ESL Fuels Ltd v Fletcher & Anor  EWHC 3726 (Ch)
Application for interim injunctive relief pending trial, which sought to prevent the defendants from selling an oil product, the constitution of which the claimant claimed was a trade secret and had been reproduced by the first defendant (an ex-employee of the claimant) contrary to the implied term of a contract of employment. Application refused.
The claimant, the MD of ESL, claimed to have invented an oil product but had kept the constituents a secret. One of the ingredients was sourced from a supplier whose identity was also a trade secret. There was a one way exclusivity agreement for ESL to supply just one client, Certas, with the product. In 2009 the first defendant made an unsolicited approach to the claimant and became his 'right hand man'. He never received a contract of employment. In 2013 the first defendant resigned and started his own company, and sought to source supplies of the same product from the supplier and to supply Certas with an equivalent fuel. The claimant applied for an interim injunction pending trail to prevent the defendant from trading this particular product.
The application was refused. ESL should readily be able to quantify any drop in income from sales to Certas; and (through the process of disclosure) it should be able to attribute such drop in sales to sales of the defendant's competing product. Provided the defendants were able to meet any award of damages, ESL could be adequately compensated in damages for any pecuniary loss it may suffer if interim injunctive relief was withheld but ESL succeeded at trial. The grant of an interim injunction may well result in the defendant company being strangled at birth if it is prevented from producing, and marketing, a competing product which, on the defendants' case, it had every entitlement to sell.
Neutral citation number:  EWHC 3726 (Ch)
Case No: 3MA30779
IN THE HIGH COURT OF JUSTICE
MANCHESTER DISTRICT REGISTRY
Manchester Civil Justice Centre
1 Bridge Street West
27th November 2013
B E F O R E:
HIS HONOUR JUDGE HODGE QC (sitting as a Judge of the High Court)
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ESL FUELS LTD (Claimant)
STEPHEN FLETCHER & ANOR (Defendants)
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Telephone: 01642 232324
Facsimile: 01642 244001
169-173 Stockton Street
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Mr Adam Solomon (instructed by DWF LLP) appeared on behalf of the Claimant
Miss Naomi Ellenbogen QC (instructed by BBS Zatman LLP) appeared on behalf of the Defendants
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- His Honour Judge Hodge QC: This is the effective return date of an application for interim injunctive relief pending the speedy trial of a claim issued in the Chancery Division of the High Court in London on 7th November 2013 under claim number HC13E04834.
- The subject matter of the claim is what is said to be confidential information in the nature of trade secrets, although that characterisation is disputed by the defendants; and it is that dispute which lies at the heart of this case.
- In view of the nature of the claimant's case, at the outset of the hearing before me I directed that it should take place in private pursuant to CPR 39.2 (3) (c). However, subject to representations from counsel, my provisional view is that there is no reason why this judgment (apart from its confidential schedule) should not be released for publication. [Having now received such representations, I have made certain minor redactions to this judgment in order to retain the confidentiality of the matters set out in the schedule. They are minimal and do not affect in any way the substance of this judgment.]
- The application first came on for hearing before Mr Justice Norris in London on Thursday 14th November 2013. Because the parties, their businesses, their witnesses, and their respective solicitors were all located in the North-West, the judge transferred the case to the Manchester District Registry (where it has now been allocated claim number 3MA30779); and, having accepted undertakings from the parties in the meantime, he gave various case management directions leading to an effective hearing before me in Manchester last Thursday, the 21st November 2013.
- By the time of that hearing, the claimant had filed no fewer than three witness statements from Mr Stephen David Whittaker, dated 6th, 18th and 21st November 2013. Mr Whittaker is a director of the claimant company (which was previously called 'Ebony Solutions Limited', and to which I shall refer as 'ESL') and (with his wife, Janet) was one of its two founding shareholders.
- The defendants relied upon two witness statements from the first defendant, Mr Stephen Alan Fletcher, dated 15th and 20th November 2013, together with a witness statement from Mr Graham Jenkins, an industrial chemist and formerly (for some three years up to March 2013) the operations and production manager of ESL, dated 14th November 2013. Although Mr Justice Norris's order made provision for only one round of evidence, at the hearing no objection was taken to the admission in evidence of the later witness statements. An approved, but unsigned, copy of the particulars of claim (settled by counsel) was supplied to the court at about 9:20 on the morning of the hearing.
- At the hearing Mr Adam Solomon (of counsel) appeared for the claimant and the defendants were represented by Miss Naomi Ellenbogen QC. Both counsel had submitted detailed written skeleton arguments dated (in each case) 20th November 2013. I had the advantage of pre-reading the witness statements and skeleton arguments before the hearing began. In his skeleton argument Mr Solomon had proposed that submissions from each party should be completed in the morning, leaving the afternoon for judgment and consequential matters. Unsurprisingly, given that three lever-arch files of authorities were placed before me, that timetable proved somewhat optimistic: Mr Solomon addressed me for about two hours, Miss Ellenbogen then responded for a little over two and half hours (interrupted by the luncheon adjournment), and Mr Solomon replied for about forty minutes. The hearing concluded at about ten past five that afternoon. Although I could have delivered an extemporary judgment at ten o'clock the following morning, neither counsel were available at that time. I therefore adjourned for judgment until ten o'clock today, Wednesday 27th November. By the time the court adjourned, I had been able to fix Monday 3rd February 2014 as the date for a speedy five-day trial of this claim in Manchester. I emphasise that five days has been allowed for this trial (to include pre-reading and delivery of judgment), and the parties will need to devise a trial timetable to accommodate this listing. As my list presently stands, the next dates I will have available after Friday 7th February are not until Tuesday 6th and Wednesday 7th May.
- The background to this application can be summarised as follows: ESL carries on the business of blending and supplying what it describes as "innovative fuel products", specifically for the road, heating, heavy duty haulage and marine markets. Mr Whittaker, who is forty nine years of age, describes himself as an "inventor and innovator". One of the products he claims to have developed, over a period of some three years prior to its launch in 2005, is a heating fuel called 'Ultra 35' (also known as 'Greenflame'), which is said to enjoy significant competitive advantages over other regular heating fuels in terms of the excise duties which apply to it. Mr Whittaker asserts that the process for manufacturing Ultra 35 is a trade secret and highly confidential, and he has always been careful to treat it as such. Mr Whittaker has never written down precisely how Ultra 35 is made; but in paragraphs 20 and 21 of his second witness statement he acknowledges (in response to points made by Mr Fletcher) that Ultra 35 is not always made from precisely the same components, or number of components, blended in precisely the same ratios.
