Property in information? Wrong question, m’Lud.

Readers with long memories will recall this blog’s discussion of a case in the English High Court last year, in which the judge decided that there was no “property” in information.  The information in question was emails stored on a computer.

High Court decision

Mr Adkins, when he was CEO of Fairstar

The case, Fairstar Heavy Transport NV v Adkins [2012] EWHC 2952 (TCC) had some unusual facts.  Mr Adkins had been employed as the CEO of Fairstar (a company involved in the shipping industry), but was not an employee.  His services were provided through a Jersey-based company controlled by him.  Emails sent to his company email account were automatically forwarded to his personal email account and the original emails were then deleted from the company’s system.

The agreement between Mr Adkin’s company and Fairstar was made under Dutch law and was subject to the exclusive jurisdiction of the Dutch courts.  A dispute between that company and Fairstar had been resolved by a settlement agreement made under Dutch law, but there was continuing litigation in the Dutch courts between Fairstar and Mr Adkins personally, in which it was alleged that he had mismanaged the company, and in which Fairstar sought to enforce some restrictive covenants.

The only question before the English court was whether Fairstar could have access to the emails on Mr Adkin’s personal computer.  Mr Adkins was refusing to provide access.

In the English High Court, the parties’ counsel were asked to formulate a specific question on which they sought a ruling from the court.  They came up with the following:

Does Fairstar have an enforceable proprietary claim to the content of the emails held by Mr Adkins… insofar as they were received or sent by Mr Adkins acting on behalf of Fairstar?

The judge in the High Court, Edwards-Stuart J, decided that the answer to this question was “no”.  He reviewed the case law on the nature of information and concluded that there was no property in pure information.

Appealing to the Court of Appeal

Fairstar sought leave to appeal the decision.  The judge refused, but the Court of Appeal decided to give leave to appeal.  The case came before the Court of Appeal in April this year (Mummery, Patten and Black LJJ), and their written decision was handed down last week.

It seems that Fairstar’s legal team had a rethink on the best way to present their case to the Court of Appeal.  Instead of focussing on the jurisprudential nature of information as property, they argued that Mr Adkins was acting as an agent of Fairstar, and that under the law of agency, when an agency appointment comes to an end, the principal is entitled to have access to documents held by the agent in his capacity as agent.

Mr Peter Susman QC, for Fairstar, asked the court to allow him to submit a revised skeleton argument that focussed on this area.  Mr Richard Spearman QC, for Mr Adkins, objected on the ground that this was a completely different point, which had not been argued in the High Court, and that it would be improper to allow the appeal to be argued on this new legal basis.

Mummery LJ, who gave the only judgment in the Court of Appeal (and with which Patten and Black LJJ agreed) allowed Mr Susman to submit his revised skeleton argument and to argue the point before the court.  In Mummery LJ’s view, it was part of the original case that Mr Adkins was an agent of Fairstar.  It was unfortunate that the parties had focussed so much on the proprietary nature of information in their question to the court (quoted above).  This had introduced an unnecessary complication and was a distraction from the core issue, which was the relationship between Fairstar and Mr Adkins.

Court of Appeal decision

Mummery LJ declined to enter into the controversy over whether information is property.  It was not necessary to do this in order to decide the case before him.  In particular he was very reluctant to make sweeping statements, such as that information could never be property.  There might be cases where the facts pointed in a different direction.  For instance, he observed that:

Some kinds of information, such as non-patentable know-how, are more akin to property in their specificity and exclusivity than, say, personal information about private life.

Before stating his conclusions on the agency point, Mummery LJ cleared the decks by saying what the case was not about.  In the English case:

• there was no claim for ownership of the computer on which the emails were stored, nor any claim to own any USB stick, electronic medium, sheets of papers or other physical thing or material
• there was no claim to ownership of confidential information in the emails, nor any claim of misuse of confidential information
• there was no claim to copyright or other IP in the content of the emails
• there was no allegation of breach of contract, fiduciary duty or any other wrongful conduct on Mr Adkin’s part, and he was willing to preserve the emails.

Thus, the only issue was whether Fairstar was entitled to access to the emails.  Fairstar described this claim as “proprietary” but, as mentioned earlier, this was an unfortunate distraction from the real basis of the claim which was in agency.

