IP theft and breach of contract: What’s the damage?

Last month one of the world’s largest pharmaceutical and medical technologies corporations sued its former employee for taking thousands of confidential market-strategy related files with him to a major competitor in breach of his employment agreement. The employee was a director of the company and held various positions including director of global pricing strategy for oncology, and director of trade channel strategy. According to the company, these roles gave him access to its confidential, trade secret and proprietary information across its portfolio, including highly confidential business plans, product launch strategies, details of relationships with distributors; and clinical studies. The company is seeking an order for the enforcement of the various non-compete and confidentiality provisions in the defendant’s contract, together with an 18-month injunction restraining him from working for the competitor. It also seeks an order prohibiting the defendant using or sharing trade secrets, delivery-up of documents and materials, compensatory damages, punitive damages for the defendant’s “wilful and malicious conduct”, and further relief.

It is difficult to benchmark a likely award for damages in the instant case given that parties often reach an out-of-court settlement. However, legal professionals in the US have observed an increase in trade secret claims being brought as ‘companion claims’ to breach of contract claims related to restrictive covenants dealing with non-solicitation of customers, suppliers or employees. To this end, it is useful to revisit the types of damages available for breach of contract.

Assessment of damages for breach of contract

The most common remedy for breach of contract is an award of damages. Nominal damages are usually awarded where the claimant has not suffered any loss as a result of the other party’s breach, whereas substantial damages may be awarded where actual loss has been sustained. In exceptional cases, the court may make an award for exemplary damages (or punitive damages) where the claimant will receive more than the calculated loss.

At common law, an assessment for damages for breach of contract will naturally depend on the facts and circumstances of the case. Factors that the Courts will take into account include mitigation and measure of damages such as the actual loss, loss of profits, and other financial consequences resulting from the breach.

In Salt Ship Design AS v Prysmian Powerlink Srl [2021] EWHC 2633, it was held that breach of an exclusivity provision by the defendant, which was a project financer in a contract for the design of a ship, had not caused the failure of the project. The Court found that no substantial loss flowed from the breach and the claimant was therefore only entitled to nominal damages. On the other hand, the defendant’s disclosure of the ship designs to another contractor to enable it to produce a new design amounted to a breach of confidence, misuse of confidential information and unlawful means conspiracy for which exemplary damages could potentially be awarded.

In Vestergaard Frandsen A/S (now called MVF 3 Aps) v Bestnet Europe Ltd [2016] EWCA Civ 54, the Court of Appeal considered the correct approach to the assessment of damages in a breach of confidence case involving a product derived from a patented product.

In this case the claimant, a manufacturer of patented insecticidal mosquito nets, made a claim against one of its former employees, an engineer, for misuse of its confidential information when he went to work for a competitor (Bestnet). It was the claimant’s case that the former employee had misused its confidential information (being a patented insecticidal formula) as a starting point in developing and improving Bestnet’s existing mosquito net product (first formula) into a new product (second formula) which generated substantial sales.

The Court held that the appropriate measure of damages for the first formula of Bestnet's nets was “the General Tire measure”, after the well-known patent infringement case, General Tire & Rubber Company [1975] 1 WLR 819. The General Tire measure was to award lost profits on sales of Bestnet’s first formula to the extent that those sales replaced sales that the claimant would otherwise have made. On sales which the claimant could not establish they would have made, the Court held that it was entitled to royalties.

As to the second formula for the nets, the Court held that the approach to the measure of damages in respect of manufactured products which did not themselves misuse confidential information, but which had been derived from an earlier misuse of confidential information, was to consider the extent to which the claimants had been harmed by having to face competition sooner.

In summary, it was held: “…the courts have, at least in patent infringement cases, awarded damages for economic loss in a variety of different scenarios. Thus where a patentee exploits the patent by manufacturing, it can recover for the lost profit on sales which it could have made itself, but for the infringement.”

Commentary

The general principle in making an assessment of damages is for the innocent party to be placed in the same position as if the contract had been performed / not been breached. To this end it will be for the claimant to substantiate any loss flowing from the alleged breach of contract.

This tends to be a highly complicated, expensive, drawn out and potentially public process, involving the provision of voluminous and complex documents such as financial statements, expert reports, market data and intelligence. For this reason, many cases settle out of court. In any event, it is crucial to seek legal advice upon the discovery of a breach of contract and to ensure that legal and expert advice are taken in order to accurately assess actual, perceived and future losses, in circumstances where lack of substantial evidence can be fatal in a claim for damages.