Nexus: misuse of confidential information

Chams Plc and another v Mastercard Asia/Pacific Pte Ltd and 5 Others – Where a contractual breach involves the misuse of IP-based confidential information

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The Nigerian Federal High Court has delivered a ruling in a suit bordering inter alia on the misuse of confidential information relating to IP. On 7th November 2019, the Federal High Court delivered a ruling in Suit No. FHC/L/CS/1440/2019 - Chams Plc & Another v Mastercard Asia/Pacific Pte Ltd and 5 Others, granting an interim injunction restraining named Nigerian banks (22 banks in all) from giving effect to MasterCard transactions in which National Identity Cards bearing the logo of the National Identity Management Commission (NIMC) are used. The interim injunction is to remain until the hearing of a pending motion on notice for similar reliefs. [For context, the national identity cards provide proof of identity and come with a prepaid payment technology provided by Mastercard and can be used to make electronic payments and deposit funds.]

...confidential architecture

As some readers (in Nigeria) will know, the suit in question relates to the concession awarded by the NIMC to a Nigerian technology firm, Chams Plc over the issuance of national identity cards. Chams Plc has claimed that after its Special Purpose Vehicle, Chams Consortium Limited was granted the concession by the NIMC to produce national identity cards on behalf of the NIMC (the national identity card project); it invited MasterCard as one of its technical partners on the project.

Chams Consortium Limited (CCL) also entered into a Customer Business Agreement (CBA) with MasterCard, which contained non-disclosure of confidential information and non-compete clauses. Pursuant to this agreement, CCL disclosed confidential information on the entire architecture of the national identity cards to MasterCard. This information as to the architecture of the national identity cards was a product of Chams Plc’s research, design and development work. CCL claims that MasterCard used the disclosed proprietary confidential information and the fact of its being formally introduced to NIMC to bypass CCL; deal directly with NIMC and commence production of national identity cards. MasterCard’s activities have been alleged to result in CCL incurring significant losses and placed MasterCard in a position to make significant revenue using Chams Plc.’s research, design and development work.

In their statement of claim, the plaintiffs have sought the sum of N84billion (approximately $231.7million) as special damages for anticipated loss of revenue from the national identity card project; N10billion (approximately $27.6million) as general damages for fraud; and N20billion (approximately $55million) for inducement of breach and termination of the concessions awarded by NIMC. The plaintiffs also filed a motion ex parte and a motion on notice and in both applications, they prayed the court to inter alia (i) restrain MasterCard from further printing National Identity Cards with the NIMC logo; (ii) restrain Nigerian banks (named as respondents to the application) from honouring MasterCard transactions with the use of the National Identity Cards; (iii) issue an Anton Piller Order for seizure and costing of machines for printing the cards and the seizure of the cards themselves; and (iv) order the police to arrest anyone who obstructs the execution of the court’s orders.

In its ruling on the motion ex parte, the court directed that the defendants be served with the originating processes and the motion on notice. Apart from the order as to service, the court granted only the second order sought i.e. the order restraining the named Nigerian banks from honouring MasterCard transactions made with the use of the National Identity Cards pending the hearing of the motion on notice. All the other prayers made in the motion ex parte are to be heard when the defendants have been put on notice.

Comment
The suit in question borders particularly on breach of contract occasioned by the misuse of confidential information. However, this Kat is interested in the question of misuse of confidential information as it relates to outputs of research and development work (i.e. knowledge-based information).

Regarding the main claims for special and general damages for anticipated revenue, fraud, and inducement of breach, it is opined that the claims are hinged on MasterCard’s alleged misuse of information as to the architecture of the national identity cards. Essentially, the alleged breach of contract lies in the misuse of confidential information. Where the plaintiffs are unable to show that MasterCard made unauthorised use of such confidential information, it may be difficult to prove the plaintiffs’ entitlement to damages especially the claim for special damages.

In Nigeria, claims of misuse of confidential information are likely to be founded in contract or tort, as there are no statutory provisions explicitly providing for such claims. However, section 15 of the Freedom of Information Act 2011 allows public institutions to deny an application to disclose information that contains “trade secrets and commercial or financial information obtained from a person or business where such trade secrets or information are proprietary, privileged or confidential, or where disclosure of such trade secrets or information may cause harm to the interests of the third party”. The section also restrains the disclosure of “information the disclosure of which could reasonably be expected to interfere with the contractual or other negotiations of a third party” and “proposal and bids for any contract, grants, or agreement, including information which if it were disclosed would frustrate procurement or give an advantage to any person”.

