Space Airconditioning Plc v Guy Smith Brothers Stores Ltd

On 13^th June 2011 I gave the parties my decision in this case. These are the reasons for that decision.

In this case the claimant, Space Airconditioning Plc, alleges extraction, retention and use of confidential information by the first defendant, Mr Adrian Guy, allegedly induced by the second defendant, Smith Brothers Stores Limited (“SBS”).

The claimant is and has been for many years a distributor of air conditioning products manufactured by Daikin Airconditioning UK Limited and Daikin Europe NV (“Daikin”). The claimant’s managing director is Mr Neil Afram.

Mr Guy was employed by the claimant as a sales manager from 8th September 2003 until 31st December 2010. He was unhappy and started looking around for other employment in the summer of 2010. He resigned from the claimant on 11th November 2010. His contract with the claimant contained no restrictive covenant preventing him from working for a competitor or against solicitation of or dealing with the claimant’s customers after his employment came to an end. He told Mr Afram that he was moving to SBS, which was by then a competitor or potential competitor of the claimant, and he was put on garden leave rather than working out his notice. Mr Guy commenced his employment with SBS on 4th January 2011.

SBS is a supplier of tube valves and fittings for mechanical services, historically plumbing services. Since about 2009 it also supplied small air conditioning units known as ‘splits’. The relevant SBS personnel are Mr Simon Goswell and Mr Darren Thomas.

In October 2010 SBS was, along with four other companies, appointed a ‘partner dealer’, in other words a distributor, by Daikin UK. The appointment enabled SBS to sell variable refrigerant volume (‘VRV’) air conditioning units. These are large external units commonly used in commercial buildings.

SBS’s appointment is regarded with much suspicion by the claimant. The defendants view the claimant’s attitude as sour grapes since until the appointment of the five ‘partner dealers’ in October 2010 the claimant was the only distributor of Daikin products in the UK.

In brief, the claimant’s case is that the defendants, in conspiracy with Daikin UK, are responsible for what is described in one of Mr Afram’s witness statements as a “wholesale raid on our customers using our confidential information”. It says it has brought the action to protect that information. By contrast the defendants say that the proceedings have been brought so that the claimant can gain a competitive advantage over them. However, having heard the oral evidence, I have little doubt that Mr Afram genuinely mistrusts the defendants, their conduct and motives. The question is whether that mistrust is well-founded and whether he has made it good in the evidence.

It is common ground between the parties that Mr Guy was bound by certain implied terms. First, he was bound not to take steps during his employment with a view to securing a competitive advantage thereafter or to act in a manner in conflict with the claimant’s interests. He was not permitted to copy the claimant’s documents or memorise information in them to use for SBS’s benefit, either during his employment or after it had terminated. Secondly, he was bound not to use or disclose the claimant’s trade secrets in accordance with the implied term considered by the Court of Appeal in Faccenda Chicken v. Fowler [1987] Ch 117. Thirdly, it is accepted that Mr Guy’s contract contained a post-termination confidentiality provision the terms of which were extremely wide. There is a dispute as to the effect of this, but nothing turns on it for present purposes.

During the course of the trial the parties narrowed the issues to headline principal issues on liability, asking the court to determine only those issues in the first instance.

Each side asked me to discount the credibility of the evidence on the other side and I will make some preliminary observations about some of the witnesses.

It was absolutely plain from Mr Afram’s evidence that he is a man who clings tenaciously to an idea once he has formed it. There were many examples of this. I mention only three.

First, he firmly believes that there was no good business reason for Daikin to appoint SBS as a partner dealer other than in the knowledge that a raid was to be made on the claimant’s database.

Email correspondence shows that the approach to SBS came from Mr Lee Nicholls of Daikin, who already knew Mr Goswell and Mr Thomas. Mr Nicholls said that if SBS was to be Daikin’s appointee it would need to appoint a specialist air conditioning salesman. He apparently expressed himself as keen to recruit Mr Guy who was plainly widely known to have itchy feet.

