Cadbury Schweppes Inc v. FBI Foods Ltd is a Supreme Court of Canada decision on the protection of trade secrets in Canada. It also describes the difference between trade secrets and patents under Canadian law.
Background
In 1969, a new cocktail known as the Bloody Caesar was created in Calgary, Alberta. The main ingredients of a Bloody Caesar are tomato juice, clam broth and vodka.CBC News (13 May 2009). "Calgary's Bloody Caesar hailed as nation's favourite cocktail". CBC News|Calgary. Retrieved 31 March 2013. Shortly thereafter, Duffy-Mott, an American juice manufacturer, began to produce and market a mixture of tomato juice, clam broth and spices under the name Clamato.Clamato. Retrieved March 31, 2013 The Bloody Caesar became one of the most popular cocktails in Canada, greatly increasing sales of Clamato in Canada along the way.
In 1977, Duffy-Mott decided to license the manufacturing and marketing of Clamato to British Columbian company, Caesar Canning. Duffy-Mott gave Caesar Canning information about how to manufacture Clamato. Caesar Canning used this information, along with spice packs (also received from Duffy-Mott), to produce Clamato.
Caesar Canning was able to successfully increase the market share of Clamato in Canada. With consent from Duffy-Mott, Caesar Canning entered into a sublicensing agreement with FBI Foods Ltd., which produced Clamato for the Eastern Canadian market.
In 1982, Cadbury-Schweppes purchased Duffy-Mott and only a few months later, they informed Caesar Canning they would be terminating the Clamato licensing agreement. As part of the licensing agreement, Caesar Canning had an industry-standard no-compete-type agreement, which stated that, after the licence's termination, Caesar Canning would not produce, manufacture or distribute any product "which includes amongst its ingredients, clam juice and tomato juice" for a period of five years or any product with a name ending with the letters -MATO.Cadbury Schweppes Inc v. FBI Foods Ltd, BCJ No 1191 (25 May 1994) at paragraph 47.
In response to the loss of the licence, Caesar Canning used the formula for Clamato (which it had received from Duffy-Mott) to create a new type of mixing-juice. In order to avoid breaching the licensing agreement, the product contained tomato juice, but no clam juice. With the help of FBI Foods Ltd., Caesar Canning was able to market this juice across Canada, under various trade names. In the court reports, judges referred to all of these products collectively as Caesar Cocktail.
While the product successfully gained market share from Clamato, Caesar Canning did not survive as an independent company and declared bankruptcy in 1985.
In 1986, FBI Foods Ltd. purchased Caesar Canning's assets and continued to sell Caesar Cocktail.
Cadbury-Schweppes did not take immediate action against FBI Foods Ltd. or Caesar Canning because they believed neither company had breached the licensing agreement, given that no clam juice was used to produce Caesar Cocktail.
However, in 1986, Cadbury-Schweppes realized they might, in fact, have a case against FBI Foods Ltd. for breach of confidence. They sued FBI Foods Ltd. for having knowingly and improperly used confidential information which Cadbury-Schweppes' predecessor, Duffy-Mott had given to Caesar Canning solely for the purpose of producing Clamato under licence, not for producing its own competing product.
Case History
Supreme Court of British Columbia
The case was first heard by Justice Carol Huddart of the Supreme Court of British Columbia.Cadbury Schweppes Inc. v. FBI Foods, BCJ No 1191 (25 May 1994). Justice Huddart ruled in favour of Cadbury Schweppes after applying the test for whether confidential information had been misused that was laid down by the Supreme Court of Canada in Lac Minerals Ltd. v. International Corona Resources Ltd. In that case, it was ruled that a plaintiff can recover for misuse of confidential information when the following three conditions are satisfied Lac Minerals Ltd v International Corona Resources Ltd, CanLII, 2 SCR 547 (11 August 1989) at paragraph 54.Cadbury Schweppes Inc. v. FBI Foods, BCJ No 1191 (25 May 1994) at paragraph 37. the information must have the necessary quality of confidence about it the information must have been imparted in circumstances in which an obligation of confidence arises there must have been a misuse of that information to the detriment of the confider.
In this case, Justice Huddart ruled that the Clamato recipe was confidential information and therefore worthy of protection because Duffy-Mott used time, money and effort to produce it. She then ruled that Caesar Canning and FBI Foods Ltd. had an obligation of confidence based on the licensing contract between Duffy-Mott and Caesar Canning, the common understanding in the food industry that recipes not widely known should be kept confidential and because the recipe had been communicated to Caesar Canning for the limited purpose of producing Clamato under licence. Finally, Justice Huddart ruled that Caesar Canning and FBI Foods Ltd. had misused the information because they used it to produce Caesar Cocktail, a purpose for which they had not been given the information.
