What can parties expect in the way of compensation when confidential information slips through the net?
Opposing parties are often very far apart on the topic of compensation for a breach of confidence. Claimants may believe that they are entitled to many millions of pounds whilst defendants expect to pay out considerably less. A recent decision from the Court of Appeal, MVF 3 APS (formerly Vestergaard Frandsen A/S) and others v Bestnet Europe Ltd and others, establishes some important points regarding the assessment of damages for breach of confidence actions. It provides some clarity as to the sums a claimant can expect to recover, or a defendant should expect to pay out, in the wake of a misuse of confidential information.
A consultant (Dr S) employed by one of the claimant companies (collectively Vestergaard) developed a formula for use in the manufacture of long-lasting insecticidal mosquito nets. Dr S left Vestergaard in 2004 and began working for one of the defendant companies (collectively Bestnet), where he continued to use and develop the formula.
The High Court held that Bestnet had misused Vestergaard's confidential information.
In determining the quantum of damages, the High Court considered two categories of mosquito nets:
- Nets made using the formula developed by Dr S during his time at Vestergaard (First Formula and First Formula Nets), which were sold by Bestnet.
- Nets made using a different formula developed by Dr S whilst working at Bestnet (Later Formula and Later Formula Products). Dr S used the First Formula (i.e. the confidential information) as a starting point in developing the Later Formula Product and it was these nets which generated substantial sales for Bestnet.
Damages were awarded to Vestergaard in respect of both types of net, applying a different measure to each type. Both parties appealed against the court's assessment.
The Court of Appeal's decision
First Formula Nets
The Court of Appeal upheld the High Court's decision and dismissed both the appeal and cross appeal. It confirmed that the appropriate level of damages in respect of the First Formula Nets, being the original product, should be determined using settled principles set out in the General Tire & Rubber Co Ltd v Firestone Tyre & Rubber Co Ltd (No.2) case, namely:
- Loss of profits where the defendant has made sales which would otherwise have been realised by the claimant but for the defendant's use of the confidential information.
- A royalty where licenses are granted in respect of patented technology, based on the royalty the defendant would have paid if it had obtained a licence.
- An appropriate amount as the court may decide, having regard to evidence presented by the claimant, where a normal rate of profit or normal royalty rate cannot be shown. In such circumstances the royalty is usually assessed on the basis of a hypothetical negotiation, taking into account the licence fee which would have been payable between a willing licensor and willing licensee.
Applying these principles, the Court awarded Vestergaard the following:
- Lost profits on sales of the First Formula Nets, to the extent that the sales made by Bestnet would have otherwise been made by Vestergaard.
- Where Vestergaard could not establish that it would have made the sales, a royalty based on a hypothetical negotiation taking into account the fee, or the "going rate", which the parties would have negotiated for Bestnet to use the First Formula.
Later Formula Products
The Court of Appeal, upholding the approach taken by the High Court, applied a very different test to the measure of damages in respect of the Later Formula Products. Where the product being sold derives from the misuse of confidential information (rather than being the original product itself), the Court concluded that the General Tire approach was not appropriate because the sale of the Later Formula Products was not itself a wrongful act. And, although the First Formula was not in the public domain, a team with Bestnet's technical skills would have been able to produce a competing product of its own accord.
Instead, the Court held that there are two heads of damages to consider in circumstances where the misuse of confidential information has led to the development of a derived product, tracing the development of the Later Formula Product back to the initial wrongful use of the First Formula:
- A "quasi-consultancy" fee for using the First Formula as a reference standard in developing the Later Formula Product. In developing the Later Formula Product, Bestnet had essentially been afforded the sort of assistance from Vestergaard that a consultant could have provided (and indeed Dr S did provide this assistance to Bestnet). The Court awarded a quasi-consultancy fee of US$150,000, having regard to the fees actually paid to consultants with expertise in the area, balanced against the substantial amount of further work done by Dr S in pursuing possible changes to the First Formula to create the Later Formula Product.
- Damages for accelerated entry into the market, taking into
- The time Bestnet saved by utilising the First Formula at the start of the process to develop the Later Formula Product;
- The level of accelerated sales made as a result of the time saved.
Notably, the Court declined to award any sum to Vestergaard for accelerated entry into the market. Although Bestnet was deemed to have saved 6 months' worth of development work by using the confidential information to create the Later Formula Product, the Court found that this would not have made any difference to the date on which the requisite World Health Organisation approval of the product was achieved. The Court found the Later Formula Product would have entered the market at the same time even if it had been developed from scratch.
The impact of the decision
The law relating to breach of confidence covers a wide range of factual situations and therefore the level of remedy/remedies for a particular breach of confidence will vary in each case. This is highlighted in this judgment by the Court's rejection of the assertion that Bestnet had a "head start" into the market. There are many factual considerations to take into account which may ultimately have an impact on the level of damages awarded in order to put the claimant in the position it would have been in, had no misuse of confidential information occurred.
Vestergaard was awarded total compensation of $485,419 in this instance, which no doubt was considerably less than it expected to achieve. The decision confirms that a successful claimant will be compensated in different ways depending upon the way its confidential information has been misused. It also confirms that an award for damages for the sale of a derived product is likely to be lower in value than an award for the sale of products made directly misusing confidential information.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.