The Judicial Committee of the Privy Council Decisions

Norbrook Laboratories Ltd v. Bomac Laboratories Ltd (New Zealand ) [2006] UKPC 25 (4 May 2006)

Privy Council Appeal No 41 of 2005

Norbrook Laboratories Limited Appellant

v.

Bomac Laboratories Limited Respondent

FROM

THE COURT OF APPEAL OF

NEW ZEALAND

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL

Delivered the 4th May 2006

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Present at the hearing:-

Lord Bingham of Cornhill

Lord Hope of Craighead

Lord Carswell

Lord Mance

Sir Martin Nourse

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[Delivered by Lord Bingham of Cornhill]

1. The issue in this appeal is whether the Court of Appeal of New Zealand was wrong to conclude that the respondent had not breached its contractual undertaking to the appellant to "maintain in confidence and not use" confidential proprietary information communicated to it by the appellant.

The agreed facts

2. Most of the facts central to the dispute between the parties have helpfully been agreed between them.
3. The appellant, Norbrook Laboratories Limited, is a company registered in Northern Ireland. It develops, manufactures and sells veterinary pharmaceutical products. In the late 1970s it developed an antibiotic intramammary dry cow remedy which it marketed as Bovaclox DC. It later developed a longer acting variant of Bovaclox DC which it marketed as Bovaclox DC Xtra. The only significant difference between the formulations for these two products is that in Bovaclox DC Xtra, but not in Bovaclox DC, the cloxacillin ingredient is coated with a prescribed percentage of lecithin, a complex chemical compound. This prescribed percentage was, and remains, confidential, and the issue in this appeal relates to it. To avoid disclosure of this figure, the Board will refer to it as "x%".
4. The respondent, Bomac Laboratories Limited, is a New Zealand company that develops, manufactures, markets and distributes animal health and nutritional products for sale in New Zealand and other countries. From 1984 to June 2001 Norbrook sold various veterinary pharmaceutical products to Bomac, which Bomac sold in New Zealand. One of these products was Bovaclox DC, which Bomac marketed from 1986 onwards under its own trade name, Dryclox DC. To do this, Bomac required a licence from the regulatory authority in New Zealand, then the Animal Remedies Board ("the ARB"), whose functions were discharged from July 2001 by the Agricultural Compounds and Veterinary Medicines Group of the New Zealand Food Safety Authority ("the ACVM"). To enable Bomac to obtain such a licence Norbrook sent Bomac a dossier in 1984 containing extensive information, some of it confidential, about Bovaclox DC.
5. In April 1988 Norbrook and Bomac made a written Secrecy Agreement. By clause 3 of this agreement Bomac undertook that for a period of 15 years from the date of receipt it would "maintain in confidence and not use, except as contemplated herein, any information provided by NORBROOK or its agents". It was to take the same precautions to prevent the unauthorised disclosure of information as it took regarding its own information of similar importance. The agreement applied to confidential proprietary information communicated by Norbrook to Bomac, but did not apply to information available to the general public otherwise than through the default of Bomac and information which Bomac already knew. It is this contract which Bomac are said by Norbrook to have broken, and it is not suggested that either of these exclusions applies.
6. In 1992 Norbrook sent Bomac a dossier containing extensive information, some of it confidential, about Bovaclox DC Xtra. Bomac submitted this dossier to the ARB to obtain a licence to market this product, and was duly licensed to do so. It marketed the product under its own trade name of Dryclox DC Xtra, later shortened to Dryclox Xtra.
7. In June 2001 the collaborative relationship between Norbrook and Bomac came to an end. Norbrook wished to enter the New Zealand market directly in competition with Bomac, and attempts over the preceding year to find a mutually acceptable accommodation proved unsuccessful.
8. The dry cow season in New Zealand runs from about February to May in each year. Thus promotion of dry cow products begins in about December for the forthcoming season and orders for dry cow products (such as Dryclox) are generally received from January.
9. At some time after the middle of 2000 Bomac began to explore means by which it could continue to sell Dryclox DC and Dryclox Xtra in New Zealand if its collaborative arrangement with Norbrook were to end. It sought products chemically equivalent to Dryclox DC and Dryclox Xtra from another manufacturer, because it could sell chemically equivalent products under its existing licences and continue to use the same trade names. On 28 August 2001 and 10 September 2001 Bomac met ACVM and discussed the steps which Bomac would have to take to change the manufacturer and formulations of Dryclox DC and Dryclox Xtra under its existing licences in time to be able to sell these products in New Zealand during the 2002 dry cow season. The ACVM advised it to submit a "C 1" application for a change in formulation of an already licensed product and to draw the attention of the ACVM to any possible differences between the Norbrook product and any substitute, so that the ACVM could compare the formulations to see if they were the same or sufficiently similar to enable Bomac to rely upon the existing registrations.
10. By this time Bomac was already in touch with the Instituto Rosenbusch SA, an Argentinian company with which Bomac had an existing relationship. Dr Balestrini was the company's managing director. Dr Iribarren and Dr Bisesti worked for the company as scientists. Some years before, Rosenbusch had prepared a small quantity of products materially the same as Dryclox DC and similar to, but not the same as, Dryclox Xtra. The Rosenbusch products, named Masticlox Forte, contained no lecithin-coated cloxacillin.
11. In June 2001 Bomac (by its chief executive officer, a director, Mr Leech) told Rosenbusch that lecithin-coated cloxacillin was required for the manufacture of Dryclox Xtra. The existence of the lecithin coating of the cloxacillin in Dryclox Xtra was, as a result of Bomac's marketing undertaken with Norbook's consent, information in the public domain. But the percentage of the lecithin coating (called "x%" above) was not in the public domain and remained confidential. It was information communicated by Norbook to Bomac in the Dryclox Xtra dossier.
12. On a date before 11 September 2001 Mr Leech and Dr Iribarren had an important conversation on the telephone. No record of this conversation was made, but Dr Iribarren (whose evidence the trial judge preferred to that of Mr Leech where they differed) gave evidence of it when cross-examined at the trial. The somewhat garbled transcript records the following exchanges:

