the knowledge of the means to produce a solution of 4-HR to treat prawns and leave no residue is of considerable commercial advantage and value in view of the size of the prawn fishing industry worldwide. This, and the other information contained in his report to which I have already referred, is sufficient to vouch the proposition that the process through which the product Prawnfresh is produced should properly be described as a trade secret. The e-mail of 26 May 2006 confirms that this was Mr McGregor's understanding of matters.

[28] Since for these purposes I am proceeding on the basis that Mr McGregor was an employee of Xyrex Limited at the time when this process was developed and utilised I require to consider the extent to which he may owe a duty of confidentiality. Guidance as to how to approach this question is gained by determining whether the particular process is properly described as a trade secret and by considering what the employees understanding was. In addition to the case of Faccenda Chicken I have taken account of the approach described by Sir Thomas Bingham MR (as he then was) in Lancashire Fires Ltd v S.A. Lyons & Co Ltd [1996] FSR 629 at 668-669, and of the test set out in paragraph 632 of the judgement in Vestergaard Frandsen A/S.

[29] On the information available to me I have decided not to proceed upon the contention that Mr McGregor was responsible for devising the process. I have concluded that the pursuers have established a prima facie case to the effect that Mr McGregor was an employee of Xyrex Limited at the time when the process was devised. I am satisfied that the process has the features of a trade secret and that Mr McGregor was aware of this. In all of these circumstances the pursuers have persuaded me that they have set out a good prima facie case to vouch their contention that he remains bound by an implied term not to use or disclose the information which he came by in that context. As the second pursuers in this case, Xyrex Limited continue to manufacture and distribute the product known as Prawnfresh.

[30] Having been satisfied that the pursuers had established a prima facie case on each of the planks of their case I required to consider the question of where the balance of convenience lay. To an extent this is influenced by the exercise of assessment which I was invited to undertake. Information was also given to me to vouch the proposition that a considerable number of the pursuers' customers were being supplied with Shrimp Treat. The defenders' promotional literature demonstrates that they supply a range of products in addition to Shrimp Treat, although they assert that it represents the bulk of their turnover. Although it was correct to observe that the pursuers had been aware of the defenders' activities for a considerable amount of time I was given information which explained why they had not acted sooner. Part of this explanation concerned the amount of time which had been taken up obtaining scientific reports from different sources and seeking to be able to rely on the work of an expert of indisputable world standing (which Professor Burns appears to be). I was also asked by counsel for the pursuers to take account of the fact that Mr McGregor, who is a citizen of the United Kingdom, has chosen to incorporate his company in The Hamriyah Free Zone, Sharjah, in the United Arab Emirates. This, said counsel, would make it extremely difficult for the pursuers to enforce any award of damages in their favour which was eventually awarded and was a further factor which tilted the balance of convenience in their favour. Counsel for the defenders accepted the generality of the point made but offered no further explanation or submissions on it. Taking the totality of these considerations together I am satisfied that the balance of convenience favours the pursuers. Accordingly I am prepared to grant interim interdict as craved. I will reserve the question of expense to allow parties to initiate any further procedure which may be deemed necessary.