Do You Want To Know A Secret: Supreme Court Rules on Breach of Confidence

The Supreme Court of Canada’s recent decision in Cadbury Schweppes v. FBI Foods considered the principles governing the assessment of damages for breach of confidence.

The Facts

Cadbury Schweppes involved a dispute over a confidential recipe for a clam-flavoured tomato juice sold under the trade-mark CLAMATO. In 1982, Cadbury Schweppes (then the owner of the CLAMATO recipe) gave a year’s notice of its intention to terminate the license of its Canadian licensee, Caesar Canning. During the notice period, Caesar Canning developed a reformulated tomato-based juice, CAESAR COCKTAIL, which did not contain clam juice.

Cadbury Schweppes did not immediately proceed against Caesar Canning. Caesar Canning subsequently went out of business and FBI purchased the formula from the receiver. A few years later, Cadbury Schweppes commenced an action against FBI for breach of confidence.

The Trial and Appellate Decisions

At trial, it was established that the person assigned to develop CAESAR COCKTAIL could not have done so but for his knowledge of the CLAMATO formula and process information. Despite a finding that this was improper use of confidential information, the trial judge declined to order “compensatory damages” because no loss flowed to the plaintiff directly from the copying. This was based on a finding that, with expert assistance, the recipe could have been independently developed within a year. However, for reasons of "fairness" she ordered "head start" damages in the amount of $29,700, which represented the amount saved by not having to hire a competent person to assist in the development of the new product. The trial judge refused to award a permanent injunction because of the plaintiff’s delay in taking action once it knew the recipe had been copied. She also held that a permanent injunction was not available in "springboard" cases or cases involving information that is "partly private and partly public".

The main issues on appeal were the appropriate measure of damages for breach of confidence and whether the breach should be permanently enjoined when it relates to "springboard" information. Cadbury Schweppes sought damages equal to the revenues and royalties it would have realized had it made the unauthorized sales. Cadbury Schweppes also contested the trial judge’s finding that the defendant’s conduct benefited it only to the extent of a 12 month "springboard". It was argued that such a "head start" shouldn’t affect the measure of damages. The Court of Appeal agreed it would not have taken FBI more than a year to come up with the recipe with expert assistance. Therefore, any damages were to be restricted to the one year "springboard" or "head start". However, it held that the "market value" method (based on the amount FBI would have had to pay a consultant to develop the recipe) was inappropriate because Cadbury Schweppes was not in the business of selling ideas; rather, it was a manufacturer whose loss is to be measured by lost profits. The court went on to find that Cadbury Schweppes’ lost profits should be determined based on FBI’s unauthorized sales. The court also ordered a permanent injunction reasoning that this merely prevented FBI from marketing a product that was developed by breaching confidence and that this would not prohibit FBI from competing legitimately. The court noted that the recipe was still not public in that no one including FBI had been able to reproduce it exactly.

The Supreme Court Decision

The Supreme Court of Canada allowed FBI’s appeal in part. The court concluded that an injunction was inappropriate and that it would inflict competitive damage on FBI beyond what was necessary to restore Cadbury Schweppes to the position it would have been in "but for" the breach. Further, the court held that FBI did not have to replicate the CLAMATO recipe exactly before its "head start" would expire. Rather, it was sufficient that a consultant skilled in the art could have come up with a clam-free "copycat" product within a year.

The court reaffirmed that flexible remedies can be fashioned to address breaches of confidence. However, it stressed that compensation will only be awarded for those losses which, on a common sense view of causation, were caused by the breach. The court noted that the threshold at which information will be considered "confidential" may be very low. Even information obtained from public sources may be confidential if the maker uses his "brain" to produce a result which can only be produced by someone who goes through the same process. The court agreed that "lost profits", not "market value", was the correct method of calculation of damages in this case because Cadbury Schweppes was a manufacturer, not a seller of information. The assessment of Cadbury Schweppes’ lost profits could be made in reference to FBI’s sales, but only if the evidence showed that the sales would have been made by Cadbury Schweppes. The court ended its judgment with an important caveat: even in a commercial context, the ultimate objective in a breach of confidence case is still a "broadly equitable result" and a "flexible and an imaginative approach" to the assessment of damages may be required.

Conclusion

Cadbury Schweppes reaffirms some important considerations and raises some new ones in actions for breach of confidence. First, duties of confidence may exist independent of any written confidentiality agreement. Second, parties should move quickly to commence an action or to seek an injunction to enjoin a breach of confidence. Third, if a contract does exist, the parties will want to define the information as broadly, or as narrowly, as possible, depending on whether one is the discloser or recipient of confidential information. Fourth, one should not assume that information which is relatively insignificant will not be considered "confidential" by a court. Fifth, if a party is in the business of "selling" ideas, a court may assess damages based on the market value of the information which may be quite significant in some industries. Sixth, a "value" placed on the information by the parties may later be used by a court in assessing damages. Finally, one cannot predict with certainty what sort of remedy a court will award for breach of confidence depending on its view of the "equities". Do you still want to know a secret?