Quality of confidence
46 Consistently with the principles outlined above, I make the following findings which I consider demonstrate that the Confidential Information amounts to information with "the necessary quality of confidence about it" (Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) 65 RPC 203, at 215) to attract the imposition of an obligation of confidence.
47 RLA contends, and I accept, that, while the individual ingredients which constitute PE 265 and Roberts 656 are readily obtainable from various industry suppliers, the Confidential Information itself is not widely known, or publicly available in the adhesives manufacturing industry. That includes, in particular, the type, relative proportions and number of polymers specified in the formulas for PE 265 and Roberts 656.
48 A matter of contention in these proceedings has been the value and effectiveness of a "starting point formulation" or "start-up formulation" ("SPF"). The parties tend to agree that SPFs are generic product formulations made available by suppliers of raw materials, particularly polymers, such as Nuplex and BASF to manufacturers of adhesives like RLA and Nexus Adhesives. This is supported by the evidence of Mr Kissock, a former BASF sales manager who had worked for 7 years with BASF Australia where he held the positions of Industry Manager (Fibre Bonding), Industry Manager (Construction Chemicals) and Industry Manager (Architectural Coatings) ("Kissock"). In the role of Industry Manager (Construction Chemicals) he had accountability for the sales and profitability of all of the business' sales within the construction chemicals strategic business unit. He left BASF at the beginning of 2009. The evidence of Kissock and Dr Farquharson, a senior research chemist for approximately 14 years at Nuplex where he was involved in the development of polymers, is that SPFs usually include a list of the raw materials and their relative proportions necessary to create an adhesive. This is also clearly apparent from the documentary evidence tendered in these proceedings. Each supplier usually suggests that all the raw materials, including the polymer or polymers, be ordered from its catalogue of available products. The purpose of providing SPFs to manufacturers like RLA and Nexus Adhesives is fairly obvious: the provision of SPFs is a way of marketing the supplier's products and establishing ongoing commercial connections, in the expectation that the manufacturer will use the SPF to create a commercially viable formula utilising as many of the supplier's raw materials as possible. These facts are uncontroversial. However, there is some dispute over how useful SPFs are in the creation of commercially viable products.
49 There is significant evidence from each side which suggests that only very rarely can an SPF be converted directly into a commercial product. The evidence-in-chief of Dr Farquharson, called by the respondents, was that SPFs provided by Nuplex are "a very general, generic guide" which are given out freely and are often generated from publicly available information and, accordingly, they "don't expect the starting point formulation to be a commercially viable formulation". Indeed, as Dr Farquharson acknowledged, the level of sophistication of SPFs is "moderate at best", and, to develop a commercially viable product from an SPF, would require a certain degree of experience in handling formulations of the relevant type.
50 On the evidence before the Court, I consider that, although SPFs may contribute to the ultimate production of an adhesive, significant further development is usually required to arrive at a commercially viable product. Notwithstanding this general need for further development, the respondents contend, accurately, that many SPFs are in the public domain.
51 Although it is true that several SPFs are available in the public domain and obtainable from suppliers like BASF and Nuplex, this only affords the public knowledge of the "types" of ingredients of flooring adhesives and those which are specific to a particular SPF. There is no evidence to suggest that the Confidential Information, as distinct from general SPFs or the individual ingredients of adhesives, is in the public domain. The availability of the ingredients does not reveal that they are necessarily present in RLA's formulations, or, if they are, the relevant quantities that are used by RLA in those formulations.
52 The evidence of Dr Garnys, an expert witness for RLA, was that, although reverse engineering of an adhesive such as PE 265 or Roberts 656 is possible, that task would require the expenditure of substantial time and money. Dr Garnys's evidence was not seriously contested by the respondents. A precise estimate of the time and money needed to reverse engineer such an adhesive was not available on the evidence and any attempt to quantify the expenditure would be in the realms of conjecture. Nevertheless, I am able to find that the ascertainment of the Confidential Information by reverse engineering of the manufactured products of PE 265 and Roberts 656, although possible, would require the expenditure of time, effort and money on experimentation to such a degree that it cannot be said to be "publicly available" or in the "public domain".
53 As I have found at [8]-[15] above, the Confidential Information consists of detailed and technical information going to the selection and specification of quantities of particular raw materials, the order of mixing components, equipment settings (including timing and speed parameters) and other information relevant to the manufacture of PE 265 and Roberts 656. Moreover, the development of the Confidential Information has been the result of the expenditure of considerable money, skill and ingenuity which, even where RLA was working from existing formulas (like PE 165 and PE 3300), took significant time to bring a finished product to the market. Whether the time taken by RLA to develop the Confidential Information is indicative of the amount of time which another developer would ordinarily take to produce comparable adhesives is, of course, a highly controversial issue in these proceedings and is dealt with later in these reasons.