- One of the components used to make Ultra 35 is a particular product (which I shall refer to in this judgment as 'the Product'), which is sourced from a particular supplier (which I shall refer to as 'the Supplier') and is produced to a chemical specification provided by Mr Whittaker. That too is said to be a trade secret. These trade secrets originally belonged to their alleged creator, Mr Whittaker; but on 21st June 2013 he sold the intellectual property rights in these trade secrets to the claimant for £5.66 million (in accordance with a valuation provided by BDO LLP). It is those trade secrets (as described in Schedule 1 to the Particulars of Claim, and reproduced in the confidential schedule to this judgment) and their description which ESL seeks to protect by this litigation. It claims that Ultra 35 is ESL's most successful product in terms both of sales and margins because it is sold by ESL to Certas Ltd (formerly GB Oils Ltd) at a rate that is more competitive than regular heating oils, thereby enabling Certas to sell it on at competitive rates.
- Under the terms of its rolling distribution agreement with ESL, Certas has the sole right to distribute Ultra 35 for resale. ESL is currently said to supply some 140 million litres of Ultra 35 to Certas each year (although Mr Fletcher puts the figure at nearer 85 million litres); and that company is said by ESL to be its single most important business partner and generator of revenue. The hearing before me proceeded on the footing that the exclusivity agreement operated one way only (with ESL obliged to supply Ultra 35 only to Certas, but with Certas not obliged to purchase the equivalent product only from ESL), with no reference being made to clause D (under the heading 'Confidentiality and Product Development Strategy') of the Agreement (at page 171 of exhibit SW1).
- Until about the middle of 2009 ESL is said to have been a small family company, with the majority of the most significant tasks being undertaken by Mr Whittaker himself. However, he wished to concentrate upon his role as an innovator and developer of products. Therefore when, in early 2009, Mr Fletcher made an unsolicited approach to him, Mr Whittaker took him on to be his 'right-hand man'; and he started working for ESL in May 2009. Mr Fletcher, who is now aged forty-one, is a qualified chemical engineer who was already recognised as a respected oil company manager. Until he resigned, on 23rd February 2009, he had been working for Nynas, a supplier of bitumen and related products. Initially, Mr Fletcher was recruited to a sales position at ESL, at an annual salary of £80,000; but this soon increased. In 2011, Mr Fletcher's title was changed to 'General Manager' (the description which appears below Mr Fletcher's name on the company's Code of Conduct); and by the time he left ESL's employment, on 20th September 2013, his salary had risen to £150,000 per annum.
- It is ESL's case that Mr Fletcher effectively became the company's managing director (although that formal title remained with Mr Whittaker, and Mr Fletcher was never formally appointed a statutory director of ESL). At no time did Mr Fletcher ever have any formal written contract of employment, although he was responsible (in May 2011) for arranging for written contracts of employment to be drawn up for ESL's other employees. An email dated 25th May 2011 (at pages 101 to 103 of exhibit SW1) shows that Mr Fletcher considered whether confidentiality clauses would be required for particular employees: he considered that these would be appropriate for the operations manager and the transport coordinator, but not for the accounts manager, the site coordinator/driver or the drivers. Mr Fletcher's email recognised that Mr Whittaker would probably also want to get a contract for Mr Fletcher; but nothing was ever done in that regard. In my judgment, the evidence does not support ESL's characterisation of Mr Fletcher as a "shadow director" (within the meaning of Section 251 of the Companies Act 2006). But he was clearly ESL's most senior employee after Mr Whittaker; and, on the evidence, I find that there is also an arguable case that he acted as a de facto director of ESL.
- Mr Fletcher first raised the topic of his resignation from ESL with Mr Whittaker on 3rd September 2013; and his employment terminated on 20th September 2013. On 12th September 2013 Mr Fletcher caused the second defendant company, Prema Energy Ltd ('Prema'), to be incorporated, with Mr Fletcher as its sole director and shareholder. Earlier, on 17th August 2013, Mr Fletcher had caused the domain name premaenergy.com to be registered.
- At paragraph 54 of his first witness statement Mr Whittaker relies upon an email from Mr Fletcher of 5th September 2013 (pages 167 to 168 of exhibit SW1) as "evidence of a carefully laid plan by Mr Fletcher to exploit Ultra 35 for his own benefit". At paragraphs 55 to 56 Mr Whittaker refers to the resignation of another ESL employee (James Taylor), who then went on to work for Prema, having previously claimed that his departure was nothing to do with Mr Fletcher. On 15th October Mr Whittaker discovered that Mr Fletcher was seeking to (1) source supplies of the Product from the Supplier and (2) to supply Certas with an Ultra 35 equivalent fuel called 'Prema 35'. On 18th October Mr Whittaker was told that Mr Fletcher was offering virtually an identical pricing structure to Certas as it currently enjoyed from ESL. ESL is concerned that if the defendants are permitted to use what it considers to be its trade secrets to manufacture an equivalent to Ultra 35 it will suffer irreparable damage, not merely in the loss of its major income stream, but in the reputation that ESL and Mr Whittaker enjoy in the market place. It is also said that if the defendants are allowed to sell Prema 35 to competitors of Certas, a significant source of revenue will be lost to that company, with which ESL has a long-term, and exclusive, supply arrangement.
- ESL's solicitors (DWF LLP) dispatched a letter before action to the defendants (care of their solicitors, BBS Zatman LLP) on 29th October 2013 (pages 8 to 13 of exhibit SW1). The substantive response was contained in a letter dated 4th November 2013 (pages 16 to 20 of exhibit SW1). The claim form and application notice were issued on 7th November and were served promptly thereafter, with an initial return date in the applications list in London of the 14th November, which the defendants' solicitors asked (on 12th November) to be adjourned to come on as an application by order with a one day fixed listing.
