Innocent until proven knowing. This article about claims for damages for misuse of confidential information
In Media Entertainment, the High Court has issued a useful reminder of the importance of pleading and proving the unconscionability of the defendant’s conduct when bringing a claim for damages for misuse of confidential information.
Media Entertainment runs an online gambling business. It has one registered shareholder who holds some of the company’s shares absolutely and the rest on trust for a number of investors.
It alleged that a third party individual, seeking the support of the investors against the shareholder and others, persuaded one of the investors to instruct its systems administrator to disclose passwords to enable the defendants to access its computer systems. Having obtained the passwords, it was alleged that the defendants accessed the systems and took control of the claimant’s infrastructure. The extent and nature of the defendants’ access was a matter of dispute, but the defendants admitted accessing the systems, changing some passwords, diverting some emails to a new account within the claimant’s systems and locking certain individuals out of those systems.
The defendants admitted that the information concerned was confidential, but asserted that their access had been consensual and authorised. The defendants also asserted there had been no ‘misuse’ of the information or intent to disrupt the claimant’s business; rather, the defendants wanted to safeguard it in the event of a change in management.
The claimant maintained that the systems administrator providing the passwords had been acting without authority. The claimant issued proceedings alleging that the defendants had misused the claimant’s confidential information, and sought declarations, injunctive relief and damages.
Equitable duty of confidence
Even where the recipient of confidential information owes no contractual obligations to the owner of the information, the law affords protection to the owner against the misuse of that information by imposing an equitable duty of confidence on the recipient of the information. The equitable duty of confidence will arise where:
the information is of a confidential nature; and
the information was communicated in circumstances importing an obligation of confidence (Coco, para 47).
The question which faced Master Dagnall in Media Entertainment was whether, to succeed on a claim for an injunction, declaration or damages for misuse of confidential information in breach of the equitable duty of confidence, it was necessary to plead and prove that the defendants knew their actions would amount to ‘misuse’ of the claimant’s confidential information. Such knowledge had not been pleaded by the claimants. The defendants accordingly applied for a strike out and/or a reverse summary judgment on the basis that, such knowledge not being pleaded, the claims for damages, injunction and declarations were not sustainable, and should not be allowed to proceed.
The High Court decision
In a 164-paragraph judgment, over 117 pages, Master Dagnall analysed the historical development of the law of breach of confidence. Against that background, he held that there was an essential difference between Media Entertainment’s claim to injunctive relief – which did not require an actionable wrong by the defendants, may be forward-looking and may be granted simply to protect Media Entertainment’s rights; and its claim for damages – which are to compensate for an actionable wrong committed by the defendants in the past.
He noted that this differentiation was reflected in the extensive authorities discussed in his judgment, including Valeo Vision, in which Aldous J held that ‘only in cases where the conscience of the defendant is bound would it be appropriate to grant relief by way of damages. Thus, for an inquiry to be ordered, it is necessary to establish knowledge or for there to be circumstances in which the defendant ought to have known or there were reasonable grounds for the defendant to know that the use was wrongful’ (para 228).
Master Dagnall noted, however, that none of those authorities dealt with the situation at hand – where the defendants knew they had received the claimant’s confidential information and the claimant had not authorised its employee to disclose the information to them, but the claimant had not alleged that the defendants knew (or should have known) there was no such authorisation. He nonetheless held that it was ‘consistent with principle that in order to be liable in damages, a defendant should have some knowledge of lack of authorisation, and hence misuse’ (para 127).
He rejected the claimant’s submission that a defendant should have to show that they had actual or ostensible authority to use the information in order to avoid liability in damages, holding that in a claim for damages the burden was on the claimant to demonstrate knowledge on the defendant’s part that their conduct amounted to misuse of confidential information (paras 128-130).
The claimant’s claim for injunctive relief, however, was held not to require any such knowledge. Referring again to Valeo Vision, Master Dagnall noted that injunctions may be granted simply to protect a claimant’s rights in and to the confidential information. The defendants’ application for a strike out of the claim for injunctive relief was therefore refused.
On the sufficiency of the claimant’s pleaded damages claim, Master Dagnall referred to the decision of the House of Lords in Three Rivers (No.3) (paras 183-191.1(3)), noting that any claim of fraud, dishonesty or other subjective wrong must be strictly both alleged and pleaded. It was therefore held not to be sufficient for the purposes of CPR 16.4(1)(a) and PD 16.8.2(5) for Media Entertainment to point to particularised facts from which it was said the necessary inferences of knowledge could be drawn without a specific, pleaded allegation being made (para 131).
Similarly, Media Entertainment could not rely on the content of witness statements served in earlier stages of the proceedings to give context to, and to supplement, their particulars of claim. The damages claim was therefore struck out (subject to a final opportunity for the claimant to apply to amend the claim (para 138)).
Damages claims against recipients of confidential information
Media Entertainment serves as a useful reminder that, while injunctive relief might be available against an innocent recipient of confidential information where the provider has acted unconscionably, no damages claim can lie against that recipient unless they have also acted unconscionably – whether through knowing the information was obtained in breach of confidence, or through knowing their use of confidential information is unauthorised.
It is unclear what level of knowledge is required before a recipient of confidential information ceases to be ‘innocent’ in their use of the information
Master Dagnall’s judgment leaves unanswered the question of whether the required knowledge of misuse in a case of this nature – where the recipient knows the information is confidential and its use is not authorised – needs to be actual, subjective knowledge, or whether recklessly or deliberately failing to take reasonable steps to discover whether the recipient is misusing the information is enough.
Practical approach to claims against recipients of confidential information
Where confidential information has been used in an unauthorised manner and where there is no contractual obligation, claimants can be keen to pursue the user of the information for damages for breach of the equitable duty of confidence. In practical terms, Media Entertainment is a reminder that damages will only be available if the claimant can show that the defendant was not an ‘innocent’ recipient of confidential information – that is, someone who, on whatever standard of knowledge applies, believed that their use of the information was authorised.
Two practical points follow from that. First, it is important to reflect at the outset on what the defendant understood the position in relation to the information to be, or at least what the defendant will say they understood the position to be. Secondly, the defendant’s alleged actual or inferred knowledge that their actions amount to a ‘misuse’ of confidential information is an essential part of any claim seeking a damages remedy, which should be clearly pleaded as a specific allegation, supported by facts, from the outset.
Diya Sen Gupta QC, Blackstone Chambers and Robbie Sinclair and Hannah Crisp, Allen & Overy LLP.
Media Entertainment – Media Entertainment NV v Sapar Karyagdyyev  EWHC 1138 (QB)
Coco – Coco v AN Clark (Engineers) Ltd  R.P.C. 41
Valeo Vision – Valeo Vision Société Anonyme v Flexible Lamps Ltd  R.P.C. 205
Three Rivers (No.3) – Three Rivers v Governor and Company of the Bank of England (No.3)  1 A.C. 610