54 The value of the Confidential Information to RLA, as reflected in the time, effort and resources necessary to produce adhesives like PE 265 and Roberts 656, has been clearly demonstrated by the evidence of RLA's witnesses Etches, Clinch and Mr Paterson who has worked in the field of developing and commercialising polymer systems and industrial adhesives, sealants and coatings for 24 years and is, at present, the Group Technical Manager responsible for RLA's Adhesives and Compounds division. Further, the proposition that information, such as the Confidential Information, would be valuable, not only to the owner of the information, but also to any competitors or third parties has also been made good by the evidence under cross-examination of the respondents' witnesses, O'Brien and Clewlow. In particular, the following exchange took place between Mr Derham QC and Clewlow:
When you left RLA, you didn't think there was anything confidential about the formula for PE265?I assumed that the formula for PE265, RLA would regard that as confidential information.
But you didn't understand the importance of that, you've just said?No. I said that I - I believe I said that it was never explained to me what "confidential information" was.
Was it explained to you that the formula for PE265, for example, was confidential information?No.
Did you understand that it was confidential information?I made the assumption that it was.
You did. You weren't under any illusion about that, were you?Well, I wouldn't imagine RLA would want all their formulas out in the market, no.
Why?Why wouldn't they?
Yes?Because it would be bad business.
Why?I can't really answer that.
…
55 During cross-examination of O'Brien, whom the respondents put forward as responsible for much of the development of Nexus 840, the notion of an adhesives manufacturer disclosing its product formulations was described as "commercial insanity". Further, Counsel for the applicants directed me to Recital C and clause 4 of the confidentiality deed dated 16 November 2006 between Nexus Adhesives and P O'Brien & Associates which recites that;
P. O'Brien acknowledges that substantial harm and damage to the business of Nexus Adhesives may occur in the event that any formulae or manufacturing process belonging to Nexus Adhesives is disclosed to any third party or competitor.
56 The findings recorded at [54]-[55] above demonstrate the importance in the adhesives industry of maintaining the confidentiality of formulations and processes. I accept that, should the Confidential Information become available to RLA's competitors, those competitors would have a commercial advantage by being able to reproduce RLA's products and sell them under their own brand without expending corresponding time or resources in developing them. They may thereby be able to manufacture and sell products with the same performance characteristics but at lower prices or use the information as a base or SPF for the development or modification of their own products.
57 Further, the Confidential Information has not been patented, and so disclosed on a public register. Rather, RLA has relied on maintaining the confidentiality of its product formulations and, accordingly, has communicated the Confidential Information to production staff only to the extent necessary to enable them to manufacture discrete quantities of the relevant product in response to individual customer orders. The Confidential Information has otherwise been stored in an electronic database subject to a password restriction accessible only to senior RLA staff (such as Clewlow, Sofat and Nixon), including sales personnel for costing purposes. Although the respondents sought to diminish the importance of the measures taken by RLA to protect the confidentiality of the Confidential Information, partly by the disputed assertion that the Confidential Information was accessible by anyone who passed through the "canteen" or "tea room", I accept the evidence adduced by RLA through the witness statements and oral testimony of Etches and Clinch, which was not seriously contested, that RLA implemented a number of policies tending to demonstrate the secrecy of the information and a desire to prevent it from becoming public knowledge. Those measures, in addition to those already mentioned, included;
(a) retrieving confidential information from departing employees;
(b) preventing publication of the details of the product formulations in, eg, Material Safety Data Sheets ("MSDS");
(c) describing the non-hazardous components of PE 265 and Roberts 656 comprising 95% of their content as "Trade Secret" in the MSDS; and
(d) actively pursuing litigation, like that against Bostik Australia which was ultimately compromised, to prevent the disclosure and misuse of its confidential information.
58 Thus far in these reasons, I have used the term "Confidential Information" to refer to the product formulation and methods of production for each of PE 265 and Roberts 656. This should not be taken to suggest that the protection afforded to the Confidential Information as a "trade secret" applies only to the totality of that information. Rather, the obligation of confidence may apply separately to each item of that information provided that it can, of itself, be characterised as a "trade secret". Thus, aspects of the Confidential Information, particularly the two key polymers in the PE 265 formulation together with their relative proportions and weights would constitute a "trade secret" if an employee of ordinary honesty and intelligence would regard that information in that light. The question posed by Harper J in GlaxoSmithKline of whether information amounts to a "trade secret" involves the application of an objective test of whether an item of confidential information, learnt during employment, would be understood by an employee of ordinary honesty and intelligence to be confidential, so that its confidentiality must be maintained even after that employment has come to an end. A lack of understanding as to what is a "trade secret" or confidential information is no defence if it is found that the objective test has been satisfied.
59 By contrast with what might ordinarily be described as "know-how" forming part of an employee's "stock of knowledge" which can be drawn upon when working for a new employer, specialised information amounting to a "trade secret" cannot be utilised in that way. That is information which can fairly be regarded as a separate part of an employee's stock of knowledge but which "a person of ordinary honesty and intelligence would recognise to be the property of his old employer" (GlaxoSmithKline, at [50]).