This provision suggests that Nigerian courts would frown at unauthorised disclosure or use of proprietary and/or confidential information. However, to the best of this Kat’s knowledge, there has not been a reported, decided case in Nigeria on parameters for imposing liability for misuse of proprietary and/or confidential information or for remedies in the case of such misuse. But, one can get a sense of how such cases may turn by looking at judicial treatment of non-disclosure clauses in employment contracts and/or confidentiality obligations of banks to their customers.

In Aero Contractors v Akingbehin (NICN/LA/123/2013), the defendant, through his solicitors had written to the plaintiff threatening to disclose the plaintiff’s confidential information if he (the defendant) was not reinstated to his position in the plaintiff’s company. The plaintiff sued for breach of the confidentiality clause contained in the defendant’s contract of employment and sought damages in the sum of N25million (approximately $68,000) for the breach. The court found that the defendant did in fact breach the confidentiality clause when he disclosed the confidential information to his solicitors. However, the court awarded only the sum of N2million (approximately $5,500) as damages. In Fidelity Bank Plc v Onwuka, the Court of Appeal held that a breach of a bank’s legal duty of confidentiality not to disclose information to third parties would give rise to liability in damages.

It remains to be seen whether the plaintiffs can show that there was confidential information provided to the defendant which the latter misused in breach of the non-disclosure obligations. Even where the plaintiffs succeed in proving their claims, it also remains to be seen if the court will award the significant sums claimed as damages.

Regarding the motion on notice, especially the Anton Piller order sought, there is also the question of whether the plaintiffs can obtain a mandatory interlocutory order permitting them to seize the defendants’ card-printing/moulding machines, inspect and cost (i.e. appraise) the volume of trade on the national identity cards.

The principles governing the grant of an Anton Piller order in Nigeria have been adopted from the decision of the English Court of Appeal in Anton Piller KG v. Manufacturing Processes Ltd in several cases including Ferodo Limited v. Unibros Stores and Akuma Ind. Ltd v. Ayman Ent. Ltd. The principles are that: (1) there must be a strong prima facie cause of action; (2) the danger to the plaintiff to be avoided by the grant of an Anton Piller order must be serious; and (3) the risk of destruction or removal of evidence must be significant rather than merely possible. The general principles regarding injunctions - serious question to be tried, adequacy of damages, balance of convenience and whether the status quo should be maintained – also apply.

Anton Pillar orders are usually made ex-parte and understandably so. If the point of the exercise is to take the defendant unawares before the defendant has time to hide evidence of infringing materials and/or activities, making the orders after putting the defendant on notice will defeat the purpose. In this Kat’s experience, Nigerian courts are wont to order accelerated hearing once Anton Pillar orders are sought via a motion on notice. That said, the decision is in the hands of the court whether to grant the Anton Piller order when the defendants in this case have been put on notice.

What happens now?
The case continues. The defendants have 30 days from the date of service of the writ and statement of claim to respond by filing a defence. The defendants will also need to respond to the motion on notice, which seeks far-reaching orders against them. Given the national significance of the case (being on the issue of identity management at the national level), it is quite possible for the parties to decide to settle out of court.

Time shall tell and readers should watch this space...

AIPPI Congress Report 2: Trade Secrets - Views from In-House Counsel

By 0x000216

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View from one of the Congress's
conference rooms overlooking
Westminster Abbey

Having benefited from a beautiful opening weekend, it was only fitting that the rain came on Monday to give AIPPI Congress attendees a taste of "real life" in London. During the afternoon, as rain speckled against the windows of the Queen Elizabeth II Conference, attendees spilled into top floor conference rooms to learn about the latest in trade secret protection.

Back over to Sarah Blair for her practical report on the session:

"Trade secrets can be a valuable tool to protect valuable know-how. One of the last panel sessions of day 1 saw six panellists discuss the new trade secrets regimes implemented by the EU and US in 2018. The US enacted the ‘Defend Trade Secrets Act’ and the EU formally adopted the ‘Directive on the Protection of Undisclosed Know-How and Business Information’.

Linda Lecomte (Wuersch & Gering LLP) moderated an extensive in-house panel comprising: Emily O’Neill (Chief Counsel at Spectris, UK); Loek Steffanie (Senior Patent Counsel at DSM, Netherlands); Pirke Fustinoni (Head of Intellectual Property at Outotec Oyj, Finland), Sascha Schalkwijk (Secrid); and, Stephen Mackenzie (Senior Counsel at Koch Industries, US).