In April 2011 the claimant’s solicitors wrote to Daikin’s solicitors Reynolds Porter Chamberlain LLP to ask about the sequence of events surrounding the appointment of SBS. Mr Afram considers the response evasive and suspicious. He asks the court to infer that as SBS did not put in a witness statement from Mr Nicholls, Daikin is simply sheltering behind its solicitors’ letter and must have something to hide. However, although a serious allegation of conspiracy is made against it, Daikin has not been joined as a party to this action. There has therefore been no disclosure of documents which might expand on Daikin’s reasons for appointing SBS as its fifth partner dealer. There are a number of innocent explanations for its conduct in so doing, not least those which RPC LLP advanced on instructions.

I repeat what I have said on many occasions before in other cases, that Mr Afram seems to think that a judge can look into the hearts of witnesses and somehow divine the truth. That is not how the system works. A judge can only find facts on the evidence, properly adduced. The evidence against Daikin is merely speculative, and certainly entirely inadequate for the court to draw the inferences required by Mr Afram.

There is a perfectly valid explanation for the appointment, namely that SBS’s main clientele comprised mechanical services contractors to whom Daikin was unable to sell directly and Daikin wanted to tap into that market. A document prepared for an SBS management meeting on 11^th October 2010 described the reason for SBS’s appointment as follows:

“The intention of appointing SBS is to develop new business from MSCs or any new business we might develop from Daikin’s competition by switch selling.”

It is rational that when Daikin was appointing five new partner dealers it might chose one whose experience was out of the ordinary, particularly as its personnel were known to and trusted by Mr Nicholls.

The claimant has adduced no evidence at all to support a conspiracy whereby Mr Nicholls, Mr Goswell and Mr Thomas agreed that SBS would be appointed one of Daikin’s new partners on the basis that Mr Guy supplied SBS with confidential information illicitly obtained, or to be illicitly obtained, from the claimant. There is no evidence, documentary or otherwise, that is inconsistent with the evidence of Mr Goswell and Mr Thomas that the prospect of the partnership did not materialise until September 2010, some time after the printings which Mr Afram finds so suspicious. I observe in passing that the comprehensive phone records which have been provided show no telephone calls at all from Mr Goswell to Mr Nicholls between 27^th April and 8^th September 2010.

Secondly, Mr Afram was convinced that Mr Guy had detailed knowledge of prices and discounts which would enable him to impart relevant confidential information to SBS. When cross-examined to the effect that Mr Guy was not in a position to retain such information in his head, Mr Afram said that all the claimant’s employees had a hard copy file of a price list for VRVs on their desks and that Mr Guy must have taken his away with him when he left. No attempt was made to produce a copy of what documents it is said that Mr Guy had on his desk. The evidence on this was incoherent and fuelled by Mr Afram’s mistrust. It is also contrary to what Mr Afram himself said, (and confirmed under cross-examination was his honest view as to the state of Mr Guy’s knowledge) in a letter of 19th January 2011,

“You know, I know that…your knowledge of the product and operation is quite limited and we can advise of 100s of mistakes you have incurred during your stay with us”.

Thirdly, Mr Afram refused to accept the statement from Mitsubishi (one of the market leaders in the manufacture of air conditioning parts) that, when Mr Guy approached it in June and July 2010 about possible employment, he did not mention anything about illicit use of the claimant’s documents. In other words, Mr Afram saw conspiracies everywhere and expected the Court to infer that they existed without adducing cogent evidence of the underlying facts.

The defendants made much of the fact that in order for the claimant to succeed, Mr Guy, Mr Goswell and Mr Thomas would all have to have been telling lies. Mr Tabachnik, counsel for the defendants, submitted that this is unlikely. Much was also made of the fact that, as Mr Afram admitted, SBS would be a “complete idiot” to take on an employee in the knowledge that he had stolen documents. However neither of these matters in itself militates against a finding for the claimant, particularly taking into account the fact that Mr Goswell was a long-standing friend of Mr Guy.

I am not now asked to make findings on the claimant’s allegations about Mr Guy’s use of the claimant’s clients’ numbers on his mobile phone, or about his activities when he was on garden leave. It is denied that any of these matters, if established, constituted breaches of Mr Guy’s duties owed to the claimant or a misuse of confidential information. However it is said that if the claimant succeeds on the main issues, these matters will add nothing so far as remedies are concerned. If, on the other hand, the claimant fails on both of the headline issues, it is accepted for present purposes that these other matters were not causative of loss affording a basis for any claim in damages or to an account of profits.

