Category Archives: Confidentiality

Disclosing business secrets to share purchasers

lea and perrinsSweet, sour, salty and savoury. Balancing these basic flavours can result in delicious food. A combination of the flavours can be found in natural foods such as tomatoes (well, if you add some salt, as many people do with tomatoes) and Parmesan cheese, and in manufactured products such as Lea & Perrins’ Worcester Sauce.

Balancing the flavours of a High Court judgment can produce similar effects in the mind, if not in the taste buds. The recent case of Richmond Pharmacology Limited v Chester Overseas Limited and others [2014] EWHC 2692 (Ch) illustrates the point.

The case concerned confidential information relating to the business of the claimant, a Clinical Research Organisation (CRO) that specialises in conducting Phase I clinical trials. The defendants included the Levine brothers, who were investors and who controlled a minority shareholding in the claimant company. The Levine brothers were also non-executive directors of the claimant. The first defendant, an offshore company, was that minority shareholder. The main questions before the court were:

(a) were the defendants in breach of confidentiality obligations to the claimant, when they disclosed information about the claimant to potential purchasers of their shares; and

(b) if they were in breach, did the breach cause the claimant any loss?

The background to the case can be summarised as follows:

  1. In 2002, the first defendant subscribed for a 44% shareholding in the claimant. The remaining 56% was owned by the three founders, who ran the company. The parties signed a shareholders agreement. The Levine brothers joined the Board of Directors.
  2. In 2008, the Levines fell out with the founders over a business issue, not related to the present dispute.
  3. In 2009, the Levines appointed a company, known as NWCF, to act as a broker/adviser to sell their shares.
  4. Initially, they tried to sell their shares to the founders, ie by means of a management buyout (MBO). When that proved to be unsuccessful, they asked NWCF to contact unrelated third parties who might want to purchase their shares.
  5. NWCF disclosed non-public information about the claimant (obtained from the Levines) to prospective purchasers under the terms of written confidentiality obligations.

The shareholders’ agreement included conventional confidentiality obligations on the first defendant to prohibit it from disclosing information about the claimant to others. The judge concluded that the Levine brothers owed similar obligations of confidentiality to the company.

The shareholders agreement also included conventional terms that allowed a shareholder to sell their shares to a third party, subject to certain pre-emption rights in favour of the other shareholders.

doctor

Brian Doctor QC of Fountain Court Chambers (note fountain in background)

In court, the defendants’ counsel Brian Doctor QC presented a persuasive commercial argument for why the defendants were not in breach of confidence. In order to sell one’s shares to a third party, it would be necessary to disclose information to them about the company. Therefore the confidentiality obligation should be interpreted as an obligation to disclose information only to trustworthy potential purchasers who had entered into appropriate confidentiality obligations. If there was no right to disclose this information, the right to sell the shares to third parties would be “entirely illusory”.

The judge did not accept this argument. The terms of the confidentiality obligations were clear and did not allow disclosure to a potential purchaser. He considered that any purchaser would want to hold discussions with the founders before investing, and therefore the shareholders would need to agree a sales process. If they couldn’t agree on a sales process, the deadlock provisions of the shareholders’ agreement could be invoked. Therefore it was not necessary to depart from the ordinary meaning of the words used in the confidentiality agreement, and to interpret it in the way that Mr Doctor proposed. The judge’s interpretation of the confidentiality obligations was consistent with commercial commonsense.

This sour conclusion (from the defendants’ perspective) was then balanced by the judge’s sweet view on the amount of loss that the claimant had suffered.

The judge considered that there were two ways in which loss might have been suffered:

(a) if the disclosed information cast doubt about the financial stability of the claimant, or the commitment of the founders to the business, or its ability to operate from its key hospital sites, this might have deterred potential customers from placing contracts with the claimant; and

(b) if the disclosed information concerned the claimant’s customers, pricing or terms of business, which might have been used by competitors to win business from the claimant.

