Breach of confidence
In Force India Formula 1 Team Limited v 1 Malaysia Racing Team(1) the High Court provided a comprehensive review of the law on breach of confidence and the correct approach to quantification of damages in such claims.
The claimant, Force India, is a Formula 1 racing team. In late 2007 it engaged the fourth defendant, Aerolab, to assist with the aerodynamic development of its car. The work involved designing and building scale models of aerodynamic parts and testing these in a wind tunnel. Force India and Aerolab entered into a development contract, the term of which ran until the end of 2009. The development contract contained a confidentiality clause which required Aerolab to maintain the confidentiality of any information that it either obtained from Force India or developed as part of the performance of its obligations under the contract.
In early 2009 Force India decided that it no longer required Aerolab's services. By this point, Aerolab had been experiencing difficulties in obtaining timely payment from Force India under the development contract. The relationship between the parties broke down, and by the end of July 2009 Aerolab had stopped work under the development contract. At the time that it stopped work, Aerolab was in possession of a large number of computer-assisted design (CAD) files - essentially, very accurate three-dimensional drawings - of aerodynamic parts of Force India's car and scale models of parts that it had been testing.
In May 2009 Mr Gascoyne, the third defendant and a former head of the Force India team, was approached by a prospective new Formula 1 team, then known as Litespeed but later incorporated as the first and second defendants, 1 Malaysia. Gascoyne approached a number of consultants to assist with the design of the new 1 Malaysia car, including FondTech, the fifth defendant and Aerolab's parent company. On July 31 2009 it was agreed that both Aerolab and FondTech would start work on the aerodynamic design of the 1 Malaysia car with immediate effect. Force India was unaware that Aerolab and FondTech were intending to work for 1 Malaysia.
In October 2009, 1 Malaysia published a press release which included photographs of the model being developed by Aerolab and Fondtech. The model bore striking similarities to Force India's car. One month later 1 Malaysia issued a further press release, which revealed that it had been working with Aerolab and Fondtech on the aerodynamic design of its car. Shortly thereafter, Force India commenced proceedings against Aerolab, alleging breach of the confidentiality clause of the development contract, and against the remaining defendants alleging breach of equitable obligations of confidence. Aerolab counterclaimed for €846,230 in unpaid fees under the development contract, which were not disputed.
The elements necessary to a claim for breach of confidence, as stated in Coco v AN Clark (Engineers) Ltd, are as follows:
- The information must have the necessary quality of confidence about it, and must not be something which is public property and public knowledge.
- The information must have been communicated in circumstances importing an obligation of confidence, such that the recipient is on notice that the information is confidential.
- There must have been an unauthorised use of the information to the detriment of the party communicating it.
From the evidence, it was clear that Aerolab and Fondtech's CAD draftsmen had used the Force India CAD files, which were in Aerolab/Fondtech's possession at the end of July 2009, as the starting point for the design of several aerodynamic parts of the new 1 Malaysia car. Rather than draw a part from scratch, the CAD designer would start with the CAD file for a Force India part and make modifications as necessary to create a new part to be modelled and tested for the 1 Malaysia car.
Applying the criteria from Coco v AN Clark (Engineers) Ltd , the court found that there had been a breach of confidence by Aerolab and Fondtech, but only in relation to the precise dimensions of individual parts of Force India's car, such as were recorded in the CAD files. The court did not accept that Aerolab or Fondtech had copied the overall aerodynamic design of Force India's car. It also rejected Force India's claims against Gascoyne and 1 Malaysia, which were premised on the existence of a common design between those parties and Aerolab or Fondtech systematically to misuse Force India's confidential information. The court did not consider that Force India had demonstrated that such a common design existed.
The court noted that in some breach of confidence cases, damages can be assessed by reference to the claimant's direct financial losses, such as:
- lost sales of a product - for example, where a claimant's competitor misuses confidential information in a competing product;
- lost licence fees, where the claimant routinely exploits confidential information by licensing it to third parties and, by the breach, is deprived of the opportunity to do so; or
- a lost sale of the confidential information, where the confidential information would have been sold but for the breach.
In other cases, where the claimant cannot prove orthodox financial loss, so-called 'Wrotham Park damages' or 'negotiating damages' can be awarded instead. The court summarised such damages as "such sums as would be negotiated between a willing licensor and a willing licensee acting reasonably as at the date of the breach for permission to use the confidential information". Damages can be assessed on this basis for the breach of either a contractual or an equitable obligation, and it is unnecessary to distinguish between the two.
The court stated that when considering the hypothetical negotiation between the willing licensor and the willing licensee:
- the date of the hypothetical negotiation is when the misuse of confidential information started;
- the other party to the hypothetical negotiation is the party that misused the confidential information, rather than any other party that might ultimately benefit from the misuse; and
- the subject matter of the negotiation is the actual confidential information found to have been misused.
Accordingly, the hypothetical negotiation in this case was:
- around August 2009;
- between Force India and Aerolab/Fondtech (rather than 1 Malaysia, as Force India had submitted); and
- in relation to the specific dimensions of certain parts of the Force India car which were contained in the CAD files.
Force India submitted that the negotiating damages should be assessed with reference to the cost of development of its aerodynamic package, which it calculated to be £13,771,419. Aerolab/Fondtech submitted that they should be assessed with reference to what it would have cost Aerolab/Fondtech to engage additional CAD draftsmen and aerodynamic engineers to design and draw from scratch the parts in respect of which Force India's CAD files were misused, for which it suggested a range of figures from €1,250 to €36,300.
The court rejected Force India's approach on the basis that:
- the breach had been in respect not of the whole aerodynamic package, but only of the dimensions of certain parts; and
- in any event, there was no justification for determining a reasonable licence fee for use of confidential information as the investment cost of producing that information.
The court also noted that the Force India car had been particularly unsuccessful, finishing last in the 2009 season, which diminished the value of the information.
Adopting Aerolab/FondTech's approach, and considering the additional cost which would have been incurred had Aerolab/Fondtech been unable to use the Force India CAD files as a starting point for the design of certain parts, the court held that a willing licensor and willing licensee acting reasonably would have negotiated a fee of €25,000 for use of the information. This included a modest premium to reflect the fact that Force India would not have wanted to assist a potential competitor. This was offset against the €846,230 owing to Aerolab under the development contract.
Although Force India's claim for breach of confidence was successful, given the award of just €25,000, it was ultimately a pyrrhic victory. It would be interesting to know what costs order was made following judgment.
The High Court decision, which runs to over 120 pages, provides a detailed and comprehensive survey of the law of breach of confidence and the quantification of Wrotham Park damages. It also confirms that, given that the hypothetical negotiation takes place by reference to the confidential information which is misused and therefore in respect of which there has been a breach of duty, the extent of the breach has a significant effect on the level of damages which the claimant can expect to receive. A party that brings a claim for breach of confidence must therefore take appropriate care when framing its case on liability, in view of the potential impact on the recovery amount if its case on liability is made out.
For further information on this topic please contact Daniel Hemming at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email ([email protected]).
(2) After Wrotham Park Estate Co Ltd v Parkside Homes Ltd  1 WLR 798.