Breach of confidence: assessment of damages

02 August 2016

Audrey Horton

The Court of Appeal has provided guidance on the calculation of damages for the sale of products whose manufacture is derived from the misuse of confidential information, though they are not actually made using that information.

Background

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

  • Where the claimant itself exploits the patent by selling articles or products, damages will generally be based on the loss of profits caused by the infringement: the profit which would have been realised by the claimant if the sales diverted to the defendant as a result of the infringement had been made by the claimant. The claimant must show that the sales would not have been made by the defendant but for the infringement.
  • Where patented technology is exploited by granting licences, damages are usually based on the royalty which the infringer would have paid if it had a licence. In making this assessment, the court will consider any comparable licences. 
  • In cases where it is not possible to show that there is a normal rate of profit, or a normal 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 (the user principle) (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 (first formula nets).
  • Nets made to a modified version of that formula, developed by S while working for B (later formula nets).

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

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

The High Court assessed the damages in relation to the first formula nets according to the principles in General Tire (www.practicallaw.com/7-589-4072). This resulted in an award for lost profits in relation to diverted sales of the first formula nets, and a royalty on the remainder of those nets sold.

In relation to the later formula nets the court awarded a lump sum quasi -consultancy fee but declined to award compensation for accelerated entry or on a head-start basis. Both parties appealed the decision in relation to the later formula nets. 

Decision

The court upheld the award of damages to V. The approach used when considering damages which flowed from sales of products which misused confidential information was not automatically correct when considering damages for derived products. The act which gave rise to the harm, and therefore to V’s right to be compensated in damages, was no longer the sale of B’s product, because that sale was not itself a wrongful act. Instead it was necessary to determine what recoverable harm could be traced back to the initial wrongful use of the confidential information to develop the product.

Where the misuse of confidential information had been a basis for developing a derived product which did not itself constitute a misuse, the consequences of the activity being wrongful were likely to be the acceleration or facilitation of lawful competition. Here, the proper measure of damages was the extent to which V was harmed by having to face this competition sooner, or to a greater extent than it otherwise might have done. 

Damages did not extend to cover all the foreseeable consequences of B’s acts. The evidence showed that, although the information was not in the public domain, a team with the technical and other skills of B would have been able to produce a competing product.

The approach of awarding damages for accelerated entry plus a quasi-consultancy fee was appropriate. There was no reason to reject the evaluation of a six-month delay to the project. This delay would not have caused V to lose its place in the queue for WHO approval.

The royalty rate should be determined according to the user principle for those sales which V could not establish caused them to lose profits: it should not be set as high as possible due to V’s position as a manufacturer. There was no reason to upset the royalty rate of 4%.

The quasi-consultancy fee was also correctly assessed in that it compensated V for the use made of its confidential information in developing the later formula nets, but was not intended to give it a share in the benefits derived by B from its use.

Comment

This decision provides helpful guidance on the calculation of damages for the sale of products whose manufacture is derived from the misuse of confidential information, even though they are not actually made using that information. Two very different approaches applied to calculations of damages for the first formula nets and the later formula nets. The decision confirms that damages will still be payable even where the later development arises indirectly from the confidential information, such damages to be assessed by reference to a notional consultancy rate. The decision also confirms that, although here V was not entitled to additional springboard damages as compensation for accelerated entry into the market, these damages may be appropriate on different facts.

Case: MVF 3 APS (formerly Vestergaard Frandsen A/S) and others v Bestnet Europe Ltd and others [2016] EWCA Civ 541.

First published in the August 2016 issue of PLC Magazine and reproduced with the kind permission of the publishers. Subscription enquiries 020 7202 1200.

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