Causes of Action Relating to Misuse of Confidential Information
The Duty of Confidence

A duty of confidence arises when a person acquires knowledge of confidential information, including trade secrets, under circumstances in which the person has notice or agreed that the information is confidential.²⁰ A duty of confidence can exist beyond the traditional categories of contractual obligation, fiduciary duty or relationship between the parties and is based on elements of trust and reasonable expectations.²¹ The courts have considered an action for breach of confidence to be sui generis, with roots in contract, equity and property law.²²

The test to determine whether a duty of confidence arises is an objective one: whether a reasonable person standing in the shoes of the recipient of the information would have realized that the information was given in confidence.²³

Industry customs may play a role in the court’s determination of whether a duty of confidence arises.²⁴ The courts have found that evidence with regard to industry customs is relevant in determining the reasonable expectation of confidentiality, even in the absence of an express confidentiality agreement between the parties.²⁵ In one case, it was also suggested that a conversation “in the field” between two engineers can be regarded as a circumstances of confidence.²⁶

Although a relationship need not exist between the parties for a duty of confidence to arise, the courts have recognized several relationships that give rise to confidentiality obligations – for example, a relationship in which confidential information is disclosed for a limited purpose, such as to a manufacturer for the purpose of manufacturing a product;²⁷ similarly, in a relationship between licensors and licensees, the courts have found that a licensee cannot disclose confidential information that was provided to it for the purposes of a licensing arrangement;²⁸ in a relationship between partners in a partnership or a joint venture, information disclosed between the partners has been considered to be disclosed in a confidential relationship;²⁹ in a relationship between employers and employees, it has been held that an employee owes his or her employer a duty of fidelity and good faith upon termination, which encompasses the duty not to retain and use documented client lists and other confidential information received in the course of employment;³⁰ and finally, when two parties enter into a contract, even if the contact is silent on the matter of confidence, it has been held that the law will imply an obligation to treat as confidential any confidential information passed between the parties for the purposes of the contract.³¹

A duty of confidence has also been held to arise in the context of commercial negotiations³² even if the negotiations ultimately fail to result in a contract or commercial arrangement,³³ and perhaps especially so if the negotiations were a ruse to gather confidential information.³⁴ In Lac Minerals, a leading case on the obligations that can arise even if a proposed commercial arrangement does not ultimately come to fruition, confidential information regarding a potential property for purchase was disclosed during negotiations for a joint venture.³⁵ The Court found that the recipient of this information had obligations of confidentiality even after negotiations fell through, and that the recipient was in breach of those obligations when it used the information to acquire the property for itself, to the discloser’s detriment.

Establishing a Claim of Breach of Confidentiality

Protection of confidential information has roots in the broad equitable principle of good faith: “[He] who received information in confidence shall not take unfair advantage of it.”³⁶ A duty of confidence does not give rise to a positive obligation, but rather the confidant has a negative obligation: not to misuse the information. In Lac Minerals, the Court stated that if a claim for breach of confidentiality has occurred, the burden of proof is on the plaintiff to show three elements:

1. that the information conveyed was confidential;
2. that it was communicated in confidence;
3. that it was misused by the confidant.³⁷

The Court held, however, that if information is disclosed in confidence, the recipient is entitled to use it only for the purposes explicitly authorized, and the burden of proof rests with the recipient to show that the use of the information was authorized.³⁸

An action for breach of confidence is not limited to that solely against a direct recipient of the information. A third-party recipient may also be liable for unauthorized use of confidential information if he or she had actual, imputed or constructive knowledge that the information was confidential.³⁹

Defeating a Claim of Confidentiality Breach

There are a number of circumstances that the courts have accepted as militating against a finding of a breach of confidentiality:⁴⁰

1. if the parties to the disclosure have expressly agreed that the information will be considered nonconfidential;⁴¹

2. if the recipient had a right to receive the information and use it any way he or she chose;⁴²

3. if the recipient has not had an opportunity to reject the attempted disclosure;⁴³

4. if the recipient did not know that the information received was obtained or communicated in breach of trust or confidence;⁴⁴

5. if the recipient of the confidential information neither knew nor ought to have known of the alleged limited purpose of the disclosure;⁴⁵

6. if the information that is the subject of a duty of confidence ceases to be confidential;⁴⁶

7. if the information disclosed in circumstances of confidence must be made available to the public by law.⁴⁷

