England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (INTELLECTUAL PROPERTY)
The Hon Mr Justice Arnold
[2012] EWHC 2002 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		25th April 2013

Lord Justice Floyd:

1. This is an appeal by the defendants (together "Bestnet") from the judgment and order of Arnold J dated 16 July 2012 ([2012] EWHC 2002 (Ch)) in which he dismissed the defendants' application to strike out in part the claimants' ("VF's") Amended Points of Claim in an enquiry as to damages for breach of confidence. The judge held that the relevant parts of the claim were plainly arguable. Moreover he was of the view that the issues of law raised by those parts of the claim were far better decided once all the relevant facts had been decided.
2. The action concerns secret information used in the manufacture of mosquito nets. The mosquito nets in question are described as long lasting insecticidal nets. The nets are formed from knitted, mono-filamentary polyethylene yarn which into which insecticide is incorporated. In use, the insecticide migrates to the surface of the yarn and is picked up through the feet of the insect. When the nets are washed, the surface insecticide is removed. However, because the migration of insecticide from within the yarn is continuous, the insecticidal properties are regenerated over time, and the net can be put back into use. The proper control of the rate of migration is important. If the insecticide migrates too quickly, the reservoir of insecticide will deplete too rapidly, reducing the useful life of the net; if the insecticide migrates too slowly, the regeneration time will be too long. Various additives will affect the rate of migration. The confidential information in issue in the action concerned the choice of additives and in particular their relative proportions, referred to in the evidence and judgments as "recipes". The source of the information was a database created by VF called the Fence database.
3. Arnold J also heard the trial of the liability phase of the action. In his judgment dated 3 April 2009 ([2009] EWHC 657 (Ch)) ("the main judgment") he found that Bestnet had misused VF's confidential information subsisting in the Fence database. He held that Dr Skovmand, who had developed the Bestnet product, had in so doing made use of information in the Fence database which showed which formulations would be likely to be successful or "well worth trying". His conclusions were upheld by the Court of Appeal (Jacob, Jackson LJJ and Sir John Chadwick) on 20 April 2011 ([2011] EWCA Civ 424). Jacob LJ (with whom the other members of the court agreed) said this at paragraphs 23-24:

"23. Overall I conclude that there was ample material here to justify the Judge's finding in the Main Judgment that the Fence database was in fact used as the basis for the first NetProtect recipes. It was not just a matter of Dr Skovmand using his general skill and knowledge or matter in the public domain (such as the use of information as referred to in [188] of the Main Judgment). It was a case of his using the detailed results in the Fence database so as to choose recipes for NetProtect which, based on those results, were likely to be successful, as indeed they were and were predicted to be from the outset. Indeed I cannot imagine any good reason why the defendants should have lied and forged to cover their tracks if the Fence database had not been used.

24. I am not shifted from this opinion by the passages from the cross-examination of Mr Gary Howe (VF's expert) upon which Mr Howe relied. They show that Mr Gary Howe accepted that scientifically the defendants could have reached their initial formulation of NetProtect by their own research. But that does not mean that they actually did that rather than taking the short-cut of using the information in the Fence database. Quite how much time and trouble they saved is a matter for debate (perhaps in the inquiry as to damages). It may not amount to a vast amount. But save time and trouble they did."

4. In a subsequent judgment dated 2 June 2009 ([2009] EWHC 1456 (Ch)) ("the remedies judgment") Arnold J held that it was right to grant an injunction to restrain future sales of Bestnet's Netprotect product launched in October 2005. However he declined to grant an injunction in respect of a later variant referred to as WHOPES II. WHOPES is the World Health Organisation Pesticide Evaluation Scheme. In a short subsequent judgment given on 2 July 2009 ([2009] EWHC 1623 (Ch)) he held that the same applied to another variant referred to as WHOPES I.
5. The reason the judge drew the distinction which he did between the October 2005 product and the two later WHOPES products can be seen from paragraphs 107-108 of the remedies judgment:

"107. I accept VF's case to the extent that I consider that the manufacture and sale of the Netprotect product launched by the Defendants in October 2005 did amount to misuse of VF's trade secrets. This is because it was made in accordance with the [REDACTED] formulation (that is to say, a formulation which was close to some of the VF recipes in the Fence database and which the information in the database indicated would be well worth trying, which formed part of the October 2004 trials and which was the Defendants' reference formulation for their development work) and differed little from VF's recipes in terms of polymer composition and other additives.

