IP and IT Law Bytes: Breach of confidence: damages

08 December 2014

The High Court has assessed damages in a breach of confidence claim relating to technical information in a database used in the manufacture of mosquito nets.

Background

In a patent infringement case, the House of Lords identified three ways that damages could be assessed:

  • Where the claimant exploits the patent by selling articles or products, damages will generally be based on loss of profits: the profit from sales that were diverted from the claimant to the defendant as a result of the infringement. It must be shown that the sales would not have been made by the defendant but for the infringement.
  • Where the claimant exploits the patent by granting licences, the court will usually assess damages based on the royalty that the infringer would have paid if he had obtained a licence, with regard to the amount that the claimant charged for other comparable licences.
  • Where it is not possible to show that there is a normal rate of profit or royalty rate, the royalty is usually assessed on the basis of the notional licence fee that would have been payable between a willing licensor and licensee (General Tire and Rubber Company v Firestone Tyre and Rubber Company Ltd [1976] RPC 197).

Many customers only buy mosquito nets that have approval from the World Health Organization (WHO).

Facts

A consultant, S, developed a formula while working for V (the confidential information). S then used the confidential information while working for B. As a result, B was able to manufacture two types of mosquito nets that obtained WHO approval:

  • Nets made to a formula based on the confidential information (the first formula nets).
  • Nets made to a modified version of that formula, developed by S while working for B (the later formula nets).

V issued proceedings against B for breach of confidence involving the misappropriation of trade secrets.

The court ruled in V’s favour on liability. The Court of Appeal and the Supreme Court upheld this decision. The court was then asked to assess damages.

Decision

Applying General Tire, the court awarded damages for lost profit on diverted sales in relation to the first formula nets. It assumed that the other suppliers on the market, including V, would have won B’s business in accordance with the shares in which they won other business in the market. So, V’s proportion of the market was applied to the total number of B’s sales of mosquito nets in order to calculate the number of sales diverted from V. The net profit was then applied to these diverted sales.

The court awarded royalties at a rate of 4% for the remaining first formula nets sold by B as payment for permission to use the confidential information that the consultant had used to arrive at the first formula. This royalty rate reflected the value to both parties of V’s contribution to potentially substantial future sales of a competing net, but recognising that the information might not lead to any sales for B. As there was no evidence as to the sales price of the nets, the court used an average notional price calculated by dividing the number of nets sold by the total profit.

The court awarded a lump sum or quasi-consultancy fee for the use of V’s confidential information in relation to manufacturing the later formula nets and gaining WHO approval. However, no sum was awarded for accelerated entry into the market: the WHO approval date would have been the same even if S had developed the later formula from scratch without the benefit of the confidential information because the relevant tests would still have had to take place during the mosquito season.

Comment

This decision is interesting in showing the calculation of damages for the sale of products whose manufacture is only indirectly derived from the misuse of confidential information. The court recognised that it would be unfair to compensate V to the same extent for the later formula nets as for the first formula nets, as this would not reflect the actual loss caused by the different products.

The court’s refusal to award a sum for accelerated market entry in this case demonstrates how damages can be limited by the circumstances; for example, here, the timing of the mosquito season.

Case: Vestergaard Frandsen A/S v Bestnet Europe Ltd and others [2014] EWHC 3159 (Ch).

First published in the December 2014 issue of PLC Magazine and reproduced with the kind permission of the publishers. Subscription enquiries 020 7202 1200

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