- The defendants complain that no explanation has been offered for the one month's delay between ESL's first discovery of the activities complained of (on 15th October) and the first hearing (on 14th November); and they submit that ESL has managed without an injunction for a significant period, underlining the fact that the interim relief sought is inappropriate and unnecessary. I reject this complaint. In my judgment, the delay between the 15th October (after which further relevant information was acquired on 18th October) and the dispatch of the letter before action on 29th October is readily explicable by the need to assemble the information required to draft that letter, particularly given that Mr Fletcher had no written contract containing any post-termination restraints or confidentiality clauses. Thereafter, there was no undue delay in pursuing the claim. Further, from the redacted invoices produced by the defendants, it would appear that Prema's first delivery of Prema 35 did not take place until on or shortly before the 25th October 2013, only two business days before the letter before action. I reject the submission that this lapse of time is any indication that interim relief is inappropriate or unnecessary.
- There was also an issue before me as to the identification of the relevant status quo. Miss Ellenbogen submits that it is the date of service of the claim form, on the 7th November 2013. She cites from the speech of Lord Diplock in Garden Cottage Foods Ltd v Milk Marketing Board  1 AC 130 at 140 B - G and the judgment of Lord Justice Dillon in Graham v Delderfield  *FSR 313 at 317. I do not find the latter case of any assistance because it was concerned with the effect of delay in bringing the matter to court, which is not the case here. Mr Solomon cites the analysis of the status quo at paragraphs 10.45 through to 10.48 of Goulding: Employee Competition*, 2nd edition (2011), in support of the proposition that the status quo means the state of affairs before the most significant recent change.
- I acknowledge that Mr Goulding's QC's analysis is open to the criticism that he does not quote the second of the two paragraphs from Lord Diplock's judgment which was cited to me by Miss Ellenbogen and, in particular, the sentence at page 140 between letters F and G:
"Now that the necessity for the court to determine that the plaintiff has made out a strong prima facie case for a permanent injunction before granting him an interlocutory injunction has been removed by the decision of this House in American Cyanamid, this also flaws the reasoning by which Ungoed-Thomas J reached the conclusion that he did as to what constituted the relevant period for determining what is the status quo."
That is a reference to the observation in Texaco Ltd v Mulberry Filling Station *Ltd  1 WLR 814 at 831 that the relevant period for what constituted the status quo* was the period preceding the commencement of the conduct on the part of the defendant in respect of which the action was brought - in that case, breaches of covenant.
- However, I must confess that I find it difficult to understand why the removal of the need to show a strong prima facie case for the grant of an interim injunction should lead to any alteration in the relevant period for determining the status quo; and, in any event, Lord Diplock's observations were obiter because, as he observed, in the case before their Lordships' House one never reached the stage at which the desirability of maintaining the status quo was brought into the balance of convenience. I accept Mr Goulding's conclusion that the status quo means the state of affairs before the most significant, recent - and I emphasise recent - change. That seems to me to accord both with principle and with the sentence in Lord Diplock's speech between letters D and E:
"The duration of that period since the state of affairs last changed must be more than minimal, having regard to the total length of the relationship between the parties in respect of which the injunction is granted; otherwise the state of affairs before the last change would be the relevant status quo."
In the instant case, I hold that the status quo was that which applied before the defendants set up in business selling Prema 35.
- Perhaps unusually for an interim injunction application, the focus of much of the argument at the hearing was upon the first limb of the test in American Cyanamid *Co v. Ethicon Ltd  AC 396, namely whether there was a serious issue to be tried. Since there is no express contractual post-termination restraint upon the use of confidential information by Mr Fletcher, Mr Solomon accepts that he has to establish that ESL has a real prospect of establishing at trial that the information which it seeks to protect was of a sufficiently high degree of confidentiality as to amount to a trade secret: see Faccenda Chicken Ltd v Fowler  Ch. 117 at 136. He submits that on the (admittedly disputed) evidence of Mr Whittaker, the formula for blending components to produce Ultra 35 satisfies all three of the classic elements required to give rise to an obligation of confidence identified by Megarry J in Coco v A.N.Clark (Engineers) Ltd  R.P.C. 41 at 47. Mr Solomon submitted (by reference to observations of Lewison LJ in Force India Formula One Team Ltd v Aerolab SRL that it is no defence that the person in breach of confidence could have obtained the information elsewhere if he did not in fact do so. Here, Mr Fletcher does not claim to have obtained the formula for Prema 35 by any process of reverse engineering.
- Mr Solomon submits that on ESL's case, the present facts conform to what has been described by the Supreme Court (in Vestergaard Frandsen *S/A v Bestnet Europe Ltd as "the classic case of breach of confidence", involving "the claimant's confidential information, such as a trade secret, being used inconsistently with its confidential nature by a defendant, who received it in circumstances where she had agreed, or ought to have appreciated, that it was confidential".
- Mr Solomon took me to the judgment of the Court of Appeal in Lancashire Fires Ltd v SA Lyons & Co Ltd  IRLR 113 for the matters to be considered when determining whether any particular item of information falls within the implied term of a contract of employment so as to prevent its use or disclosure by an employee after the termination of his employment. He also referred me to the guidance to be derived from the judgment of the New South Wales Court of Appeal in Del Casale v Artedomus (Aust) Pty Ltd  NSWCA 172 at  as to the factors relevant to an identification of confidential information. He drew my attention to Hodgson JA's citation (at ) of Astbury J's decision in Amber Size & Chemical Co. Ltd v Menzel ** 2 Ch. 239 as an example of the court restraining the use by an ex-employee of confidential information in the nature of a secret formula or process which, since it involved a number of elements such that independent discovery by inquiry or experiment was unlikely to occur, could quite readily be distinguished from an employee's general know-how.
- Mr Solomon also makes the point (by reference to observations of Cross J in Printers & Finishers Ltd v Holloway  RPC 239 at 255) that the mere fact that the confidential information is not embodied in a document, but is carried away by the employee in his head, is not, of itself, a reason against the grant of an injunction to prevent its use or disclosure by him. He also relies on the decision of Buckley J in Under Water Welders & Repairers Ltd v Street and Longthorne  RPC 498 **for the proposition that it is no bar to the grant of interim injunctive relief that the applicant has not condescended to any details as to the particular characteristics of the relevant process which is said to give it a confidential character.
- In summary, Mr Solomon submits that it is clear that in all the circumstances of the case, the relevant information relied upon by ESL meets all of the criteria for the existence of an equitable obligation of confidence; and there is therefore a serious issue to be tried.