"Q Yesterday you said first recollection that you have of discussion with Leech about lecithin was during telephone conversation?

A That's right.

Q `During that telephone conversation Leech tells you, does he, that he wants you to make Masticlox vs. Forte with lecithin coated cloxacillin?

A What he requested, if we can produce the product cloxacillin coated, I told him it may be we have to phone our suppliers and look for their answers.

Q Did he tell you in that discussion that he had a vague recollection that he had seen something about the % being [x%]?

A No, he only request coated cloxacillin.

Q Do you say in that telephone conversation you told him that the % coating of cloxacillin would be [x%]?

A I told him that I believe it should be [x%] because our penicillin coating is [x%], but it has to request this information to the supplier.

Q All of that took place in course of one single telephone conversation?

A That's right.

Q Do you accept now that in fact you can get coatings of cloxacillin with lecithin at %s different to [x%]?

A No, I cannot accept, because people from chemo only coat with [x%].

Q But other manufacturers throughout world offer coatings at different %?

A Not to my knowledge, we have only 2 suppliers, one of them cannot supply and the one that can supply to us is with [x%], what other suppliers over the world do, I don't know."

He added in answer to a later question;

"I told him [x%] but I had to ask our supplier."

13. Dr Iribarren's reference to x% "gelled" or "clicked" with Mr Leech, as he testified in his evidence. He thought he had seen Bomac advertising material talking about that percentage of lecithin coating. Mr Leech believed at the time, as the parties agree, that the percentage of lecithin coating was in the public domain due to earlier advertising material, but he could not identify any such material and the Court of Appeal found there had been none.
14. On 12 September 2001 Mr Leech completed a spreadsheet which compared the Rosenbusch formulations with what he knew of the Norbrook formulations for Dryclox DC and Dryclox Xtra. The Norbrook formulation for Dryclox DC was not in any way confidential, and nothing turns on that part of the spreadsheet. The formulations for Dryclox Xtra were very similar, although not identical. Only one difference is material. The Norbrook formulation was shown as containing "lecithin x%". The Rosenbusch formulation was shown as containing lecithin, with no percentage. The spreadsheet recorded at the bottom: "Both products exactly the same except for the lecithin coat of the Xtra". Mr Leech faxed this spreadsheet to Rosenbusch on 12 September. On his own copy he wrote, against the Rosenbusch formulation: "Perfect but add lecithin coating".
15. Also on 12 September 2001 Mr Leech faxed a letter to Dr Balestrini in the absence of Dr Iribarren from Argentina. In this letter he wrote:

"Firstly, I had a very good meeting with the Ministry on Monday, but they insist that our product formulations are exactly the same as Norbrook, so I have sent by email the information that is available about the Norbrook formulations and compared them to the formulations you are presenting. You should note that both products are the same strength.

