Choppy waters in Mimo Connect v Buley yacht breach of confidence dispute as Court of Appeal overturns "limited undertakings" decision

Court of Appeal grabs the ball
back in breach of confidence
interim injunction dispute 
(L. Prang & Co, C. C. (1872)
The cat - Felis domesticus.,
Retrieved from the Library of Congress,
https://www.loc.gov/item/2017660723/)

Today's trainee solicitors do not know the heart racing feat of yesteryear of trying to navigate the maze of the Royal Courts of Justice to find the (then) Queen's Bench Division (QBD) Fee Office to pay the Claim Form Fee (by cheque) by 4PM, to then hauling it to the Issuing desk before 4:30PM to issue a Claim Form.  Indeed most IP litigators practicing in the UK have never had the pleasure of navigating what is now the King's Bench Division (KBD), spending most of their life in the comparatively modern Chancery Division.  The AmeriKat started her life out in the QBD (and Chancery) so grew up being fastidiously paranoid about bundling and having an uncanny (but otherwise completely useless in the real world) ability to navigate the Bear Garden. Although her time now is very much spent in Chancery, she still monitors decisions coming from the KBD as many of our confidential information and trade secrets cases come from those hallowed halls.   

One such decision was that in Mimo Connect v Buley & Ors, which ended up in the Court of Appeal a month ago with the decision of Lord Justice Bean (giving Judgment of the Court) handed down two weeks ago ([2023] EWCA Civ 909).

Background

As she said in the last post, trade secrets cases are full of facts, so buckle in.  

Mimo is a company that provides internet connectivity to customers in the maritime sector (e.g. yachts).  The first defendant was a co-founder of the business (with the Robertsons), and he and his wife (the second defendant) were also shareholders, directors and, until recently, employees.  There was no written contract of employment.  The shareholders' agreement contained restrictive covenants directed to protecting the goodwill of the business, including restrictions on competitive activity by way of rival businesses and soliciting clients, employees and suppliers (Clause 9).  Clause 13 of the shareholders' agreement also contained terms protecting the company's confidential information. These terms apply for 12 months after a party stops being a shareholder (i.e. after a sell/transfer of shares).  The second defendant transferred her shares to the first in March 2023.  

As Sales Directors of Mimo, the first and second defendants were responsible for and were given considerable resources for generating and converting new sales leads.  As senior employees, directors and shareholders they were also party to virtually all of the confidential information and trade secrets of the business, including through apps which were installed on their laptops and iPhones which were paid by Mimo.

The third defendant - M/Y Connect Maritime - was set up in November 2022 by the first and second defendants.  Although both were originally 50/50 shareholders, in March 2023 the first defendant transferred all his shares to the second.  

Last July, relationships between Mimo and the first and second defendants soured. Lawyers were brought in to assist in the de-merging of the first and second defendants from Mimo.  Negotiations stalled in February 2023 over a number of matters, including how to split clients.  In the meantime, Mimo was aware of the incorporation of the third defendant, but had understood that it was not trading and would not do so until an agreement had been reached.  However, in April it emerged that the first and second defendants had been diverting or attempting to divert business away from Mimo, had been dealing with Mimo's suppliers for this purpose and were using Mimo's client contacts and confidential information [1].  The fourth defendant was involved in the new business and "there had been switching of customers to [M/|Y Connect Maritime] by changing the counter-party to the contract from [Mimo] to  [M/|Y Connect Maritime] and representing that this was a purely administrative step." ([1], quoting [19] of  Linden J's decision).  Around the time this came to light, the second defendant resigned and said she would not be returning her phone or laptop.

Following these events, Mimo took steps to ensure that incoming emails to the second defendant were diverted to the original co-founder, Mr Robertson, and to investigate her company email.   This uncovered further evidence that M/|Y Connect Maritime was trading and business was being diverted in respect of at least four clients ([1], quoting [24] of Linden J's decision).  The first defendant was then suspended pending investigation, with the letter notifying him that he should stay away from work and comply with his duties under his contract of employment (being implied duties as there being no written employment contract).  Letters before action were then sent and undertakings by the first and second defendants were then given stating they would comply with the shareholders' agreement for 60 days. After the undertakings were signed Mimo believed that there was evidence that the fist and second defendants breached their undertakings.  Thus, Mimo made an application for interim relief.  

The Application 

Presented with those facts, on 26 May 2023 Mr Justice Linden granted interim relief stopping the defendants from misusing confidential information, from competing with Mimo's business and from contacting Mimo's clients.  On the return date, Deputy Judge  Tinkler gave an ex tempore judgment.  In that judgment, he accepted limited undertakings of the first-third defendants.  These undertakings were that the first defendant would work only as a yachting insurance broker and that the defendants would not work with a specific list of vessels which they had contact with while working at Mimo.  The Judge said that these undertakings would, on the balance of convenience, address the employment contract issue (i.e. there needing to be reasonable notice for resignation, but without a written contract what that period is is uncertain).     

