Xu v Corbiere Ltd & Ors [2018] EWCA Civ 1899

Case No A3/2018/1532[2018] EWCA Civ 1899
IN THE COURT OF APPEAL
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
INTELLECTUAL PROPERTY
MR. JUSTICE ZACAROLI
[2018] EWHC 1650 (Ch
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 31/07/2018
Before
LADY JUSTICE KINGLORD JUSTICE SALESLORD JUSTICE SINGH
Between
KE XUAppellantCORBIERE LIMITEDRespondentTRENCHANT LIMITEDRespondentTRENCHANT EMPLOYEE SERVICES LIMITEDRespondent
MR. STEPHEN CRAGG QC and MR. TOM WAINWRIGHT (instructed by Imran Khan and Partners) for AppellantMR. ANTHONY PETO QC, MR. JAMES LEWIS QC, MS. LAURA NEWTON and MS. RACHEL SCOTT (instructed by Allen & Overy LLP) for RespondentsHearing Hearing date: 31 July 2018
Judgment
[1]This is an appeal from an order made by Mr Justice Zacaroli on 28th June 2018, whereby he sentenced the appellant, following contempt proceedings, to a sentence of 13 months' imprisonment each, for seven contempts in all, to run concurrently.

Background

[2]The facts which underpin the proceedings are set out with clarity and economy in the judge's judgment and I substantially take the background to this appeal from the judge's first, liability, judgment.[3]The respondents are engaged in quantitative investment research and software development. They specialise in developing algorithmic investment strategies that allow computerised buying and selling of stocks and shares without human intervention. The strategies that are developed are highly confidential and the cost of developing them significant.[4]In order to protect the commercial sensitivity of the investment strategies that the respondents develop, they are stored in encrypted form and obfuscated, or disguised, so that the characters are unrecognisable.[5]Mr. Xu, the appellant in this matter, is a Chinese national who worked for the respondents as a quantitative analyst between October 2012 and 5th August 2014. Over a period of several months, prior to the termination of his employment, Mr. Xu, using hacking software specially designed by himself, wrongfully accessed and “reverse engineered” the respondents' computer codes and in doing so gained unencrypted access to a total of 55 strategies by decoupling and unobfuscating them. The result was that he had access to substantial amounts of highly confidential information.[6]Whilst he was doing this, Mr. Xu was simultaneously communicating with recruitment and other consultants and potential employers in the quantitative finance market with the intention of utilising the information he had obtained in order to benefit himself in the employment market.[7]In July 2014, Mr. Xu purchased a one-way ticket to Hong Kong and provided his mother and parents-in-law, (who had been in the United Kingdom for his wedding,) with a considerable quantity of computer equipment and hard drives to take back to Hong Kong and China prior to travelling there himself.[8]On the morning of 6th August 2014, having left a letter of resignation on his line manager’s desk, Mr. Xu flew to Hong Kong. His sudden departure led the respondents immediately to commence proceedings for breach of confidence and breach of contract.[9]On 14th August 2014, Mr. Xu was arrested in Hong Kong. He remained in custody there until he was extradited to the United Kingdom on 11th December 2014. Subsequently, on 30th June 2015, Mr. Xu pleaded guilty to offences under the Fraud Act 2006 and was sentenced to four years imprisonment. Although he admitted accessing and viewing the 55 strategies, for the purposes of his plea at the criminal proceedings, Mr Xu expressly denied having taken copies of all the strategies, admitting to copying only those three strategies in respect of which handwritten notes had been found at his home.[10]Mr. Xu was subsequently made the subject of a Serious Crime Prevention Order (SCPO) on 3rd July 2015. By the order he was required to disclose the location of the confidential information and to identify the persons who had possession of, or access to it. He failed to do so.[11]On 29th July 2016, the respondents began a private prosecution on the basis that Mr. Xu had breached the terms of the SCPO. Following a trial by jury, Mr. Xu was acquitted on three counts, but found guilty on two other counts and was sentenced to a further 18 months' imprisonment.[12]By their verdicts, the jury rejected Mr. Xu's denial of having taken copies of the respondents' intellectual property and found, by implication, that it had been proved, beyond all reasonable doubt, that he had taken copies of strategies above and beyond the three handwritten copies which had been seized from his home.[13]At a hearing on 16th May 2017, His Honour Judge Tomlinson made a confiscation order against Mr. Xu in the sum of £37,208.91. The benefit of his crime was declared, for the purposes of that confiscation hearing, to have been over £31 million. The figure was agreed for the purposes of the confiscation hearing only.[14]On 1st June 2017, His Honour Judge Tomlinson ordered the SCPO to continue, somewhat varying its terms, and making a fresh order which was issued on 7th July 2017.[15]Moving forward to this year. On 29th January 2018, in civil proceedings brought by the respondents, the judge made an order requiring Mr. Xu to state, “to the best of his information, knowledge and belief what copies of the respondents' confidential information he had taken and what had become of the copies and the names of those who have or had had the confidential information in their possession”. That order dated 9th January 2018, is known as the “January Order” and is the order in relation to which these committal proceedings were subsequently launched.[16]Meanwhile, on 15th September 2017, the Secretary of State for the Home Department communicated to the respondents her decision, dated 11th September 2017, that Mr. Xu be deported to China. In subsequent judicial review proceedings, the respondents challenged that decision on the basis that their private interest in protecting their confidential information outweighed the public interest in the deportation of the appellant as a criminal who has been sentenced to a four-year sentence of imprisonment.[17]The judicial review claim was heard and dismissed by Supperstone J on 20th December 2017. Whilst leave to appeal to the Court of Appeal was granted by my Lord, Lord Justice Singh, the appeal was withdrawn on 9th July 2018 by consent. The order records as following:
