Introduction

In Diagcor Bioscience Incorp Ltd v Chan Wai Hon Billy & Ors HKCFI 488, the Court of First Instance (“CFI”) delivered an important judgment on the misuse of confidential information by former employees and on employee negligence in the context of clinical testing. The case addressed two main questions: (1) whether former employees and their associates had used their former employer’s confidential and proprietary information in setting up and operating a rival prenatal testing business; and (2) whether the 3rd defendant, a former employee, was negligent in issuing incorrect thalassemia test reports to the employer’s customers.

Background

The plaintiff, Diagcor Bioscience Incorporation Limited (“Company”) is a pre-eminent Hong Kong biotechnology company specializing in molecular diagnostic laboratory services, and in particular, prenatal testing for pregnant women.

Relevant to the case were the Company’s prenatal tests for:

1.      Identification and prediction of foetal gender (“Company’s Y‑Test”); and

2.      Detection and diagnosis of the genetic disorders Alpha‑Thalassemia (“Alpha‑Test”), and Beta‑Thalassemia (“Beta‑Test”).

 

In the principal claim, the Company sued all 11 defendants comprising five former senior employees (respectively “D1 to D5”), two related associates (respectively “D6 and D7”), and four companies used to operate the rival business (collectively, the “Corporate Defendants”) (collectively, the “Defendants”), alleging that the Defendants had misused the Company’s trade secrets and confidential information relating to the Company’s Y-Test (“Confidential Information Claim”) to create and launch a rival test (“Defendants’ Y-Test”) within two months of D1 to D5 leaving the Company and joining the rival Corporate Defendants.

Separately, the Company also pursued a negligence and breach of employment contract claim against D3, arising from her issuance of an inaccurate test report (“Negligence Claim”) while employed as the Company’s Associate Laboratory Manager.

 

The Confidential Information Claim

For the purpose of the Confidential Information Claim, the Company relied on a body of technical information including the identity of 15 Y‑markers and one X‑marker; the associated primer and probe sequences; the primer and probe validation data obtained during development and modification of the Company’s Y‑Test; and the relevant experimental protocols of the Company’s Y-Test (together, the “Confidential Information”). The CFI accepted that this material was confidential in nature and formed part of the Company’s trade secrets.

There was no real dispute that several of the Defendants had access to that Confidential Information during their employment. The issue was whether the Defendants had obtained the Confidential Information and in fact used it in developing the Defendants’ Y‑Test, or whether the Defendants’ Y-Test had been independently developed and created without using the Confidential Information.

The Court’s decision on the Confidential Information Claim

The CFI ultimately rejected the Defendants’ assertion that the Defendants’ Y‑Test had been independently developed in just two months. In reaching this conclusion, the CFI relied on a number of key findings that, taken together, made the defence case incredible and highly improbable.

1.      The 2^nd Defendant, who, only during cross-examination at trial, gave evidence to the effect that he was responsible for developing the Defendants’ Y‑Test (“Purported Developer”). This was inconsistent with the Defendants’ pleaded case, which had pointed to a different individual as the developer and designer of the relevant primers. Moreover, the Defendants did not call the originally identified individual to give evidence, despite relying on that person’s supposed role in the independent development narrative.

 

2.      There was no satisfactory contemporaneous record showing a genuine R&D process carried out from scratch by the Purported Developer, such as working notes, design files or source materials that would ordinarily be expected where a new diagnostic test is said to have been independently created in a short time.

 

3.      Most significant of all, MK15, one of the Defendants’ genetic markers for the Defendants’ Y-Test matched the Company’s marker FM01 in every material respect, including the forward primer, reverse primer and probe sequences. The Company had itself developed FM01 by reference to an academic article and then subsequently made specific modifications, including a slight shortening of the published forward primer. The Defendants were unable to give any convincing explanation for the exact overlap that the trial judge described as the “Company’s footprint”, and the CFI considered that the presence of that unusual detail was a strong indicium of copying rather than coincidence.

 

4.      The Purported Developer’s explanation that the source reference for MK15 had been lost because of a computer breakdown, and might even have vanished from the internet, was rejected as implausible.

 

5.      The Defendants’ account of their validation process was unsatisfactory in several respects. Furthermore, once the CFI rejected the evidence of independent development on other grounds, it considered that the purported validations did not displace the inference that the rival test had been built on misappropriated trade secrets.