Mummery LJ accepted Fairstar’s submissions and allowed the appeal.  In summary, his main reasons were:

1. The relationship was one of agent and principal.
2. A principal is entitled to require production by the agent of documents relating to the affairs of the principal.  This right survices termination of the agency appointment.
3. Documents may include information held electronically (eg see CPR 31.4).
4. Documents held on a computer are subject to the rule summarised in point 2 above.
5. The question of whether information is property does not need to be decided in this case.

Comments on the decision in the Court of Appeal

In IP Draughts’ view, Mummery LJ was bending, if not breaking, the rules to do justice in the case.  Viewed from the outside, it looks like a completely new line of argument was raised in the Court of Appeal.  It is difficult to detect any sign of the agency point being part of the argument or decision in the High Court.  The principal line of authorities under discussion in the High Court was on the question of property in information.  The principal line of authorities under discussion in the Court of Appeal was from a different branch of commercial law – agency law.

Mummery LJ is a very experienced, wise, humane and pragmatic judge who is due to retire fairly soon.  His approach is the opposite of some Chancery judges whose judgments read more like academic treatises than practical decisions for busy people.  IP Draughts is left feeling that justice was probably done in this case, but at the same time he is uneasy: if judges disregard the rules on what can be argued on appeal, there may be costs to the justice system overall, and the outcome of cases becomes less predictable.

As for the question of whether information is property, we are no further forward.  As this blog has previously mentioned, the question is not just an academic one.  It has practical implications for the wording of IP contracts, including licences and assignments.  Mummery LJ rightly highlights that commercial know-how looks more like property than private information.

The girl who played with fire but didn’t betray a confidence

IP Draughts is a big fan of the Millennium Trilogy of books by the late Stieg Larsson, and of his brilliant but maladjusted heroine, Lisbeth Salander.  He is also a fan of the original series of films of the books, which used actors who looked like real people on the streets of Stockholm, rather than the gym-buffed, perma-tanned, wrinkle-free types that Hollywood seems to prefer.

All of this came to IP Draughts’ mind when he read the case report, published this week, of Lord Neuberger’s judgment in the UK Supreme Court case of Vestergaard Frandsen A/S (now called MVF 3 ApS) and others (Appellants) v Bestnet Europe Limited and others (Respondents) [2013] UKSC 31.

Trine Sig

The point on appeal concerned the confidentiality obligations of an ex-employee. Mrs Trine Sig had left the employment of Vestergaard and started a rival business with some former colleagues.  One of the co-founders of the rival business had misused Vestergaard’s trade secrets, but Mrs Sig wasn’t aware of this. Arnold J, at first instance, held that Mrs Sig was nevertheless liable for breach of confidence.  He pointed to the confidentiality obligations in her contract of employment and the fact that she was closely involved in setting up the rival company and in its commercial development activities.  This was enough, in his judgment, to make her liable.  In support of this view he cited Seager v Copydex [1967] 1 WLR 923, in which the court held that a person can be liable for breach of confidence even if he is not conscious that what he is doing amounts to misuse of the information.

The Court of Appeal, led by Jacob LJ, overturned this part of Arnold J’s decision.  The Supreme Court, led by Lord Neuberger, concluded that the Court of Appeal had been right, and Arnold J had been wrong.  Mrs Sig was not liable.

Vestergaard presented three main arguments in the Supreme Court, all of which Lord Neuberger rejected.

1. Contractual obligation

Lord Neuberger was not prepared to imply into Mrs Sig’s contract with Vestergaard a term that she would not assist another person to abuse V’s trade secrets in circumstances in which she did not know the trade secrets and was not aware they were being misused.  This would be to impose strict liability and would be almost penal in nature, and was wrong in principle.

2. Common design

This was the most strongly advanced ground on which Vestergaard relied. Their Lordships rejected it.  Lord Neuberger drew an analogy with the driver of a car who transports someone to a bank, and the passenger robs the bank.  The driver would be liable in tort for the robbery but only if she knew that her passenger intended to rob the bank.  As Mrs Sig did not have the trade secrets or know that they were being misused, she could not have a common design with those who did misuse the information.  Breach of confidence was not a tort of strict liability.

3. Playing with fire

Lord Neuberger understood Vestergaard’s third argument as effectively saying either that Mrs Sig ‘turned a blind eye’ to her co-founder’s misuse of the trade secrets, or that she must have appreciated that she was ‘playing with fire’ by involving that co-founder in the development of the rival product.  As for turning a blind eye, this argument could not succeed without a finding of dishonesty on Mrs Sig’s part, which was not the case here.

