Cadbury Schweppes Inc. et al. v. FBI Foods Ltd.

citation(s): [1999] 1 S.C.R. 142 online , January 28, 1999 per Binnie J.


JurisDictioncom.gif (2187 bytes)  Case Comment        2007 Donald M. Cameron


Contents


Summary


Facts

Duffy Mott developed a recipe for CLAMATO juice - a clam and tomato drink. Duffy Mott licensed the recipe to Caesar Canning. [4] To enable Caesar Canning to produce CLAMATO, Duffy-Mott communicated related information about its recipe and manufacturing procedures which the trial judge found to be confidential. Caesar Canning entered into an agreement with FBI Foods to make products for it in Ontario. [5]To enable it to manufacture Clamato, FBI Foods was given information about the CLAMATO recipe and methods of manufacture which Duffy-Mott regarded as, and FBI Foods now acknowledges was, confidential.

[6] In 1982, the respondent Cadbury Schweppes acquired the shares of Duffy-Mott and, in a switch of business strategy, decided that Duffy-Mott would take back the production and marketing of Clamato in Canada.  To this end, it notified Caesar Canning on April 15, 1982 that the Licence Agreement (and consequently the sub-agreement with FBI Foods) would terminate in 12 months.  Caesar Canning was offered an ongoing contract to produce Clamato at a fixed fee per case, which it declined.

[8]   Armed with 12 months’ notice of the termination of its licence, Caesar Canning immediately began work to develop a competing product.  Lorne Nicklason, its Manager of Quality Control and Quality Assurance, developed a “reformulated” tomato-based juice over a few months in late 1982, working from the list of ingredients and processing specifications for Clamato, but omitting clams or other seafood.  He made sure that the new product was distinguishable chemically from Clamato, with different levels of salt, pH, and soluble solids.  However, the trial judge found (93 B.C.L.R. (2d) 318, at p. 325), and it is no longer disputed, that: 

It is beyond doubt that without the formula and process information about Clamato Mr. Nicklason could not have developed Caesar Cocktail personally.  He did not have the necessary skills.  The evidence is equally persuasive that Caesar Canning could have developed a product as much like Clamato as Caesar Cocktail without using the Clamato recipe by hiring the appropriate skills.  It could have done so within the 12-month notice period at modest cost.  

... Anyone who saw the recipe for Caesar Cocktail would have known that it was derived so entirely from the Clamato formulation as to be a virtual copy without clams.  The other variations were very minor.

[12] Caesar Canning went bankrupt and FBI Foods bought its assets.

[35]      Nothing is said expressly in the Licence Agreement or Tolling Agreement about confidentiality.  It has already been mentioned that there is no privity of contract between the appellants and the respondents.

[62] ... It is to be emphasized that this is a case of unauthorized use as opposed to unauthorized disclosure. 

[65]      The trial judge awarded the respondents the equivalent of the consulting fee it would have cost Caesar Canning to develop Caesar Cocktail without improper use of the respondents’ confidential information.  ... The “consulting fee” approach uses the putative development costs (in this case, of Caesar Cocktail) as a proxy for the market value of the confidential information.


The Decision

DMC comment: A third party who receives confidential information who knows that the information was received in confidence can later be restrained by the courts.

[19]     Equity, as a court of conscience, directs itself to the behaviour of the person who has come into possession of information that is in fact confidential, and was accepted on that basis, either expressly or by implication.  Equity will pursue the information into the hands of a third party who receives it with the knowledge that it was communicated in breach of confidence (or afterwards acquires notice of that fact even if innocent at the time of acquisition) and impose its remedies.  It is worth emphasizing that this is a case of third party liability.  The appellants did not receive the confidence from the respondents, but from the now defunct Caesar Canning.  The receipt, however, was burdened with the knowledge that its use was to be confined to the purpose for which the information was provided, namely the manufacture of Clamato under licence.

[21]     While the only controversies still alive in this Court turn on the principles on which financial compensation is to be calculated, and whether or not this is a proper case for a permanent injunction, the disagreement among the parties on the remedies reflect their differing views as to the true nature and scope of the cause of action for breach of confidence.  This appeal therefore requires us to examine more closely the character of the interest protected in this case, and on that basis to assess the appropriateness of the remedy that was in fact granted by the British Columbia Court of Appeal.

DMC comment: The basis of the confidential relationship can affect the remedy.

[22]        After making the comment reproduced above [re Lac Minerals], Sopinka J. added, at p. 615:  

This multi-faceted jurisdictional basis for the action provides the Court with considerable flexibility in fashioning a remedy.  The jurisdictional basis supporting the particular claim is relevant in determining the appropriate remedy.  [Emphasis added.]  