The difference between Dryclox DC and Dryclox Xtra is the amount of volume in the syringe. Therefore, the formulation you currently call Dryclox Xtra is perfect. We need to put 4.5 grams of that formulation in the syringe to produce Dryclox DC and 5.4 grams in the syringe for Dryclox Xtra. The only difference with the Dryclox Xtra formulation is the inclusion of x% Lecithin (coating of the Cloxacillin).

We are reorganizing the dossiers to reflect this accordingly and will send you detailed information and manufacturing files within a couple of days."

There had been no written reference to x% in correspondence before. No information had reached Mr Leech of the percentage of lecithin coating available from Rosenbusch's suppliers. Dr Bisesti replied to Mr Leech by fax on the same day, observing:

"It is very important to confirm that in the formulation of Dryclox DC I must use Cloxacillin Benzathine without lecithin and only in the Dryclox Xtra formulation I must use Cloxacillin benzathine with [x%] of lecithin."

The appellant's complaint of disclosure in breach of the secrecy agreement is based on the 12 September spreadsheet and Mr Leech's letter which followed it.

16. On 28 September 2001 Bomac submitted a change of formulation application (C 1) and a change of manufacturer application (C 2) to the ACVM. The change of formulation application related only to a change from aluminium monostearate to aluminium stearate, and the change of manufacturer to the substitution of Rosenbusch for Norbrook. The Dryclox Xtra formulation erroneously showed the lecithin ingredient in each case as x% of the total weight rather than of the lecithin coating of the cloxacillin ingredient. As the end of the year approached, Bomac and Rosenbusch made preparations to enable Bomac to supply customers with Dryclox DC and Dryclox Xtra manufactured by Rosenbusch during the 2002 dry cow season, if regulatory approval were given in time. On 17 December 2001 the ACVM granted approval to sell the Rosenbusch – manufactured Dryclox DC and Dryclox Xtra products under the existing licence numbers. Bomac was thus able to compete effectively with Norbrook during the 2002 season.

The litigation

17. Norbrook issued these proceedings in June 2002, pleading claims for breach of confidence, breach of fiduciary duty and breach of the Fair Trading Act 1986 as well as breach of contract. In response to its application for injunctive relief an expedited trial was ordered. This took place before Heath J over 14 sitting days ending on 28 November 2002. With admirable expedition he delivered a comprehensive judgment on 2 December 2002, covering not only Norbrook's contract claim but its other claims as well. Those other claims give rise to no issue in this appeal.
18. In rejecting Norbrook's complaint that Bomac had broken the secrecy agreement by disclosing the confidential x% figure to Rosenbusch, the trial judge made two important factual findings which the Court of Appeal (Keith, Tipping and McGrath JJ) was unable to accept. First, the judge's summary of what Dr Iribarren said to Mr Leech in their telephone conversation before 11 September 2001 (see para 12 above) went "further than what the witness actually said in his evidence" (para 29) and "overstated what could be inferred from Dr Iribarren's evidence" (para 30). Secondly, the judge treated Dr Bisesti's faxed letter of 12 September 2001 as if it preceded, and not (as was the case) followed, Mr Leech's faxed letter of the same date: see para 15 above. Thus, the Court of Appeal held, in para 34 of the judgment of the court delivered by McGrath J:

"34. The issue whether there has been a breach of confidence turns simply on whether the protected confidential information was misused. Because we have differed from the Judge on certain findings of fact it is necessary for us to decide this question afresh. We are, however, satisfied that the unauthorised use pointed to by Mr Chapman for Norbrook during the argument on appeal can in the circumstances only be a subconscious use rather than a deliberate one. The different findings of fact made in this judgment do not disturb the Judge's rejection of the allegation of deliberate misuse by Mr Leech. The crucial question is accordingly whether Bomac subconsciously misused of [sic] the confidential information."