108. By contrast, I consider that the manufacture and sale of mosquito nets made in accordance with the formulation submitted by Bestnet for WHOPES II evaluation does not amount to misuse of VF's trade secrets, although that formulation derived from such misuse. This is partly because it was a [REDACTED] formulation, which is further away from VF's recipes. More importantly, as counsel for the Defendants submitted, I have already found that this formulation differed from any of VF's recipes, in particular in terms of its polymer composition, inclusion of [ADDITIVE L] and inclusion of [ADDITIVE M]. Counsel for VF relied upon Dr Skovmand's evidence that it was "not very different"; but in my judgment it was different enough." (redactions as in redacted judgment, emphasis supplied)

6. The judge also relied, at paragraph 109, on the fact that considerable time had passed since October 2004 when Bestnet began work on their nets. Although the case was not one in which the confidential information could be obtained by reverse engineering, the identities of the three principal additives could be obtained from public domain sources and suitable proportions of them could be worked out by trial and error. He held that an independent consultant could have come up with similar recipes after a certain amount of time and effort. He did not, however, attempt to quantify that effort, as he was not required to for the purpose of determining whether to grant or refuse an injunction in respect of the WHOPES products.
7. Arnold J's conclusions on the scope of the injunction were also upheld by the Court of Appeal, despite VF's cross appeal. The court observed that the grant of an injunction was a discretionary remedy and the judge had weighed all the relevant factors. The court expressly endorsed the view that the passage of time was relevant. Jacob LJ (again with the concurrence of the other members of the court) said this at paragraph 57:

"The passage of time is likewise relevant. After all what the defendants did was to cut a corner, getting on the market earlier than if they had not misused confidential information. Mr Gary Howe, in cross-examination, had accepted that scientifically the defendants could have developed their product independently – time was saved and perhaps not a very great deal of it. By the time of the WHOPES I product the head start had much less significance. That was a matter which the Judge was properly entitled to take into account."

8. Arnold J's distinction for the purposes of deciding whether to grant an injunction between products which amounted to misuse of confidential information and those whose formulation was derived from the confidential information reflects a similar distinction made by Laddie J for the same purpose in Ocular Sciences Limited v Aspect Vision Care Ltd (Part 2) [1997] RPC 395. At page 396, under the heading "Injunctions against continued use", Laddie J said this:

"Before considering whether in this case it would be appropriate to restrain the defendants from using their current technology or running their business, it is right to consider precisely what the injunction is going to stop and how that relates to the plaintiffs' rights which have been breached. In particular what is the effect of an injunction, as sought here, which prohibits a defendant from "making any use of" the confidential information? Where the defendant continues to possess the confidential information and his products incorporate or disclose it or their manufacture continues to use it, an injunction against use will automatically restrain continued operation of the process and sale of products. But what would be the effect of an injunction in those terms where the defendant's products or process do not themselves continue to incorporate or disclose confidential information although they were brought into existence or were perfected or owe their commercial success to the fact that confidential information was used in the past? Such products or processes can be referred to conveniently as "derivative" or "derived". If exploitation by the defendant of such derived products and processes is considered to be continued use of the information employed in their creation or development, an injunction against use would have the effect of prohibiting further exploitation of the derived matter. If that is so, the court should consider whether injunctive relief which goes that far is intended and appropriate."

9. 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 thereby. On 8 December 2009 VF elected for an enquiry as to damages or equitable compensation. Pleadings in the enquiry were subsequently exchanged.
10. By paragraph 3 and 4 of its Amended Points of Claim in the enquiry, VF pleaded as follows:

"3. The Claimants are entitled to recover compensation in respect of the following classes of harm caused to them by reason of the Defendants' acts of breach of confidence:

(i) Loss of profit wherever in the world resulting from the Defendants' sale and offer for sale and tender for contracts for the supply of products manufactured in accordance with a formulation derived in whole or in part from the misuse by the Defendants of the Claimants' trade secrets. In particular the Claimants will seek their lost profit caused by the sale or offer for sale or tender for contracts for the supply of the following of the Defendants' products ("the Defendants' Unlawful Products"):

(a) Products made to the formulation of the Netprotect product launched by the Defendants in October 2005.

(b) Products made to the formulation of the Netprotect product in respect of which the Defendants obtained WHOPES I recommendation in December 2007.

(c) Products made the formulation of the Netprotect product in respect of which the Defendants obtained WHOPES II recommendation in December 2007.

(d) Products sold … under or by reference to or in reliance upon the WHOPES I and WHOPES II evaluations obtained by the Defendants in respect of the Netprotect products referred to under (b) and (c) above

(e) Products manufactured in accordance with any formulation derived in whole or in part from the misuse by the Defendants of the Claimants' trade secrets as held at trial.

