Date: 13 September 2016
A dispute has been running for years between a Danish manufacturer of insecticide impregnated mosquito nets, MVF, and their former scientific consultant and ex-employees over misappropriation and use of secret formulae for such nets.
In 2009, the High Court found that there had been misappropriation and misuse of trade secrets and awarded damages but no injunction. Now, the UK Court of Appeal has upheld the award of damages, confirming that damages arising from misuse of trade secrets may be awarded on a basis analogous to patent infringement where the wrongdoer makes us of or embodies the confidential information in a product. However, where the products put on the market merely take indirect advantage of a breach of confidence, this does not make such sales wrongful in themselves, and a lower measure of damages is appropriate.
When all the evidence was in, it must have seemed to MVF (formerly Verstergaard Frandsen) like an open-and-shut case. Was it really necessary to cross-examine a dozen witnesses over a 14-day trial? The defendants' witness admitted he had maintained a copy of a database of over 100 formulae that he had built up while working for the claimants. Unfortunately "yes" – the devil of a trade secrets case is in the detail, and the High Court will expect to scrutinize the detail: "it is well recognized that breach of confidence actions can be used to oppress and harass competitors and ex-employees". 1
Making an insecticide-impregnated net is an art of cooking. You start with the polymer (polyester in the case of MVF and polyethelene in the case of Bestnet) and you can coat it with insecticide or you can mix the insectide into the polymer prior to extrusion. The latter is preferred, because it has to withstand many washes (typically 20 washes) and you want the level of insecticide at the surface to remain almost as high after the 20th wash. So you have to control the rate at which it migrates to the surface. But extruding a polymer with different additives into a yarn to make a net is much more complicated that merely coating the yarn. The evidence showed there were issues over homogenous mixing and vaporisation during high temperature extrusion. Some mixtures failed to form a yarn at all.
While employed by VF, one of the defendants, Torben Larsen, went to some lengths to impress on others the confidential nature of the company's formulae and ingredients. He even asked the supplier, Ciba, to change the labels on the one of the drums of ingredients to disguise it before sending to a net manufacturer in India, "to keep our recipe secret" and he asked Dr Skovmand not to send emails to the manufacturers with the additive recipe and the batch ingredients in the same document.
Mr Vestergaard Frandsen engaged Dr Skovmand by oral agreement on the steps of the offices of UNHCR in Geneva in December 2000. It was a, "gentleman's" agreement, which means it was is intended to be respected, but binding in honour only. The agreement was not recorded in writing at that time and there were no witnesses. He was paid $1.8 million over 6 years working for MVF. The court held that confidentiality was "taken as read" in their agreement.
Dr. Skovmand said he merely took, as his starting point, advice from Ciba to use certain additives (referred to in the judgement as Additives A, B and C) to mix in with the polymer. He said that advice was "freely given to me and clearly could not be considered any sort of trade secret". But he was wrong on that point. Even though he had no written contract with Verstergaard Frandsen, he was working for them as a consultant and was under an obligation of confidentiality. He was not free to use that knowledge for another client.
If that were all, it would not have been enough for a successful trade secret action, because that much information had also been published in MVF's published patent application (which named Dr Skovmand as sole inventor and was assigned to MVF). There were other trade secrets. For example, Ciba advised Dr Skovmand that Additive C was not important and that additive G would work better. After extensive experiments paid for by MVF, he found that advice to be wrong. (One might refer to this as a "negative trade secret" – i.e. there is value in knowing what blind alleys not to follow.)
Neither was it a case of performing a well-planned set of experiments, starting from the Ciba recommendations, to find a working formula. Dr Skovmand wrote: "Based on our [earlier] tests we can make some good guesses as to what the formulation should be". One cannot separate the test recipes from the experimental results. Different recipes were bioassayed by Dr. Skovmand in experiments paid for by MVF. From this work, Dr Skovmand knew which were the more promising recipies. That knowledge was a trade secret of MVF.
1. Quoting Laddie J in Ocular Science v Aspect Vision Care  RPC 289, 359.
What is a trade secret?
There are three prerequisite elements to an action based on breach of confidence 2:
1. The information must have the necessary quality of confidence about it.
2. It must have been communicated in circumstances importing an obligation of confidence.
3. There must have been an unauthorised use of the information to the detriment of the party communicating it.
The "necessary quality of confidence" is simply expressed in terms of what the information is not. It "must not be something which is public property and public knowledge." 3
What is not a trade secret?
An employee is entitled to use for his or her own benefit or future employer his own skill, knowledge and experience even if it was learned in the course of the relationship (the Judge in MVF v Bestnet expressed doubt as to whether this approach applies to all consultants but did not have to decide on this).
A customer list is normally a trade secret, but in the absence of special circumstances, an ex-employee is not generally restricted from canvassing or doing business with customers of his or her former employer.
Chemical formulae or designs or special methods of construction are typically considered trade secrets, although an employee's recollection of instructions imparted to him in confidence during his employment (which he is not free to divulge during his employment) are not necessarily trade secrets that he cannot use after employment. An example might be a source of a key material, where the source is confidential to the employee but he may be free to obtain the material from the same source when no longer employed. 4 There are three elements to consider:
1. The information must be information the release of which the owner reasonably believes would cause him injury or be of advantage to rivals;
2. The owner must reasonably believe it is confidential and not already in the public domain;
3. The information must be judged in the light of the particular industry or trade concerned.
Because there was not written contract, the Court had to consider what may be protected by an implied term of confidentiality. The factors to be considered were: • The nature of the employment, e.g. whether the employee is in a position to habitually handle information he or she knows to be of a sensitive nature;
• The nature of the information and whether it is a trade secret or of such a highly confidential nature as to be accorded the same protection as a trade secret;
• Whether the employer impressed on the employee the confidentiality of the information (beyond merely telling the employee that certain information is confidential, what is relevant is the attitude of the employer to the information);
• whether the information can easily be isolated from other information (his "stock of knowledge, skill and experience") that the employee is free to use (i.e. separable from the skill acquired by the employee in the course of employment).
There are many take-away messages from this case.
The first, and most obvious, is to engage consultants in writing. A written contract is not necessary to establish confidentiality (and indeed, merely marking a document "confidential" can be quite sufficient), but with a written contract, it is not necessary for the court to determine just what are the implied terms and it may be possible to include a non-compete clause or restrictive covenant to gain more protection when the employment ends.
A second clear message is how to handle confidential information. Merely telling employees that it is confidential is not enough. Taking steps to remind them explicitly that certain information is a trade secret, and limiting dissemination of information can not only deter employees from handling it too freely or walking away with it, but can help to establish that it is in fact a trade secret (and that its owner believes it to be such).
Finally, there is a message for the patent-versustrade secret dilemma. If there is an invention that can be patented with meaningful claim scope, infringement is absolute and any use of the invention is an infringement subject to damages on a lost-profits basis. But if not, and there is a likelihood of designing around the claims, be aware that employees and consultants are free to leave your service and use the published information to compete with impunity.
Knowing the state of the art before filing a patent application and making an informed judgement on the likelihood of obtaining meaningful protection is important before deciding on the right strategy.
2. Coco v A.N.Clark (Engineers)  RPC 41,47 3. Saltman Engineering v Campbell Engineering (1948) 65 RPC 203, 215 4. E Worsley v Cooper  1 All ER 290 16
Written by Hugh Dunlop, Partner