The claimants did not produce convincing evidence of either of these alternatives, and therefore, in the judge’s view, the claimant had not suffered any loss. The Levines were conscious of the risk that marketing the shares might damage the claimant’s business and “took considerable care to avoid any such damage occurring”.

one poundFinally, the written judgment records the judge’s provisional view, subject to hearing submissions from counsel, that the proper order to make was to award nominal damages of £1 against the first defendant, and to dismiss the claims against the Levines.

Some salt and spice are added to the judgment by the judge’s comments on the reliability of the witnesses’ evidence (he seems to have preferred the Levines over the founders).

Comments

Several points interest IP Draughts in this judgment:

  1. The judge was not prepared to stretch the interpretation of the confidentiality obligation in the way that the defendants’ counsel proposed. Stick to the natural meaning of the words used. If it doesn’t say that you can disclose the information to prospective purchasers of your shares, you are not permitted to do this.
  2. And yet, at a commercial level, Brian Doctor QC was right: if you can’t disclose information to a prospective purchaser, how can you sell your shares? IP Draughts is not entirely convinced by the commerciality of the argument that the shareholders are supposed to agree a sales process and, if they can’t, the deadlock provisions of the shareholders’ agreement can be invoked. This seems like after-the-event rationalisation.
  3. It is sometimes tempting to treat the question of breach of contract as the primary issue, with the question of the amount of damages as something to be calculated at a later point. This judgment reminds us that the two issues run in parallel and, except for the question of legal costs (which are usually borne by the loser), neither is more important than the other.

IP Draughts has previously commented on this blog about the practice of business people when negotiating corporate transactions. Due diligence packs are typically prepared, which enable the purchaser to view and assess the company’s assets. Those assets may include contracts (eg a licence agreement or a clinical trial agreement between the target company and a hospital or CRO), and the contracts may include strict confidentiality obligations that prohibit their disclosure to third parties. There is not usually an exception for disclosure to potential purchasers of the business. In IP Draughts’ experience, parties sometimes include contracts of this kind in due diligence packs, despite the confidentiality restrictions set out in the contracts. In practical terms, this may be necessary for the corporate transaction to happen, and the disclosure may not cause the other contracting party any loss, particularly if the the selling party is careful about its process. Nevertheless, it has long seemed to IP Draughts that there is a strong element of “skating on thin ice” about such arrangements.

jourdanThe other issue that this case raises in IP Draughts’ mind is also one that he has raised before on this blog. It is the practice of the courts, when allocating cases to judges, to ask deputy judges to hear cases that involve the interpretation of contracts. The judge in this case was a practising barrister, Stephen Jourdan QC, sitting as a Deputy High Court judge. In IP Draughts’ view he did a competent job, even though IP Draughts doesn’t entirely agree with his reasoning.

Other examples in recent years that IP Draughts recalls, where a significant case on contractual interpretation was decided by a deputy judge at first instance, include the case of Rhodia vHuntsman (Julian Flaux QC, later a High Court judge; meaning of reasonable endeavours) and Oxonica v Neuftec (Peter Prescott QC; upheld on appeal; interpretation of a definition of Licensed Product in a licence agreement).

Why do the courts sometimes give important questions of contractual interpretation to deputy judges and not to proper (ie full-time) judges? Is it because:

  1. Most judges have little professional experience of drafting and negotiating commercial contracts, and therefore there is no real advantage in giving such a case to a full-time judge. This is unlikely to be an acknowledged reason (!)
  2. Such cases are not considered particularly significant by the judge in charge of the list, as they are considered to raise few questions of public importance. Contracts are mostly private matters for the parties. Therefore they can be delegated to a deputy judge. In IP Draughts’ view, the present case has some public importance in the context of parties’ obligations in mergers and acquisitions, which are a significant part of the commercial life of the country.
  3. Such cases are easy to manage and decide, and therefore suitable for deputy judges. Sometimes the deputy judge is being assessed for his or her suitability for promotion to a full-time role (as happened in the case of Julian Flaux and could well happen to Stephen Jourdan) and cases of this kind are good tests of judicial calibre.

In the interests of transparency, it would be good if a listing judge (past or present) would comment on this issue.