 

The CFI ultimately concluded that as the defence case depended on a chain of highly unlikely coincidences, it was more likely than not that the Defendants had used the Company’s confidential information to accelerate the launch of their competing Defendant’s Y‑Test, and that the validation exercises relied upon by them were not shown to be genuine; even if some validation had been carried out, it did not displace the inference that the rival test had been built on misappropriated trade secrets.

The Negligence Claim

This claim was directed specifically against D3, who at the material time was employed by the Company as a Part‑I Medical Laboratory Technologist (“MLT-I”) and Associate Laboratory Manager. The Company alleged that D3 was negligent in handling two clinical testing incidents. As admitted by D3 herself, she acted as the “final gatekeeper” before the Company’s test reports were issued, as her duties included reviewing patient test results and draft reports prepared by junior staff and signing and issuing the final test reports, with no further internal review before release. Accordingly, there was no serious dispute that D3 was under a duty to exercise all reasonable care and skill in reviewing and checking the test results before officially issuing the test reports on the Company’s behalf. The issue in this claim therefore was whether D3 had breached this duty in relation to two separate incidents, one concerning the Alpha‑Test and the other concerning the Beta‑Test.

The Alpha‑Test incident

The Alpha‑Test incident occurred in December 2011. The test request form indicated that both parents were carriers of the alpha‑thalassemia gene, which meant that the foetus faced a substantial risk of inheriting the mutation. The gel photograph for the sample showed no band at the expected 1,800 bp position for a normal allele but a bright band at around 1,350 bp, indicating the presence of a deleterious mutation.

A subordinate first misread the gel image, and D3 then failed to identify that obvious error when reviewing the gel photo, worksheet and draft report. A final report was issued stating that there was “no deleterious mutation”, which was incorrect. The error was subsequently uncovered after the referring doctor queried what appeared to be a false negative result, whereupon the Company checked the gel image and confirmed the mutation.

The CFI held that this was an obvious professional mistake. The CFI rejected D3’s submissions that her pregnancy, heavy workload, or purported deficiencies in the Company’s internal system provided a defence or gave rise to contributory negligence. The CFI also held that no elaborate expert evidence was required to establish breach because the mistake was so clear that D3 herself accepted that an ordinarily competent MLT‑I should have detected it.

The CFI therefore found D3 liable in negligence in relation to the Alpha‑Test incident, and also held that the same conduct amounted to a breach of an implied contractual duty to perform her work with reasonable care and skill.

The Beta‑Test incident

The Beta‑Test incident occurred in May 2012 and concerned DNA sequencing data. Unlike the Alpha‑Test incident, this part of the case involved a sequencing trace that contained a top peak and a broader lower peak which might represent either background noise or an overlapping mutation signal.

The Company’s complaint was not that D3 should have identified the mutation straightaway. Rather, the Company argued that, given the ambiguity in the trace, D3 ought not have issued the report without re‑running the sequencing test. The CFI accepted that re‑running the test could have clarified the position.

Nonetheless, the CFI held that this incident was materially different from the Alpha‑Test incident. The issue was not obvious on the face of the data, and the CFI was not satisfied that the Company had proved that D3’s handling of the Beta‑Test fell below the standard of an ordinarily competent MLT‑I exercising reasonable care and skill. This part of the Negligence Claim therefore failed.

Takeaway

The judgment in Diagcor demonstrates that the courts may infer misuse of confidential information from the overall evidential picture even in the absence of direct proof of copying.

For employers, the case underlines the importance of clearly identifying and protecting confidential technical information, controlling employee access to it, and retaining proper records of research and development. It also highlights the need for careful exit management where senior employees or groups of employees leave to join or establish a competitor.

The judgment is equally important for employee’s negligence from an employment perspective. The CFI held that the senior technical employee who acted as the final reviewer of sensitive diagnostic reports was liable in both contract and tort where an obvious professional mistake causes loss to the employer. At the same time, the different outcomes on the Alpha‑Test and Beta‑Test incidents show that the courts will distinguish between a clear error and a genuinely ambiguous technical judgment. The legal principle in Diagcor applies equally to other employment relationships, where the employers may be providing other services to their clients or customers. 

Diagcor is a significant reminder for life sciences, diagnostics and other technology‑driven businesses that confidential information protection, documentary discipline and internal quality control are central both to preventing disputes and to succeeding in litigation when disputes arise.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

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