(ii) Loss of profit wherever in the world resulting from the sale and offer for sale and tender for contracts for the supply of products by third parties under licence from or with the permission of the Defendants which are manufactured in accordance with a formulation derived in whole or in part from the misuse by the Defendants of the Claimants' trade secrets ("Third Party Unlawful Products").

4. The Claimants' primary case is that its lost profits in respect of the sale, offer for sale and tender for contracts for the supply of both the Defendants' Unlawful Products and Third Party Unlawful Products stand to be quantified as follows:

(i) The Claimants' lost profits from sales which would otherwise have been made and contracts which would otherwise have been entered into had the said unlawful products not been on the market. The Claimants' case is that such lost profits are to be quantified according to the principles set out under paragraphs 6 to 9 below in respect of a notional volume of lost sales calculated by reference to the market share of the Claimants' Permanet products as set out under paragraph 10 below; and

(ii) A notional royalty on sales of and contracts for the supply of unlawful products which would not otherwise have been made by the Claimants. For the avoidance of doubt it is the Claimants' case that such royalty would be payable on the proportion of the actual number of sales of such unlawful products in respect of which the Claimants are not entitled to claim lost profits under paragraph (i) above. The rate of such royalty is to be calculated in accordance with the principles set out under paragraph 11 below.

11. VF's primary case was therefore lost profits, or alternatively a royalty on sales of all products, whether those products were made using the confidential information or were merely "derived". An alternative case was also pleaded based on a royalty on all Bestnet's sales of unlawful products.
12. The application notice sought an order striking out paragraphs 3(i)(b) to (e) inclusive (as well as some other, related, paragraphs) of the Points of Claim. In other words, at that stage, it was sought to eliminate altogether from the scope of the enquiry anything other than the October 2005 NetProtect product identified at 3(a). This was 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. At this stage it is important to note that the case for lost profits or alternatively a royalty based on the October 2005 product identified at paragraph 3(i)(a) was accepted not to be strikable.
13. Before the judge, however, Bestnet accepted that it did not necessarily follow that VF was not entitled to any damages at all in respect of the products identified at 3(i)(b) to 3(e) of the pleading. It was accepted that it would be open to VF to formulate a case based on the allegation that Bestnet had obtained a head start as a result of misusing VF's secrets. However, no head start case had at that stage been pleaded. The existing pleading treated each sale as giving rise to a right to compensation, making no distinction between the October 2005 products which did make direct use of confidential information, and the more remote ones which were merely derived from such misuse.
14. Matters have moved on since the date of the judgment under appeal. VF have successfully applied to amend their Points of Claim to add a claim based on a head start. The amendments were allowed by consent by order of Master Marsh on 17 January 2013. The head start claim is contained in what is now paragraph 6 of the pleading:

" 6. As a further alternative, if and insofar as the Claimants are not entitled to damages caused by the sales of the Defendants' Unlawful Products and/or Third Party Unlawful Products by reason [of] the manufacture of such products not themselves constituting an ongoing misuse of VF's trade secrets or otherwise, the Claimants will seek damages caused by the accelerated entry of the Defendants' Unlawful Products and/or Third Party Unlawful Products onto the market as a result of the misuse of the Claimants' trade secrets. The Claimants' case on the period by which the Defendants entry onto the market has been accelerated through their unlawful acts is set [out] in paragraph J above."

15. The cross-reference to paragraph J is also to a further paragraph added by amendment, which is as follows:

"Further and in any event, the development, production and testing of a PE LLIN product is an expensive process that requires sophisticated PE manufacturing equipment and access to chemical and biological testing facilities. If the Defendants had sought to engage an independent contractor to create the Netprotect product without misusing the Claimants' trade secrets the research programme would have taken at least 8 years and cost significantly in excess of £1 million. In support of the foregoing the Claimants will rely on the cost and duration of its own research programme by which the trade secrets misused by the Defendants (as recorded in paragraphs 339 to 355 of the Main Judgment) were obtained. The Claimants will rely in particular on the Claimants development programme over the period 1996 to 2004 as recorded in paragraphs 141 to 304 of the Main Judgment."