- Miss Ellenbogen submits that given the nature and effect of the relief sought by ESL, this hearing should be determined in accordance with the principles formulated by the Court of Appeal in Lansing Linde Ltd v Kerr  1 WLR 251 and Laddie J in Series 5 Software Ltd v Clarke * 1 All ER 853 so that some assessment of the merits should be made, rather than a simple determination of whether there is a serious issue to be tried. Alternatively, and if the lower threshold test is considered to be appropriate, Miss Ellenbogen submits that none of the requirements of American Cyanamid* is satisfied.
- In my judgment, Miss Ellenbogen can derive no assistance from Lansing Linde. That was not a trade secrets case such as the present. It was a post-termination restraint case where it would not be possible to hold a trial before the restraint had expired, or substantially expired, a factor emphasised by all three members of the Court of Appeal: see pages 258 between letters A and B, 266 between letters F and G, and 269 letter H to 270 letter A. Moreover, both Lord Justice Staughton and Lady Justice Butler-Sloss stressed the limits upon the court's assessment of the claimant's prospects of success, and the need for judicial control over its extent: see pages 258 between letters C and D and 270 between letters B and C. In Series 5 Software, whilst he considered that the court was not precluded from considering the strength of each party's case when deciding whether to grant an application for interim relief in a confidential information case, Laddie J was also of the view that the court should rarely attempt to resolve complex issues of disputed fact or law: see 865 letters F - G. I consider that the head-note correctly states the effect of the decision when it says that any view as to the relative strengths of each party's case should be reached only where it is apparent from the witness statements and any exhibited contemporary documents that one party's case is much stronger than the other's.
- In my judgment, the correct approach to the grant of interim injunctive relief is that stated by Robert Walker LJ in Guardian Media Group Plc v Associated Newspapers Ltd, *unreported (20th January 2000) at , namely that the American Cyanamid principles have a degree of flexibility, and do not prevent the court from giving proper weight to any clear - and I stress the word clear* - view which the court can form at the time of the application for interim relief (and without the need for a mini-trial on copious written evidence) as to the likely outcome at trial.
- I turn then to consider whether that threshold test is satisfied. Miss Ellenbogen took me to the discussion of trade secrets in the first instance decision of Arnold J in Force India  RPC 757 at  - . She submits that, in reality, the court is being invited to prevent Mr Fletcher from exercising his skill and know-how in producing and selling a blended fuel which has a competitive advantage because [reason redacted]. That is said to be a classic restraint against competition. She relies upon the decision of Hoffmann J in Lock International Plc v Beswick  IRLR 481 for the proposition that in a claim against an employee for misuse of confidential information it is of the essence that the employer should be able to identify with particularity the trade secret to which he lays claim. The terms of any injunction must also be capable of being framed in sufficient detail to enable the defendant to know exactly what information he is not free to use on behalf of his new employer. She submits that ESL fails on both counts. Miss Ellenbogen also prays in aid the decision of Laddie J in Ocular Sciences Limited v Aspect Vision Care Limited [**1997] RPC 289 (although that was a claim for final relief at trial) as to the need for full and proper particulars of all the confidential information on which a claimant intends to rely in a claim for breach of confidence, and also on the extent of an employee's right to use his acquired skill and expertise.
- On this latter aspect, I was also taken to the decisions of Brightman J in United Sterling Corporation Ltd v Felton & Mannion  IRLR 314 and the Court of Appeal in FSS Travel & Leisure Systems Ltd v Johnson ** IRLR 382. The latter decision emphasised the need to identify and establish, by sufficiently specific, precise and cogent evidence, a body of objective knowledge qualifying for protection as a trade secret quite separate from the skill, experience, know-how and general knowledge inevitably acquired by a previously professionally qualified employee before and during the course of his employment.
- It is ESL's evidence and case that Mr Whittaker had to share the secrets of Ultra 35 with Mr Fletcher when he became his "right-hand man". At paragraphs 35 to 38 of his first witness statement Mr Whittaker says this:
"35 I explained to Mr Fletcher that I wanted him to take over a range of important tasks. These included all aspects of ordering from suppliers including negotiating and agreeing prices. For this purpose, very soon after his joining I gave him unlimited authority to authorise payments by ESL. I had also to share with Mr Fletcher the secrets of the Ultra 35 product because it was intended that his role was to assume the responsibility of dealing with [the Supplier] and the other suppliers who provide ESL with the chemical components which make up Ultra 35.
36 Before I did this I explained to him about the innovative nature of Ultra 35 and its development, its launch in 2005 and the secret and confidential nature of its manufacture, constituents and processes. It was made expressly clear by me to Mr Fletcher that he was to be entrusted with commercially confidential information and trade secrets and that he was to take care to maintain the secrets. I first explained this to him in the period between his unsolicited approach to me and my offering him a role shortly before his email of 9th February 2009. What I said to him was that we, i.e. ESL, had a significant advantage with Ultra 35 that permitted ESL to do something that no-one else could do and I said to him that if he came on board we would have to make sure it stayed that way, which meant keeping the secret of how Ultra 35 was produced.
37 After Mr Fletcher joined ESL he and I devised strategies together as to how we could keep the secret despite developing new products that use the same components and processes. I made it clear to him that he would have to be very careful when ordering components from oil companies and discussing their specifications so as not to reveal their precise use because of the secret nature of the process of manufacture of Ultra 35.
38 In fact during the previous year before he joined ESL I had spoken to Mr Fletcher when he was at Nynas about ordering a component from Nynas that I intended to use in Ultra 35. Even at that stage I had said to him when he asked about the use to which the product would be put that I could not explain to him exactly why I wanted the particular component as it formed part of a trade secret."
- This evidence is challenged by Mr Fletcher in his first witness statement. He says the following:
"32 All of this shows that, contrary to what Mr Whittaker has suggested, there was no set or singular formula to make this fuel. The method for making it was wide ranging and changed on a regular basis and is well known in the industry.
33 Mr Whittaker has also suggested that the components needed are not regular products that can be brought from refineries. That is simply wrong. As I have demonstrated above the product can be and has been produced using widely available components...