Justice Huddart ruled that FBI Foods Ltd. and Caesar Canning should be liable for their misuse of Duffy-Mott's Clamato recipe. She ruled that, because Cadbury-Schweppes could not prove they had lost money due to the competition, FBI Foods, Ltd. should only be required to compensate Cadbury-Schweppes for money Caesar Canning saved by not having to develop its own recipe for Caesar Cocktail. This amount was later judged to be $29761.20. Justice Huddart did not order FBI Foods Ltd. to give all of the profits it made from Caesar Cocktail to Cadbury-Schweppes because Cadbury-Schweppes had not requested such a remedy until after she had ruled that FBI Foods Ltd. and Caesar Canning had misused their recipe. She also refused to prohibit FBI Foods, Ltd. from continuing to use the recipe on the basis that FBI Foods could have figured out how to replicate the recipe on its own and because Cadbury-Schweppes's four-year delay in bringing suit would make it unfair to require FBI Foods to discontinue producing a product that it had been producing for years.
British Columbia Court of Appeal
Both parties appealed the order of Justice Huddart to the British Columbia Court of Appeal.Cadbury Schweppes Inc. v. FBI Foods, BCJ No 1813 (15 August 1996). Cadbury-Schweppes believed that Justice Huddart should have awarded them higher damages as well as an injunction. FBI Foods Ltd. appealed Justice Huddart's ruling, arguing that the contract did not prohibit them from using the confidential recipe, only from using a recipe including both clam juice and tomato juice. They also argued that the parties did not intend the recipe to be kept confidential "for all time", and thus they should not be found liable for using it.
Justice Mary Newbury, speaking for the B.C. Court of Appeal, dismissed FBI Foods Ltd.'s appeal. She ruled that the duty of confidentiality arose outside of the written terms of the contract. Instead, it arose from the relationship between the parties when the contract was made. She also determined that, in this case, neither Caesar Canning nor FBI Foods Ltd. was ever to use the recipe to produce a copy of Clamato. If either wished to produce its own tomato juice cocktail, they should have created their own recipe.
Justice Newbury agreed with Cadbury-Schweppes and therefore ordered FBI Foods Ltd. to pay a higher level of damages and enjoined them from using the recipe to produce Caesar Cocktail.
Justice Newbury ruled that the fact that Cadbury-Schweppes did not request an accounting of FBI Foods Ltd.'s profits was because both parties had agreed to delay the determination of damages until after the determination of liability. She also ruled that forcing FBI Foods Ltd. to pay $29761.20 was insufficient, given that Cadbury-Schweppes would not have sold their recipe to FBI Foods Ltd. for this price. To allow FBI Foods Ltd. to essentially "buy" the recipe at such a low price would damage future confidential business relationships. She ruled that damages should be assessed based on the profits that Cadbury-Schweppes would have made had all sales of Caesar Cocktail for the first 12 months after it entered the market been made by Cadbury-Schweppes and not Caesar Canning.
Justice Newbury found that Caesar Canning was more blameworthy for intentionally using the recipe to copy Clamato juice than Cadbury-Schweppes was for not acting against FBI-Foods Ltd. or Caesar Canning until several years had passed, given that Cadbury-Schweppes had not realized that a remedy was available. She therefore ruled that an injunction was appropriate because a court should not countenance a "forced sale" of confidential information from one party to another.Cadbury Schweppes Inc. v. FBI Foods, BCJ No 1191 (25 May 1994) at paragraph 51.
Supreme Court of Canada
FBI Foods Ltd. appealed the decision of the British Columbia Court of Appeal to the Supreme Court of Canada, arguing that the injunction and award of the first 12 months of profits from Caesar Cocktail overcompensated Cadbury-Schweppes. They claimed that any losses suffered by Cadbury-Schweppes were due to Cadbury-Schweppes's own cancellation of the licensing agreement, not from competition from Caesar Cocktail, and that therefore they should not have to provide any compensation. Cadbury-Schweppes cross-appealed, arguing that Caesar Canning and FBI Foods Ltd. had effectively "pirated" their secret recipe and that they should therefore be compensated for the full market value of the recipe, as if it had been patented.Cadbury Schweppes Inc. v. FBI Foods, SCR 142 (28 January 1999) at paragraph 2.
The decision of the whole Supreme Court of Canada was written by Justice Ian Binnie. Justice Binnie agreed with the trial judge and the British Columbia Court of Appeal that FBI Foods Ltd. had misused Cadbury-Schweppes's confidential information, and that the only thing for the Supreme Court to consider was the remedy to grant Cadbury-Schweppes. He felt that it would first be necessary to examine the special nature of the misuse of confidential information as a cause of action.
Justice Binnie noted that there was no uniform way to examine the wrong done by a party that misuses the confidential information of another party. The victim of the misuse may have a claim to an equitable remedy against the misuser, as well as a cause of action under property law, contract law and tort law. The remedies available for each of these types of wrongs could differ. Rather than let every case for misuse of confidential information turn on how best to characterize a plaintiff's harm, Justice Binnie thought it best to consider misuse of confidential information as its own sui generis claim and to provide remedies based on what is most just given the particular facts of a case.