16. Mr Wilson QC and Mr George Hamer, who appeared for Bestnet on this appeal, both made submissions to the effect that the claim for an 8 year head start was untenable. However Bestnet made no application to expand the scope of the appeal to include an application to strike out paragraphs 6 and J. Mr Wilson tells us, and we accept, that he reserved his position when the amendments were agreed to before the Master, based on the fact that this appeal to the Court of Appeal was at that stage pending. The terms of such a reservation were, however, never reduced to writing. Whatever the effect of this reservation was, it cannot have the effect of expanding the scope of the present appeal to include an application to strike out paragraphs 6 and J.
17. The position is therefore that, as matters presently stand, the enquiry is proceeding on the basis that VF will be alleging that the misuse of confidential information gave Bestnet an illegitimate 8 year head start. This claim will require the judge hearing the enquiry to compare two scenarios. The first is the actual scenario in which Bestnet came on the market when they did. The second is the scenario in which Bestnet market their product after 8 years delay, or whatever lesser period the Court decides is appropriate. The judge will then have to assess the harm caused to VF by the actual, accelerated entry. The 8 year period is of course more than long enough to cover the period when the WHOPES products, and any other derived products, were on the market.
18. The head start case is of course put forward as an alternative to the primary case pleaded in paragraphs 3 and 4. However the fact that the claim now includes, in any event, an allegation which may well involve consideration of the impact on VF of the WHOPES products, calls into question whether anything of value from the case management perspective would be achieved by eliminating those products from the claim in paragraphs 3 and 4. Nevertheless, Mr Wilson maintains on this appeal that those paragraphs should be struck out insofar as they relate to products other than the October 2005 product, that is to say the "derived" products. In relation to the derived products, VF's case can, in his submission, only be based on a head start. There can be no basis, he submitted, for continuing damages based on every sale of a Bestnet product, except in relation to the October 2005 product. The claim in relation to the derived products could lead to Bestnet having to pay damages for VF's lost profits which, on the assumption that they are greater than Bestnet's profits, could result in Bestnet being worse off than if they had not sold the product at all. This would amount to a remedy more severe than the injunction which Arnold J had held to be disproportionate.
19. Mr Platts-Mills QC, who appeared on the appeal with Mr Tom Moody-Stuart, submitted that the judge was right for essentially the reasons he gave. The extent to which Bestnet had continued to use VF's confidential information in respect of the derived products remained to be elucidated. By way of example he took us to some documents which had been uncovered in the course of related proceedings in France which he submitted showed that there had been more use of VF's secret information than had been uncovered at the trial. He showed us the passages from the main judgment in which Arnold J had pointed to the absence of any cogent explanation of what Bestnet had actually done. In fact Bestnet had failed to provide the judge with any proper chronological summary because, as Arnold J concluded, the state of Bestnet's evidence did not permit this to be done.
20. The measure of damages to compensate an injured party for an economic tort was stated by Lord Wilberforce in General Tire & Rubber Company v Firestone Tyre & Rubber Company [1975] 1 WLR 819 at 824 to be:

"that sum of money which will put the injured party in the same position as he would have been if had not sustained the wrong."

21. In cases where the claimant and defendant are in competition with one another, making and selling competing products, the damages will include profits which the claimant can show that it has lost by reason of the wrong which has been committed. Thus, for example, in patent infringement cases, the claimant will normally receive lost profits on sales by the defendant which he can show he would have made if the defendant had not infringed. There is however an extension, or some might say an exception to this first principle. In relation to infringing sales where the claimant cannot show that the defendant's sale has caused him to lose the profit on a corresponding sale, it may nevertheless recover a reasonable royalty. This principle is explained in the well known Scottish patent case in the House of Lords, Watson, Laidlaw & Co. Ltd v Potts, Cassels & Williamson (1914) 31 RPC 104 at 119-120 where Lord Shaw said:

"It is at this stage of the case … that a second principle comes into play. It is not exactly the principle of restoration, either directly or expressed through compensation, but it is the principle of price or hire. It plainly extends - and I am inclined to think not infrequently extends - to patent cases. But indeed, it is not confined to them. For wherever an abstraction or invasion of property has occurred, then, unless such abstraction or invasion were to be sanctioned by law, the law ought to yield a recompense under the category or principle, as I say, either of price or hire. If A, being a liveryman, keeps his horse standing idle in the stable, and B, against his wish and without his knowledge, rides or drives it out, it is no answer to A for B to say: 'Against what loss do you want to be restored? I restore the horse. There is no loss. The horse is none the worse; it is better for the exercise.'"

22. That principle has indeed been applied more generally. For example, in a case involving damages for breach of a restrictive covenant, in Wrotham Park Estates v Parkside Homes [1974] 1 WLR 798 at 813 (Brightman J).
23. In Dowson & Mason v Potter and anr [1986] 1 WLR 1419 the claimants had developed a new type of landing leg for articulated lorries. In breach of confidence the defendants obtained confidential details of the names and addresses of the suppliers of components of the claimants' landing legs and the prices paid to them. The defendants, using the information, met with the suppliers and in due course became competitors of the claimants in making and selling these articles. An enquiry was ordered by consent as to the damages sustained by the claimants by reason of the use of the confidential information by the defendants and the offer for sale, sale and supply of landing legs made with the assistance thereof. The defendants issued a summons seeking the directions of the court as to the proper basis for the assessment of damages. The registrar decided that the proper basis was:

"the loss suffered by the plaintiffs which falls to be assessed according to their loss of profits resulting from the wrongful disclosure and use of the confidential information referred to in the [consent order]."

