Misuse of Confidential Information

In the recent decision of Thales Australia Limited v Madritsch KG & Anor [2022] QCA 205 (21 October 2022), the Queensland Court of Appeal had cause to consider the possible misuse of confidential information in respect of a component used in a standard service rifle used by the Australian Defence Force.

Freeburn J (with whom Morrison JA and Mullins JA agreed) discussed the legal principles involved and said:

PART B: PRINCIPLES OF MISUSE OF CONFIDENTIAL INFORMATION

[37]     Before analysing the primary judge’s reasons and the grounds of appeal, it is useful to state some relevant legal principles on the misuse of confidential information.

[38]     First, the three elements of the cause of action for breach of confidence are:

(a)       The information must have the necessary quality of confidence about it;

(b)       The information must have been imparted (by the plaintiff to the defendant) in circumstances importing an obligation of confidence (or pursuant to a contract to the same effect); and

(c)       There must be an unauthorised use of that information to the detriment of the plaintiff.[1]

[39]     Second, as to proof of the third element, misuse, confidential information can be misused by the unauthorised disclosure of that information or by some other misuse of the confidential information. A misuse might occur where the defendant uses the plaintiff’s design in the manufacture of their tools,[2] or it may even occur where the defendant used the plaintiff’s secret process but did so without including one essential element of that process.[3] The use of a material part of the information can establish a breach of confidence.[4]

[40]     Third, the misuse of confidential information can be inferred.[5] In some cases a plaintiff may be able to show, by direct evidence, that the information used by the defendant is derived from the confidential information. An example may be where an employee of the defendant has observed the copying and use of the plaintiff’s confidential information.[6] As a matter of practicality, though, those cases where there is direct evidence of misuse are likely to be rare. Thus, a plaintiff may establish a misuse of confidential information by means of indirect or circumstantial evidence.[7]

[41]     Fourth, the types of indirect or circumstantial evidence that enable the court to infer a misuse of confidential information are not confined. However, examples of evidence which has enabled courts to infer misuse are as follows:

(a)       Misuse may be inferred because of an ‘identity of characteristics’ between the plaintiff’s products and the defendant’s products;[8] for example, the plaintiff may be able to prove the misuse indirectly by demonstrating the existence of some ‘significant fingerprint’ because the defendant’s product has particular dimensions, a design, a composition or behaviour which is only to be found in the plaintiff’s product and which is consistent with the use of the information and inconsistent with use of non-contaminated sources;[9]

(b)       Misuse may be inferred because of the confidant’s conduct after receiving the information; an example is Surveys & Mining Ltd v Morrison[10] where the defendant applied for mineral licences soon after receiving confidential geological information;[11]

(c)       Misuse may be inferred because the defendant has gone to all the same suppliers and customers as the plaintiff and that it would be highly unlikely that the same group would have been approached had the defendant been working from uncontaminated sources;[12]

(d)       A plaintiff may be able to persuade the court that the defendant could not have got to the position they have, with the speed they have, had the defendant simply started from legitimate sources and worked everything out for himself – in other words the defendant’s speedy progress suggests misuse of confidential information;[13]

(e)       The sequence and temporal proximity of events may provide more than a reasonable basis to definitively conclude that there was a disclosure of the confidential information, and the inference may be further supported by the lack of explanation accompanying the appearance of the confidential information in the plaintiff’s product or work;[14] and

(f)        Logically, the inference may be drawn where there is a combination of the above factors.

[42]     Fifth, the inference may be avoided if the defendant can demonstrate that the information was developed by its own efforts, or acquired independently, or acquired by reverse engineering of products placed on the market by the plaintiff or by a third party.[15] However, those arguments may be difficult to sustain if the offending conduct occurs soon after the information has been received in confidence. In Talbot v General Television Corporation Pty Ltd,[16] for example, the plaintiff claimed that the defendant, a television network, made use of his concept in an episode of its television program, A Current Affair, without, as he intended when he disclosed the concept, including him in the project. The defendant’s employees argued that they had independently arrived at their own idea for a television program about millionaires. That argument failed. Harris J found that the similarity between the plaintiff’s concept and the defendant’s television program supported the inference that, once the concept had been disclosed, the defendant had made subconscious use of the plaintiff’s concept.[17]

[43]     Sixth, as Madritsch/Nioa submitted to the primary judge,[18] the so-called ‘springboard doctrine’ prevents a person using another’s confidential information in order to bring out its own product in a manner or time it would not otherwise have been able to achieve.[19] If a person wishes to design a product without it being alleged that the person has used confidential information, he or she must proceed through an independent design sequence and not use the confidential information as a springboard to jump through the sequence.[20] And, therefore, 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.[21]

[44]     Seventh, as explained by Ryan J in RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd, the absence of a logical explanation for doing something can support an inference that confidential information was used as a springboard.[22]

[45]     That last principle should not be taken too far. An inference of misuse of confidential information must still be established by means of indirect or circumstantial evidence. In RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd, for example, there was evidence that the respondents, three former employees of RLA, made improper use of their knowledge of RLA’s confidential information concerning the formulations for two flooring adhesives developed and manufactured by RLA. The former employees were found to have used the confidential information as a ‘springboard’ to develop and bring to the market adhesive products for their newly established company, and to have done so more quickly than they otherwise would have.

