This is an informal case summary prepared for the purposes of facilitating exchange during the 2024 WIPO IP Judges Forum.
Session 3: Confidential Information and Trade Secrets
Supreme Court of Appeal of South Africa [2018]: Pexmart CC and Others v H. Mocke Construction (Pty) Ltd and Another (159/2018) [2018] ZASCA 175
Date of judgment: December 3, 2018
Issuing authority: Supreme Court of Appeal of South Africa
Level of the issuing authority: Appellate Instance
Type of procedure: Judicial (Civin( �/span>
Subject matter: Competition; Undisclosed Information (Trade Secrets)
Plaintiff: Pexmart CC and Others
Defendant: H. Mocke Construction (Pty) Ltd and Another
Keywords: Unlawful competition, Unlawful use of confidential information and trade secrets, Protectable confidential information, Requirements, Principles restated
Basic facts: Mocke Construction (Pty) Ltd (Mocke Construction) was a pipeline construction company involved in the plastic lining of steel pipes. Its sole director was Mr. Mocke, an engineer. Mr. Mocke registered Mocke Construction in order to solicit business from a gold mining company in relation to a pipelining project. During 2009, Mr. Mocke entered into business negotiations with an American chemical engineer and biochemical scientist, Mr. Don Gish, who was the inventor of the Polymeric/Sureline Process (the deforming process) for the plastic-lining of steel pipes. The intellectual property rights to the deforming process were owned by Mr. Gish’s company, Polymeric Pipe Technology Corporation of the USA (Polymeric).
The deforming process used a specialized deformer machine to internally line steel pipes with a high-density polyethylene plastic. The plastic liner protected the steel pipes from erosion by sand and slurry deposits pumped during the mining process, thereby improving their longevity. The deforming process was described as a technology that in effect folded a fully dimensional plastic liner pipe into a C- shape by using a specially made and imported deformer machine on-site. The deformer machine would fold the plastic liner pipe into a C-shape while at the same time wrapping the folded plastic liner with a specially designed tape. This process enabled the folded plastic liner pipe, which had the same diameter as the internal diameter of the steel pipe, to be pulled through the steel pipe in a section of up to 1 km at a time.
Business negotiations between the two engineers culminated in Mr. Gish selling Mr. Mocke the ‘exclusive and irrevocable license [to the Polymeric/Sureline Process]’. In turn, Mr. Mocke, with Mr. Gish’s consent, permitted Mocke Construction the use of the intellectual property rights that flowed from the license. The specifications of the tape that was manufactured for Mr. Mocke in South Africa for use during the deforming process was regarded by Mocke Construction and Mr. Mocke as a trade secret. Accordingly, Mr. Mocke had a confidentiality agreement with the supplier of the tape, in terms whereof the supplier would not sell the tape to anyone else.
During February 2011, Mocke Construction offered employment to a Mr. Henn, who was Mr. Mocke’s long-time associate. Mr Henn accepted the offer and was appointed as Mocke Construction’s operations manager. Following Mr. Henn’s appointment, Polymeric provided intensive training to the technicians employed by Mocke Construction regarding the deforming process and use of the deformer machine. Mr. Henn thus became involved in Mocke Construction’s pipe-lining project. Some problems were encountered when utilizing the machine. The problems arose because of the different welding method used in South Africa. The quality of the welding created icicles which cut the tape as the liner was being transferred through the steel pipe, thus causing the liner to get stuck inside the steel pipe. Since Mr. Gish was present in South Africa at that stage, it was up to Mr. Mocke, Mr. Gish and Mr. Henn to collectively come up with a solution. Mr. Mocke came up with the idea of deforming and taping the liner pipe outside the steel pipe as it was entering the steel pipe, and then pushing it through that pipe at a far greater speed. This method resolved the problem, and the business of Mocke Construction operated on the basis of the modified method of deforming the plastic liner.
In 2013, Mocke Construction terminated Mr. Henn’s employment. Soon thereafter, Mr. Henn took up employment with Mocke Construction’s competitor, H Pexmart CC, becoming its director. In 2014, Mr. Mocke discovered that Pexmart CC and Pexmart Lined Pipe Systems (Pty) Ltd (together referred to as Pexmart) were in advanced negotiations with the same gold mining company that had previously had business dealings with Mocke Construction. The tender was for the completion of a pipe-lining project in respect of which the existing contractor had defaulted. Mr. Mocke asserted that Pexmart’s tender was based on the use of the deforming process. He stated that he had later learnt that the gold mining in question had opted to use Pexmart because its tender was cheaper.
Having formed the view that in developing the machinery and techniques it was using at that stage, Pexmart had reverse-engineered the Polymeric deformer machine with the intention of marketing their services competitively, Mocke Construction and Mr. Mocke demanded that Pexmart desist from using the deforming machine, which, according to them, was being employed by Pexmart unlawfully. Pexmart and Mr. Henn ignored the demand, whereupon Mocke Construction and Mr. Mocke approached the Gauteng Division of the High Court, Pretoria (the High Court) and instituted proceedings predicated on unlawful competition. They sought an interdict restraining Pexmart and Mr. Henn from engaging in unlawful competition. They alleged that Mr. Henn had infringed the intellectual property rights of Mocke Construction and Mr. Mocke by using their confidential information and trade secrets, which, on their contention, encompassed their exclusive proprietary knowledge pertaining to the deforming process. In addition, they asserted that Pexmart and Mr. Henn had unlawfully used their techniques, on-site training, technology and know-how associated with Mocke Construction’s deforming machine.