60 In my view, the evidence discussed at [48]-[58] above and that adduced during the cross-examination of Clewlow, Sofat, Nixon and O'Brien demonstrates that a person of ordinary honesty and intelligence would recognise the Confidential Information to be the property of his old employer.
61 There was some attempt by the respondents to suggest that they did not understand the concept of a "trade secret", and to invite a finding that nobody at RLA had properly explained to them the meaning of "confidential information" or "trade secret". As I have emphasised at [58] of these reasons, the respondents' subjective understanding of the nature of the information is irrelevant if the objective test be satisfied. In any event, it was evident, during cross-examination by Mr Derham QC, that Clewlow, Sofat and Nixon each understood that the Confidential Information was regarded by RLA as something which should be kept confidential, and should not be disclosed to competitors. Significantly, the respondents considered their own product information, similar to the Confidential Information, such as manufacturing formulas, to be confidential information which they would not wish to be disclosed to the public. It was also elicited during the cross-examination of O'Brien that information of that kind is regarded within the adhesives industry as confidential in nature and not to be publicly disclosed. The exchange between Mr Derham QC and O'Brien was in these terms;
So, for example, you would wish to ensure that any formula you developed was not available to any other competitor of yours?Yes.
It would be kept secret, wouldn't it?Yes.
And it would only be provided to anybody else outside your company, under strict conditions that it be kept secret?Under contractual agreement, yes.
Yes, a contractual agreement?Yes.
And, in fact, that is the practice in the industry, isn't it?In general.
…
In other words, they wouldn't give you their actual formulation?No. Some - under some circumstance that doesn't occur until you've qualified with them.
And once you've qualified with them, and they actually engage you to manufacture a particular product in accordance with their formula, they sign you up to keep that formula secret, don't they?Yes.
In every case?Yes.
Yes. And that's well known in the industry, isn't it?Yes.
And that's something that you know, that Jonathan Clewlow was fully aware of, isn't it?Yes.
Yes. It's also the case, isn't it, that where, in a particular market there are a number of manufacturers manufacturing competing adhesives, they do not share their formula with their competitors?No.
Have you ever seen that occur?No.
It would be pure commercial insanity, wouldn't it?Yes.
62 It is, in my view, quite clear from the evidence that each of Clewlow, Sofat and Nixon, in fact, knew that the Confidential Information was confidential to RLA in the context of the adhesives industry. In accordance with the principles enunciated in Australian Medicare and GlaxoSmithKline, I consider the Confidential Information to have the "necessary quality of confidence about it" to import an obligation of confidence enforceable by an action like the present. I have also been led to characterise the Confidential Information, and certain specific items of that information, as a "trade secret". I do not accept that certain aspects of the Confidential Information, such as the number, type and amount of polymers in a formulation, can be considered part of an employee's "stock of knowledge" which can legitimately be drawn upon when working for a new employer. As indicated at [59] above, the "know-how" exemption does not apply where the knowledge constitutes a "trade secret", which in this case comprises specific items of the Confidential Information that can fairly be regarded as a separate part of an employee's stock of knowledge but which "a person of ordinary honesty and intelligence would recognise to be the property of his old employer". Accordingly, for the reasons explained in the following paragraph, I consider that the number, type and amount of polymers in both PE 265 and Roberts 656 constitute a "trade secret".
63 In these proceedings, both parties acknowledged that the key components of the adhesive products PE 265, Roberts 656, Nexus 820 and Nexus 840, are acrylic polymers. The polymer content of each adhesive makes up of the bulk of the raw material used in both pressure sensitive adhesives and vinyl flooring adhesives and is considered to be the main "cost driver" as it is the most expensive ingredient in the finished product. In my view, any knowledge of the type, number and quantity (i.e, weight) of polymer used in a specific adhesive formulation constitutes a "trade secret", provided that the information is not in the public domain. Accordingly, any "stock of knowledge" taken away by the respondents on leaving RLA, which included such information about the polymers used in PE 265 and Roberts 656, was a "trade secret", and not available to be used to further the development of a competitive product. Although such knowledge might have formed a separate part of an employee's stock of knowledge it was, nevertheless, information which "a person of ordinary honesty and intelligence would recognise to be the property of his old employer".
64 In the interests of maintaining the confidentiality of information possessed by both parties, I shall identify the ingredients used in each product with a particular pseudonym. It is clear that the parties regard the polymers as the main constituent of their respective adhesives. Where necessary later in these reasons, I shall assign other pseudonyms to other ingredients. Accordingly, the two polymers in PE 265 are hereafter referred to as Polymer A and Polymer B. The polymer in Roberts 656 is Polymer B. The polymers in Nexus 820 are Polymer 1, Polymer 2 and Polymer A. The polymers in Nexus 840 are Polymer B and Polymer 3. I shall also make reference to a Nuplex Polymer 4 and a Nuplex Polymer 5, which were considered in the development process by the respondents but ultimately not used in their final formula for Nexus 820 or Nexus 840.