19. The court then addressed that "crucial question". Having accepted the judge's dismissal of Mr Leech's suggestion that the x% lecithin coating had been disclosed to the public in Bomac's advertising material, the court continued:

"39. That leaves Dr Iribarren's evidence which justifies the finding that he told Mr Leech on a provisional basis and subject to checking that [an x%] coating was likely to be available from one supplier. It is also important that Dr Iribarren first mentioned the [x%] lecithin coating figure to Mr Leech, rather than the other way around. Before hearing back from Dr Iribarren on the outcome of his approach to the supplier of Rosenbusch, Mr Leech referred to the [x%] figure, without qualification, in his fax to Rosenbusch addressing the formulation he wanted it to supply, to provide what he hoped would be an identical product formulation to that of Norbrook.

40. It follows that Mr Leech's statement in the fax went further than the information Dr Iribarren had given him in their earlier conversation. The question is whether that additional feature should lead the Court to draw an inference that Mr Leech misused the confidential information. Whether this is so requires an examination of the context in which the fax was drafted and sent.

41. It is clear that Mr Leech had taken some comfort from the confidential information in his possession. He said that when Dr Iribarren mentioned the [x%] figure it 'gelled' with him. He was also unable to demonstrate that there was a possible source for that mental reaction, based on his subconscious memory, which was in the public domain. We are satisfied that there is no such source and that the information subconsciously retained in the mind of Mr Leech was originally derived from confidential information as to the quantity of the coating.

42. The question, however, is whether he made improper use of that information, either by employing it in the fax to Dr Bisesti, or by omitting to inquire further from independent sources as to the percentage figure. Several matters are relevant in determining this question. First, while Dr Iribarren's indication that [x%] might be the figure was far from definite, it is clear from his evidence that he thought that was the probable position, given that a [x%] coating was available for penicillin. Secondly, Mr Leech had decided to submit a speculative application designed to give Bomac the opportunity to compete selling its newly sourced product in the 2002 season. He hoped that the application would be successful but if it was not approved because of formulation differences Bomac still expected to obtain from the exercise valuable information to assist it to get an approval in time for the following season. Thirdly, it is also of some significance that, as at 12 September 2001, Mr Leech did not completely understand what the [x%] figure represented. A schedule attached to his letter to Rosenbusch indicated that he believed that the [x%] figure was the percentage of lecithin in Dryclox Xtra, when the correct position was that it was the percentage only of the cloxacillin ingredient which formed 28% of the formulated product. This misunderstanding was carried through to the application that Bomac submitted to the ACVM."

20. The court expressed its conclusions as follows:

"43. Having regard to these considerations we conclude that there was no misuse of confidential information in this case. While Mr Leech said he took comfort from remembering that the figure was [x%], it has not been shown that he did or omitted to do anything on the basis of his comfort. The shift from the possibility that the figure was [x%] to an apparently definite reference to [x%] has to be viewed bearing in mind that Mr Leech had already been told that Dr Iribarren believed that 'it should be [x%] because our penicillin coating is [x%]'. Based on that legitimately acquired information, Mr Leech was entitled to work on the basis that the figure would be [x%], albeit that was still provisional. An inference that information had been misused could be drawn only if he had conveyed that the precise figure would be [x%]. We accept that it is possible to read the fax in that way. In its context, however, it is more likely that Mr Leech's reference to [x%] was no more than a shorthand reference to the provisional figure of [x%] and based on no more than what Dr Iribarren had told Mr Leech. In the light of the conversation between Dr Iribarren and Mr Leech, it is unlikely that a mere reference to [x%] without more would have been meant in a more precise way. More specific language would have been required to convey to Rosenbusch that the figure was definitely [x%].

44. In reaching the conclusion that this inference is possible and to be preferred, we also have regard to the fact that the reference to the [x%] figure does not appear to have materially affected the course of Rosenbusch's work.

