Damages awarded for misuse of confidential information by former employees to create competing produ

Damages awarded for misuse of confidential information by former employees to create competing produ

Damages awarded for misuse of confidential information by former employees to create competing produ

RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd and Ors1

The Federal Court has awarded damages to a RLA Polymers Pty Ltd, a flooring adhesives manufacturer, after finding that former employees who founded a competing company had misused confidential information to speed up their product development. Justice Ryan ordered Nexus Adhesives Pty Ltd, the company co-founded by two of the former employees, to pay damages for sales made during the period of time that was saved as a result of the misuse of the confidential information.

Confidential Information

The applicant, RLA, alleged that, amongst other things, three of its former employees, Jonathan Clewlow, Ishu Sofat and Brett Nixon breached an equitable and contractual obligation of confidence not to misuse RLA’s confidential information. Each of the former employees admitted that they owed a duty of confidence to RLA but denied that certain information was confidential.

The Court considered each of the elements RLA needed to satisfy in order to make out an action for misuse of confidential information, namely that:

  1. the information the subject of the action must be confidential;
  2. it must have been imparted in circumstances importing an obligation of confidence; and
  3. there must have been an actual or threatened unauthorised use or disclosure of the confidential information.

Justice Ryan held that each of these elements had been satisfied. Specifically, his Honour found that the former employees retained information about the formulations, including component ingredients, of two of RLA’s flooring adhesive products and that such information was confidential to RLA (and was not, as the former employees argued, part of an employee’s “stock of knowledge” which can legitimately be drawn upon when working for a new employer). His Honour also found that the former employees had disclosed RLA’s confidential information to Mr Clewlow and Ms Sofat’s company, Nexus (Nexus and the former employees, together, were the respondents in this proceeding), and that the respondents misused that confidential information by referring to and using it in the research and development of Nexus’ own flooring adhesive products. The Court proceeded on the basis that Nexus was under an (equitable) obligation to keep RLA’s confidential information confidential and not to misuse that information, although not expressly identified in the judgment.

RLA argued that, as a result of the respondents’ misuse of its confidential information, Nexus obtained an unfair advantage in developing and getting to market its own adhesive products and that, accordingly, the relief to which it is entitled should reflect that advantage. This is known as the “springboard doctrine”.

Springboard doctrine

In his Honour’s words, “a recipient of confidential information or trade secrets should not be allowed to use it as a springboard into a better position than would have been achieved from the use of publicly available information and the recipient’s own independent skill and ingenuity”.2

By way of example, his Honour referred to the observations of Lord Greene in Saltman Engineering Co Ltd v Campbell Engineering Co3. In that case, Lord Greene observed that the defendants “dispense[d] in certain material respects with the necessity of going through the process which had been gone through in compiling [drawings of a product] … thereby sav[ing] themselves a great deal of labour and calculation and careful draftsmanship”. That is, the defendants in that case relied upon the work carried out by the plaintiff (including the time, effort and expense involved in carrying out that work) to more quickly develop and manufacture their own product. Such reliance, in effect, allowed the defendants to “springboard” to a better position than they would have been if they independently developed that product themselves without reference to the plaintiff’s drawings.

Calculation of damages: what advantage was gained?

If the springboard doctrine applied in the present case, his Honour held that it would be necessary to consider what advantage Nexus had obtained by misusing RLA’s confidential information. That advantage would be taken into account in awarding relief to RLA.

To calculate that advantage, his Honour compared the time actually taken by Nexus to develop the products with reference to RLA’s confidential information with the time it would have taken to independently develop those same products without reference to RLA’s confidential information. Relying on RLA’s evidence, including evidence provided by independent experts, his Honour concluded that, without reference to RLA’s confidential information, it would have taken Nexus between nine and 12 months to research, develop and launch its product to market (his Honour ultimately used the mid-point of this timeframe, being 10 and a half months, when calculating relief). His Honour found that, conversely, it actually took Nexus a mere five months to research, develop and launch its product, with reference to RLA’s information.

In light of his findings, his Honour ordered Nexus to account to RLA for the profits Nexus made from sales of its adhesive products developed by reference to RLA’s confidential information for a period of five and a half months from first sales of its products, being the time between the date Nexus actually launched its products and the date it would have launched its products had it independently developed them.

How employers can safeguard their confidential information

  • Ensure that employees are subject to contractual restraints extending beyond the term of their employment agreement which spell out in as much detail as possible the nature of the information which the employer considers to be confidential.
  • Ensure that employers impose positive obligations on employees to deliver up or destroy all documents in their employees’ possession and otherwise permanently delete all records (including electronic records) which contain the employer’s confidential information upon termination of an employee’s employment.
  • Consider imposing a post-employment restraint on employees to prevent them from developing a business in competition with their former employer for a specified period of time.

Endnotes

  1. [2011] FCA 423.
  2. At [73].
  3. (1948) 65 RPC 208 at 215.