Growing a franchise network by acquiring confidential information – the English court says tread carefully
Much of the value of many services businesses lies in the information they develop about their customers, their identity, requirements and budgets, and its confidentiality will often be jealously guarded. Confidentiality is easily lost and the biggest threat to it usually comes from the very employees who have gathered the information. This has given rise to numerous disputes relating to whether an employee has a right to take "their" customers with them when they move employers. In a recent dispute in the British courts, a travel agency franchise was held liable for misuse of confidential information by recruiting as franchisees individuals who brought their ex-employer's information with them, a decision which has now been confirmed by the Court of Appeal.
Travel Counsellors Limited is a large UK travel agency franchise network of travel consultants who can work from home. Trailfinders is also a large and long-established UK travel agency, but its travel agents are employees. TCL recruited a number of Trailfinders employees as franchisees and several of them brought with them details of their valuable clients. TCL then emailed those clients seeking to sell TCL services to them. Trailfinders sued the ex-employees and also TCL for breach of confidentiality.
Trailfinders regarded the customer data as its confidential information, a position TCL did not dispute (and anyway it regarded its own customer data in the same way). The main issue in the case was the extent to which the franchisor, TCL, was liable for the information the franchisees brought with them. TCL did not know that the information definitely was obtained in breach of confidence, but should it have known and were the circumstances such that there was a duty of confidentiality upon it? TCL argued it was not liable.
Some of the evidence in the case was revealing of the mindsets of the various actors. TCL's brochure sent to prospective franchisees encouraged them to "feel free to bring your old customer contact list with you". In communications from one of the Trailfinders employees while preparing to leave the company, he said "I'm a good decent person….It's all so exciting. It's like being a spy".
How much knowledge of the Trailfinders confidential information did TCL have to have before it became liable? Knowledge is a slippery concept but the case has clarified this important standard. The Court held that it does not have to reach "blind eye knowledge", in other words that the recipient in effect knows it is confidential but "turns a blind eye". Instead a court should ask whether a reasonable person in the position of the recipient would have notice that the information or some of it may be confidential to another party. If it would, a reasonable person's response should be to make enquiries. If the recipient did not do so, obligations of confidentiality would arise. Here the circumstances were such that TCL was held to be on notice that the new franchisees may be bringing Trailfinders' confidential information with them, and TCL should then have made further enquiries. By failing to do so it became liable too for the breach of confidentiality.
Since the case was first commenced, the EU Trade Secrets Directive became law (including in the UK as it was pre-Brexit). As a result the Directive's provisions did not strictly apply but it is likely the result would have been the same, as UK confidentiality law is very similar to the provisions of the Directive, As a result the case may provide some guidance as to how a similar case in the EU may be decided.
What the EU-UK Trade and Cooperation Agreement means for intellectual property owners
We already knew that Brexit would have a significant impact on IP rights, particularly brands. What does the new agreement add to the issues?
The EU-UK Trade and Cooperation Agreement (TCA) setting out the terms of the future relationship between the EU and UK came into effect on 1 January 2021. Here, we discuss the impact of the TCA on IP rights and the implications for IP owners.
Title V of Part Two of the TCA covers IP. The key points are:
- The TCA largely sets out minimum standards that the parties must adhere to, nearly all of which are already enshrined in EU and UK laws.
- We already knew that Brexit would have a significant impact on brands and the TCA does not change that (see our checklist for more).
- The TCA gives the UK greater scope to determine its exhaustion of rights regime (compared to the EU's proposed draft of the TCA).
- As expected, there is nothing in the TCA on the territorial disclosure requirements for Unregistered Community Design and UK Supplementary Unregistered Design rights to arise (see more here).
- No agreement was reached on the mutual protection and enforcement of future geographical indications.
- Personal data can continue to be transferred from the EU to the UK, as if the UK were still a Member State, for at least four months from 1 January 2021 and potentially for a further two months, provided neither party objects.
- The TCA affords the UK greater flexibility in its future copyright regime (compared to the EU's proposed draft of the TCA) although no changes are immediately expected.
- We already knew that Brexit would have a significant impact on digital content services and the TCA does not change that. EU and UK laws will start to diverge within the next 18 months since the UK will not be implementing several key EU Directives.
- There is scope for divergence of laws in important areas such as supplementary protection certificates and regulatory rights.
- The UK will retain Enforcement Directive style damages (including for "knowing infringement") as the EU had wanted.
- UK law has been automatically modified, without specific implementing measures, where necessary to implement the TCA.