Pexmart and Mr. Henn opposed the application, alleging that the process used by Mocke Construction was not confidential and contained no trade secrets. They contended that many companies specialized in the deforming of plastic pipes for the lining of steel pipelines and that various methods for deforming plastic pipes were publicly available on the internet. They asserted that they had recently developed their own method for deforming a pipe so as to reduce the diameter thereof. In a further affidavit filed a year after the first answering affidavit, Pexmart and Mr. Henn averred that they had, pursuant to legal advice, since commenced using a pipe liner folding method of deforming pipelines. Despite claiming that the method they used was not the same as the one used by Mocke Construction, they did not explain what their pipe liner folding method entailed.
Given the factual disputes that had come to light, the parties consented to an order referring the application for oral evidence. The order permitted oral evidence to be given by deponents who had deposed to the affidavits already filed, while stipulating that other witnesses could testify if they served and filed their affidavits at least 21 days before the hearing of the matter. The oral evidence was to be confined to four issues, namely:
1) Whether the two deforming processes adopted by Pexmart and Mr. Henn are dissimilar to the Sureline and/or Polymeric deforming process utilized by and under license to Mocke Construction and Mr. Mocke, or are identical thereto;
2) Whether the Sureline and/or Polymeric deforming process of Mocke Construction, its machine(s), intellectual property, techniques, on-site training, technology and the know-how associated therewith is protected by the license awarded to Mocke Construction and Mr. Mocke;
3) Whether protectable confidential information exists in respect of the Sureline and/or Polymeric deforming process of Mocke Construction, its machine(s), intellectual property, techniques, on-site training, technology and the know-how associated therewith; and
4) Whether Pexmart and Mr. Henn are unlawfully utilizing such protectable confidential information.
During the hearing of the matter, Mr. Mocke, Mr. Gish and a Mr. Broli testified on behalf of the applicants (Mocke Construction and Mr. Mocke). Mr. Gish testified that the methodology to operate the machine satisfactorily in all conditions was not something that could be ascertained by simply looking at the machine, or deducing it from the design of the machine. He stated that there had been many people who had tried to copy the deformer machine but became bankrupt because they did not have the technology to control the liner pipe going through the machine. Mr. Gish asserted that after Mr. Mocke had purchased the deformer machine from him, he (Mr. Gish) had taught Mr. Mocke’s technicians the secrets of how to operate the machine and control the process. Mr. Gish testified that he kept the operation of the machine discreet and only disclosed it to people he worked with as licensees.
It was undisputed that Mr. Henn had intimate knowledge of Mocke’s deformer machine and its method of operation. Pexmart and Mr. Henn adduced no oral evidence and decided to stand by the assertions made in the affidavits filed on their behalf. Having considered all the evidence, including photographs depicting the two machines and a video recording that visually demonstrated the deforming process (demonstrating the speed with which a steel pipe can be lined with a plastic pipe by employing the deforming process), the High Court found in favor of Mocke and Mocke Construction in respect of the four issues. It therefore granted the restraining order that was sought. With leave of the High Court, Pexmart and Mr. Henn lodged an appeal with the Supreme Court of Appeal of South Africa.
On appeal, the central issue was whether Pexmart and Mr. Henn had unlawfully made use of confidential information and trade secrets of Mocke Construction and Mr. Mocke in relation to the pipelining process. The Supreme Court of Appeal observed that the case was not about reverse engineering; instead, it was about whether unlawful use was made by the appellants of the respondents’ confidential information and trade secrets.
Held: The Supreme Court of Appeal concluded that the reasoning and conclusion of the High Court in relation to whether the processes adopted by Pexmart and Mr. Henn were dissimilar to those employed by Mocke Construction and Mr. Mocke could not be faulted. The Supreme Court of Appeal also concluded that in determining whether there was protectable confidential information in respect of the deforming process, its machine, intellectual property, techniques and on-site training, technology and the know-how associated therewith, the High Court was correct in having regard to the claims made by Mr. Mocke in his affidavit as well as in his evidence. The Supreme Court of Appeal therefore upheld the decision of the High Court and dismissed the appeal with costs.
Relevant holdings in relation to confidential information and trade secrets: The Supreme Court of Appeal reviewed the principles relating to the unlawful use of confidential information and trade secrets of a competitor as an instance of unlawful competition. It confirmed the three known requirements for information to be viewed as protectable. It reaffirmed that a trade secret is protectable (a) when it relates to and is capable of application in trade or industry; (b) has the necessary quality of secrecy or is confidential, is not in the public domain and is known only to a restricted number of persons; and (c) has economic value to the proprietor. The Supreme Court of Appeal pointed out that whereas there was no closed list of acts that constituted unlawful competition, the misuse of confidential information in order to advance one’s own business interests and activities at the expense of a competitor was one of the well-known acts that constitute unlawful competition.
The Supreme Court of Appeal emphasized that there was no general and inflexible rule that stipulated that an adverse inference was to be drawn where a party had failed to call as a witness someone who was available and able to elucidate the facts. Rather, the drawing of such an adverse inference is fact specific. The Supreme Court of Appeal considered that in the circumstances of the present case, the drawing of such an inference from Mr. Henn’s failure to testify was warranted given his centrality to the dispute. Moreover, the evidence of Mr. Mocke and Mr. Gish regarding the confidential information and trade secrets developed over years and many hours of practical application in the industry was canvassed in extensive detail yet remained uncontroverted, even though it called for rebuttal.
In addition, the Supreme Court of Appeal held that the details of the deforming process were not in the public domain and were known only to those with whom Mr. Gish and Mr. Mocke chose to work. It found that the evidence showed that the information in question had economic value. It therefore held that all three requirements for protectable confidentiality and trade secrets had been met.
Relevant legislation: None. South Africa does not have specific legislation governing trade secrets or know-how.