45. The fact that Mr Leech did not look for alternative percentages or request that Rosenbusch to do [sic] so is also understandable. Bomac had decided to submit a speculative application in the hope that it would be successful in time for the coming season. In those circumstances it is not surprising that Mr Leech simply accepted the percentage which could be supplied to Rosenbusch from its usual sources. Taking all these matters into account we conclude that Mr Leech's comfort with the [x%] figure had no impact on what he did and that the probable inference is that Mr Leech was simply referring to information already legitimately available to him in making reference to the [x%] figure in his facsimile of 12 September 2001.

46. In these circumstances it has not been shown by Norbrook that the gelling in Mr Leech's mind of the [x%] figure led to any misuse of confidential information. [x%] was the only quantity that Rosenbusch expected would be available at the time and that provided a legitimate basis for Mr Leech to mention it in the way he did on 12 September and to include it in the formulation submitted."

The argument

21. While supporting some of the court's reasoning in paras 39 and 41, Mr Briggs QC for Norbrook criticised its conclusion as untenable. The x% figure was confidential information within the terms of the secrecy agreement. Bomac was not at liberty to disclose it to Rosenbusch or use it to obtain a source of Dryclox Xtra alternative to Norbrook. Dr Iribarren's remarks to Mr Leech before 11 September, as recounted by him in evidence, speak for themselves: he was familiar with an x% lecithin coating on another product; he did not know of a lecithin coating other than x%; he did not think his supplier could supply a coating of other than x%; but he would enquire. At this stage Dr Iribarren might have been able to make an educated guess what percentage Norbrook used for the lecithin coating of the cloxacillin ingredient of Dryclox Xtra, but he did not know. Prompted by Dr Iribarren's reference to x%, however, Mr Leech recalled that this was the percentage which Norbrook used. So, first in the spreadsheet and then in his fax to Dr Balestrini of 12 September 2001, he told Rosenbusch exactly and unambiguously what the percentage was. Having thus instructed Rosenbusch to coat the cloxacillin ingredient of the new Dryclox Xtra product with x% of lecithin, Bomac was able to submit its C 1 application to the ACVM with no indication that the new formulation differed, or might differ, from the product already licensed in this respect. Tests of the Norbrook Dryclox Xtra product commissioned by Rosenbusch in Argentina had not, in the time available, found any trace of lecithin in the product at all. But Rosenbusch was able to manufacture the product to an identical formula, so far as concerned the lecithin coating, because Bomac had told it what the formula was.
22. To this argument Mr Dobson QC for Bomac advanced a number of replies. First, he submitted that there were concurrent findings of fact made by the courts below, which the Board should be unwilling to disturb. It is of course true that the Board, like other second-tier appellate courts, is ordinarily unwilling to disturb concurrent findings of fact made by the courts below. But in this case the important findings of fact are not concurrent since the Court of Appeal, finding that the judge had erred in his appreciation of evidence, undertook its own factual enquiry. Moreover, the findings which give rise to controversy are not findings of primary fact but the inferences to be drawn from those primary facts. Mr Briggs did not invite the Board to depart from any finding of primary fact made by the courts below; indeed, he relied on those findings.
23. It was submitted, secondly, that the reference to x% had come from Dr Iribarren and not Mr Leech. This was accepted by the judge, but not accepted by the Court of Appeal. It is plain from his evidence that Dr Iribarren mentioned x% before it was mentioned to him. But he did so in a tentative and provisional way, as a prelude to enquiry. It was Mr Leech who, drawing on his recollection of what Norbrook had told Bomac in confidence, and believing the information to be in the public domain, told Rosenbusch what x% in the Norbrook formulation was, in his spreadsheet and his letter of 12 September.
24. It was suggested, thirdly, that Mr Leech's reference to x% in the spreadsheet and letter was a reference back to what he had been told by Dr Iribarren. This was accepted by the Court of Appeal in para 43 of its judgment. But it is not easy to reconcile with the court's reasoning in paras 39-41 of its judgment, nor with Mr Leech's evidence of how his recollection was prompted by Dr Iribarren's reference, nor with the very explicit terms of the spreadsheet and letter.
25. Fourthly, reliance was placed on evidence given by Mr Leech that the inclusion of x% in the spreadsheet as part of the Norbrook formulation was a mistake; he had intended to show it as part of the Rosenbusch formulation. But the judge made no finding in Mr Leech's favour on this point. The suggestion cannot easily be reconciled with the terms of his letter. And even if the disclosure was inadvertent it was not the less a disclosure.
26. It was submitted, fifthly, that no disclosure was made because, both to Rosenbusch (in the spreadsheet) and to ACVM (in the C 1 application), Mr Leech erroneously described the x% of lecithin as applicable not to the coating of the cloxacillin ingredient but to the weight of the product. It is, however, clear that neither Rosenbusch nor ACVM was misled by Mr Leech's error. Both understood x% to apply to the lecithin coating of the cloxacillin ingredient. Mr Leech's error appears to have been the result of loose expression rather than misunderstanding, since he expressed the true position entirely accurately in his letter of 12 September and referred to lecithin as a coating of the cloxacillin both before and after that date.
27. Sixthly, it was argued, as the Court of Appeal held in para 42 of its judgment, that Mr Leech decided to submit a speculative application to the ACVM. This is understood to mean that he submitted an application not knowing whether the proposed Rosenbusch substitute would be accepted as chemically equivalent to Norbrook's product or not. In relation to the change from aluminium monostearate to aluminium stearate, this may be so. But it is not so of the x% lecithin coating of the cloxacillin ingredient since, once his recollection was jogged, Mr Leech did know what x% was and was thus able to inform Rosenbusch accordingly.
28. Lastly, it was argued that any disclosure by Mr Leech made no difference, since x% was the percentage known to Dr Iribarren for lecithin coating of cloxacillin ingredients, was the percentage on which he would have worked in any event and was perhaps the only percentage which his supplier could supply. It may be that all these points are correct, and if so they may be very relevant to issues of causation and damage. But they have not been fully explored, and they are irrelevant to the simple question now under consideration, whether in breach of the secrecy agreement Bomac disclosed the x% lecithin coating figure, admittedly confidential information, to Rosenbusch.