[23]      This observation has to be read in light of the actual result in that case.  It will be recalled that the defendant Lac Minerals was held to have acquired in confidence information about potential gold deposits in Northern Ontario from the plaintiff Corona Resources in the course of negotiations for a joint venture.  Lac Minerals had been brought into the picture because its financial clout as a “senior” mining company was considered by Corona to be essential to obtain funding to develop the gold mine.  Lac Minerals quietly used the information received from Corona to bid behind Corona’s back for a rich gold-bearing property adjacent to the Corona site from a third party, then let the negotiations with Corona lapse.  It was thereby held to have misused confidential information to scoop for itself a commercial opportunity that it would otherwise have known nothing about.  All members of this Court agreed that there had been an actionable breach of confidence, but divided on the issue of whether or not a fiduciary duty existed, and, if so, the appropriate remedy.  Of the five members of this Court who heard the appeal, only two (La Forest and Wilson JJ.) held that Lac Minerals had breached a fiduciary duty to Corona.  Applying fiduciary principles, and aiming at disgorgement, they held that a constructive trust should be impressed on the gold mine in favour of Corona.  La Forest J. considered that a constructive trust could be imposed “regardless of the basis of liability” (p. 643).  The other three members of the Court (McIntyre, Lamer and Sopinka JJ.) held that imposition of a fiduciary duty was inappropriate in light of the commercial nature of the relationship, but split on the appropriate remedy.  Lamer J. (as he then was) agreed with Wilson and La Forest JJ. that a constructive trust ought to be imposed.  The other judges considered that it was inappropriate to impose a proprietary remedy, i.e., a constructive trust, on the asset itself (the gold mine) and would have awarded financial compensation only.  The majority view on remedy (per Lamer, Wilson and La Forest JJ.) therefore imposed a constructive trust even though it was the majority view on liability (per McIntyre, Lamer and Sopinka JJ.) that the parties were not in a fiduciary relationship.  

[24]        The result of Lac Minerals is to confirm jurisdiction in the courts in a breach of confidence action to grant a remedy dictated by the facts of the case rather than strict jurisdictional or doctrinal considerations.  See J. D. Davies, “Duties of Confidence and Loyalty”, [1990] Lloyd’s Mar. & Com. L.Q. 4, at p. 5:  

There is much to be said for the majority view [in Lac Minerals] that, if a ground of liability is established, then the remedy that follows should be the one that is most appropriate on the facts of the case rather than one derived from history or over-categorization.

[26] ..... In short, whether a breach of confidence in a particular case has a contractual, tortious, proprietary or trust flavour goes to the appropriateness of a particular equitable remedy but does not limit the court’s jurisdiction to grant it.  Such a view is consistent with earlier cases in this Court, including Pre-Cam Exploration & Development Ltd. v. McTavish, [1966] S.C.R. 551.

[34]        The particular contractual terms relied on by the appellants, in the remedies context, are the termination and “entire contract” clauses in the Licence Agreement, which provide as follows:  

7.  LICENSEE agrees that during the term of this Agreement and for a period of 5 years thereafter LICENSEE will not manufacture, produce, market, advertise, distribute or sell in the Territory any other product which includes among its ingredients clam juice and tomato juice.     

. . .  

14.  . . .   (c)  This Agreement constitutes the entire agreement and understanding between the parties relating to the subject matter hereof and supersedes any and all prior agreements and understandings (whether written or oral) with respect to the subject matter hereof.      

[35]      Nothing is said expressly in the Licence Agreement or Tolling Agreement about confidentiality.  It has already been mentioned that there is no privity of contract between the appellants and the respondents.  The only party with whom Duffy-Mott had a contract was Caesar Canning, now bankrupt, who is not and never was a party to these proceedings.  The appellant FBI Foods was party to the Tolling Agreement with Caesar Canning, but while Duffy-Mott consented to that agreement, it was not made a party to that contract.  However, the appellants contend that the contractual terms limit or circumscribe the equitable duty of confidentiality that would otherwise arise, and restrict the remedy to be granted.  In their view, the respondents are entitled to no compensation whatsoever.

[37]      The appellants argue that if contractual provisions can altogether negate the duty of confidence otherwise arising, they should equally be capable of limiting, expressly or by implication, the compensation payable.  The appellants say the respondents got exactly what they bargained for, namely a competitive post-termination environment in which Clamato could lose market share to a Caesar Canning successor product that met the contractual criteria of being free of clam broth.  