The “Springboard” Principle

One specific type of misuse of confidential information that the courts have prohibited is based on the “springboard” principle. The springboard principle provides that a person who obtained information in confidence is not permitted to use it as a springboard, or an unfair head start, for activities detrimental to the confider, even after the information becomes available to the public.⁴⁸ This principle was developed partly to provide redress where even though the misappropriated information may be “nothing very special,” the misuse of the information nonetheless permits a recipient of that information to enter the market faster than would otherwise be possible.⁴⁹ The English authorities have expressed the reasoning for extending the restriction beyond the time that the information becomes public to account for any unfair head start given to the possessor of the information in comparison to a member of the public.50 This restriction is to promote equality between a person who possesses the relevant information prior to public disclosure and someone who receives the information through public disclosure and who would generally still have to prepare plans and specifications, construct prototypes and conduct tests in order to enter the market.⁵¹

In Cadbury Schweppes, the leading Canadian case dealing with springboard principle, a licensor revealed to the licensee, under licence, confidential information about a recipe for a tomato cocktail with clam broth. After receiving notice to terminate the licence, the licensee used the confidential information to develop a competing product. Even though it was held that the information was “nothing very special” and a competing drink could have been developed without the use of the confidential information, it was nonetheless found that using the confidential information gave the licensee a head start that would not have otherwise been available but for its misuse of the confidential information. Damages were assessed for the period of time the licensee would reasonably be expected to develop a competing product without using the confidential information, a period that amounted to the springboard period enjoyed by the licensee.⁵²

The Fiduciary Duty

A person who owes a fiduciary duty has a positive obligation to act altruistically for the sole benefit of the beneficiary. A fiduciary relationship co-exists with an obligation of confidence with respect to confidential information⁵³ and so a fiduciary duty includes a duty of confidence.

Whereas a duty of confidence may arise when a third party acquires the confidential information, a fiduciary duty can arise only between the fiduciary and the beneficiary.⁵⁴ The law recognizes certain relationships as fiduciary in nature, including director–corporation, trustee–beneficiary, solicitor-–client, partners and principal–agent.⁵⁵

Directors, officers and other senior management are fiduciaries to their employers. Fiduciary obligations include a duty of loyalty and good faith, and an avoidance of a conflict of duty and selfinterest.⁵⁶ In Canadian Aero Services Ltd. v. O’Malley,⁵⁷ the Court held that a finding of fiduciary obligations on the directors and senior officials of a company was simply a recognition of the degree of control they have over the operations of the company. It has been noted that generally an employee whose actions require another person’s approval will not likely be seen as a fiduciary.⁵⁸

Besides being found in the traditionally recognized relationships, a fiduciary duty may be found to exist if the following characteristics are found in a relationship:

1. The fiduciary has scope for exercise of some power or discretion.

2. The fiduciary can unilaterally exercise that power or discretion to affect the legal or practical interests of the beneficiary.

3. The beneficiary is peculiarly vulnerable to the fiduciary.⁵⁹

The courts are generally reluctant to find fiduciary obligations between arm’s-length commercial parties.⁶⁰ While the courts accept that disclosure of any confidential information will generally place the confider in some position of vulnerability,⁶¹ in the commercial context this vulnerability is seen as flowing from the terms of a commercial relationship freely entered into by the parties and is not the kind of vulnerability that will serve to elevate the relationship to one that is fiduciary in nature.⁶² In this type of relationship, the courts will generally leave the parties to contract for the position that they desire, and supplement that contract with a duty to not misuse confidential information.⁶³ Despite this, a court has stepped in to find a fiduciary relationship when the vulnerability arises from the inability of a party, despite its best efforts, to prevent an injurious exercise of power or discretion that is combined with a grave inadequacy, or absence, of other legal or practicable remedies to prevent the wrongful exercise of that power or discretion.⁶⁴

Establishing a Claim of Breach of Fiduciary Duty

Unlike a claim for breach of confidentiality, the plaintiff need not have suffered detriment to establish a claim of breach of fiduciary duty⁶⁵ and so actions for breach of confidence often also allege breach of fiduciary duty because of the lower threshold for breach.⁶⁶ However, the courts may be reluctant to impose a fiduciary duty where there is also a breach of confidence, perhaps because the remedies available for a breach of confidence are broad and generally at least equivalent to those available for a breach of fiduciary duty.⁶⁷

To establish a claim for breach of fiduciary duty in the context of misuse of confidential information or trade secrets, a plaintiff must show the same elements as in other claims for a breach of fiduciary duty, and must establish that the defendant owed a fiduciary duty to the plaintiff and breached this duty.⁶⁸

To Be Continued.

FOOTNOTES:

20. See Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 574 [Lac Minerals] Note that Lac Minerals was a split decision in which the Court was unanimous only on the issue of breach of confidence; Coco v. A.N. Clark (Engineers) Limited, [1969] R.P.C. 41 (Ch. D.) [Coco].