They are however relevant to the question of credibility, and I look at Mr Guy’s evidence against that background. He accepted that he did retain a mobile phone with clients’ telephone numbers on it (or at any rate the names of individuals at the client companies whom he said were largely personal friends) and that he did not hand over that telephone until a date in February 2011 after proceedings had begun. Mr Guy’s solicitors told the claimants’ solicitors with some indignation that he had left his company’s mobile phone behind when he left. This was disingenuous since the customer names, the subject of the claimant’s complaint, were on Mr Guy’s personal mobile phone.

The Defence contains an admission that while on garden leave Mr Guy passed on to Mr Goswell details of four customers and as a result SBS sent account opening applications to them.

Mr Guy admits to speaking on the phone to customers of the claimant. He says that they initiated the calls rather than the other way round. Although it appears from the schedule of telephone calls that he did in some cases call them back Mr Tabachnik pointed out, in support of his statement that he did not solicit any of them, that there were no orders placed until after the termination of his employment. Mr Guy admitted in his witness statement that he asked Mr Goswell to call those customers, and that some customers were sent account opening applications, a matter which he described as “perhaps not good business practice”.

There is also some evidence in the form of emails to Mr Afram that Mr Guy contacted one of the claimant’s clients during garden leave, and RPC LLP told the claimant’s solicitors that during a taxi journey Mr Guy had boasted to a Mr Bowden of Daikin that he had been doing so. Although the evidence was indirect and not subject to cross-examination it seems to me likely that Mr Guy did indeed speak to some of his contacts among the claimant’s clients during his period of garden leave with a view to transferring them to SBS after he had left. Mr Guy’s admission of these facts were elicited piecemeal.

With these matters affecting credibility in mind, I turn to the issues I am now asked to decide.

The claimant’s computer software enables it to identify which documents were printed at which terminal on which date. The case under this head is limited to documents printed by Mr Guy on 24^th June 2010 and 26^th July 2010. On 27^th July 2010 Mr Guy met Mr Goswell and Mr Thomas and is said by the claimant to have shown them the print-outs to demonstrate his potential worth to SBS.

There are two relevant matters. One is the circumstances surrounding the meeting. The other is the nature of the documents themselves.

First, the meeting on 27^th July 2010. The claimant infers that Mr Guy went to SBS with a view to discussing potential employment with SBS. It is said that there was no need for him to visit SBS. Mr Guy says that he had a legitimate reason to visit SBS, namely to discuss a project in relation to the Mariner School in which both companies were involved. He could not explain why a face to face meeting was necessary other than generally to chase SBS and keep up the relationship. He did not apparently pursue the question of the project when nothing materialised in August or September.

However Mr Guy now says that his real reason for visiting SBS in Essex was to visit an old friend in the Benfleet area, a Mr Newsum. The appointment with SBS was a pretext. Mr Guy, Mr Goswell and Mr Thomas maintain that he only spent a very short time at SBS’s offices. He accepted that it was not a legitimate use of company time to use it to visit a friend, but said in effect that by this time he was fed up with Mr Aslam and decided to do it anyway.

The claimant points out that a man who was willing to be dishonest in relation to such a matter is not likely to be telling the truth about the purpose of the SBS meeting either. There is perhaps some illogicality in this argument. If Mr Guy is telling the truth about his visit to Mr Newsum (and it was not put to him in terms that he was not) then his purpose was not to spend the day at SBS. If on the other hand the visit to Mr Newsum did not take place or was a blind to cover the alleged conduct, his dishonesty in the use of his employer’s time is irrelevant. However I can see that in general terms Mr Guy’s attitude may be relied on in relation to his credibility.

As a matter of common sense, it seems to me likely that Mr Guy did put out feelers as to the possibility of a job at SBS, by whom he was in fact subsequently employed. He may even have boasted that he could bring in a lot of work. By that stage he was certainly looking round for other employment. I found Mr Goswell’s manner of denial a little evasive. The prospect of Mr Guy joining SBS may also have formed the foundation for the eventual decision to enter the air conditioning market on a more serious basis. However that is very far from finding that Mr Guy provided confidential documents to SBS at that meeting.