"As the 'early removal scheme' provided by section 260 of the Criminal Justice Act 2003 has no application to an individual committed to prison for contempt of court, the SSHD will not remove Mr. Xu from the United Kingdom pursuant to the SSHD's deportation powers while Mr. Xu remains committed to prison for contempt of court pursuant to the term of 13 months' imprisonment imposed on him by Mr. Justice Zacaroli on 27 June 2018 ..."
[18]On 13th April 2018, summary judgment was granted to the respondents in their parallel claim made for repayment of bonus and salaries paid to Mr. Xu and a final injunction was made against him.[19]On 10th April 2018, the respondents issued the present committal applications. The Secretary of State was informed of the committal proceedings but has chosen to play no part in them.[20]On 19th June 2018, Zacaroli J conducted a hearing in order to determine whether the breach of the January order had been established to the necessary criminal standard of proof, namely beyond all reasonable doubt. This judgment was handed down as a separate liability judgment in which, as I have already recorded, he found Mr. Xu to be in contempt of court on a total of seven counts. Whilst split into a number of separate counts and recorded individually on the face of that order, the essence of each count was largely the same, namely that Mr. Xu had failed to disclose what he did with the copies of the respondents' confidential information which he had stolen in August 2014 and that, in having failed to provide that information, he was in breach of the January Order.[21]The judge at the conclusion of the liability judgment, looking at the totality of the contempt, was satisfied that Mr. Xu had taken copies of the claimants' confidential information and said:
“62. ... he has deliberately breached the obligations, which it remains within his power to perform, to identify whether that confidential information remains on devices to identify the names and addresses and contact details of those who have or have had custody of confidential information, to disclose the current whereabouts of devices containing the confidential information and the names and addresses of those who have or have had custody or control of the devices.”
[22]The sentence imposed by the judge was one of 13 months' immediate imprisonment. The judge in his judgment properly divided his consideration as to sentence between the punitive element and the coercive element. In respect of the punitive element, the sentence of the court was, in effect, one month.[23]This matter has come before the court on 31st July 2018 and Mr. Cragg, Queen's Counsel on behalf of the appellant, having acknowledged that a month has now passed since sentence, takes no further point today as to the punitive element of the sentence.[24]Turning then to the coercive element. The judge did not accept, contrary to counsel’s submission, that the coercive element had been exhausted the judge, pointing out that this was the first time that the possible coercive effect of committal for contempt has arisen.[25]The judge dealt in his judgment with the heavy emphasis placed by Mr. Cragg on the lack of evidence as to quantification of either damage to the respondents or profit to Mr. Xu.[26]The judge accepted, that if it were the case that even if the appellant were able to use the information, it had in fact by now lost all its value such that the respondents would suffer no damage, then there would, arguably, be no purpose in “coercing” him to provide the details of the confidential information he had stolen. The judge accepted that if established, that would be a factor pointing away from a coercive prison sentence.[27]The judge held, however, that that point had not been reached for a number of reasons which he set out in full in his judgment between paragraphs 35 and 41. However, in summary:(1) The very fact there is difficulty in quantifying the damage is a reason for requiring compliance so that the claimants can take steps to prevent misuse occurring in the first place.(2) It is accepted that at the time it was taken, the information had "enormous potential value" which was confirmed by the lengths the appellant went to remove it to China and out of the claimant's reach.(3) The fact that four years later the appellant will still not disclose valuation, the consequences, notwithstanding the consequences for the appellant, leads the court to a reasonable inference that there remains some value in the information.(4) In relation to the coercive element, it is entirely in the appellant's own hands to stop the coercive element by complying with the court order.[28]The judge was unimpressed by arguments that a coercive sentence should not be made as a confiscation order has been made and the appellant has been the subject of a "relentless pursuit by the claimants", which included challenging the deportation order made by the Secretary of State. The judge regarded the actions of the respondent company as understandable given what is at stake.[29]The judge carefully considered whether to suspend the sentence and reminded himself of the need to impose the shortest sentence commensurate with its purpose. He gave weight to the diminishing prospect of harm over time before concluding, at 53:
"Taking these, and all other factors I have mentioned in this judgment into account, I have concluded that the appropriate sentence in this case is 13 months, on the basis that the punitive element is limited to one month only. I regard the fact that it lies in Mr. Xu's hands to avoid a sentence of a full year (and spend just one further month in jail) as a significant incentive to compliance, and a sufficient one having regard to the need to ensure the sentence is as short as needed."

