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

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.

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.

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:

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.

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:

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.

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:

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:

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.

By paragraph 3 and 4 of its Amended Points of Claim in the enquiry, VF pleaded as follows:

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.

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.

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.

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:

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

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.

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.

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.

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.

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:

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:

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).

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 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

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

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.

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:

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.

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.

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:

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.

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.

I agree.

I also agree.