On 13 June 2016, the English Court of Appeal handed down its latest judgement in the long-running trade secrets case Vestergaard Frandsen (now MVF3 ApS) and others v Bestnet Europe and others. The Court held that where the misuse of confidential information had been a basis for developing a derived product which did not itself constitute a misuse, damages were recoverable but the proper measure of damages was the extent to which the claimant had been harmed by having to face such competition sooner, or to a greater extent than they otherwise might.

This latest episode gives us an interesting insight as to how the Court will approach assessment of damages where a product is not a direct result of misuse of the trade secret, but the manufacturer has gained a head start in its development programme through the earlier misuse.

The story so far

The case involves a familiar scenario to followers of trade secrets litigation. Two ex-employees of Vestergaard decided to set up a rival company to produce long lasting insecticidal fabrics for mosquito nets. Prior to leaving Vestergaard, Mrs Sig and Mr Larsen surreptitiously embarked on a project to compete with their employer in association with a Dr Skovmand. Dr Skovmand had been a scientific consultant with Vestergaard and was, in effect, its head of development. Unlike Dr Skovmand and her co-defendant, Mr Larsen, Mrs Sig had not been involved in product development at Vestergaard. She had been a sales manager and had not had access to the Fence database which held the confidential information in dispute (essentially recipes and techniques for production of the fabrics).

Vestergaard complained that Bestnet’s first generation product, NetProtect, was developed using their confidential information. In 2009, Arnold J concluded that Dr Skovmand (who was not a party to the UK proceedings) had used the information in the Fence database to devise the initial NetProtect recipes. Arnold J also found that Mrs Sig was liable for breach of confidence even though she had not been personally involved in devising the NetProtect recipes and did not appear to know until the proceedings were started that information in the Fence database had been used. Arnold J reasoned that a person could be liable for breach of confidence even if [he] is not conscious of the fact that what [he] is doing amounts to a breach of confidence. It was this issue that formed the basis of an earlier appeal to the Court of Appeal (which reversed Arnold J’s decision) and ultimately the Supreme Court. In 2013, the Supreme Court agreed with the Court of Appeal that Mrs Sig was not liable for breach of confidence.

This appeal

The latest appeal to the Court of Appeal related to the manufacture and sale of other nets which did not involve direct use of the confidential information in dispute. However, these second generation nets were said to be derived from misuse of that information.

At the trial Arnold J held that the misuse of Vestergaard’s trade secrets was the starting point for a substantial program of further development which resulted in a formulation which was different from any of Vestergaard’s recipes in a number of respects. The evidence showed that, although the information was not in the public domain, a team with the technical and other skills of Bestnet would have been able to produce a competing product. As counsel for Bestnet explained, Bestnet had available to them the skills of Dr Skovmand. Dr Skovmand was not entitled to use Vestergaard’s trade secrets, but he was otherwise able to use his skill and expertise in assisting Bestnet to develop a competing product. What he did wrong was to start some distance down the road along which Vestergaard had already travelled and gain Bestnet accelerated entry into the market for their second generation product.

At the subsequent enquiry as to damages, Rose J awarded damages in respect of both types of net, applying a different measure to each type. For the derived product, the damages awarded were to compensate Vestergaard for the use made of their confidential information in developing the derived product (assessed as a quasi-consultancy fee), but was not intended to give them a share in the benefits derived by Bestnet from its use. Both sides appealed aspects of Rose J’s decision of 3 October 2014. Floyd LJ, giving the leading judgment, dismissed both the appeal and the cross appeal.

Comment

This case is one of the largest trade secrets cases the English courts have seen in recent years and the saga looks set to continue.

It remains to be seen how, if at all, implementation of the new EU Trade Secrets Directive (finally approved last month, published in the Official Journal yesterday and outlined in our earlier post) will change the English courts’ approach to the assessment of damages for derived products. The case is also an interesting reminder of how an employee is entitled to use his bank of skill and knowledge legitimately acquired as a result of his employment. This is one aspect of the new Directive which has been debated at length to safeguard the mobility of employees. This has not been a problem to date under English law which recognises the distinction between an employee’s skill and knowledge and his employer’s trade secrets.