It seems to me that the claimant’s argument assumes what it seeks to prove. It is said, on the one hand, that if Mr Guy did print out documents for use at the meeting, the irresistible inference is that there was a sinister purpose to the meeting. And if there was a sinister purpose to the meeting, to quote from Mr Hillier QC’s closing submissions,

“the next part of the [conspiracy] story falls into place. Further discussions occurred. DAUK became involved. We do not have DAUK’s telephone records but Mr Guy had his conversation with Mr Nicholls on 17^th August. He learned of the distributorship concept. With him in SBS, the idea made sense.”

Reliance is then placed on the speed with which Mr Guy contacted the claimant’s customers as soon as he was free to do so as evidence that his involvement was an essential part of the conspiracy. The trouble with this argument is that it piles supposition on speculation.

I therefore turn to the documents that were printed out the two dates in the summer of 2010 to see whether the printing gives rise to the inferences I am asked to draw.

Mr Guy admits that he printed out a number of customer sheets on this day. He says however that he had a legitimate reason for doing so, that he did not show them to SBS and that the hard copies were disposed of long before his employment was terminated. The claimant says that this is too convenient and that his story is incapable of being checked.

The main documents relied upon were customer summaries. It is notable that such summaries do not show important discount information. Mr Guy's explanation for the printing is as follows. An issue arose about the credit limit of one of the claimant's principal customers, Callisia. Mr Guy was the person who dealt with the Callisia account. Callisia’s credit limit was low, only some £30,000 in June 2010. Callisia had exceeded that credit limit and Mr Afram had told Mr Guy either to obtain personal guarantees from the directors or to obtain payment in advance. Callisia was apparently extremely upset about this, but Mr Afram would not back down. Mr Guy says that he printed off the relevant records with a view to demonstrating that there were other customers all over the country trading above their credit limit, and no similarly robust approach had been adopted.

The claimant contends that the story is implausible. There is no complaint by Callisia in the documents about the credit arrangements. On the contrary, credit had been increased on 18^th June 2010. It is said that the data as at 31st of December 2010 indicates improbability that all the customers shown on the summaries were over the limit. Instead, the information provided Mr Guy with a useful snapshot of the value of customers nationwide. The claimant also points out that prior to disclosure Mr Guy gave a different explanation for the printing, namely to make out a case for a salary increase by reference to other salesmen's revenues.

However, it is clear that there was indeed an issue with Callisia regarding its credit limits at the relevant time. That appears from the customer action letter and summary of 18^th June 2010 (requiring early settlement or personal guarantees) and is corroborated by the large number of calls made by Mr Guy to Callisia in June. There is also an important e-mail exchange between Mr Guy and Mr Afram culminating in one of 24^th June, the day of the printing, in which Mr Guy told Mr Afram,

“I spoke with Mike [Taverner, of Callisia] and HE WANTS A MEETING with you to increase his credit facilities. He wants to come to the table….

Callisia have now won 2 DAIKIN VRV PROJECTS. I have a meeting with Mike tomorrow PM.”

Further, the printed customer summaries are those which have the most information regarding credit limits. They are the only screenshots which include the credit limit notes, where references to personal guarantees are found.

I do not think that Mr Guy should be criticised for failing to recall why he printed these documents when his solicitors originally wrote to the claimant. Mr Guy had not been provided with the print log, which may well have jogged his memory when he saw what the particular entries were. Also, as he said, there was considerable time pressure to respond.

Much is made by the claimant of the fact that in the event Mr Guy did not use the printed documents to put forward his alleged case. Mr Hillier, submitted that it was absurd to suggest that Mr Guy was too timid to confront Mr Afram. However, having heard Mr Afram in the witness box I regard Mr Guy’s explanation, that he changed his mind about doing so as he regarded Mr Afram as intractable, as an entirely plausible one.

Mr Guy admits to printing some 67 customer contact reports. They are not documents containing discount information. His explanation is that he was showing initiative in reallocating the customer base. The claimant again says that this is implausible. Mr Guy did not discuss the reallocation with affected employees or with Mr Afram. He had just been refused a salary increase for the third time and was obviously disenchanted with his employment. The documents would be useful to a competitor.