 

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New legal superhero (or supervillain) is born: the Motivated Intruder

The man on the Clapham omnibus should not be confused with Hector the Tax Inspector

The man on the Clapham omnibus should not be confused with Hector the Tax Inspector

English law is full of fantastical creatures.  Pride of place goes to the Reasonable Man who is, by all accounts, an ordinary and prudent person, who is bowler-hatted and most commonly found on the Clapham omnibus.

He gets everywhere (he has cousins on the Bondi tram and the Shau Kei Wan tram).  He is free from over-apprehension and from over-confidence.  He provides a neutral standard that assists the bemused lawyer to assess whether or not any particular act is negligent.

Contract lawyers know the Officious Bystander well.  He occasionally interrupts proceedings to suggest terms for inclusion in contracts which are so obvious that they can be implied and do not need to be stated.

The Man on the Bondi Tram retired in 1960.  Mr Pettifog remembers him well.

The Man on the Bondi Tram retired in 1960.

There is the Informed User who is something more than a consumer, knowing a fair bit about the existing design corpus but who is most definitely not an expert in the field.  He helps us to establish the boundaries of individual character in registered designs.  Or there is his close friend from the world of patents, the Person Skilled In The Art (aka the Nerd With No Imagination).  He is widely read in his field but has no imagination.  If he wouldn’t have thought of it, an invention satisfies the requirement of novelty necessary for the grant of a patent.

Less impressive is the Moron In A Hurry.  If two items are so different that they would not confuse even the Moron In A Hurry then there is no confusion and no passing off or trade mark infringement.

IP Draughts confesses that he had not heard of the Man on the Shau Kei Wan Tram

IP Draughts confesses that he had not heard of the Shau Kei Wan Tram

There is now another character to add to the fold: the Motivated Intruder.

The Information Commissioner’s Office highlighted his existence in November 2012, although some sightings date back to 2008.  He (or quite possibly she) has been quietly permeating the vexed topic of effective anonymisation.  This is more interesting than it sounds and currently matters a great deal to academic researchers although I predict it will soon matter just as much to insurance companies.

Old Etonian classics scholar, and Mayor of London, emonstrates the correct use of an omnibus

Old Etonian classics scholar, and Mayor of London, demonstrates the correct use of the masculine dative plural of “omnis”

Under UK law, information about a living and identifiable person can only be processed in accordance with the terms of the Data Protection Act.  To generalise, if you don’t have the individual’s consent (informed and freely given), you can’t use their data.  This is an issue for researchers keen to use the huge repository of data collected by the National Health Service (NHS).  The NHS holds a treasure trove of useful information but it was collected for clinical care purposes, not for research.  Obtaining individual consent permitting personal data to be used for research purposes just isn’t practical.  Cue much gnashing of academic teeth at the wasted opportunity.  But there is hope.  If the data is anonymous, it does not qualify as personal data and the restrictions of the Data Protection Act fall away.

Consent is not necessary in order to perform the act of anonymising personal data.  However, the question that now looms is just how anonymous information has to be to ensure that it is no longer classed as personal data.  The Data Protection Act is concerned with the likelihood of re-identification rather than with the possibility.  It boils down to needing to know whether any given method of anonymisation renders the information so secure that it is not reasonably likely that individuals, even individuals with rare medical conditions living in sparsely populated regions, will be re-identified.

20140318 Ta-DahHow can the researcher be confident that the data has been effectively anonymised and therefore is not personal data?  Enter the Motivated Intruder.

This character has no prior knowledge but wants to identify an individual from an anonymised dataset.  The Motivated Intruder is competent, has access to resources such as the internet and public documents, and, will take all reasonable steps to try to re-identify an individual from the anonymised dataset.  But the Motivated Intruder does not have specialist skills and will not break the law.  He sits somewhere between the inexpert member of the public and the skilled specialist.  If the statistical method used would defeat the Motivated Intruder then the data can be treated as anonymous and used with confidence by the researcher.