Key takeaways from the session include:

1. Practical Steps to protect trade secrets

The panellists were asked to share what policies and practices they had developed with their companies to help protect its trade secrets. These included:

Written, global policies to ensure clarity and consistency of policies across all relevant jurisdictions. Sascha Schalkwijk commented that such policies will necessarily be commensurate with a company’s size and resources. The key is to identify valuable information and high risk areas to enable sufficient and achievable policies to be put in place.

Document marking and classifications to show when documents are confidential or privileged.

On-board training to serve two purposes: first, to teach all new staff both the importance of trade secrets and the company’s policies on protecting them (scripts can be useful in this regard). Second, to understand the new-joiner’s background so as to consider how to prevent and reduce the risk of their utilising another’s trade secrets.

Continuous training to remind staff about trade secret policies. Options could include in-person teaching sessions or interactive e-learning modules. Such training might comprise general corporate training or more specific training for specific roles – Loek Steffanie pointed out the importance of using appropriate language to ensure that the policies are understood.

Leaver policies to be conducted by HR departments, including, for example, computer audits and checklists that all confidential documents have been returned. Stephen MacKenzie noted that employees don’t always take documents for their use, but sometimes simply to have copies of their works. However, control must be retained over such documents and must be returned upon their leaving.

Working with IT to monitor outgoing document traffic or to conduct computer audits upon an employee’s departure. It was noted that this option is not allowed in some jurisdictions.

Spot audits, e.g. in a factory, whereby an undercover visitor is sent to see if anything confidential can be seen or accessed. Loek Steffanie made the valuable point that public relations are important when conducting such audits – it should be stressed that it is for the asset’s protection that such an audit was conducted rather than to judge their performance or actions.

Global policies – to ensure consistency of policies across jurisdictions and with all parties – both internally and in working with third parties. Sascha Schalkwijk commented that such policies will necessarily be commensurate with a company’s size and resources. The key is to identify the valuable information and high risk areas to enable sufficient and achievable policies to be out in place.

Non-disclosure Agreements for use with third parties. Emily O’Neill suggested having both a standard template and a playbook of useful clauses to allow for some flexibility when negotiating such agreements. Consider what you are doing and what must be shared and tailor the agreements accordingly.

Following up confidential discussions in writing. For example, by sending an email summarising the meeting and stating that, as was understood by all of the parties present, the information was confidential. Copies needn’t be provided to the legal team – it’s not their role to monitor – but they should be saved and accessible if they are ever required.

2. A magic wand

A creative question was put to the panellists by the Kat’s very own Annsley Merelle Ward: what would they change if they had a magic wand?

Stephen MacKenzie would impose more serious penalties for the use of trade secrets. He considered that a slap on the risk by way of a fine is not sufficient and thinks that there should be criminal liability.

Pirke Fustinoni on the other hand was generally satisfied with Finland’s laws on trade secrets. She emphasised that it is was simply a matter of continuously building a corporate culture to facilitate and maximise protection.

Emily O’Neill would improve IT infrastructure for obtaining and recording evidence.

Loek Steffanie would use the magic wand to enable him oversight of all activities that might lead to a trade secrets leak to enable him to act quickly to prevent them and/or to have knowledge of such leaks as soon as they happen to be able to take immediate steps to mitigate the damage. Rapid response, Loek said, was absolutely critical.

Sascha Schalkwijk considered that there wasn’t anything specific that she would use the magic wand for. She reiterated that, working for a relatively new and small company, it is a matter of taking baby steps so as to do what is needed at each stage. As it grows, it will need to consider how to update and upscale its trade secret policies.

Linda Lecomte opted to use her magic wand to have a cyber-awareness unit to investigate and obtain evidence about trade secret infringements."

Wishbone, chin and spine -- and we're talking about a car?

By 0x000216

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For all you motor enthusiasts out there, this has been an interesting week for cars and IP (see KatPost on VW and trade mark issues here, not to mention the post previous to this one). In preparing this post, this Kat (being rather naive where motoring matters are concerned) has learnt all manner of new-fandangled motoring terms such as 'rearward chin' and 'profiled foot' to delight her friends in after-dinner party conversation and to dazzle in future work trivia nights.