However, he did not impose any wider prohibition on the defendants dealing with clients. Applying the American Cyanamid [1975] AC 396 test, he turned to the first of the three limbs - is there an arguable case.  He held that this was not a difficult decision - there are plainly multiple arguable issues, namely whether information used by the defendants in approaches to potential clients was confidential information belonging to Mimo and how the restrictive covenants in the shareholder's agreements fit into that (e.g., whether after termination, the restrictive covenants would still be binding on a party, whether the terms in the restrictive covenants were too wide or not reasonable enough to be binding, whether the claimant and potentially its majority stakeholders came to the Court with clean hands, etc).    Under the second limb - adequacy of damages - it was accepted by both parties the test was met that damages would not be an adequate remedy (which is usually the position of parties when client relationships are in issue). Under the final, third limb - balance of convenience - the Judge cited the statement in Olint Corp v National Commercial Bank Jamaica [2008] 12 JJC 2201 which said that the Court's decision should be the one that causes the "least irremediable prejudice to one part of the other."  He summed up the balancing exercise as follows:

"If I grant the injunction in the terms offered by the defendants they agree that they will not deal with the list of identified vessels. They agree that the first defendant will only undertake work as an insurance broker in the next three months. The risks remaining to the claimant are, in essence, that there is work undertaken by one of the defendants either using confidential information in relation to a vessels the claimant has not identified, or that a defendant breaches a different and enforceable term of the restrictions. 

If I grant the injunction in the terms sought by the claimants, the first defendant would not be able to undertake any activities in relation to any client of the claimant for 12 months. The second defendant, the first defendant and the third defendant would be unable to seek new business in competition with the claimants, even if that business was completely new, unrelated to anything currently or historically carried out in the claimant's business activities, and in a part of the world where the claimant has not previously conducted activity. The granting of the injunction would also mean that the claimant would retain 100 per cent of the existing business, notwithstanding the 58 per cent shareholding of the majority shareholders. I note that thus far the universe of identified and quantified claims relates only to approximately six contracts undertaken by the third defendant which may or may not be in breach of restrictions in relation to confidential information or the restrictive covenants."

He concluded that the defendants' undertakings provided significant protection tot the claimant, whereas the injunction could cause significant prejudice to the defendants in circumstances where  - on evidence as to Mimo's financial position - it was unclear that Mimo could compensate the defendants under any cross-undertaking for damages.  As such, under the third limb of American Cyanamid, the application for a continuing broader injunction failed.  

The Judge also held that a speedy trial was not appropriate as there was no reason for this case to jump the queue ahead of others in the list.  

The Appeal

Mimo appealed the decision on six grounds.  The Court of Appeal allowed the appeal noting that they were "conscious of the difficulties faced by the judge, who was deluged with a mass of material at short notice and gave an extempore judgment. But we differ from him in a number of respects." [8[.  The injunctions in respect of the confidential information were therefore continued, together with springboard relief.  

Their decision boiled down to the following three takeaways:

1.  When the issue in a case is about the enforcement of time-limited covenants, it "crie[s] out for an order for a speedy trial". [9].  If the trial does not take place until the second half of the 12 month period (i.e.  in this case, the length of time for the enforcement of the restrictive covenant after termination of a shareholder), that has the potential to seriously prejudice Mimo.  The Court of Appeal's decision in this respect has already been applied in City Site Solutions v Baker & Ors [2023] EWHC 2064 (KB).

2.  The limited undertakings "were inadequate" [11] to protect Mimo's legitimate interests pending trial.  The balance of risk of doing injustice needed to be gauged against the "clear evidence of misuse of confidential information and attempts to divert customers of the claimant towards the third defendant in breach of the first and second defendants' fiduciary duties." [11] The history and defendants' behavior in the present case, the Court continued, justified the defendants' later concession at the appeal that they should be prohibited until trial from dealing with Mimo's customers even outside the specialist area of the business.  

3.  Although the question as to the first defendants' employment status and the length of a notice period was interesting [14], it did not need to be examined because of the non-competition provisions in the shareholders' agreement which protected Mimo.

Immediate thoughts

Three immediate thoughts.  First, the drum will continue to be beat - facts are everything in confidential information cases.  Here the facts and records that Mimo was able to obtain as to the defendants' activities and their explanations were crucial in the balance of convivence exercise at the first hearing and then at the Court of Appeal. Collecting this evidence, including monitoring company incorporations at Companies House, was key.  Second, the Court of Appeal seems to warn about overcomplicating or, in their words at [10], mischaracterizing these types of cases.  When riddled with facts, trade secrets cases can easily obfuscate the core issue and what the relief should be.  Put simply, as the Court of Appeal identified, "[t]his is a claim by a company for interim relief against its directors/shareholders for breach of their fiduciary and/or contractual duties." Once you characterize the claim as such, the relief analysis follows.  Finally the fact the first two defendants were shareholders and directors was pivotal as they could rely on those protections.  Had they only been employees, with no written employment contract, there would have been a protracted dispute as to the status of the defendants as employees, their implied terms and their notice period.  Thus, for any business, especially small businesses, it is important to get those written employment contracts signed.  In the meantime, the case continues so we will now have to wait for the speedy trial to see who was ultimately right.