Looked at from Mr Guy’s perspective, however, his account of the printing makes sense. At the end of May 2010 Mr Guy’s boss retired, and his workload dramatically increased. He was refused a pay rise. He sought both to lighten his burden and demonstrate initiative by starting the process of re-allocating accounts. A new salesman was employed, Mr Gavin Hale. Mr Guy said that there was a conversation between them which gave him to understand that Mr Hale was to be responsible for sales in the M3 corridor. Although at first Mr Hale was not responsible for the M3 area he has since become so. Virtually all the details printed for customers were either customers of Mr Guy or customers of other salesmen, notably Mr Gaffney, who would be affected by the appointment of a man newly responsible for the M3 corridor.

In the vast majority of cases, the document printed was the customer contact sheet. This would have the sort of contact details that a new salesman would appreciate, but contains no information as to discounts, budgets, levels of business or outstanding quotations. Such information is what one would expect someone to print if they were intending, as alleged, to engage in a wholesale raid.

I observe that the case was originally put on the basis of allegations of “multiple quotation printing”, but these have now been abandoned.

I find that the claimant has not made out its case on the balance of probabilities as to the purpose and use (by Mr Guy or SBS) of the printings he made on 24^th June and 26^th July 2010.

The second headline issue is whether Mr Guy misused his knowledge of the claimant’s structure of discounts offered to customers on listed prices. The primary focus of the claimant’s case has always been that he was able to do so because he deliberately stole documents containing such information. However it is also contended that he misused trade secrets which he acquired in the course of his employment. The contest is therefore between legitimate use of his expertise in, and knowledge of, the air conditioning market and its pricing structure on the one hand, and unlawful use of confidential information as to discounts on the other.

As a matter of common sense the claimant would have to establish three matters in order to show that Mr Guy misused his knowledge of the claimant’s discount structure. They are, (i) that Mr Guy had detailed knowledge of the claimant’s price list, (ii) that he had (contrary to what Mr Aslam himself asserted in his letter of 19^th January 2011 and confirmed in oral evidence) relevant knowledge as to how that structure would operate in any given case and (iii) that there were no other significant material factors involved in the pricing decision.

I found the claimant’s evidence about price lists incoherent and confusing. It is clear that Mr Guy had a copy of a price list, but that he obtained it from SBS, who had acquired it legitimately. In any event, that list only contains prices for mini VRVs and omits the larger VRVs and chillers. Many of the items in the quotations complained of (some 26) were not on the price list, including some of the big ticket items. There was no credible evidence at all that Mr Guy took away a price list for the VRVs. Mr Guy said clearly that he had a list of VRV items and product numbers but he would get the price only by inputting product codes in the computer. There was no coherent case to the contrary. Mr Afram produced a document to the court which he said was the 2010 price list, but it was conceded through Mr Hillier that it was not in fact the 2010 price list. It is therefore not at all clear what this document was. The 2009 Price List furnished to the court is a very large document. It is ludicrous to suggest that Mr Guy could have memorised it and there is no seriously supportable allegation that he took away any such list, which he denies having done. Mr Afram accepted in cross-examination that Mr Guy asked others to price jobs involving chillers, and there is no evidence that he has ever had the relevant information in that respect.

I turn to Mr Guy’s knowledge of how the claimant’s discount structure operated. It is common ground that Mr Guy has knowledge and expertise derived from his experience with the claimant. However he insisted in cross-examination that he would only have a rough idea of what discount might be applied on a particular quotation and that this would in itself be of limited assistance given his imperfect knowledge of the full list prices and the need to be competitive in the market as a whole.

The claimant applies 27 different categories of discount depending on the type of product. In addition to this the claimant’s discretion was a key factor in the application of discounts. There was no rigid discount policy. A discretion was retained in each case and it was exercised whenever the claimant took the view that it was necessary to do so for the purposes of competition or where the order was a large one. I was taken through many examples of the ad hoc exercise of this discretion.

Thus it was put to Mr Guy in cross-examination that the discount usually offered to Independent Air Conditioning Limited was 18%. However, a quotation produced by Mr Afram shows that the discount offered to Independent Air Conditioning Limited was sometimes 5%, sometimes 15%, sometimes 17% and sometimes 18%, depending on the item in question. Another quotation, for a Mental Health Facility, is based on a 20% discount. Again, Callisia was offered a 21% discount for the St George’s Breast Clinic, but the documents show that in a different instance Callisia was offered a 22% discount in order to win a £32,000 order. Mr Afram also confirmed that if the claimant believed that there was a cheaper competing quotation the claimant could exceed even 22%. In any event, discounts were regularly reviewed so that information about discounts quickly became out of date.