The proceedings which attracted her attention related to a claim by Force India Formula One Team Ltd (Force India) against several defendants for misuse of confidential information and copyright infringement relating to the design of a half-size wind tunnel model of a Formula 1 (F1) racing car.

1 Malaysia Racing Team SDN and its English subsidiary 1 Malaysia Racing Team (UK) Limited (the first and second defendants) operated a Formula 1 team under the name of ‘Lotus’. During his career, Mr Michael Gascoyne (the third defendant) had worked as a designer and technical director for both Force India and Lotus. Aerolab SRL (Aerolab, the fourth defendant) and its parent company Fondmetal Technologies SRL (Fondmetal, the fifth defendant) operated a wind tunnel and had worked as external aerodynamic design consultants for a number of F1 teams.

In 2008, Force India entered into a Development Contract with Aerolab. The key terms were:

1. The duration of the Development Contract was until 31 December 2009 (clause 2).
2. Aerolab was obliged to deal with Force India in the utmost good faith and to use its best endeavours to ensure that its staff did likewise (clause 3(c)).
3. Intellectual property (including copyrights and designs) created or developed by Aerolab pursuant to the Development Contract became the sole property of Force India (clause 3(h)).
4. The agreed fee for this work was €246,833 per month in 2008 and €253,400 per month in 2009 (clause 4).
5. The Development Contract was governed by and to be construed in accordance with English law and the parties agreed to submit to the exclusive jurisdiction of the English courts (clause 8(e)).
6. Aerolab and its employees were under a duty of confidentiality and an obligation of non-disclosure (clause 5).

Aerolab terminated the Development Contract in 2009 and started working for Lotus. Force India claimed that Aerolab’s design of a half-size wind tunnel model of a F1 racing car had been subsequently used in a car that Aerolab had designed for Lotus. In particular, Force India alleged copying of 71 designs. Of these, 57 were designs or precursors of designs for wind tunnel model parts and 14 are assemblies or combinations of individual model part designs. Of the 57 individual model part designs, 36 were for aerodynamic components, the full size equivalents of 25 of which were visible on the Force India F1 car during the 2009 season. The remaining 21 out of 57 were mechanical wind tunnel model parts which have no equivalent in a full size car.

Lotus did not dispute that some its employees had engaged in some copying of computer files containing Force India designs. There were four areas of dispute:

1. How much copying took place?
2. To what extent was the copying actionable?
3. Which Lotus companies were liable?
4. What sum should be awarded to Force India as compensation?

Aerolab made a cross-claim against Force India in relation to an unpaid debt. In particular, it contended that it had terminated the Development Contract after Force India's repudiatory breach by persistent non-payment of sums due to it.

The matter came before Arnold J in the Chancery Division of the High Court: Force India Formula One Team Ltd v 1 Malaysia Racing Team SDN BHD & Ors [2012] EWHC 616 (Ch) (21 March 2012). Be warned the judgment is a long one of 86 pages owing to the factual complexities in bringing a case of this nature.

Misuse of confidential information
As specified in Coco v AN Clark (Engineers) Ltd [1968] FSR 415, to establish an action for breach of confidence, it is necessary to demonstrate that: (a) the information itself had to have the necessary quality of confidence; (b) the information was communicated in circumstances importing an obligation of confidence; and (c) there was an unauthorised use of the information to the detriment of the party communicating it (at [215]). In relation to information gained by employees during their employment, Faccenda Chicken Ltd v Fowler [1987] Ch 117 established that, after the termination of an employment contract which did not include an enforceable restrictive covenant, a former employee could use a third party's information which formed part of his or her own skill, knowledge and experience learned during the course of his employment, provided that it was not a trade secret of his former employer (at [225]).

Arnold J then analysed the evidence to determine which of the designs complained of by Force India were: (a) already in the public domain; (b) derived from Aerolab's employees' own skill and knowledge; or (c) were confidential information which had been misused by Lotus employees. This all makes quite a read for the car enthusiast. In relation to the last category, Arnold J found that these designs were for the front wing endplate and turning vane; for the front wing transition element; the rear wing; the forward bargeboard; chin fences; vortex generator; rearview mirror; front spine; drive shaft; limit cams and shaft clamps; and lower wishbone flexure.