35 As regards the production process, although Mr Whittaker suggests that the production process is a "trade secret" the fact is that the components used to make a batch of the oil were simply mixed together …
36 Any of the components could be added in any order whatsoever. It made no difference to the end product. In every oil refinery in the world, and I would guess in almost every oil terminal in the world, oil streams are mixed. There is no secret at all in the production process or in the percentage of each component required to make the end product.
37 There is nothing secret or confidential whatsoever about this process. I was and am aware of these matters as a result of my years of experience in the industry. There are numerous different ways of producing this type of fuel …
42 To suggest that the formula for making such a basic fuel is secret is in my view absolutely wrong. I have never been shown or informed of any formula.
43 It is not correct, as suggested by Mr Whittaker, that no one else needed to know how the product was made or that he did not share that information. Nearly all of the individuals within the company knew how the various blends were produced as did, obviously, the third parties who manufactured the blends.
44 I did not know what the formula was within the 'Assignment of Intellectual Property Rights' document referred to by Mr Whittaker and exhibited to his witness statement, until that document was served on my solicitors, after much delay (and only as a result of an order by the court) at 11.46 a.m. on Thursday 14 November 2013.
45 I have now had the opportunity to properly consider that document for the first time. It confirms my initial suspicions that there is no "formula" and the description is circular and so vague and generic as to hold little meaning. Self-evidently, it is not a formula; merely a generic description.
46 I do not understand how what is set out in this document can possibly amount to a trade secret. I do not know what is meant by "knowledge" which is not defined. At no stage did Mr Whittaker ever give me any such knowledge. As I have set out above, due to my experience and knowhow in the industry, I already had the knowledge as to how to make this product. For example, if I had been approached, prior to joining ESL, and asked to produce [type of fuel redacted], I could have done so easily from my own knowledge.
47 In my view, the description set out in the document is meaningless. It is not even a formula. It is simply a vague description as to the practice of blending oils …
49 The formula does not amount to anything that could be said to be unique or that sets out a method (of making any product) that was not already within my knowledge and knowhow.
50 Ultra 35 has been made in many ways using many components in varying quantities. Many other components have been looked at during my time in the business and, although they would have been fine to use in the blending, were not purchased due to cash constraints. Hitting the basic parameters that are regularly tested for is not difficult if you have a basic knowledge of fuels blending. That is where my specialist skill and knowledge as a chemical engineer lies …
52 There are in any event a number of different products of the nature of Ultra 35 in the market i.e. [types of fuel redacted] …
54 In summary, there is no trade secret or confidential information attaching to Ultra 35. There is no "magic" to the production of Ultra 35 and there is no secret formula. The principal reasons why there are relatively few suppliers of the product is that the major fuel companies tend to concentrate on mainstream fuels and there are a small number of independent blenders in the market with access to an oil terminal, a tax warehouse and transport facilities.
55 The key to ESL's success over the years lies mainly in the fact that they have access to a "tax" warehouse and to suppliers of the components required. In addition, however, and most importantly, the key has been a very lucrative contract with Certas who have been prepared to purchase a significant volume of this fuel. ESL's success has been down to high sales volumes to Certas which themselves were driven by massive expansion on the part of Certas…"
- Mr Fletcher also disputes Mr Whittaker's role as an inventor/innovator at paragraph 117. Mr Fletcher concludes (at paragraphs 126 and 127) as follows:
"126 For the reasons set out in this statement, I do not believe that there is any trade secret owned by ESL or which it is entitled to seek to protect in these proceedings. The product which ESL sells as Ultra 35 is made from mixing the most basic of ingredients, such as [types of ingredient redacted], and there is a multitude of components, combinations of components and percentage mixes that can be used to make this kind of [type of fuel redacted]. Quite simply, to make the fuel, the relative components are put into a tank and mixed up.
127 In my view, Mr Whittaker and ESL are concerned simply to stifle legitimate competition in the absence of any contractual restraints."
- In his second witness statement Mr Fletcher asserts (at paragraph 13) that he already had the knowledge of how to make an oil of the Ultra 35 type even before he joined ESL. At paragraphs 26 and 27 he says this:
"26 I disagree with the comments at paragraph 29 [of Mr Whittaker's second statement]. I can make and have made a similar fuel using my skill and knowledge and not as a result of working at ESL or using any trade secret. For example, during my time at Nynas, we were blending and making kerosene, gas oils and fuel oils. I could show someone how to blend this type of [type of fuel redacted] in a few minutes. It is very simple and is only a matter of [requirements redacted]. As I have previously stated, many other components can be used if they fit the distillation range i.e. they are not too "heavy" and have relatively low sulphur levels.
27 I fail to see how the claimant can ask the court to protect a formula that, even now as part of this application, they are not prepared to disclose. I also think that it is nonsensical to describe anything in the schedule/description as amounting to "vital information"."
- Mr Solomon recognises that the defendants challenge almost all that Mr Whittaker has said; but he submits that the court is in no position to determine these disputed issues of fact on the papers. He submits that the defendants are seeking to exploit a concept - that of [type of fuel redacted] - using a specific formula the knowledge of which was imparted to Mr Fletcher in confidence whilst employed in a senior role by ESL. He says that nowhere does Mr Fletcher claim that he had to experiment to develop a fuel similar to Ultra 35. He does not say that he engaged in any reverse engineering. Mr Solomon points to what are said to be deficiencies in the defendants' evidence, such as the lack of any detailed description of how to blend a fuel similar to Ultra 35, and the lack of any evidential basis underpinning Mr Fletcher's assertions that there are other producers of a fuel of the same nature as Ultra 35.
- Mr Solomon relies not only upon the contrary evidence of Mr Whittaker, but also upon the email from Mr Paul Vian (the Managing Director of Certas) to Mr Whittaker of 21st November 2013 which forms exhibit SW3 to Mr Whittaker's third witness statement. That email read as follows:
I understand that ESL Fuels Limited is currently engaged in litigation with Prema Energy Limited in relation to Prema's production and sale of its Prema 35 product.
I write to confirm, in my capacity as managing director of Certas Energy UK Limited (Certas), that we did not purchase any potential equivalent product to Ultra 35 until such time as Certas was approached by Stephen Fletcher/Prema Energy offering its Prema 35 product. Moreov
er, during the past ten years Certas has acquired twenty nine oil distributor companies, none of whom also supplied/purchased an equivalent product.