[38]      This analysis is correct so far as it goes, but it leaves out of consideration the fact the respondents did not bargain for the unfair competition of having their own know-how, imparted in confidence, used against them.  The contract cannot reasonably be read as negating the duty of confidence imposed by law.  The contractual context, while it may place important parameters on what compensation would be appropriate, does not assist the appellants in their effort to eliminate the compensation altogether.

DMC: re confidential information as "property":

[48]      I agree, of course, with the author’s emphasis on confidentiality.  Breach of confidentiality is the gravamen of the complaint.  When it comes to a remedy, however, I do not think a proprietary remedy should automatically follow.  There are  cases (as in Lac Minerals) where it is appropriate.  But equity, with its emphasis on flexibility, keeps its options open.  It would be contrary to the authorities in this Court already mentioned to allow the choice of remedy to be driven by a label (“property”) rather than a case-by-case balancing of the equities.  In some cases, as Lord Denning showed in Seager v. Copydex Ltd. (No. 2), supra, the relevance of the specific quality of the information to a remedy will not be its property status but its commercial value.  In other cases, as in Lac Minerals, the key to the remedy will not be the “property” status of the confidence but the course of events that would likely have occurred “but for” the breach.  Application of the label “property” in this context would add nothing except confusion to the task of weighing the policy objectives furthered by a particular remedy and the particular facts of each case.  In the present case, the trial judge considered the confidential information to be nothing very special, and that “but for” the breach the respondents would in any event have faced a merchantable version of Caesar Cocktail in the market place within 12 months.  On these facts, a “proprietary” remedy is inappropriate.

DMC comment: The plaintiff should be restored to the position it would have occupied "but for" the breach.

[51]        In the present case, the policy objectives in both equity and tort would support restoration of the plaintiff to the position it would have occupied “but for” the breach (Elsley v. J. G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916, per Dickson J., at p. 935). ...

DMC comment: The information must have been used to the detriment of the paty communicating it. Cadbury will have to prove at the reference the nature and extent of any detriment suffered to establish the basis for a monetary award.

54      The concept of detriment need not be explored on this occasion because, as the Court of Appeal correctly emphasized, the parties had agreed prior to trial that any evidence regarding losses allegedly suffered by the plaintiff would be deferred to a post-trial reference.  This arrangement obviated the need for the respondents to lead evidence of detriment at the liability trial.  In the end, however, having elected the remedy of financial compensation, the respondents will obviously have to demonstrate at the reference the nature and extent of any detriment suffered to establish the basis for a monetary award.

DMC comment: damages where no injunction is ordered - all nature of remedies is available.

60      Although Nocton v. Lord Ashburton was a case of a faithless fiduciary, the decision in Lac Minerals, as already discussed, is authority for the proposition that the availability of equitable remedies in a breach of confidence action does not now turn on the presence or absence of a fiduciary duty.  Other Canadian cases which have based an award of financial compensation for breach of confidence in the exercise of a general equitable jurisdiction without trying to find a fiduciary duty or worrying about the restrictions buried in the modern successors of Lord Cairns’ Act include Apotex Fermentation Inc. v. Novopharm Ltd., supra; Recovery Production Equipment Ltd. v. McKinney Machine Co., [1998] A.J. No. 801 (QL) (C.A.); Treadwell v. Martin (1976), 67 D.L.R. (3d) 493; Planon Systems Inc. v. Norman Wade Co., [1998] O.J. No. 3547 (QL) (Ont. Ct. (Gen. Div.)); Z Mark International Inc. v. Leng Novak Blais Inc. (1996), 12 O.T.C. 33 (Ont. Ct. (Gen. Div.)).  See also L. Tsaknis, “The Jurisdictional Basis, Elements, and Remedies in the Action for Breach of Confidence  -- Uncertainty Abounds” (1993), 5 Bond L. Rev. 18, at pp. 46-47.  

61        Equity, like the common law, is capable of ongoing growth and development: Canson Enterprises, supra, per La Forest J. at p. 580; United Scientific Holdings Ltd. v. Burnley Borough Council, [1978] A.C. 904, per Lord Diplock, at p. 926.  In my view, therefore, having regard to the evolution of equitable principles apparent in the case law, we should clearly affirm that, in this country, the authority to award financial compensation for breach of confidence is inherent in the exercise of general equitable jurisdiction and does not depend on the niceties of Lord Cairns’ Act or its statutory successors.  This conclusion is fed, as well, by the sui generis nature of the action.  The objective in a breach of confidence case is to put the confider in as good a position as it would have been in but for the breach. To that end, the Court has ample jurisdiction to fashion appropriate relief out of the full gamut of available remedies, including appropriate financial compensation.