The Appeal

[30]Having confirmed to the court this morning that he has no instructions from Mr. Xu to seek to purge his contempt by providing the information required by the January Order, Mr. Cragg has helpfully distilled his eight grounds of appeal into three specific challenges to the judge's judgment, which, he submits, should lead this court to conclude that the judge had been wrong to apply any coercive sentence in relation to the contempt.[31]The three areas in respect of which Mr. Cragg says the judge fell into error are:(1) that there is no further purpose in making a coercive order on the facts of the present case;(2) that the judge was wrong in deciding that there was sufficient evidence of harm which justified the making of a coercive order; and(3) that the judge failed adequately to take into account the wider matters of public interest and, in particular, in respect of the deportation order.[32]In support of his argument that the time has passed for any coercive sentence, Mr. Cragg took the court to Wilkinson v Anjum and another [2011] EWCA Civ 1196, [2012] 1 WLR 1036, in particular to the judgment of McFarlane LJ, at 26:
"In the course of submissions, Mr. Green agreed that, really, points two and three have a common characteristic. He is submitting that time must come as a matter of law and of fact in any particular case that the court will have to say that 'enough is enough' and that any longer, in terms of time in prison, was not to be contemplated because of the danger of indefinite incarceration, or 'enough is enough' in terms of there being no further coercive benefit present in any additional term of imprisonment."
[33]Mr. Cragg also took the court to the following passage, starting at paragraph 36:
"A failure to comply with any fresh order would probably expose the defaulter to fresh contempt proceedings and the possibility of a further term of imprisonment.” "38. While such a course is legally permissible, the question of whether it is justified in a particular case will turn on the facts that are then in play. It will be for the court on each occasion to determine whether a further term of imprisonment is both necessary and proportionate. "39. Part of the court's proportionate evaluation will be to look back at past orders and at the cumulative total of any time already spent in prison and to bear those factors in mind when determining what order is to be made on each occasion. The court should also have some regard, if that is appropriate, to the likely sentence that might be imposed for similar conduct in the criminal court."
[34]Mr. Cragg submits that the judge failed properly to carry out this task. The judge approached the matter in his judgment in this way:
"28. I do not accept that, on this basis, the coercive element has been exhausted. As Mr. Lewis QC submitted, while an admission after conviction might have had some effect on sentence, that effect would have been very limited ... "29. This is, on the other hand, the first time that the possible coercive effect of committal for contempt of court has arisen. This is qualitatively different from a sentence in criminal proceedings. ... the civil court can maximise the coercive prospects of a sentence for contempt of court, by indicating that part of it which might be remitted on further application of the defendant following purging of the contempt, and by increasing the incentive for compliance by shortening the punitive element as compared to the coercive element."
[35]The fact that this was the first time there has been committal proceedings is, says Mr. Cragg, only part of the picture. The court, he says, must look at everything that has happened to the appellant, including the criminal convictions, the confiscation order and summary judgment, together with what he had described as “the relentless pursuit” of Mr. Xu by the respondents by way of keeping him under surveillance and challenging the deportation. Further, he said, the judge should have had in mind the fact that Mr. Xu is now apparently penniless and is away from his family in China. All these, he says, when put together should have led the judge to conclude that “enough is enough” in Wilkinson terms and that, as he put it, “there is no point in passing a coercive sentence on a man who has unequivocally demonstrated that he is not going to be coerced”.[36]I do not, with respect, accept Mr. Cragg's argument. In my judgment, the judge was correct in finding that this was the first time that the possible coercive effect for contempt of court has arisen. The judge, with meticulous care, differentiated between the punitive and coercive elements of his sentence; the criminal conviction and the sentence of imprisonment substantially wiping out the punitive element of the contempt sentence.[37]Similarly, the confiscation hearing arose directly from the criminal conviction and the civil judgment which had resulted in a quantified award in respect of bonus and salary paid to the appellant reflects a wrong in relation to which the respondent had secured a civil remedy.[38]In my judgment, it would be wrong for the court to jumble together all the disparate aspects of the various proceedings which Mr. Xu has brought upon himself and, in doing so to allow him successfully to submit that because he could, at various stages and in various proceedings, have disclosed information about the confidential information he had stolen, that each of those orders (or proceedings) should now be regarded as having had a coercive element and, as a consequence, these first, contempt proceedings should now be regarded as being at the end of the line rather than the beginning.[39]In my judgment, the SCPO, which is designed to prevent the commission of crime, had no relevance to the civil proceedings and I can see no reason why a civil court should be prevented from punishing the appellant for breach of its own order because of the existence of the SCPO.[40]In his written submissions, Mr. Peto QC on behalf of the respondents, said "The suggestion that the sentence should be reduced to reflect Mr. Xu's obstinacy and ruthless determination to flout court orders is misplaced. It amounts to rewarding bad behaviour." I agree.[41]In the context of this case, Mr. Cragg's argument that “enough is enough” amounts, in my judgment, to the singularly unattractive submission that because Mr. Xu is absolutely determined not to disclose any information, or in any way to purge his contempt, the court may as well be pragmatic and accept that making an order of coercive imprisonment is simply pointless. The time may come, in line with Wilkinson and other cases, when it is no longer proportionate to make such orders, but this is the first time that a coercive order for imprisonment has been made in contempt proceedings and in my judgment the judge was right in regarding that as a matter of considerable significance.

