Court of Appeal provides guidance on damages for derived products in trade secrets cases
The Court of Appeal has recently issued helpful guidance as to the extent of the right of a successful Claimant to claim damages in misuse of confidential information (trade secrets) cases.
The the long running case of Vestergaard Frandsen A/S (now called MVF3 ApS) & Ors v Bestnet Europe Ltd & Ors concerns secret information used in the manufacture of long lasting insecticidal mosquito nets ("LLINs"). Mr Justice Arnold heard the trial of the liability phase of the action and in his judgment dated 3 April 2009 ( EWHC 657 (Ch)) he found that Bestnet Europe Ltd ("Bestnet") had misused Vestergaard Frandsen ("VF's") confidential information in the development of its "Netprotect" LLIN. In a subsequent judgment dated 2 June 2009 ( EWHC 1456 (Ch)) Arnold J held that it was right to grant an injunction to restrain future sales of Bestnet's Netprotect LLIN launched in October 2005. However he declined to grant an injunction in respect of a later variant of the Netprotect LLIN submitted for WHOPES (World Health Organisation Pesticide Evaluation Scheme) evaluation referred to as WHOPES II. In a short subsequent judgment given on 2 July 2009 ( EWHC 1623 (Ch)) Arnold J held that the same applied to another variant submitted for WHOPES evaluation referred to as WHOPES I.
Arnold J held that the WHOPES I and II Netprotect LLINs did not amount to an to a misuse of VF's confidential information but were derived from the misuse of VF's confidential information and, in declining an injunction on these derived products, he held that VF's remedy for past misuse should be a financial one.
The conclusions of Arnold J were upheld by the Court of Appeal (Sir Robin Jacob, Jackson LJJ and Sir John Chadwick) on 20 April 2011 ( EWCA Civ 424).
By his order dated 2 July 2009, Arnold J ordered an enquiry as to damages or equitable compensation for breach of confidence or at VF's option an account of Bestnet's profits made. VF elected for an enquiry as to damages or equitable compensation and, in its primary case seeks its lost profits, or alternatively a royalty on sales of all products, whether those products were made using its confidential information or were "derived" from the misuse.
The Defendants brought a strike out application seeking to eliminate from the scope of the enquiry anything other than the October 2005 NetProtect product identified on the basis that, as the judge had held that the manufacture and sale of the mosquito nets made in accordance with the formulation submitted for WHOPES evaluation did not amount to misuse of confidential information, VF could not claim damages or equitable compensation in respect of the impact on VF of sales of those products.
The Defendants application failed at first instance again before Arnold J. On appeal, the Court of Appeal has held that it would be undesirable to lay down, by striking out the relevant parts of the claim, a general principle for the assessment of damages in cases of breach of confidence leading to the manufacture and sale of derived products. Such a decision is far better taken once the full facts have been determined. The Court of Appeal went on to highlight that injunctions and damages are distinct remedies and the principles which govern their availability are not the same. It endorsed the judgment of Laddie J in Ocular Sciences Limited v Aspect Vision Care Ltd (Part 2)  RPC 39 that, if the facts of the case make a judge hesitate as to whether to grant an injunction, a financial penalty may be the appropriate alternative.
The Court of Appeal concluded that "when it comes to considering damages, the distinction between the two classes of product sold by Bestnet may not be as material as it is when considering the grant of an injunction. Both classes, to some, although a differing degree, benefit from the VF confidential information. Whether it is right, in the end, to limit VF to head start damages in respect of the derived products is a decision which can only properly be made when the extent of that benefit has been established on the facts" and that it would "be wholly wrong at this stage to hold that VF had no real prospect of establishing their primary case in relation to the derived products."
The full judgment of the Court of Appeal can be found by clicking here.