The nature of confidential information - Have you got what you paid for?

By Jeremy Charlston and Clare Doneley.

Key Points:
While confidential information is not "property" in the usual sense, it is capable of being passed on. An action for breach of confidence can be assigned, especially when that action relates to rights or interests to be owned by the assignee.

A decision of the Federal Court has considered whether confidential information, together with the right to bring actions in relation to breaches of confidentiality occurring prior to the acquisition of assets, can be assigned to the purchaser of the assets of a company.

While the decision involved two corporate entities, the case tells us much about the nature of confidential information and holds interesting lessons for anyone who owns confidential information and may want to pass it on, including government entities.

Facts in TS & B Retail Systems Pty Ltd v 3Fold Resources Pty Ltd and Others (No 3) [2007] FCA 151

TS&B was a company that manufactured, supplied and installed shop fittings for major retail outlets.

Around the same time as TS&B went into receivership, a group of its employees secretly copied manufacturing drawings and tables of data and left TS&B in order to set up 3Fold Resources Pty Ltd as a competitor.

Subsequently, TS&B Retail purchased the assets of TS&B, including its intellectual property rights. TS&B Retail sought damages for breach of copyright and breach of confidence against 3Fold and its individual directors.

To resolve the breach of confidence claims raised by TS&B Retail, the Federal Court had to consider whether TS&B Retail had standing to bring its action. To establish standing, the Court looked at whether TS&B Retail:

• had taken an assignment of TS&B's confidential information; and
• was entitled to maintain a cause of action for breaches of confidence that occurred:
  • from the time it became entitled to share in the confidential information; and
  • prior to it becoming entitled to share in the confidential information.

Purchase of TS&B assets

By letter dated 19 February 2003, TS&B Retail offered to purchase the assets of the business from the Receivers of TS&B. The assets were relevantly described as:

"All intellectual property and proprietary rights (whether registered or unregistered) owned by the Vendor in the following intellectual property of the Business (including documents recording the intellectual property, whether in soft or hard copy) (Intellectual Property Rights):

(i) [including business names, trade names and trademarks]

(ii) [domain names used in the business]

(iii) copyright and all other intellectual property and proprietary rights in all drawings regarding production and tooling;

(iv) all customer lists, pricing and costing information and customer and production records; and

(v) patents, drawings, discoveries, inventions, improvements, trade secrets, technical data, formula, computer programs, databases, know how, logos, design, design rights, copyright and similar industrial or intellectual property rights;

All choses in action, claims and rights howsoever arising (to the fullest extent possible at law) that the Vendor may have against any entity or individual in relation to any breach, infringement, misuse or copying of the Intellectual Property Rights as at the Effective Date other than claims based upon an alleged contravention of the Corporations Act (Claims)."

By letter dated 20 March 2003, TS&B Retail wrote to the receivers proposing that the sale be on the terms set out in the letter of 20 March 2003 along with those in the letter of 19 February 2003. Relevantly, the letter of 20 March 2003 stated that "for the avoidance of doubt, the "Intellectual Property Rights" includes, to the extent it may be transferred or assigned at law, any right of the Vendor to have information (including, without limitation, confidential information) kept confidential, and the "Assets" includes all Claims in connection with any such right other than claims based upon alleged contravention of the Corporations Act".

The Court held that (to the extent it mattered) the letter of 19 February 2003 was an offer to purchase the assets. The offer was accepted by the Receiver signing and returning a copy of the letter to TS&B Retail. That resulted in a binding contract. The provisions of the letter of 20 March 2003 were a variation to that contract.

Assignment of confidential information?

TS&B Retail asserted that it took an assignment of TS&B's confidential information. According to the contract, there was an attempt to assign confidential information to TS&B Retail, as the letter of 19 February 2003 recorded that "all intellectual property and proprietary rights" were the subject matter of the contract.

The Court relevantly stated:

• the only thing capable of being assigned is property or a right in property
• confidential information is not property in any normal sense; and
• confidential information is not property at all.

While confidential information is not property and is therefore not capable of being assigned per se, the Court stated that "it now seems accepted that confidential information can be passed on by one person to another, and the person to whom it has been imparted can take action to protect the information".

The Court held that the confidential information had passed to TS&B Retail, and accordingly TS&B Retail was entitled to maintain a cause of action for breach of confidence that occurred from the time it became entitled to share in the confidential information.

Assignment of claims for breach of confidentiality

The Court held that TS&B Retail was not able to bring an action for a breach of confidence that occurred prior to TS&B Retail becoming entitled to use the confidential information merely because the confidential information had passed to TS&B Retail.

No doubt, for this reason, the contract between TS&B Retail and the Receivers purported to assign to TS&B Retail any pre-existing claim TS&B may have had for breach of its confidential information.

There is however a general rule that a personal right to litigate cannot be assigned either at law or in equity - an action for breach of confidential information is a personal action.

The Federal Court overcame the general rule by referring with approval to an exception in England to the bar on assigning personal rights. In Trendtex Trading Corporation v Credit Suisse [1982] AC 679, Lord Roskill said:

"In English law an assignee who can show that he has a genuine commercial interest in enforcement of the claim of another and to that extent takes an assignment of that claim to himself is entitled to enforce the assignment unless by the terms of the assignment he falls foul of our law of champerty, which, as has often been said, is a branch of our law of maintenance …The Court should look at the totality of the transaction. If the assignment is of a property right or interest and the cause of action is ancillary to that property right or interest, or, if the assignee has a genuine commercial interest in taking the assignment and in enforcing it for his own benefit, I see no reason why the assignment should be struck down as an assignment of a bear cause of action or as savouring of maintenance".

Therefore, in order for there to be an assignment of a right to sue for breach of confidence, a party will need to show that:

• the party has a genuine commercial interest in taking the assignment and in enforcing it for the party's own benefit; or
• there has also been an assignment of a property right or interest to which the cause of action is ancillary.

Justice Finkelstein said that the logic of Lord Roskill's view was inescapable. This was especially so when, as in this case, TS&B Retail's cause of action was connected with, or related to, rights or interests owned by, or that would fall into the ownership of, TS&B Retail. Accordingly, TS&B Retail, was entitled to maintain a cause of action in relation to breaches of confidence that occurred prior to its purchase of the assets of TS&B.

For further information, please contact Jeremy Charlston and Clare Doneley.