Unfortunately, the Motivated Intruder is still a youngster.  There are few examples of his work.  In some cases, it has been enough to defeat the Motivated Intruder to redact certain aspects of the dataset such as the dates and locations of medical incidents.  In others the likelihood of identification was low enough that statistical information relating to same sex adoption and (in a separate case) to school entrance exams was effectively anonymised and could be released.  In another case, the raw data from a clinical trial could not be effectively anonymised and therefore should not be released.  There are questions that remain to be answered: just how hard will the Motivated Intruder try?  What sort of information does the Motivated Intruder care most about?  How much embarrassment or anxiety can the individual who is identified be expected to tolerate?

An earlier sighting

As with the Loch Ness Monster, we need a clearer picture…

As time goes on and the Motivated Intruder is cited (sighted… geddit? Unfortunately, yes. Ed) more often so we will have a clearer picture and so researchers can proceed with greater confidence.

In fact, the Motivated Intruder has the potential to play a starring role in an information debate coming to your screens in the very near future.  The care.data project has been put on ice because of growing public concern that anonymised health data could find its way into the hands of unscrupulous insurance companies who would promptly and easily re-identify it and use it to push our premiums up.  Time to call for the Motivated Intruder to restore public confidence?  Or is it too late for that?  The Motivated Intruder focuses on the likelihood of re-identification.  Public opinion might well be focussed on the possibility of re-identification.

PS IP Draughts is curious to know if there are any other fictional legal characters, not mentioned above, in readers’ jurisdictions.  He wonders whether the woman on the Edinburgh tram could be a candidate. Please let us know via this blog’s comments.

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Research results: more moonbeams in a jar?

braveI embarked on this post with trepidation.  It’s always worrying when you start out thinking that you have a problem and that you disagree with IP Draughts.  The problem involves know-how: how should you deal with it, when it is part of the output of a research project?

Many research projects produce identifiable and protectable IP. There may be negotiations over who should own that IP, and the law gives us a set of rules that explain who is the first owner if different terms are not agreed.

But research projects also produce interesting things that are not obviously classified as identifiable and protectable IP – the ill-defined stuff that is sometimes called ‘know-how’.  Partners in the research want (demand, in some cases) rights to continue to use the know-how or to stop other people from using it.   Research funders want to own it as an output of the research.   IP Draughts says it is not something that can be assigned. [Don't take any notice of his maunderings.  Ed.]

Two examples of know-how occupy my world:

Results – actual hard data.  As explained elsewhere, there is no property in information itself.  If it is to be protected, it needs to be covered by confidentiality or fixed as an acknowledged piece of IP.  It could be recorded as a copyright work or entered into a database.  But that approach doesn’t really deal with the whole problem.  The copyright owner can prevent the copyright work from being copied without permission but the data probably also exists outside of the copyright work (eg the difference between a publication and the data it is based on).  As for databases, it is the database, and the investment in creating the database, that is protected by database right and not the data itself.  Database right gives the owner of the database the right to control the use of the database rather than the content of the database.  Neither protects the data itself.  Conclusion: confidentiality is the best bet to protect the data.

Methods – specifically, refinements to established surgical methods that arise in the course of clinical trials.  Again, there is no property in the information itself.  Patenting is unlikely to be the answer (cost, difficulty in demonstrating novelty, exclusion of certain methods from patent protection).  Copyright offers some hope but the same arguments apply.  Conclusion (again): if the method is to be protected at all, confidentiality is the best bet.

Daguerrotype stereotype

Daguerrotype stereotype

The researcher will want to be able to continue to use the know-how.  The funder, stereotypically, will want to protect, restrict and commercialise.  And so we turn to the law to find out who owns the know-how and who can control it and, potentially, how to transfer it.

We know that know-how is practical information that is secret, substantial and identified (EU Tech Transfer Reg (772/2004)) and we know that know-how is not property and cannot be assigned (IP Draughts commentaries).