There are other factors which influence a distributor’s approach to pricing, not least that Daikin products are now distributed not just by the claimant but by Daikin’s five partner dealers as well. Many of these other distributors may have lower overheads than the claimant which gives them a significant competitive advantage. There are other component manufacturers as well as Daikin, such as Mitsubishi, whose products are generally cheaper than those of Daikin. The mark up inherent in the list price is over 60%.

Of course it would give SBS an advantage if it could predict the prices offered by one of its rivals even though there were many others in the market. However, all in all it is not surprising by itself that there are a number of instances in which SBS’s pricing is keener than that of the claimant.

I was taken during the course of the trial to the transactions relied on as demonstrating that Mr Guy had misused trade secrets. In one case, a Callisia quotation (St George’s Breast Clinic), Mr Afram asserted that the defendants persuaded Callisia not to ask the claimant to re-tender after receiving SBS’s quotation. However the documentary evidence shows that the claimant was in fact asked to re-quote. In any event Callisia has said that the claimant would not have won the order even if SBS had not done so as there was a third, unrelated, cheaper supplier. On another occasion (Gray’s Mechanical Services (Pencoed Gym)) it was evident that if SBS had not had the business it would have gone to Mitsubishi rather than the claimant.

In relation to this last quotation, Mr Afram produced a hypothetical calculation to demonstrate how Mr Guy was allegedly able to undercut the claimant by using its discount information. However, Mr Afram’s conclusion does not follow even on the assumption that Mr Guy had the relevant pricing and discount information. If the claimant had applied a 21.5% discount, which it might well have done, suc45h a discount would have resulted in a lower price than that offered by SBS.

On other occasions I am satisfied that the customer (APS Mechanical), itself sent SBS the claimant’s quotation, including the prices quoted or (Cold-Aire) gave the claimant’s bottom line figure, so that there was no question of illicit use of trade secrets. Mr Hillier submitted that a similar assertion was made for the first time in Mr Guy’s evidence relating to the Callisia St George’s Breast Clinic quotation and that it should therefore be disbelieved. However, not only is Mr Guy’s account of his conversation with Mr Davis of Callisia inherently plausible, but there are so many other question marks over the claimant’s allegations about this tender that I cannot find that the claimant has made out its case on this quotation.

In one case (Independent Air) the claimant’s quotation post-dated the termination of Mr Guy’s employment and he could not have known what the claimant had done. Some examples are not like for like in relation to the equipment or specifications quoted for (JA Waite, Independent Air, Alexander Air (Apsley House) and Bonair) or even in relation to the project (Ash Refrigeration) so that no meaningful comparison can be made. The mere fact that SBS did manage to undercut the claimant is insufficient by itself to demonstrate unlawful use of confidential information. The same is true of the Wyetech quotation. In one case (Alexander Air (Eagle Court)), the claimant’s quotation was significantly cheaper than that of SBS.

I have examined all the quotations relied on and I am unable to find any hard evidence of, or a pattern suggesting, misuse of trade secrets. In cases where SBS won the contract there is nothing to show that SBS’s quotation was devised other than in the usual way, having regard to all relevant market considerations as outlined above.

In these circumstances I do not need to examine the Faccenda v. Fowler categories. I find that that the claimant has not made out its case that Mr Guy broke his contractual duties by extracting confidential information by the printings on 24^th June and 26^th July 2010. I also find that the claimant has not proved its case that Mr Guy used discount information unlawfully in providing quotations on behalf of the defendant company. In those circumstances the relevant claims against SBS necessarily fail also.

I have already on 13^th June last discharged the injunction granted by Mann J on 15^th February 2011 and continued in limited form by Newey J on 24^th February 2011. I adjourn all consequential matters (including permission to appeal and costs) to be heard next term. The parties are to consult with the listing officer about the date. However, this is without prejudice to the ability of any party to apply to the court for these matters to be heard as vacation business at an earlier date.