Court of Appeal: employers beware employees bearing secrets

Court of Appeal: employers beware employees bearing secrets

Court of Appeal: employers beware employees bearing secrets

You have recruited a new sales person from your competitor. The new employee arrives on their first day and – smilingly – presents you with some rather useful information from their former employment, for example, some recent business plans or customer lists. Do you say thank you very much and proceed to use it? Or do you tell the employee to destroy it immediately? A recent Court of Appeal decision confirms that in this sort of situation the new employer should normally make enquiries about the source of the information.


The dispute[i]

A number of employees left Trailfinders and entered into franchise agreements with Travel Counsellors Ltd. (TCL). TCL expected and positively encouraged new franchisees to bring customer contacts with them, without warning of the risks of breaches of confidence. The ex-employees noted down lists of Trailfinders customers before they left their employment, including email addresses and contact numbers. They then transferred these details to TCL’s database.

High Court decision

In March 2020, the High Court found that TCL had breached its equitable duty of confidence by using the information brought to it by the ex-employees for the benefit of its own business. An equitable duty of confidence arises whenever a person “receives information he knows or ought to know is fairly and reasonably to be regarded as confidential.” It was held that a reasonable person in the position of TCL’s CEO would have been aware that at least part of the information provided by the ex-employees would have belonged to Trailfinders, and was confidential customer information. TCL did not ask the ex-employees where the information had come from and showed no desire to find out. Further details of this judgment can be found in our earlier article here.

The appeal

TCL appealed the decision, its main ground of appeal being it did not believe the High Court judge had applied the right legal test to determine whether TCL owed an obligation of confidence to Trailfinders. TCL argued that it could not be liable just because a reasonable person would make enquiries as to whether some part of the information it had received was confidential.

The Court of Appeal unanimously dismissed the appeal. Arnold LJ noted, however, that there is surprisingly little authority on the point raised by TCL. He cited his own judgment in Primary Group (UK) Ltd v Royal Bank of Scotland plc [2014] EWHC 1082 (Ch) which sets out the test for an equitable obligation of confidence to arise: confidential information must have been communicated in circumstances importing such an obligation. Arnold LJ confirmed that the High Court judge correctly applied this test. The only other authority which touches on this point is the Court of Appeal's decision in Racing Partnership Ltd v Done Brothers (Cash Betting) Ltd [2020] EWCA Civ 1300 which highlights that it is relevant to consider what, if any, enquiries a reasonable person would make.

The test

The Court of Appeal held that the recipient must know or be on notice that at least some of the information is confidential to another party. If this is the case, as assessed by reference to a reasonable person in the recipient’s position, then the reasonable person’s response may be, depending on the context and the facts, to make enquiries about the source of the information. If a reasonable person would make those further enquiries, but the recipient chooses not to, then an obligation of confidence arises. Actual knowledge, or turning a blind-eye is not required for an equitable duty of confidence to arise.

TCL was on notice that at least some of the information it received from its new franchisees was confidential. Taking into account the circumstances of how it received the information (for example the quantity of information, and the invitation to bring old customer contact lists), it should have made further enquiries of the ex-employees as to the source of the customer lists.

An increased burden on recipients of information

This decision and the comments contained within the judgment will be most helpful in an area of the law on confidentiality where authority is sparse. It may increase the burden on those who receive potentially confidential information to make further enquiries of the discloser as to the nature and source of the information if a reasonable person would do so, but whether a reasonable person would do so will be very context and fact dependent.

[i] Travel Counsellors Ltd v Trailfinders Ltd [2021] EWCA Civ 28

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