21. See Saltman Engineering Co. Ltd. and others v. Campbell Engineering Co., Ltd., [1963] 3 All E.R. 413 (C.A.) [Saltman]; Lac Minerals, ibid.

22. See Lac Minerals, ibid.; Cadbury Schweppes, supra note 5.

23. Coco, supra note 20.

24. Ibid.

25. Lac Minerals, supra note 20. See also Ken Graham Consumer Products Ltd. v. Sunbeam Corp. (Canada) Ltd. (1989), 25 C.P.R. (3d) 52 (Ont. H.C.J.) [Ken Graham].

26. Lac Minerals, ibid.

27. Ken Graham, supra note 25.

28. Cadbury Schweppes, supra note 5. See also Breeze Corporation v. Hamilton Clamp and Stamping Ltd. (1961), 37 C.P.R. 153 (Ont. H.C.).

29. Ken Graham, supra note 25.

30. R.T. Investment Counsel Inc. v. Werry (1999), 46 B.L.R. (2d) 66 (B.C.S.C.).

31. Saltman, supra note 21.

32. Seager v. Copydex Ltd., [1967] 1 W.L.R. 923 (C.A.) [Seager].

33. Coco, supra note 20.

34. Sweet Factory Inc. v. Hudson’s Bay Co. (1988), 85 C.P.R. (3d) 417 (Ont. Ct. Gen. Div.) [Sweet Factory].

35. Supra note 20.

36. Seager, supra note 32.

37. Lac Minerals, supra note 20.

38. Ibid.

39. See Apotex Fermentation, supra note 14; Cadbury Schweppes, supra note 5.

40. See C.L. Slusarchuk and D. Crane, “When Will Confidentiality Obligations Be Imposed by the Common Law?” in R.A. Fashler et al., eds., Trade Secrets and Confidential Information (Vancouver: The Continuing Legal Education Society of British Columbia, 2002) 2.1 at 2.1.17 [Slusarchuk].

41. S D & A Marketing v. Horn Abbot Ltd. (1989), 26 C.P.R. (3d) 168 (Ont. H.C.J.).

42. Abode Properties Ltd. v. Schickendanz Bros. Ltd., [1999] A.J. No. 1407 (Alta. Q.B.).

43. Cope Allman (Marrickville) Ltd. v. Farrow (1984), 3 I.P.R. 567 (N.S.W.S.C.).

44. Bryndon Ventures Inc. v. Bragg (1989), 31 C.P.R. (3d) 452 (B.C.S.C.) aff’d (1991), 37 C.P.R. (3d) 489 (B.C.C.A.).

45. Hollinsworth v. BCTV, a division of Westcom TV Group Ltd. (1999), 59 B.C.L.R. (3d) 121 (C.A.).

46. A.-G. v. Guardian Newspapers Ltd. (No. 2), [1990] 1 A.C. 109 (H.L.).

47. Glaxo Canada Inc. v. Canada (Minister of Health and Welfare) (1992), 41 C.P.R. (3d) 176 (F.C.T.D.).

48. Terrapin Ltd. v. Builders’ Supply Co. (Hayes) Ltd., [1960] R.P.C. 128 (C.A.) [Terrapin].

49. Cadbury Schweppes, supra note 5. See also Saltman, supra note 21.

50. Terrapin, supra note 48.

51. Ibid. See also Manson, supra note 3 at 1.1.09.

52. Cadbury Schweppes, supra note 5.

53. Lac Minerals, supra note 20.

54. Ibid.

55. Ibid.

56. Canadian Aero Services Ltd. v. O’Malley (1973), 40 D.L.R. (3d) 371 (S.C.C.) [Canadian Aero].

57. Ibid.

58. Slusarchuk, supra note 40 at 2.1.09.

59. Lac Minerals, supra note 20.

60. Ibid. See also Cadbury Schweppes, supra note 5.

61. Cadbury Schweppes, supra note 5 at 165.

62. Visagie v. TVX Gold Inc. (2000), 49 O.R. (3d) 198 (C.A.).

63. Cadbury Schweppes, supra note 5 at 163-5.

64. Sweet Factory, supra note 34.

65. Lac Minerals, supra note 20 at para. 42, La Forest J. La Forest J. was in the minority on the Court's finding that a fiduciary duty did not exist in this case but his statements regarding the criteria for breach were not in dispute.

66. Slusarchuk, supra note 40 at 2.1.07.

67. Ibid. See also Cadbury Schweppes, supra note 5.

68. Sweet Factory, supra note 34.