DMC: value of the early entry of Caesar Cocktail onto the market

[64]        The applicable concept of restoration was set out in the reasons of McLachlin J. in Canson Enterprises as follows, at p. 556:  

In summary, compensation is an equitable monetary remedy which is available when the equitable remedies of restitution and account are not appropriate.  By analogy with restitution, it attempts to restore to the plaintiff what has been lost as a result of the breach; i.e., the plaintiff’s lost opportunity.  The plaintiff’s actual loss as a consequence of the breach is to be assessed with the full benefit of hindsight.  Foreseeability is not a concern in assessing compensation, but it is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach. [Emphasis added.]    

The concept of the “lost opportunity” is particularly apt here.  The respondents’ real complaint is not that the appellants manufactured Caesar Cocktail at a particular temperature or atmospheric pressure.  Production details are a means to an end.  The respondents’ “lost opportunity” was that the appellants, using these confidential production techniques, entered the marketplace with Caesar Cocktail a year earlier than would otherwise have been the case.  The respondents were not entitled to be free of competition from the appellants.  Apart from the clam juice limitation, they were only entitled to be free of the appellants’ competition which used the respondents’ confidential information.  The respondents argue that no consultant could duplicate “precisely” the Clamato production details.  This may be true, but the trial judge reasoned that it would not be necessary for the appellants or their consultants to discover independently the actual Clamato details within that year.  Juice formulation is not rocket science.  A consultant skilled in the art and deploying a variety of techniques could have come up with a plausible clam-free copycat product within 12 months to bring the respondents’ commercial “opportunity” to a close.  Moral indignation is not a factor that is to be used to inflate the calculation of a compensatory award.  The respondents’ entitlement is to no more than restoration of the full benefit of this lost but time-limited opportunity.

DMC comment: market value not the appropriate measure of damage.

66      The trial judge clearly consigned the trade secrets which the respondents had confided to the appellants to the “nothing very special” category, as she awarded Lord Denning’s measure of compensation applicable to the lowest level of importance, a mere consulting fee to represent the avoided cost of in-house development.  The respondents complain that no consultant could exactly replicate the magic of Clamato, and certainly could not do so in 12 months.  The trial judge’s view, however, was that it would not be necessary for the appellants to discover and replicate exactly the respondents’ production techniques.  They would be competitive using substitute techniques that produced any sufficiently close copycat tomato-based product to satisfy the ordinary customer.  If the market value of the confidential information is the proper measure of compensation in this case, I would accept the assessment of the trial judge.  My quarrel is not with her calculation but with the underlying premise that market value is the appropriate approach on the facts of this case. 

DMC: the springboard approach: lost opportunity of no competition fo 12 months

K.  The Springboard Doctrine  

[67]        The trial judge acknowledged that the breached confidences had acted as a “springboard” to enable the appellants to bring Caesar Cocktail to market 12 months earlier than would otherwise have been the case.  The “springboard” or “head start” concept descends from the judgment of Roxburgh J. in Terrapin Ltd. v. Builders’ Supply Co. (Hayes) Ltd., [1967] R.P.C. 375 (Ch. D. 1959), aff’d [1960] R.P.C. 128 (C.A.), at p. 391:  

As I understand it, the essence of this branch of the law, whatever the origin of it may be, is that a person who has obtained information in confidence is not allowed to use it as a spring-board for activities detrimental to the person who made the confidential communication, and spring-board it remains even when all the features have been published or can be ascertained by actual inspection by any member of the public.    

The “springboard” concept has been referred to in Canada, including in Lac Minerals, per Sopinka J., at p. 610; Santé Naturelle Ltée v. Produits de Nutrition Vitaform Inc. (1985), 5 C.P.R. (3d) 548 (Que. Sup. Ct.), at p. 553; Montour Ltée v. Jolicœur (1988), 19 C.I.P.R. 25 (Que. Sup. Ct.), at p. 45; Matrox Electronic Systems Ltd. v. Gaudreau, [1993] R.J.Q. 2449 (Que. Sup. Ct.), at pp. 2463-64; and Ben-Israel v. Vitacare Medical Products Inc., supra, per Beaulieu J., at p. 106.  