[46]     Eighth, much depends on the respective fields of the parties. In those cases where there is no closely substitutable field of common activity, the use of another’s confidential information may be more readily identifiable whether in the form of designs or drawings, manuals, or a description of a methodology for a manufacturing process or business method. On the other hand, where the parties are involved in closely substitutable fields of common endeavour, an inference of misuse will not arise unless there is a precise identification of the information, its confidential character, and its misuse.[23]

[47]     Ninth, the plaintiff need not establish that the defendant or its employees intentionally, or even consciously, used the confidential knowledge they gained as a springboard. The subjective intentions of the defendant and its employees are irrelevant to whether or not the confidential information was used.[24]

[48]     Tenth, none of the principles just discussed alters the legal burden of proof. In a proceeding for breach of confidence the burden of proving, on the balance of probabilities, each of the three elements of the cause of action remains with the plaintiff throughout.[25]

[1] These are the elements explained by Megarry J in Coco v AN Clark (Engineers) Ltd (1968) 1A IPR 587. Note that it is unclear whether detriment is an essential part of the action: see, for example, the discussion in Bently and Sherman, Intellectual Property Law 2nd edition at 1035 [2.2.3].

[2] Saltman Engineering Co Ltd v Campbell Engineering Co Ltd [1963] 3 All ER 413.

[3] Amber Size & Chemical Co Ltd v Menzel [1913] UKLawRpCh 65; [1913] 2 Ch 239.

[4] See the discussion of this topic in Laws of Australia (Westlaw Au) at [23.6.260]. The authors of the ‘Confidential Information’ section of this text are Professor Sam Ricketson, Professor Andrew F Christie, and Dr Ben McEniery. Professor Ricketson is the author of the seminal text, The Law of Intellectual Property: Copyright, Designs and Confidential Information which later became the four-volume loose-leaf service of the same name (by Ricketson and Cresswell).

[5] Ibid at [23.6.270]. See also the examples which follow.

[6] Bently and Sherman, Intellectual Property Law 2nd edition at 1035 [2.2.1].

[7] Ibid.

[8] This is the description in Laws of Australia at [23.6.270] but the authorities cited there do not directly support the proposition. Instead, the proposition is supported by CMI-Centers for Medical Innovation GmbH v Phytopharm plc [1999] FSR 235 at [60]. See also Coco v AN Clark (Engineers) Ltd (1968) 1A IPR 587 at 595.

[9] CMI-Centers for Medical Innovation GmbH v Phytopharm plc [1999] FSR 235 at [60]. See also Coco v AN Clark (Engineers) Ltd (1968) 1A IPR 587 at 595 where Megarry J, on an application for an interlocutory injunction, described the plaintiff as founding his case on what during the argument was described as a “complex of confidential similarities” between the two engines. That case can be contrasted with Berkeley Administration v McClelland Inc [1990] FSR 505 where the court was not satisfied that the defendants, former employees of the plaintiff, in preparing their own business plan, had used five specific items of confidential information derived from financial projections in the plaintiff’s business plan. Wright J was not satisfied that the former employee’s figures were so similar that they must have been derived from the plaintiff’s figures.

[10]  [1969] Qd R 470.

[11] Laws of Australia at [23.6.260].

[12] CMI-Centers for Medical Innovation GmbH v Phytopharm plc [1999] FSR 235 at [60]. See also Bently and Sherman, Intellectual Property Law 2nd edition at 1035 [2.2.1].

[13] CMI-Centers for Medical Innovation GmbH v Phytopharm plc [1999] FSR 235 at [60].

[14] Krueger Transport Equipment Pty Ltd v Glen Cameron Storage & Distribution Pty Ltd [2008] FCA 803; (2008) 78 IPR 262 at [82].

[15] Ibid.

[16] [1980] VicRp 26; [1980] VR 224.

[17] This summary is based on the work (described above) Laws of Australia at [23.6.260].

[18] Plaintiff’s Closing Submissions at [130].

[19] RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd [2011] FCA 423; (2011) 280 ALR 125 at [70] (Ryan J).

[20] Dart Industries Inc v David Bryar & Associates Pty Ltd [1997] FCA 481; (1997) 38 IPR 389 at 408–9 (Goldberg J). In this context, the concept of a ‘jump through’ the sequence really means that rather than using its own independent design sequence, the defendant is gaining an unfair advantage by using the confidential information.

[21] [2011] FCA 423; (2011) 280 ALR 125 at [73] (Ryan J).

[22] [2011] FCA 423; (2011) 280 ALR 125 at [70] (Ryan J).

[23] Retractable Technologies Inc v Occupational and Medical Innovations Limited [2007] FCA 545; (2007) 72 IPR 58 at [104] (Greenwood J).

[24] See Seager v Copydex Ltd [1967] 2 All ER 415; RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd [2011] FCA 423; (2011) 280 ALR 125 at [77]; Talbot v General Television Corporation Pty Ltd [1980] VicRp 26; [1980] VR 224 at 238-9 (Harris J) and upheld on appeal at 242.

[25] See, for example, Rhesa Shipping Co SA v Edmunds [1985] 1 WLR 948 at 951 (a civil case where the question was whether it could be inferred that the loss of the vessel had been caused by ‘the perils of seas’).