Most businesses are familiar with their legal options if an employee or competitor copies confidential information. But what if the vital information is incorporated into new products alongside novel or more recent innovations?
One of the most fertile areas for these “derived products” is the world of software coding. Sophisticated competitors do not just cut and paste lines of stolen code. At the very least they put code through automatic translation, but even that leaves traceable artefacts – meaning that the truly serious competitor will rewrite aspects of stolen code in a new way, in a more current language and combine it with his own ideas and innovations. While this puts obstacles in the way of reliable detection, it is by no means guaranteed to offer protection.
This article discusses the factors which influence the Courts approach to compensating businesses in confidentiality cases involving derived products of this type.
Confidential information and trade secrets
The unauthorised retention, use or adaptation of confidential information is unlawful. In brief, the legal approach to confidential information is that it is information that has a necessary ‘quality of confidence’ and is not in the public domain. Broadly speaking, the more valuable and inaccessible the information, the more confidential it will be, while trivial information is not protectable at all. While this does not mean that information is confidential just because it creates value, it does mean that novel and private information is confidential and the protectability of that information is strengthened by the commercial value that the information represents or generates.
The World Trade Organization TRIPS Agreement defines a trade secret as information which:
"(a) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question
(b) has commercial value because it is secret; and
(c) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret."
Derived products and injunctions
When it comes to software, it is relatively easy for experienced programmers to use information as the inspiration or basis for improvements to an existing product or as parts of an entirely new product. The resulting products are not therefore direct copies or embodiments of confidential information, but are 'derived products'. Derived software can fall anywhere in a spectrum which spans between the use of a simple confidential idea as a starting point for a new line of original and independent development, all the way through to a system that is completely reliant in all important respects on a set of stolen code.
In practice, it can be difficult to discern how much of the infringing product is derivative and how long it would have taken to produce it without the head start provided through the unlawful use of confidential information. Both these factors can have an impact on the amount of damages that might be available and whether an injunction should be granted (and if so, for how long).
These issues were recently revisited in the long running case Vestergaard Fransden A/S v Bestnet Europe Limited ("Vestergaard"). The product in this case was mosquito nets, particularly the secret formulas used in the insect repellent that they were impregnated with. After Vestergaard's researchers defected to their competitor Bestnet it was discovered that they had taken Vestergaard's confidential research and test results for numerous variations of the formula and then used them to continue the development work at Bestnet. One product used a formulation which was very similar to Vestergaard's (effectively a direct copy), whilst others used formulations which were derived from Vestergaard's confidential information but which were different (i.e. derived products).
Although the parties were directed to resolve their differences by the Court after a preliminary hearing, they failed to do so and an injunction was granted to prevent the use of the direct copy as its manufacture and sale was a misuse of Vestergaard's trade secrets.
In the case of the derived products, however, the manufacture and sale was not found to be a misuse of trade secrets, because the formulation was sufficiently different to the original research they had taken. On the specific facts, it was decided that the formulations in the derived products could have been worked out from public materials and trial and error, so the advantage Bestnet gained was accelerated entry to the market.
So, despite being produced in breach of confidence, no injunction was granted and Vestergaard instead pursued damages. The question was: how to decide what the damages should be.
Damages for breach of confidence
Damages are typically awarded due to a breach of contract, such as breach of the employee's obligations in the employment contract. In some cases, however, greater damages may be available as an 'account of profits', which is recovery of the profits made as a result of the unlawful use of information.
Where a breach of confidence results in competing derived products, the complications identified above impact upon the damages available and how they could be assessed. As a derived product is not a complete embodiment of the confidential information the claimant is not entitled to a direct account of profits or damages in respect of all lost profits due to the infringement, as they would if there was a direct copy.
The key advantage the infringing party gains from the breach of confidence is a head start or accelerated access to the market. The Court therefore has to assess when the product would have come to the market legitimately, and what the claimant has lost in the intervening period. The starting point is that where the claimant can demonstrate some loss of profits due to the breach they will be recoverable, but this might be limited to the period it would have taken for the defendant get the product to market legitimately. This inevitably involves a detailed enquiry into the nature of the confidential information itself and the extent to which it influenced the derived product.
If breach of confidence is established but a loss of profit is hard to show, the Courts may award a royalty for the use of the information. This is usually calculated as a lump sum payable immediately or an on-going royalty tied to the value of the product in future. It should be said, however, that a royalty is usually only appropriate where it is conceivable that the claimant would have sold or licensed the information. It is not appropriate where the parties are in direct competition and is therefore less common in situations involving sectors like the financial services industry.
Damages in other circumstances
Where an employee enters into competition with his employer there could also be a breach of a general fiduciary duty or a breach of a specific contractual term. This adds a further element to the determination of damages.
Consider a scenario in which an employee poached clients who reliably generated £100,000 of business each year for the employer. In a tortious claim the damages claimed might be £100,000 per year for a number of years into the future (for policy reasons a court would be unlikely to award this amount indefinitely). If, on the same facts, a claim was brought for breach of contract, the court would seek to put the employer in the position it would have been in had the contract been fulfilled. This is calculated as the losses suffered up to the date of the trial without looking towards potential economic loss in the future.
There is a further measure which has been argued in relation to breaches of restrictive covenants, known as Wrotham Park damages. In this case, the damages paid represent a reasonable payment which the employer would (hypothetically) have accepted in exchange for relaxing the obligations owed by the employee. This payment would therefore include consideration of the profit the employee stands to make.
From the above it can be seen that the Courts are alive to the real world problems posed by derived products and are engaged with the methods of finding the right way to compensate wronged parties, based on a considered view of the details of each case of infringement.
As far as derived products are concerned, the greater the value of the confidential information and the extent to which it is used, the more likely it will be that account of profits or damages for loss of profits will be awarded.
Where the derived product is further removed from the confidential information and it is difficult to ascribe a specific value to the breach of confidence, the court might prefer to award a reasonable royalty in place of any actual lost profits – as long as the parties are not in direct competition.
As the judge in Vestergaard observed:
"...it would be undesirable...to lay down...a general principle for the assessment of damages in cases of breach of confidence leading to the manufacture and sale of derived products."
The judge also emphasised that the Courts will award damages even where an injunction has been rejected. For those who have suffered the removal of confidential information by sophisticated staff, there is comfort to be taken in the remedies available and the undoubted scope for development in this area as technology advances.
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