On the alternative part of the argument, that she was playing with fire, it might be argued that she took a risk in involving her co-founder, and finding that she took this risk might make it easier to find that she acted dishonestly.  But taking a risk on its own did not make her liable.  It does not automatically follow that if you play with fire you will be burnt.

Nordic walking

Vestergaard was originally a Danish company, and Mrs Sig and her co-founders have names that suggest a Nordic background.  Interesting as this case is on its legal merits, IP Draughts cannot help thinking of the Nordic connections in the phrases ‘turn a blind eye’ and ‘playing with fire’.

It was Admiral Lord Nelson who famously turned a blind eye to his superior’s order to withdraw his ships from battle, and instead decided to continue attacking the Danish fleet in the Battle of Copenhagen.

The second of the books in the Millennium Trilogy goes by the English name of The Girl Who Played With Fire (or, in the original Swedish, Flickan som lekte med elden).

IP Draughts wonders whether there could be a new board game for lawyers called Spot the Nordic Connections in English Court Cases.  Could this be the next crowdsourcing investment opportunity?

Damages are not an adequate remedy: go directly to injunction

There is a clause in many confidentiality agreements that sticks out like a sore thumb.  The clause worries clients, because they don’t understand it.  It looks so different from most of the clauses in the agreement.  Some lawyers gloss over it, recognising it as a standard piece of legal verbiage.  Other lawyers, particularly in the UK, are uneasy about it, and sometimes seek to water it down.  Yet the clause persists in thousands, if not millions, of confidentiality agreements across the globe.

Some typical manifestations of the clause follow.  The first is from a UK template found on the internet that appears to be based on a PLC document…

The Recipient acknowledges that damages alone would not be an adequate remedy for the breach of any of the provisions of this agreement. Accordingly, without prejudice to any other rights and remedies it may have, the Disclosing Party shall be entitled to the granting of equitable relief (including without limitation injunctive relief) concerning any threatened or actual breach of any of the provisions of this agreement.

…while this one is from a confidentiality agreement that was the subject of a reported case (discussed below) in the Delaware courts in 2012:

Money damages would not be [a] sufficient remedy for any breach …by either party.  The non-breaching party shall be entitled to equitable relief, including injunction and specific performance, as a remedy for any such breach.

What a relief!

In other words, if a party breaches the confidentiality obligations, the other party is entitled to an injunction.

When deciding whether to grant an injunction, the court considers various factors, including whether an injunction is necessary.  If the breach can be adequately compensated with a financial award, the court might decide that an injunction is not necessary. Clauses such as those above record the parties’ agreement that an injunction is an appropriate remedy.

IP Draughts doubts whether clauses of this kind have much value under English law.  The award of injunctions forms part of what is known as the law of equity.  Equitable remedies are generally at the discretion of the court.  Clauses of this kind smack of telling the court what it must do.  IP Draughts tends to dilute wording of this kind in negotiations, eg by saying “shall be entitled to seek equitable relief”.  This change takes some of the impertinent sting out of the clause and is usually accepted by the other party.

It seems, however, that some US courts take a different approach.  The 2012 case of Martin Marietta Materials Inc v. Vulcan Materials Company concerned the interpretation and enforcement of a confidentiality agreement that included the words quoted above.  In that case, the Supreme Court of the State of Delaware upheld a decision by Chancellor Strine. In the words of Chancellor Strine at first instance in this case:

In Delaware, parties can agree contractually on the existence of requisite elements of a compulsory remedy, such as the existence of irreparable harm in the event of a party’s breach, and, in keeping with the contractarian nature of Delaware corporate law this court has held that such a stipulation is typically sufficient to demonstrate irreparable harm.

Various case law is cited both by Chancellor Strine, and by Jacobs J in the Delaware Supreme Court, in support of this contention.

According to this law firm article, the approach of Delaware state law differs from that of US federal law on this point.  The authors discuss the federal case of Riverside Publishing Co. v. Mercer Publishing LLC, No. 11-1249 (W.D. Wash. Aug. 4, 2011):

Riverside pointed to the settlement agreement’s irreparable harm clause to argue that, absent injunctive relief, Mercer’s purported breach would cause irreparable harm. The court disagreed. It first recognized that circuit and district courts have declined to presume irreparable harm based on a contract clause. Pointing to the Supreme Court’s emphasis in Winter v. Natural Resources Defense Council that movants demonstrate actual harm, the court “querie[d] whether it can give any weight to such a clause.” “At best,” the court concluded, “the clause is evidence that at the time of the Settlement Agreement, the parties predicted that breaches of [certain terms of the Agreement] would be the sort that would cause irreparable harm.”Although “[t]hat prediction is perhaps entitled to some weight,” the court held that the clause did “not relieve Riverside of its obligation to demonstrate irreparable harm.”

