Court of Appeal Guidance on Damages for Misuse of Confidential Information

If you choose or are forced to take legal action to protect your confidential information and are successful in establishing liability against an infringing party then your case will move to the assessment of damages stage. The Court of Appeal has now provided guidance on the calculation of damages for the sale of products whose manufacture is derived from the misuse of this confidential information, even if the product is not made using this information.

The relevant case before the Court concerned mosquito nets made by the Defendant to a formula developed by an employee of the Claimant. As an employee of the Claimant this information belonged to the Claimant but when the employee moved to the Defendant it used the formula in its new employment. This allowed the Defendant to manufacture two new types of mosquito net which obtained World Health Organisation approval, which is of paramount importance in the mosquito net market.

After ruling in favour of the Claimant on liability, the High Court was required to assess the damages due to the Claimant. In relation to the first mosquito net the High Court awarded damages on the basis of lost profits in relation to diverted sales achieved by the Defendant that the Claimant could otherwise have expected to make. The second mosquito net produced by the Defendant was based on an amended version of the stolen formula and for these nets the High Court awarded a lump sum quasi-consultancy fee.

The Defendant appealed the decision of the High Court. The Court of Appeal held that it was necessary to determine what recoverable harm could be traced back to the initial misuse of the confidential information to develop the mosquito nets. The normal approach of considering damages that flowed from the sale of products misusing confidential information was not appropriate in this case where the sale of the Defendants mosquito nets was not, in itself, a wrongful act.

In this case the misuse of confidential information was the basis for developing a derived product rather than a copy, so the proper measure of damages would equate to the extent to which the Claimant was harmed by having to face competition in the market from the Defendant sooner than it would otherwise have done. The Court of Appeal therefore decided that the approach of the High Court in awarding damages for accelerated entry plus a quasi-consultancy fee was appropriate.

This decision also confirms, in relation to the second mosquito nets produced by the Defendant, that damages will still be payable even where the development arises indirectly from the misuse of confidential information. Any such damages are to be assessed by reference to a notional consultancy rate. If you would like any further information on this case or the issues raised please do not hesitate to contact the team at McDaniel & Co. on 0191 281 4000 or by email to legal@mcdanielslaw.com.