Evidence of Harm

[42]It is submitted that the judge was wrong in deciding that there was sufficient evidence of harm which justified the making of a coercive order. The judge made findings of fact in respect of harm:
"33. I accept, as a matter of principle, that the likely damage to the claimants (whether expressed as actual damage caused by Mr Xu's actions, or the inability to recover profits from Mr Xu which he would be able to make if reunited with the software and devices in China) is a relevant consideration in considering the coercive effect of a sentence for contempt. If, for example, it was clear that even if Mr Xu were able to make use of the confidential information, it has by now lost all value, so that the claimants could not conceivably be damaged, then the lack of any purpose in coercing him to provide the information sought would be a factor pointing strongly against any further prison sentence. "34. On the basis of the evidence before me, however, I do not think that point has been reached. "35. First, the thrust of the submissions made by the Secretary of State and adopted by Mr Xu, is that there is enormous difficulty in quantifying any damage that might be suffered by the claimants. In the context of interim relief in cases of misappropriation of confidential information, the inherent difficulties in quantifying the damage caused by the misuse of the information is frequently offered, and accepted by the court, as a justification for imposing an injunction preventing that misuse. I consider that, by analogy, a similar point arises here. The very fact that there would be difficulty in quantifying the damage to the claimants is a reason for requiring compliance with the order for disclosure in order that the claimants can take steps to prevent the misuse occurring in the first place. "36. Second, as Mr Cragg QC accepts, the confidential information had enormous potential value at the time that it was misappropriated by Mr Xu. Indeed, the lengths Mr Xu went to in order to obtain it, and ensure that the devices on which it was contained were removed to China and out of the reach of the claimants (as described in my judgment finding the contempt proved) suggest that is so. "37. Thirdly, and in similar vein, the very fact that Mr Xu is refusing to disclose what he has done with the information, even after four years, gives rise to the reasonable inference that there remains something of value in it to him."
[43]Mr. Cragg took the court to the Secretary of State's skeleton argument in the (now withdrawn) appeal against the judgment of Supperstone J in the judicial review proceedings. He did so to support his argument that there was no evidence in support of harm to the respondents and submitted that they, the respondents, had failed to provide any evidence of harm when they had been in a position to do so. It would be wrong, Mr. Cragg submitted, “to send a man to prison without a figure”. With respect to the skill with which Mr. Cragg put his argument, it is in my judgment unsustainable because: (1) The passage he took the court to in the skeleton argument, in a passage in which the Secretary of State specifically accepts the judge's analysis, quoting the following passage from Supperstone J's judgment, namely:
"It is clear from all the evidence is that while there is a potential risk that the claimants could suffer significant harm to their commercial interest, any financial loss that they are likely to sustain remains unquantifiable and very uncertain." (2) As my Lord, Lord Justice Sales pointed out during the course of the hearing, it could be argued that the value of the material to the appellant is of more importance when considering the coercive element than the loss to the respondent. In this respect, Mr. Cragg rightly accepts that there is nothing he can say or do to ameliorate the judge's finding at paragraph 37 of his judgment where he said: "
