Vestergaard Frandsen A/S & Ors v Bestnet Europe Ltd & Ors

In a breach of confidence claim involving competing products, damages are not confined at the strike-out stage to a head-start award merely because later products are derived from misuse rather than continuing to embody the confidential information. The compensatory principle remains relevant: lost profits may be recoverable where the claimant proves displaced sales, and a reasonable royalty may be available where it cannot. The distinction between direct and derived products for an injunction does not necessarily determine the measure of damages. Whether the confidential information materially benefited derived products, and whether recovery should be limited to a head-start period, ordinarily requires the facts to be established. An arguable damages case should not be struck out merely because the ultimate measure remains uncertain.

The claimants alleged that the defendants misused confidential information in a database of formulations for insecticidal mosquito nets. Arnold J found misuse at the liability trial, and his conclusions were upheld on appeal: [2009] EWHC 657 (Ch) and [2011] EWCA Civ 424. He later distinguished products that directly used the information from products derived from it when deciding the scope of an injunction.

In an enquiry as to damages, the claimants pleaded lost profits or a reasonable royalty on sales of both classes of products, and later added an alternative claim for loss caused by accelerated market entry. Arnold J dismissed the defendants’ application to strike out the claims relating to derived products: [2012] EWHC 2002 (Ch). The appeal concerned whether those claims were legally untenable or remained arguable pending findings on the extent of the confidential information’s benefit.

Floyd LJ delivered the leading judgment, with Tomlinson LJ and Lloyd LJ agreeing. The court dismissed the appeal and upheld the refusal to strike out the pleaded claims concerning products derived from misuse of confidential information.

1. The ordinary compensatory principle applies to damages for an economic wrong. The award should place the injured party in the position it would have occupied absent the wrong. In a competition case, this may include lost profits on sales the claimant would have made. Where the claimant cannot prove a corresponding lost sale, a reasonable royalty may be recoverable. The court relied on General Tire & Rubber Company v Firestone Tyre & Rubber Company [1975] 1 WLR 819, Watson, Laidlaw & Co. Ltd v Potts, Cassels & Williamson (1914) 31 RPC 104 and Wrotham Park Estates v Parkside Homes [1974] 1 WLR 798.
2. Dowson & Mason v Potter and anr [1986] 1 WLR 1419 demonstrated that damages for breach of confidence are not automatically limited to the market value of information which could have been obtained independently. The distinction between direct and derived products did not justify a general rule at the strike-out stage. Seager v Copydex (No 2) [1969] 1 WLR 809 was distinguishable because it concerned information held for sale or licensing, rather than rival manufacturers.
3. The distinction drawn for the purposes of an injunction did not necessarily determine the assessment of damages. Injunctions and damages are distinct remedies. As illustrated by Ocular Sciences Limited v Aspect Vision Care Ltd (Part 2) [1997] RPC 395, financial compensation may be appropriate where injunctive relief would be disproportionate.
4. Whether the derived products benefited from the confidential information, and whether any award should be limited to loss caused by an accelerated market entry, depended on the facts. The amended head-start claim would in any event require analysis of the derived products. There was therefore no sufficient case-management benefit in striking out the primary claim before the relevant facts had been established.

• Court of Appeal (Civil Division): The appeal was dismissed, upholding the refusal to strike out the relevant parts of the damages pleading: [2013] EWCA Civ 428.
• High Court, Chancery Division (Intellectual Property): Arnold J dismissed the defendants’ strike-out application, holding that the claims were plainly arguable and better determined after the facts had been established: [2012] EWHC 2002 (Ch).