Who was liable for these misuses of confidential information? Aerolab and FondTech accepted (at [338]) that they were liable for any misuse of confidential information found to have been made by their respective employees. Arnold J noted (at [338]) that Aerolab's liability was in contract, whereas FondTech's liability was in equity, also finding that Mr Gascoygne was not liable for the above breaches of confidential information. This was because the method by which Aerolab and FondTech created the designs was not the subject of any agreement with Mr Gascoyne. On the contrary, Arnold J noted that Mr Gascoyne relied on Aerolab and FondTech to use their own professional skill and knowledge to create the designs. As Arnold J had rejected the claim against Mr Gascoygne, it followed that Lotus could not be liable for authorising Mr Gascoygne to act as its agent.

Copyright Infringement
Force India claimed that each of its CAD files was a copyright work, that Aerolab and FondTech created CAD files which reproduced substantial parts of its CAD files and that 1 Malaysia UK made electronic copies of the Aerolab/FondTech CAD files in the UK, thereby infringing Force India's UK copyrights. There was no dispute as to subsistence and ownership of copyright in the Force India CAD files. There was some discussion as to whether these were artistic or literary works. In the view of Arnold J (at [370]) they comprised both: he found (at [373]) that the Aerolab/FondTech CAD files did reproduce a substantial part of the corresponding Force India CAD files for the following parts: the vortex generator, rear brake duct lower element and rear view mirror. Accordingly, the copyright claim succeeded to that extent, but not otherwise.

Quantum
Arnold J observed (at [374]) that it was very difficult to find a clear, accurate and comprehensive statement of the principles applicable to the assessment of damages or equitable compensation for breach of confidence. In his view, the case law was very confused, and none of the existing commentaries deal entirely satisfactorily with it. Accordingly, he began by sketching the contours of the problem, then examine the authorities, then draw some general conclusions and finally address a couple of specific issues which arise in this case.

From such an analysis, Arnold J believed (at [386]) that the cases established the following principles for the assessment of such damages:

1. The overriding principle is that the damages are compensatory.
2. The primary basis for the assessment is to consider what sum would have arrived at in negotiations between the parties, had each been making reasonable use of their respective bargaining positions, bearing in mind the information available to the parties and the commercial context at the time that notional negotiation should have taken place.
3. The fact that one or both parties would not in practice have agreed to make a deal is irrelevant.
4. As a general rule, the assessment is to be made as at the date of the breach
5. Where there has been nothing like an actual negotiation between the parties, it is reasonable for the court to look at the eventual outcome and to consider whether or not that is a useful guide to what the parties would have thought at the time of their hypothetical bargain.
6. The court can take into account other relevant factors, and in particular delay on the part of the claimant in asserting its rights.

For Arnold J (at [424]), the same approach was to be adopted to the assessment of damages or equitable compensation whether the obligation of confidentiality which has been breached is contractual or equitable. Where the claimant exploited the confidential information by manufacturing and selling products for profit, and his profits had been diminished as a result of the breach, then he could recover his loss of profit. Where the claimant exploited the confidential information by granting licences to others, and his licence revenue had been diminished as a result of the breach, he could recover the lost revenue. Where the claimant would have 'sold' the confidential information but for the breach, he could recover the market value of the information as between a willing seller and a willing buyer. Where the claimant could not prove he has suffered financial loss in any of these ways, he could recover such sum as would be negotiated between a willing licensor and a willing licensee acting reasonably as at the date of the breach for permission to use the confidential information which had been misused in the manner in which the defendant had used it.

Looking at matters in the round, Arnold J considered (at [424]) that a willing licensor and a willing licensee acting reasonably would have negotiated a fee of €25,000. This figure was fair, equitable, effective, proportionate and dissuasive, as required by Article 3 of Council Directive 2004/48 on the enforcement of intellectual property rights. This sum was to be set off (at [463]) against the €846,230 which Force India owed Aerolab under the Development Contract.

The IPKat thinks that this case is a timely reminder of the importance of having sufficient factual evidence to support each limb of a breach of confidence action. As noted above, Force India complained about 71 designs, of which only 11 survived judicial scrutiny.

Merpel, always liking to know what a remedy for infringement might be worth, is grateful to Arnold J for his helpful summary on compensation for breach of confidence.

Nexus

Chams Plc and another v Mastercard Asia/Pacific Pte Ltd and 5 Others – Where a contractual breach involves the misuse of IP-based confidential information

AIPPI Congress Report 2: Trade Secrets - Views from In-House Counsel

Wishbone, chin and spine -- and we're talking about a car?

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