[68]      The respondents contend that the trial judge erred in her measure of equitable compensation for two reasons.  Firstly and most importantly, they were not in the business of selling their trade secrets to competitors, and therefore the “market value” of the information is irrelevant.  There is some support for this in the reasons of Sir Edward Eveleigh in Dowson & Mason Ltd. v. Potter, [1986] 2 All E.R. 418 (C.A.), where at p. 422 he rationalized Seager v. Copydex Ltd. (No. 2), on the basis that in that case the plaintiff “would have sold [the] information; that was his line of business”. There is also some support for this view in Coco v. A. N. Clark (Engineers) Ltd., supra, per Megarry J. at p. 50.  

[69]        Secondly, the respondents say the “springboard” cases are inapplicable because, properly understood, they presuppose that at the end of the “head start” period, the defendants would in fact have discovered the actual secrets they earlier misappropriated.  In fact, they say, Clamato has been often emulated but never precisely copied.  

[70]        In my view the respondents’ argument reads the jurisprudence too narrowly.  The unique features of the respondents’ manufacturing process, and its alleged lack of replicability, do not necessarily establish a causal relationship to a financial loss.  The respondents were not in the business of selling information, and I therefore agree with them that the “market value” of the confidential information is not the appropriate measure of compensation in this case.

[71]      That having been said, the respondents were in the business of exploiting commercial opportunities, and their ability to make a profit from Clamato was limited by the acknowledged entitlement of the appellants to market a similar product without clam juice.  The assessment of compensation has therefore to address the value of the lost market opportunity and, in particular, the lost advantage of being able to market Clamato free of the appellants’ competition for 12 months, and not be diverted to a valuation of the confidential information itself.

DMC comment: key is the durtation of the lost opportunity

[74]        In my view, the key to the assessment of equitable compensation in this case is the expected duration of the respondents’ “lost opportunity”, i.e., the economic advantage they would have enjoyed after the cancellation of the licence “but for” the breach.  It would be inequitable to protect the respondents’ interest in a commercial opportunity they never enjoyed by invoking undue solicitude for their “nothing very special” information.

DMC comment: Injuctive relief is available to restrain the apprehended or continued misuse or disclosure of confidential information.

[78]         Injunctive relief, whether interim, interlocutory or permanent, is available in appropriate circumstances to restrain the apprehended or continued misuse or disclosure of confidential information.  The problems here were, firstly, the delay of the respondents in asserting their rights coupled with the appellants’ change of circumstances in the interim, relying at least in part on the respondents’ inactivity; secondly, the trial judge’s finding that the protected information was “nothing very special”; and thirdly, the conclusion of the trial judge that any loss could be adequately remedied by financial compensation.

DMC: delay can reduce likelihood of permanent injunction; balancing the equities favours no permanent injunction

[82]        In this case, the delay of the respondents, combined with the ongoing investment and commercial activity of the appellants based on Caesar Cocktail in the interim, argued powerfully against the grant of injunctive relief.

[86]        I think, however, that one’s indignation in this case has to be tempered by an appreciation of the equities between the parties at the date of the trial.  Eleven years had passed since Caesar Cocktail went into production, using “nothing very special” information that could promptly have been replaced (had the respondents made a timely fuss) by substitute technology accessible to anyone skilled in the art of juice formulation.  At the date of trial, it would have been manifestly unfair to allow information of peripheral importance to control the grant of injunctive relief.  The equities in favour of the respondents’ claim for an injunction to put Caesar Cocktail off the market rightly yielded to the appellants’ equities in continuing a business to whose success the confidential information had so minimally contributed.

DMC comment: Cadburys was entitled to its lost profits caused by teh breach of confidence during the 12 months after the termination.

 [94]          The reference directed by the Court of Appeal should therefore continue, but on somewhat modified terms.  Firstly, the mandate is to assess the loss attributable to the breach of confidence, if any, sustained by the respondents during the 12-month period following the termination.  For this purpose, some guidance may be taken from the discussion of compensation for breach of trade secrets outlined in the American Restatement (Third) of Unfair Competition, ch. 4,  at § 45, p. 516:  

e.  Relief measured by plaintiff’s loss.  A frequent element of loss resulting from the appropriation of a trade secret is the lost profit that the plaintiff would have earned in the absence of the use by the defendant.  The plaintiff may prove lost profits by identifying specific customers diverted to the defendant.  The plaintiff may also prove lost profits through proof of a general decline in sales or a disruption of business growth following the commencement of use by the defendant, although the presence of other market factors that may affect the plaintiff’s sales bears on the sufficiency of the plaintiff’s proof.  If the evidence justifies the conclusion that the sales made by the defendant would have instead been made by the plaintiff in the absence of the appropriation, the plaintiff may establish its lost profits by applying its own profit margin to the defendant’s sales.


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