The very fact that Mr. Xu is refusing to disclose what he has done with the information, even after four years, gives rise to the reasonable inference that there remains something of value in it to him." That is a finding Mr Cragg cannot go behind. (3) Mr. Peto, in response to the assertion that the respondent had produced no evidence of harm, took the court to the witness statement of Lawson Caisley in which he sets out, by way of example, details of one of the stolen strategies in particular. The value of that strategy in relation to the year of 2017 alone being some $11.6 million.[44]In any event, in my view, there is no question of it being necessary for harm to be established by reference to a specific figure. I can do no better than the judge did at paragraph 35, where he refers, by analogy, to the well-recognised difficulties in ascribing a value to potential damage in applications made for injunctions in general “theft of confidential information” cases.[45]The final limb of Mr. Cragg's argument is that committal proceedings are public law proceedings and therefore the public interest goes beyond the interest of the parties and can, he submits, therefore extend to the sentencing exercise. In those circumstances, Mr. Cragg says, the judge was wrong in making an order of imprisonment at a time when he knew that the SSHD had decided that it was in the public interest for the appellant to be deported. The judge, having had this very submission made to him, did not agree, saying:
"41. Finally, Mr. Crag points to the fact that a further period in prison would delay the deportation that the Secretary of State has determined is in the public interest. Whether that is correct or not ... I need to consider the appropriate sanction within the parameters of these proceedings."
[46]I agree with the judge. In my judgment, there is no reason why the normal deportation procedure should not be followed (as reflected in the judicial review appeal consent order), namely that the appellant will be deported upon completion of his sentence of imprisonment.[47]It is important to note that the Secretary of State addressed the issue of deportation in the judicial review which took place before these contempt proceedings. At that stage the Secretary of State said that the public interest outweighed the respondents' private interest in pursuing their litigation. The Secretary of State, as I have already noted, was subsequently informed of the committal proceedings and chose not to attend to argue, as he could, that the public interest in deporting the appellant should now not only outweigh private litigation, but also the court's right to punish a contempt. In any event, Mr. Cragg clarified that he was not going so far as to say that the judge would have been bound by the Secretary of State's views as to where the public interest lies, or that the public interest in deporting the appellant necessarily prevents the judge from sentencing the appellant in committal proceedings.[48]In my judgment, the judge was entitled to consider the appropriate sanction within the proceedings before him.

Conclusion

[49]In my judgment, the judge's judgment was an exemplar of a sentencing judgment. He set out the law and applied it with care, taking into consideration each of the submissions made on behalf of the appellant before concluding that the sentence of 12 months as a coercive element was the right and proportionate sentence in all the circumstances. In my judgment, none of the three matters upon which Mr. Cragg relies, taken either individually or together, serve to undermine his conclusions. In my judgment, the judge made a proportionate order of imprisonment which, in the circumstances, was inevitably to be served immediately by Mr Xu.[50]In those circumstances, I would dismiss the appeal.[51]I agree.[52]I also agree.