IP Draughts suspects that the approach of the English courts would be similar to that of the US federal courts, but he is not aware of any case law on the point.

So, it seems there is some point to these clauses after all, in some US courts.  Often, the financial losss that results from breach of a confidentiality obligation is difficult to assess or prove, and the party that “owns” the confidential information may well view an injunction as the most useful remedy for breach.  There is, therefore, a good reason for including such a clause if it increases the likelihood of an injunction being granted.

Footnote: IP Draughts is not sure what legal principle is being referred to by Chancellor Strine in his use of the phrase the “contractarian nature of Delaware corporate law”.  IP Draughts is not familar with the word contractarian.  Some US lawyers with whom IP Draughts has discussed similar issues (eg see the recent debate on Adams on Contract Drafting here) seem to consider that agreeing to a remedy in a contract sets up some kind of estoppel.  From IP Draughts’ reading of the English laws of estoppel and waiver, it is not immediately obvious that any of these laws is directly applicable to this type of situation.  However, the law in this area is not clear or simple (and some of the leading English cases were decided the late Lord Denning who liked to stretch the law, and was not always followed by more conservative judges).

“No-one ever litigates the wording of an NDA”: wrong!

Some people regard the signing of confidentiality agreements (sometimes known as non-disclosure agreements, or NDAs) as symbolic – merely a gesture of good faith.  According to this view:

• What matters is that a document called an NDA is signed.
• The detailed wording of the NDA is not important.  For instance, it doesn’t matter that the NDA includes strict conditions on the confidentiality obligations, eg a requirement to confirm orally-disclosed information in writing within 30 days of the oral disclosure.  It certainly isn’t worth negotiating the wording, even though no-one is planning to keep detailed notes of the confidential discussions and send those notes to the other party as evidence of what has been disclosed.
• The court will ignore the wording of the agreement and give effect to the general business intention that the information should be treated confidentially.
• Anyway, who goes to court over the obligations in NDAs, and how often do those cases turn on the detailed wording of the NDA?

IP Draughts has long wondered where this world-view comes from, for it is one with which he profoundly disagrees.

Experience tells him that some courts, particularly the lower-level courts such as the English County Court, are not always as concerned with the applying the letter of contractual obligations as they should be, when deciding business disputes.  IP Draughts reconciles this in his mind with the thought that many judges in the lower courts have no real experience of drafting or advising on commercial contracts.

In the higher courts, where the sums at stake at large, one can expect a greater attention to the details of what the parties have actually agreed in their contracts.  Thus, in the Chancery Division of the High Court, where many business disputes are litigated, one might expect the judge to cast a forensic eye over the language of an NDA that the disputants have signed, before deciding on their confidentiality obligations.  But what of the view, summarised above, that in a business context NDAs are rarely litigated, and no-one ever litigates over the detailed wording of an NDA?

Can you keep a secret?

It is true that much of the case law involving confidentiality obligations arises in a non-business context.  Famous cases in this area in the English courts started in the 19th century with Prince Albert (the husband of Queen Victoria) seeking to protect his etchings; memorable cases in recent years include one in which the UK Government sought to prevent disclosure of Government secrets in an ex-spy’s memoirs – the Spycatcher case; and one in which Michael Douglas and Katherine Zeta-Jones protected photos of their wedding from publication in a celebrity gossip magazine.

There have been cases in the English courts concerned with the disclosure of business information, but many of the leading cases seem to have been concerned with obvious wrongdoing, eg the chicken salesman in the Faccenda case, who took his employer’s customer lists with him when he left his employment and set up on his own.  In such cases, the detailed wording of the NDA has not always been a matter of primary importance in the dispute.

It is with some relief, therefore, that IP Draughts can point to a recent case in the Court of Appeal in which the detailed wording of an NDA has been the central matter under discussion.  This enables IP Draughts to put on his best “I told you so” expression, and to pepper the conversation with German words that he pretends to understand like angst, schadenfreude and zugzwang.