I can also confirm that had Certas the knowledge or ability to manufacture an equivalent product then they would have done so. However, up until recently the only product on the market which was of the required quality for Certas's needs was Ultra 35.
I can also confirm that over the past few years Certas dealt primarily with Stephen Fletcher when liaising with ESL up until his resignation, and it appeared to me that he was played an integral role in managing the affairs of ESL.
- Miss Ellenbogen emphasises that one does not know what preceded, and provoked, Mr Vian's email beyond what is said about it by Mr Whittaker. She also emphasises that Certas is a distributor, rather than a manufacturer or producer, of fuel oils, and that Mr Vian does not profess to have technical skills himself. This is in contrast to Mr Fletcher's own technical expertise, as outlined, in particular, at paragraph 5 of his first witness statement (which is not disputed by ESL). Miss Ellenbogen points out that Mr Vian does not condescend to particularise Certas's needs; and she makes the point that one would not expect a competitor (such as [identity of competitor redacted], which is also a seller of fuel oils) to be prepared to offer its own competing product to Certas. Acknowledging all of these points, I do not consider that I can simply disregard the evidence contained within Mr Vian's email. It may be possible to challenge that evidence at trial. But for the purposes of this interim hearing on the papers, I find that it supports ESL's case that there is a serious issue to be tried.
- Despite all that Miss Ellenbogen has so eloquently said on the defendants' behalf, I accept Mr Solomon's submission, for the reasons that he gives, that at the heart of this litigation there are clearly triable issues of fact which can only be determined at a full trial on oral evidence. In my judgment, it is not possible to form a clear - and I stress clear - view on the written evidence as to the likely outcome of the trial.
- Miss Ellenbogen also submits that the orders sought by ESL are embarrassing for want of an adequate definition of the "confidential information" which it is sought to protect, and are too widely drawn as a matter of law. As to the former submission, Mr Solomon counters that the defendants gave voluntary undertakings to Mr Justice Norris, incorporating a definition of "confidential information" in the terms which ESL proposes should be incorporated in the order which it now seeks. It is therefore too late for the defendants to submit that this definition is insufficiently precise.
- I reject this contention. The undertakings were given solely to regulate the position for seven days over until an effective hearing of the interim injunction application. Further, the undertakings were expressly given without prejudice to the defendants' contention that there was no confidential information which was the property of the claimant and/or which it was entitled to protect. In my judgment, this contention remains open to the defendants. Miss Ellenbogen relies upon the judgment of Brightman J in the United Sterling Corporation Ltd case (previously cited) to undermine Mr Solomon's reliance upon the earlier Under Water Welders case; and she cites in support the observation at page 231 of Brearley & Bloch: Employment Covenants and Confidential Information: Law Practice and Technique, 3rd edition, to the effect that it is unlikely, in today's atmosphere of greater scepticism regarding claims of confidentiality, that an injunction would have been granted in these circumstances.
- However, applications such as the present are always highly fact-specific. On the evidence in this case, I am satisfied that the defendants have sufficient knowledge of the nature of the confidential information, the use of which ESL seeks to restrain; and that they will have no difficulty in complying with any court order. The nature of the confidential information has been sufficiently defined to enable the defendants to know what they can, and cannot, do with sufficient precision.
- Miss Ellenbogen referred me to observations of Scott J in Balston Ltd v Headline Filters Ltd  FSR 330 at 351 - 352, of Cumming-Bruce LJ in GD Searle & Co Limited v Celltech Limited  FSR 92 at 99 - 101, and of the Court of Appeal in [Caterpillar Logistics Services (UK) Ltd v De Crean]()  EWCA Civ 156, reported at  3 All ER 129 at  - . She submits that ESL is merely seeking to stifle competition in the market place by a former employee. Of course, I bear these observations in mind; but having found that there is a serious issue to be tried as to whether the confidential information asserted in the present case is a trade secret, on analysis I do not find them to be of any real assistance to the defendants. ESL's complaint is not merely that the defendants are seeking to compete with ESL, but rather that they are seeking to exploit its trade secrets in order to do so. As Mr Solomon observed in his reply, a trade secret does not become part of an employee's stock in trade simply because he learns of it, and uses it, during the course of his employment. Nor is ESL seeking to restrain the business activities of the defendants generally. It does not seek to prevent the defendants from producing, and selling, all forms of fuel oil but only one particular formulation, albeit one in which the defendants would enjoy a particular competitive advantage because of [reason redacted**]. However, on ESL's case that competitive advantage derives from the use of its trade secrets, which were imparted to Mr Fletcher in circumstances giving rise to a seriously arguable obligation of confidence.
- Having found that there is a serious issue to be tried as to whether the confidential information asserted by ESL is a trade secret, I turn then to the balance of convenience. This was the subject of much less evidence and argument before me. ESL's evidence can be found at paragraphs 66 - 71 of Mr Whittaker's first witness statement:
"66 I believe that it is self evident that if Mr Fletcher is permitted to use ESL's trade secrets to manufacture Ultra 35 the damage to ESL would be irreparable, not merely in the loss of its major income stream but in the reputation that I and ESL enjoy in this market. A significant source of profitable revenue will be lost to Certas too with whom ESL has a long term and exclusive supply of arrangement.
67 Mr Vian said to me when I spoke to him on 15th October 2013 that Certas is seriously concerned at Mr Fletcher's activities because no-one else in the market has developed a product with the qualities and competitive advantage of Ultra 35 as I myself know, and which is itself a function of the confidentiality that protects Ultra 35, and that Certas has relied on ESL's supply of Ultra 35 to develop a thriving and profitable division supplying users of industrial oil boilers, and that Certas regard with concern the prospect of this being under threat. Mr Vian as an experienced oil executive will be aware of [identity of product redacted] from [identity of supplier redacted].
68 Mr Vian said that he regarded the manner of Mr Fletcher's approach to Certas as being a veiled commercial threat, that is to say buy from me or I will sell to your competitors, as I relate above. That is why I understand from Mr Vian that Certas regards itself as a matter of self preservation almost bound to deal with Mr Fletcher.
69 The fact is, therefore, that Mr Fletcher's unique position as a senior employee and shadow director of ESL has furnished him with the means to speak to Certas in that way. I believe that Certas expects ESL to protect its confidential information, not only for itself but for those with whom it does business, and who in turn rely on ESL.
