The US company Celgard, LLC has won against its rival, the Chinese company Shenzhen Senior Technology Material Co. Ltd. (“Senior”) issued an injunction preventing Senior from importing or supplying its battery accessory products to the UK. The court found that it was likely that Senior Celgards had misused confidential information and trade secrets and that the UK was the most appropriate forum to attempt the dispute. This is the first order under the relatively new UK Trade Secrets Regulation 2018, which is based on the EU’s Trade Secrets Directive. The judgment, which has now been upheld on appeal before the Court of Appeal, contains a number of helpful clarifications about the approach that UK courts will take to protect confidential information, particularly on a cross-border basis.
Celgard is a well-established manufacturer of battery separators, a permeable membrane used in a range of batteries. Senior is a newer entrant in this fast growing market.
Dr. Zhang, scientist and expert in battery disconnection technology, previously worked at Celgard and moved to Senior’s CTO in 2017. During the litigation, Senior tried to hide this fact. Senior also did not disclose that at the time of an earlier hearing in the dispute, a shipment of products was on its way to the UK.
Celgard filed for an injunction in the UK to prevent Senior from supplying competitive products to a major UK customer. Senior was ready to deliver its competing products to such a customer at an “unimaginably low price”.
Celgard argued that Dr. Zhang used his battery technology trade secrets to support senior product development. Celgard said Senior was violating common law’s duty of confidence and also the new trade secret regulations.
Rule 3 of Regulation 2018 provides for this
The acquisition, use, or disclosure of a trade secret is unlawful if the use or disclosure of the acquisition constitutes a breach of trust in confidential information.
Likewise, infringing goods are those that benefit significantly from the misuse of confidential information.
The stated intention of the directive (codified in its recitals) is to prohibit “the importation of … goods into the Union or their storage for the purpose of … placing on the market” when foreign trade secrets are misused.
The Supreme Court ruling
In deciding whether to issue an injunction, the court had to address two main issues.
First, was the UK the appropriate jurisdiction to hear such an international dispute? The court quickly dealt with this issue. Although the dispute was between an American plaintiff and a Chinese defendant, the court stated that the UK was an appropriate place to determine the dispute as the damage to Celgard would be a loss of a key customer in the UK.
Second, was it appropriate to issue an injunction under the well-known American cyanamide test? The court rated the American cyanamide criteria as follows:
Is there a serious problem that needs to be tried?
Although Celgard did not have the benefit of disclosure to prove his allegations in the meantime, Justice Trower noted that there was enough evidence against Senior to show that there was a serious problem that needed to be tried. The court outlined the following points:
- With the arrival of Dr. Zhang of Celgard, Senior’s market share for these “dry separator” products increased significantly. Celgard argued that this was due to “an improvement in the range and quality of the senior product”.
- Celgard said the improvements made by Dr. Zhang achieved not through senior independent research or collaboration with other third parties
- Dr. Zhang had told Celgard that he would work for a non-competing company and that he would have to work under a different name while at Senior.
Would compensation be appropriate?
The court ruled that compensation for damages would not be an appropriate remedy given that Celgard was the acting supplier to a certain UK customer and the development of the senior product resulted in Celgard at risk of losing its position as supplier to the company, particularly due to the cheap price at which the senior marketed his product and undercut his competitors. Although the loss of an individual contract could be offset by damage, the impact on Celgard’s ability to contract elsewhere and the pressure on the prices of the product in the absence of an injunction would be a type of loss that is difficult to obtain quantify is.
What is the balance of convenience?
All in all, the court ruled that the balance of convenience had been tipped in favor of issuing the injunction.
The review by the appeals court
Senior appealed the injunction to the Court of Appeal. The appeal was dismissed and the Court of Justice (according to Lord Justice Arnold) provided some useful clarification on these (until recently) untested waters:
- The doctrine of the misuse of confidential information is all about controlling information. The appeals court denied Senior’s claim that confidential information was owned, in line with the policy that it is not a type of intellectual property but a type of unfair competition. The same applies to the fair doctrine of trust.
- The UK was where the damage was done and where the act of unfair competition would take place (i.e. importing the cheaper, non-compliant products). The court dismissed Senior’s argument that the location of the damage to Celgard was where the confidentiality of the information was compromised (in China) as selling in the UK would affect the Celgard market in the UK.
- The level of specificity required in the allegations is not high. The court agreed with Celgard’s situation and stated that the claim may need to be clarified later in the proceedings, but that the level of detail asserted at this stage was sufficient.
On a number of points, the Trade Secrets Regulations codify principles that have already been laid down in English law. However, the ruling clarifies that applicants retain their fair rights to confidential information and have additional rights under the trade secret provisions. In addition, the confirmation that the UK is an appropriate forum to hear major international disputes is welcome news for many companies in the UK, especially in light of Brexit.
Squire Patton Boggs is an international law firm with a team that specializes in the protection and use of confidential information and trade secrets. If you need advice on any of these topics, please contact Carlton Daniel (Partner, London) or Jack Blakey (Associate, London).
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