The case is called Dorchester Project Management Limited v BNP Paribas Real Estate Advisory and Property Management UK Limited [2013] EWCA Civ 176.  It was decided on 7th March 2013 and it is reported here.

In reported decisions in which contracts are interpreted, the judge sometimes make disparaging comments about the drafting.  This can cause IP Draughts’ hackles to rise, particularly when the comment does not seem to be justified, or where IP Draughts doubts whether the judge’s drafting would have been any better.  See, for example, Arnold J’s comments, in the Codemasters case, that an indemnity clause was “not felicitously drafted”, discussed here.

In the present case, in the words of Arden LJ: “The judge noted that the [NDA] was badly drafted”.  IP Draughts is happy to see such a comment, as the NDA was mediocre, to say the least. It included the following wording (colouring added by IP Draughts):

4.1 BNPPRE will not circumvent DORCHESTER, by seeking to make contact in any way with any third parties introduced to each other in relation to the Opportunity, or their agents, except as where previously agreed for the purposes of collating information, due diligence material and matters essential for the purposes of progressing the Opportunity.

4.2 DORCHESTER and BNPPRE agree to keep – and to procure to be kept – secret, all Confidential Information which may come to each of their knowledge as a result of their relationship hereunder.

4.2.1 BNPPRE may disclose such Confidential Information as is necessary to any directors, employees or professional advisors of BNPPRE, and (subject to DORCHESTER’s prior written consent) any third party providing funding or ancillary services for that Party’s involvement in, or in relation to the development of, the Opportunity. BNPPRE will procure that those third parties are bound by similar obligations of non-disclosure and non-circumvention contained herein, and they shall be responsible for any unauthorised disclosure, whether by it or any third Party to whom disclosure is made.

One of the issues that the court had to decide was whether clause 4.2.1 made BNPPRE liable for “circumvention” by a third party to whom BNPPRE had disclosed information.  The judge at first instance had decided that BNPPRE was not liable.

In the Court of Appeal, counsel for Dorchester argued that, under clause 4.2.1, BNPPRE was bound to procure that the third party enter into a back-to-back agreement containing “similar obligations of non-disclosure and non-circumvention” to those imposed on BNPPRE by the NDA. “Similar obligations” are those which transmute the obligations which the deed imposes on BNPPRE into obligations of the receiving party under the back-to-back agreement. [On the wording, IP Draughts agrees with this submission.]  Counsel argued that the first-instance judge’s interpretation was defective because it failed to give full effect to this obligation.

Counsel for BNPPRE naturally favoured the first-instance judge’s interpretation. In his submission, clause 4.2 imposed the obligation of confidence and then clause 4.2.1 provided a safe harbour from that prohibition. On that basis, he submitted it was no great step to read the rest of clause 4.2.1 as limited to protecting Dorchester from the risk of the non-disclosure of confidential information provided by BNPPRE to the third party, or at least restricting liability to Dorchester to loss caused by non-disclosure of that information.  He submitted that the only provision curbing circumvention was clause 4.1, and that the responsibility provision was limited to liability for unauthorised disclosure of information supplied by BNPPRE to the third party. Therefore there is no sanction for failure to obtain a non-circumvention agreement from the third party.

IP Draughts can sort-of-see what counsel for BNPPRE is saying, in that the first part of the highlighted sentence uses the phrase “non-disclosure and non-circumvention”, while the second half of the sentence makes BNPPRE responsible for “unauthorised disclosure” without mentioning non-circumvention.  However, it seems to IP Draughts that the first half of the sentence, which uses the word “procure”, is enough to make BNPPRE liable for its failure (as was the case here) to get the third party to sign an NDA that contained non-circumvention terms.

Arden LJ, in the Court of Appeal, favoured Dorchester’s interpretation (as does IP Draughts).  The other two judges in the Court of Appeal agreed with her conclusions.  IP Draughts has attempted to simplify the arguments and focus on a couple of key points; Arden LJ’s judgment covers many more points and requires some careful reading.

At one level, this is a relatively minor case that hinges on the fine detail of how a particular clause in a badly-drafted NDA should be interpreted.  IP Draughts would not be bothering you with it, except to make the point that parties do fight over the detailed wording of NDAs, and it is important to draft them carefully, if you don’t want to end up litigating in the High Court, getting one decision,  and then, as in this case, getting the opposite decision in the Court of Appeal.