70 The value of ESL with Ultra 35 that has made it an attractive proposition for potential purchasers and investors, including Certas, would be seriously damaged, if not lost, as a result of the defendants' activities.
71 Prema plainly has no ostensible substance. I do not know Mr Fletcher's means but, unless and until demonstrated to the contrary, doubt they would extend to the damage that ESL would sustain if he was permitted to continue on his current course down to a possible trial of this matter, even with the direction for a speedy trial which I understand counsel will seek from the court. Zatman's letter says that Prema has significant financial backing which will enable it to contest this litigation. I do not know if that is correct but of course no undertakings have been offered whether on behalf of Prema or any third party."
- The defendants' evidence is at paragraphs 123-125 of Mr Fletcher's first witness statement (headed 'Balance of Convenience/Damages as an adequate remedy'):
"123 In any event, I do not consider that the balance of convenience lies in favour of the grant of an interim injunction, which would seriously hamper Prema, a company plainly still in its infancy. Prema already has significant overheads, particularly in terms of the costs of storing fuel in tanks and its sea terminal. Its continued trading does not affect ESL's own ability to trade and there is no indication that ESL has in fact suffered, or will suffer, any loss as a result.
124 I am not seeking to exclude ESL from the marketplace, whether from trading with Certas or anyone else. If ESL has chosen to date to enter into an exclusive supply agreement with Certas, that is a commercial decision which does not restrict my right to sell an alternative product.
125 Mr Whittaker does not explain why damages would be an inadequate remedy, were he to succeed at trial. If, as he asserts, ESL and Prema Energy are the only ones producing the fuel which ESL sells as 'Ultra 35', any losses which he could establish should be readily quantifiable.
- Mr Whittaker comments upon this at paragraphs 53 to 55 of his second witness statement (also headed 'Balance of Convenience/Damages as an adequate remedy'):
"53 Mr Fletcher addresses these issues in three short paragraphs at paragraphs 123 to 125. He asserts that the second defendant, Prema, already has significant overheads, but gives no indication of any. There are no relevant documents appended to this section of his witness statement. Significantly, Mr Fletcher asserts that Prema's 'continued trading does not affect ESL's own ability to trade'. This fundamentally ignores the commerciality of the situation. As I set out in my first witness statement, there has been an offer to purchase a majority shareholding in the claimant for many millions of pounds. I refer to paragraph 70 of my first witness statement. The prospect of any such offer being made now with a direct competitor producing an identical product is fanciful. If the defendants were allowed in the meantime to carry on producing Prema 35, and supplying the same market as that for Ultra 35, prospective suitors would become alarmed and would price that concern into any offer made after conclusion of this action, even if the outcome is that the defendants are prevented by order from their current activities. It would be hard to maintain to a potential purchaser that the claimant has a unique position in the market in circumstances in which the defendants have been permitted to continue to trade and erode that position, albeit through breaching their legal obligations to the claimant. Furthermore Prema 35 would be taking business away from the claimant and eroding its turnover and profitability.
54 The supply arrangement between the claimant and Certas is undermined and damaged by the existence of the defendants if Certas, as its managing director has in turn said to me, feels itself commercially forced to buy from the defendants in order to maintain the exclusivity for this product it previously enjoyed by reason of the arrangements between us made possible by the claimant's trade secret.
55 Although Mr Fletcher boldly states that damages would be an adequate remedy if the interim injunction is not granted, there will be a massive impact on the claimant as there is no indication that the defendants would have any means whatsoever of meeting those damages. On the other hand, Mr Fletcher does not dispute that the cross undertaking in damages from the claimant is more than adequate. Plainly the balance of convenience favours granting an interim injunction pending a speedy trial. At present the second defendant has only just begun to trade, and it has done so in the knowledge that the claimant was going to attempt to prevent it from doing so. In any event, this injunction really seeks to prevent the defendants from using the claimant's trade secret plus other associated relief, and does not seek to prevent the defendants from any other trade."
- Mr Fletcher expands upon his evidence at paragraphs 40 to 43 of his second witness statement:
"40 In relation to paragraph 53, Prema's overheads are storage charges (access to nine tanks with one in operation at a yearly cost of £350,000), the purchase of components, product testing, office facilities (short term licence of £12,000 per year), vehicles and wages. Prema has to cover off around £50,000 of expenses per month.
41 In relation to paragraph 54, Certas have made it clear that they will buy from whom they choose.
42 In relation to the question of damages at paragraph 55, Mr Whittaker ignores the fact that the claimant is effectively attempting to stop us from trading. We have only made about £9,000 worth of profits so far. Prema had commenced trading by the time we received the claimant's solicitors' letter of claim dated 29th October 2013. Prema's first invoice was dated 25th October 2013.
43 If the claimant's application is granted, and if Prema is injuncted from trading for the next 8 to 12 weeks, this would have a massive impact on our ability to trade effectively thereafter. We are a tiny company attempting to get our business off the ground, and gaining a toehold into this market is a key to our business. Being prevented from doing so would be catastrophic for the business."
- I have borne all of this evidence firmly in mind. For ESL, Mr Solomon submits that Mr Whittaker, in his witness statements, has given evidence as to the value of the trade secret. It is not clear what assets the defendants have which would come anywhere near compensating ESL for the potential losses it may incur. The defendants' evidence does not deal at all with that point. It is said that the defendants' evidence skates over the issue in three short paragraphs of Mr Fletcher's first witness statement. Indeed, to the extent that any indication of the defendants' ability to pay is provided, it is implied that there would be none. Prema is said still to be "in its infancy" and is just starting up and is already said to have "significant overheads". Mr Solomon makes the point that ESL does not seek to prevent the defendants from trading in other fuel products. Further, Mr Solomon submits that, as with many confidential information cases, it may be very difficult to prove loss caused by the defendants' breaches, and to determine what the consequential loss to ESL would be. On the other hand, there is said to be a good cross-undertaking provided by ESL, the value of which has not been disputed by the defendants. It is said that the balance of convenience entirely favours the grant of the injunctions. It is said that the lesser evil must be to prevent the defendants from commencing a new business for what would be a relatively short period of time pending a speedy trial, rather than to permit what might prove to be hugely expensive damage to ESL. It is said that, as can be seen from the defendants' redacted invoices, the vast majority of which (all save for less than £2,000) were issued after ESL's letter before claim, the defendants have been trading safe in the knowledge that to do so was opposed by ESL, which would be seeking injunctive relief to prevent them from doing do. It is said that it is not now open to the defendants to assert that there is any equitable, or just, basis for them continuing to do so pending a speedy trial.