Conclusion

29. Despite the arguments to the contrary, the Board feels bound to conclude that it did. The Court of Appeal accepted that Mr Leech's letter of 12 September, with the spreadsheet, could be read to convey that the precise figure would be x%. That is what the documents expressly stated, and there is no alternative way of reading them. Norbrook has been at pains to disavow any challenge to Mr Leech's integrity and good faith, and it is not suggested that he deliberately disclosed what he knew to be confidential information. Since, as he agreed, he believed x% to be information in the public domain, he could scarcely have done so. The breach of contract which Norbrook set out to prove has, in the opinion of the Board, been very clearly established.

Onus of proof

30. This conclusion enables the Board to address very briefly a question on the onus of proof which was considered by the Court of Appeal and addressed at some length in the parties' written cases.
31. In argument before the Board Norbrook accepted that the burden of proving a breach of the secrecy agreement lay on it, as in any other case where a party seeks to establish a breach of contract. In such a case the legal burden of proof lies on the plaintiff and never shifts. But if the plaintiff adduces evidence from which, in the absence of any adequate explanation or answer, an inference of breach may properly be drawn, an evidential or provisional burden falls on the defendant, as explained by Lord Denning in Brown v Rolls Royce Ltd [1960] 1 WLR 210. Thus if A entrusts B in confidence with secret proprietary information not publicly available, and B is precluded by contract from using that information for its own purposes, and the relationship between them ends, and B puts on the market a product which could not ordinarily be made without using A's secret information, a claim by A for breach of contract is likely to succeed unless B shows that it obtained the information from another legitimate source, or as a result of independent research, or in some other manner not involving misuse of A's information. This is an approach to decision-making which depends not on abstruse legal doctrine but on the application of common sense. It is, however, an approach which has little bearing on a case such as the present in which discovery has been given and evidence heard at length on both sides. The question then is whether, in the light of all that evidence, the plaintiff has proved its case on the balance of probabilities, a question which for reasons already given the Board answers in this case in favour of Norbrook.

Disposal

32. The appeal will be allowed. The order of the High Court on Norbrook's breach of contract claim, and the order of the Court of Appeal, will be set aside. The case will be remitted to the High Court for determination of all issues consequent upon this decision. The Board invites written submissions from both parties on costs within 28 days from the delivery of judgment.