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Cadbury Schweppes v. FBI Foods.doc

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University of Alberta
Business Law
B LAW402
Elaine Geddes

Cadbury Schweppes Inc. v. FBI Foods Ltd. 1999 Supreme Court of Canada Duffy-Mott licensed its trademark and its formula for making "Clamato", a confection of tomato juice and clam broth, to Caesar Canning. To enable Caesar Canning to produce Clamato, Duffy-Mott communicated information about its recipe and manufacturing procedures which was confidential. Caesar Canning subsequently entered into a contract with the appellant FBI Foods to manufacture Clamato and passed on this confidential information. The respondent Cadbury Schweppes acquired the shares of Duffy-Mott and notified Caesar Canning that the licence agreement (and consequently the sub-agreement with FBI Foods) would terminate in 12 months, on April 15, 1983. The licence agreement left Caesar Canning (and therefore FBI Foods) free to compete with the respondent in the juice market after termination. It provided only that Caesar Canning would no longer have the right to use the trademark "Clamato" and would not, for a period of five years, manufacture or distribute any product which included among its ingredients clam juice and tomato juice. Working from the list of ingredients and processing specifications for Clamato, but omitting clams or other seafood, Caesar Canning developed Caesar Cocktail, which went on the market immediately after the licensing agreement terminated. FBI Foods agreed to co-pack the new product. The respondents had surreptitiously discovered the exact formula of Caesar Cocktail at the end of March 1983, but did not take any action to enjoin the manufacture and sale of Caesar Cocktail, or otherwise protest, since they mistakenly believed that the absence of clam broth in the reformulated recipe would be fatal to their claim. When Caesar Canning declared bankruptcy, FBI Foods purchased its assets and carried on the production of Caesar Cocktail through a wholly owned subsidiary, FBI Brands. In 1986, the respondents obtained new legal advice respecting their legal rights, and dispatched a cease and desist letter to FBI Brands. Eventually, this action was commenced in 1988 against the FBI companies. The trial judge concluded that by misappropriating the confidential information the appellants had wrongfully obtained a 12-month "springboard" into the highly competitive juice market that but for the breach they would not have enjoyed. She refused an injunction but awarded as "head start damages" the amount it would have cost Caesar Canning to hire a consultant to assist with in-house development of a new tomato-based brand during the 12-month notice period. The Court of Appeal granted the respondents a permanent injunction against continued use of the confidential information, or products derived therefrom. It also awarded compensation equivalent to the profits they would have earned had they in fact sold an additional volume of Clamato equivalent to the sales of Caesar Cocktail during the 12-month period following termination of the licence, the amount of which was to be determined in a reference. BINNIE J. -- Equity, as a court of conscience, directs itself to the behaviour of the person who has come into possession of information that is in fact confidential, and was accepted on that basis, either expressly or by implication. Equity will pursue the information into the hands of a third party who receives it with the knowledge that it was communicated in breach of confidence (or afterwards acquires notice of that fact even if innocent at the time of acquisition) and impose its remedies. It is worth emphasizing that this is a case of third party liability. The appellants did not receive the confidence from the respondents, but from the now defunct Caesar Canning. The receipt, however, was burdened with the knowledge that its use was to be confined to the purpose for which the information was provided, namely the manufacture of Clamato under licence. The result of Lac Minerals is to confirm jurisdiction in the courts in a breach of confidence action to grant a remedy dictated by the facts of the case rather than strict jurisdictional or doctrinal considerations The respondents at trial pleaded breach of fiduciary duty. The law takes a hard line against faithless fiduciaries. Such a finding, if made, would have assisted the respondents in their claim to what amounts to a remedy that is "proprietary" (i.e., the respondents, in their cross-appeal, claim that the appellants' sales should be treated as belonging to the respondents, by analogy with the principles governing defaulting trustees or patent infringers for the purpose of calculating financial compensation). Thus, while the courts below found that the facts of this case neither fall into one of the established categories of fiduciary relationships (e.g., solicitor and client, principal and agent), nor meet the exceptional criteria for the creation of a fiduciary duty outside those established categories, the respondents seem to think the remedy not only can but should be approached on the same basis as if the fiduciary argument had succeeded. Even prior to Lac Minerals the Court expressed the view that the policy objectives underlying fiduciary relationships did not generally apply to business entities dealing at arm's length. Because of the requirement of vulnerability of the beneficiary at the hands of the fiduciary, fiduciary obligations are seldom present in the dealings of experienced businessmen of similar bargaining strength acting at arm's length. The law takes the position that such individuals are perfectly capable of agreeing as to the scope of the discretion or power to be exercised, i.e., any "vulnerability" could have been prevented through the more prudent exercise of their bargaining power and the remedies for the wrongful exercise or abuse of that discretion or power, namely damages, are adequate in such a case. In some sense, disclosure of almost any confidential information places the confider in a position of vulnerability to its misuse. Such vulnerability, if exploited by the confidee in a commercial context, can generally be remedied by an action for breach of confidence or breach of a contractual term, express or implied. In this case, the licensing arrangement expressly contemplated open competition upon termination, subject for a period of five years to avoidance of what came to be recognized as a useless limitation, namely mixing clam broth with tomato juice. While the law will supplement the contractual relationship by importing a duty not to misuse confidential information, there is nothing special in this case to elevate the breached duty to one of a fiduciary character. The respondents' demand to have the appellants' sales treated as an asset "pirated" from the respondents by analogy with a trust estate goes too far. Just as a contractual term can limit or negative a more general duty implied by the law of tort, so too can a contractual term that deals expressly or by necessary implication with confidentiality negate the general obligation otherwise imposed by equity. The ability of parties to contract out of, or limit, general duties otherwise imposed by law has been labelled "private ordering". The respondents' characterization of confidential information as property is controversial. Traditionally, courts here and in other common law jurisdictions have been at pains to emphasize that the action is rooted in the relationship of confidence rather than the legal characteristics of the information confided. Breach of confidentiality is the gravamen of the complaint. When it comes to a remedy, however, I do not think a proprietary remedy should automatically follow. There are cases (as in Lac Minerals) where it is appropriate. But equity, with its emphasis on flexibility, keeps its options open. "So I would think it a sufficient detriment to the confider that information given in confidence is to be disclosed to persons whom he would prefer not to know of it, even though the disclosure would not be harmful to him in any positive way." (Argyll v. Argyll) We should clearly affirm that, in this country, the authority to aw
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