English law protects trade secrets but will not protect know-how of itself (Faccenda Chicken).  Know-how is treated as a lesser being than a trade secret and needs to shelter behind confidentiality.  The EU is currently considering a draft Directive introducing specific protections for trade secrets (EU draft Dir 2013/0402) that would impose penalties for the unlawful acquisition, disclosure or use of trade secrets.  A trade secret is defined as information that is secret, has commercial value because it is secret and has been the subject of reasonable steps to keep it secret.  On that definition, know-how might amount to a trade secret in some cases.  But again we see that confidentiality is key.  We also see a requirement for that confidentiality to protect a commercial value.

small printSo, it looks like the answer to my problem is that no one really owns know-how, although you can expect to control it if you have the benefit of a confidentiality obligation that covers it.  There might be property in related IP rights but my sense is that these IP rights will often not catch the guts of the know-how – the data or the method.  Phew, I agree with IP Draughts.

And the lessons for our researcher?  Read the definitions in the research agreement and read them carefully.  Then see where and how those definitions are used.  If know-how is referred to in the definition of Confidential Information and the funder controls the Confidential Information, the researcher’s right to use their general know-how may be restricted.  If the definition of Intellectual Property includes data or methods, we may have ‘category confusion’ particularly if that data and those methods are not protected by any recognised form of IP.

A good (?) example of this is the EU’s Horizon 20/20 programme, whose contract terms define Background as follows:

Background’ means any data, know-how or information — whatever its form or nature (tangible or intangible), including any rights such as intellectual property rights — that: (a) is held by the beneficiaries before they acceded to the Agreement, and (b) is needed to implement the action or exploit the results.

Faced with a definition like this, which mixes up know-how, information and IP rights, you need to look very carefully at where the defined term is used and how it affects you.

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Confidentiality obligations in the parallel universe of M&A

familiarFor many technology-based companies, confidentiality agreements (CDAs) are routine documents that present few surprises.  Some of IP Draughts’ clients sign dozens, or even hundreds, of the things each year.  Often, they are signed as a first step in business discussions that may or may not lead to the parties signing a commercial agreement, such as a services agreement, research collaboration agreement, or IP licence agreement. A few issues tend to be negotiated, including duration, and law and jurisdiction, but most of the CDAs that one encounters are mostly on the right lines.

The conventions that are followed in relation to confidentiality in general business discussions do not always seem to flow through into the world of corporate mergers and investment transactions.  As an IP lawyer, IP Draughts has been surprised by some of the differences that he has seen.  They have included:

  1. Disclosure of a company’s trading contracts to potential purchasers or investors, despite the presence of provisions in those contracts that forbid the disclosure of the contracts’ terms.  Sometimes this issue is mitigated by limiting the disclosure to access in a data room, without the right to copy the agreements, but this doesn’t affect the fundamental issue  that the documents are being disclosed in breach of a confidentiality obligation.  If the transaction is consummated, perhaps the issue goes away, but in other cases …
  2. brokerBrokers and other finance professionals who refuse to sign CDAs, arguing that they must be free to do business with multiple companies in the same market sector, and CDAs would prevent them from doing this. Instead, clients should trust them to behave honourably.  Of course, this doesn’t protect the client, and sometimes highly sensitive, technical information about a client’s products in development is disclosed to these organisations.
  3. Other finance professionals who are not willing to sign CDAs whose obligations last longer than a year or two.  This may be okay if only financial information is provided but, again, technology-based companies sometimes find themselves disclosing technical information that is valuable as a secret for much longer periods.  Sometimes, those professionals can be persuaded to agree to a longer period in respect of “trade secrets” but in IP Draughts’ experience this cannot be assumed.
  4. Finance professionals who insist (as do some major companies, particularly those headquartered in the US) that if information is disclosed orally, it will only be treated as confidential if it is confirmed in writing within a period such as 28 days.  Yet in practice most of the subsequent discussions are held in meetings and by phone, and no confirmatory record is prepared.  Admittedly this problem is not unique to the financial sector.

secretsLawyers who work with the financial sector on a regular basis will no doubt be very familiar with its practices, which seem remote from the business world.  IP Draughts wonders whether these practices (of which the terms of CDAs form a very small part) will change in light of the recent upheaval in the world of finance.

What are you seeing?

 

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