24. The defendants appealed against that order arguing that the basis of assessment should be only the value of the information taken as between a willing purchaser and a willing buyer. They based that argument on the decision of the Court of Appeal in Seager v Copydex (No 2) [1969] 1 WLR 809. It was submitted that there were two types of breach of confidence, one where that which is taken is not obtainable elsewhere (for example a secret formula), and another where were what has been taken can be obtained independently. It was argued that, in the latter case, it was the market value of the information alone which determined the measure of damages. The Court of Appeal rejected this argument. They pointed out that that Seager v Copydex was a case concerning a claimant who was prepared to sell the confidential information in question. As with any claimant whose business is the sale or licensing of his intellectual property, the measure of damages is what would have been charged if the defendant had acted properly rather than improperly. The case with which they were concerned was one of rival manufacturers, making it possible for the claimants to claim lost profits if they could show they had suffered any. Having reviewed some of the authorities on confidential information Sir Edward Eveleigh observed at 1424H that Saltman Engineering v Campbell Engineering (1949) 65 RPC 203, although not in terms binding on the Court, gave

"a strong indication that there is no difference in the measure of damages in the two types of breach of confidentiality which [counsel for the appellants] has suggested".

25. Mr Wilson relied on a sentence in the judgment of Sir Edward Eveleigh where he said:

"So, in the present case the defendants saved themselves time and trouble; how much time and trouble is a matter which no doubt will have to be determined."

26. However, what the Court of Appeal did was to leave in place the registrar's order that damages be assessed by reference to the lost profits resulting from the breach of confidence.
27. Apart from these two cases, the researches of counsel have not uncovered any other authority on the correct approach to the assessment of damages in a breach of confidence case involving a derived product (as that term is used by the judge). As Dowson & Mason v Potter demonstrates, the underlying principles must be those expressed by Lord Wilberforce in General Tire and by Lord Shaw in Watson, Laidlaw. In Dowson & Mason, Sir Edward Eveleigh referred to what Lord Wilberforce had said about the elemental principles in General Tire at page 824:

"These elemental principles have been applied in numerous cases of infringements of patents. Naturally their application varies from case to case. Reported authorities, many of which were cited in argument, may be useful examples of judicial reasoning, but are capable of misleading if decisions on particular sets of facts and observations in judgments leading up to such decisions are later relied upon as establishing a rule of law."

28. In the light of observations such as this, it seems to me that it would be undesirable for this court to lay down, by striking out the relevant parts of paragraphs 3 and 4 of the re-amended Points of 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, as the judge decided.
29. Quite apart from this general consideration, I do not consider that the distinction which the Judge drew in the remedies judgment for the purposes of deciding to grant an injunction necessarily means that the only basis for assessment of damages in the case of the derived products will be the head start or accelerated entry basis. Injunctions and damages are distinct remedies and the principles which govern their availability are not the same. Moreover, as Laddie J appreciated in Ocular Sciences, 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. I was not persuaded by Mr Wilson's point about damages being a more severe remedy from Bestnet's point of view than an injunction. He raised it as no more than a possible consequence, and it is a possible consequence in any case where an injunction is refused and financial compensation awarded instead.
30. Still further, it seems to me 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. Given the concession that VF's claim for damages on their primary case of loss profits or royalty is arguable in respect of the October 2005 product, it would in my judgment 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. They should be allowed the opportunity of attempting to do so. As Slade LJ pithily put it in Dowson & Mason:

"If [the appellants'] submissions are correct and the district registrar's formula is an incorrect one, the plaintiffs will not be in a position to recover that loss of profit even though they may prove it." (original emphasis)

31. Finally, as I have already said. I see no benefit from a case management standpoint of striking out these paragraphs now, given the agreed amendment to the Points of Claim to add the claim for damages on the head start basis. That claim will inevitably cover an analysis of the sales of the derived products.
32. For these reasons, which merely supplement those which the judge gave, I consider that the judge was right not to strike out the relevant paragraphs of the Points of Claim. I would therefore dismiss the appeal.

Lord Justice Tomlinson:

33. I agree.

Lord Justice Lloyd:

34. I also agree.