- It is said that an offer to deposit four per cent of the net profit earned on the sale or supply of Prema 35 into an account to be held by the defendants' solicitors is unacceptable to ESL. It is said that it is not known even now whether the defendants have entered into contractual relations with any third parties for the sale or supply of Prema 35, nor when any such contracts were made. All that has been provided to ESL are redacted invoices. (As an aside, Mr Solomon submits that the very fact that the defendants need to redact the information on the invoices demonstrates how commercially sensitive and confidential such information is.) Nevertheless, it is said by Mr Solomon that it is settled law that the court has the power to grant an injunction against an ex-employee restraining him from entering into future contracts, or even fulfilling a contract already made with a third party. However, there is nothing in the defendants' evidence which suggests that there would be any prejudice to third parties, or that there could be such prejudice.
- For the defendants, Miss Ellenbogen submits that Prema is a fledgling business which has already incurred significant overheads and is trading. It is said to have considerable financial backing, and that Certas has made clear that it will not have its suppliers dictated to it. Miss Ellenbogen submits that ESL is not itself precluded from trading, and there is no evidence that it has suffered, or will suffer, any loss. There is said to be no evidence that it cannot still sell one hundred per cent of its production of Ultra 35 to Certas.
- Miss Ellenbogen submits that Mr Whittaker's evidence (at the end of paragraph 53 of his second witness statement) that Prema 35 will be taking business away from the claimant, and eroding its turnover and profitability, is just bare assertion. Further, Miss Ellenbogen submits that if, as ESL contends, the only competitor in the market place for Ultra 35 is Prema, then any losses sustained by ESL should be readily quantifiable.
- Miss Ellenbogen addresses Mr Whittaker's assertions that there has been an offer to purchase a majority shareholding in the claimant for many millions of pounds, and that the prospect of any such offer being repeated, with a direct competitor producing an identical product, is fanciful. As to that Miss Ellenbogen says: (1) That it is no answer to the point made by the defendants. (2) That, in any event, the offer in question was made by Certas in 2010. She refers in that regard to paragraph 2.20 of the BDO Valuation report. She says that, for reasons not identified, that offer was not accepted, and it is clear from Mr Whittaker's evidence that no offer has been made by anyone since. (3) Miss Ellenbogen says that ESL cannot be heard to complain if the value of its shares is reduced by the existence of competition in the market place.
- Miss Ellenbogen submits that ESL is an established, successful business. By contrast, if Prema's ability to trade is stifled, even on an interim basis, that will affect its ability to gain a foothold in the market place. Mr Fletcher, in paragraph 43 of his second witness statement, describes the likely effect on its business as being "catastrophic". Miss Ellenbogen submits that the extent of its associated losses will be difficult to quantify. In short, Miss Ellenbogen submits that ESL just does not like competition, and that the grant of an injunction against the defendants would be oppressive, and would cause more harm than refusing to grant it pending a speedy trial of this claim.
- In reply, Mr Solomon submitted that the defendants have only been trading for a couple of weeks so it has not been possible for ESL to produce any evidence of actual, and continuing, loss. He submits that common sense dictates that sales of Ultra 35 will drop if a competing product, not previously available, is now available in the market. He submits that the availability of a competing product of that kind may also undermine the value of ESL's business. He submits that there is no real evidence before the court that the defendants will suffer any loss if an interim injunction issues which will not be compensated in damages by a party to litigation, namely ESL, which is well able to discharge such a liability.
- Those are the submissions on the adequacy of damages and the balance of convenience. In my judgment, on the issue of the adequacy of damages, the balance falls in the defendants' favour. I acknowledge that ESL is an established business, and that it would be well able to discharge any liability on its cross-undertaking in damages if it were to be granted interim injunctive relief yet were to fail at trial. However it has, and for some years past it has had, only one customer for Ultra 35, namely Certas. ESL should, in my judgment, readily be able to quantify any drop in income from sales of Ultra 35 to Certas; and (through the process of disclosure) it should be able to attribute such drop in sales to sales of Prema's competing product (Prema 35). Provided the defendants are able to meet any award of damages, in my judgment ESL can be adequately compensated in damages for any pecuniary loss it may suffer if interim injunctive relief is withheld but ESL succeeds at trial. As for any damage to ESL's commercial reputation and standing, in my judgment this will be adequately redressed if ESL is vindicated by victory over the defendants at trial. That will establish the validity of ESL's trade secret in the formula for Ultra 35, both for the past, and also for the future. As for Prema, it is a fledgling company attempting to get its business of the ground. The grant of an interim injunction will prevent it from developing its business and meeting its start-up costs. It may well be strangled at birth if it is prevented from producing, and marketing, a competing product which, on the defendants' case, it has every entitlement to sell.
- In the Series 5 Software case (previously cited) Mr Justice Laddie (at page 868 between letters E and F) recognised that, as far as the balance of convenience was concerned, it was clear that either of the first two injunctions sought by the plaintiff in that case might well have the effect of depriving the defendants of the means of earning a living. He described their new venture as being "strangled near birth". In my judgment, that is a weighty factor to be borne in mind when considering the balance of convenience.
- Whilst I acknowledge that the desirability of maintaining the status quo favours ESL, in my judgment one never reaches the stage at which this is brought into the balance of convenience. In my judgment, subject to an undertaking by the defendants to preserve the net profits realised on the sale of Prema 35 pending the trial of this claim, the balance of convenience falls in favour of the defendants in relation to sales of Prema 35. However, subject to that, an interim injunction will issue to protect ESL's allegedly confidential information. In other words, the confidentiality of the alleged trade secret is to be preserved; but that is not to prevent the defendants from being able to sell Prema 35, subject to appropriate preservation of the net profits. The confidential schedule to this judgment will simply reproduce Schedule 1 to the Particulars of Claim.
- I appreciate that I have been going for about an hour and a half. Are there any matters which either of you feel that I have not adequately addressed in this judgment which it is necessary for me to address?
End of Judgment
Published: 13/01/2014 09:54