Damages in Trade Secrets Cases - "Derived Products"

July 2016

In the latest1 of the, now numerous, decisions in the dispute between Vestergaard and Bestnet about long lasting insecticidal mosquito nets ("LLINs"), the Court of Appeal in June this year provided guidance as to the proper approach to the assessment of damages for sales of so-called "derived products". The claim was based on alleged misuse of confidential information (or trade secrets). In this context, derived products are those that result from an earlier misuse of trade secrets, in the course of their development. According to a previous decision almost 20 years ago2, it is a "matter of degree" whether the sale of a derived product, that no longer directly disclosed or incorporated the confidential information used in their creation, can be said to be a further misuse. The question before the Court of Appeal now was how to approach damages in respect of sales of derived products that should properly be considered not to be further misuses.

The decision too provides a factual scenario against which to assess whether the approach to derived products in the EU Directive on the Protection of Undisclosed Know-how and Business Information (Trade Secrets) etc ("Trade Secrets Directive"), which came into force in June 2016 and requires implementation by EU Member States by June 2018, is the same.

In the litigation, previously Bestnet had been found to have misused confidential information in Vestergaard's so-called "Fence Database" as the starting point for development work on LLINs. The Fence Database was, in essence, a spreadsheet listing the formulation of samples of nets and including the results of tests carried out on them. Certain samples were made with various concentrations of the insecticide deltamethrin, and used certain additives. The additives were mixed into the polymer of the net, to control the rate of migration of fresh insecticide, so that the insecticidal qualities of the net can be "regenerated" at the right rate following insecticide removal by insects or in washing of the net. Vestergaard's Fence database was created and compiled by their then consultant and expert scientist in the field of insecticide and polymer products. The consultant left Vestergaard and joined Bestnet.

database folderAt the original trial on liability in 2009, the Judge held there had been a misuse of confidential information in the Fence Database when devising the initial Bestnet recipes. So far as later products were concerned, the misuse was, however, merely the starting point for a substantial programme of further development which resulted in a formulation which was different from any of Vestergaard's recipes in a number of respects, including the polymer composition, and the inclusion of two further particular additives. Following judgment on liability, the Judge had concluded that Vestergaard were entitled to an injunction restraining Bestnet from using or disclosing information contained in the Vestergaard Fence Database, since that was information which he had held constituted Vestergaard's trade secrets.

He drew a distinction, however, between an injunction to restrain use or disclosure of trade secrets, on the one hand, and, on the other, restraining Bestnet from benefiting from past misuse of confidential information. The Judge considered that the manufacture and sale of Bestnet's products made according to, what was referred to as, the "Later Formula", which was further away from Vestergaard's recipes, did not amount to a misuse of Vestergaard's trade secrets, even though the Later Formula was derived from such misuse. Another important factor was that the identities of the three principle additives contained in the Vestergaard recipes could be obtained from public domain sources and suitable proportions of them could be worked out by trial and error, which is in fact what the consultant had originally done. Thus, an independent consultant, starting from publicly available material, could have come up with recipes similar to those in the Fence Database after the expenditure of a certain amount of time and effort. In the words of the Court of Appeal, in a previous judgment, what Bestnet had done was "to cut a corner, getting on the market earlier than if they had not mis-used confidential information".

An injunction to restrain manufacture and sale of products made according to the Later Formula had thus been considered by the Court to be a disproportionate remedy.

patent definitionNow, the latest judgment, which arose from an appeal against the decision of Rose J on the enquiry as to damages, mainly concerned the approach to damages when it came to the sale of products according to the Later Formula nets. The first instance Judge had decided that the correct measure of damages was an "accelerated entry" or "head start basis", coupled with the award of a "quasi-consultancy" fee. She rejected Vestergaard's contention that, in effect, damages should be awarded on the basis of loss caused by each sale of a derived product in the same way as, for example, damages are assessed for each infringing sale in a patent infringement case (what was referred to as the General Tire basis).

The Court of Appeal dismissed Vestergaard's appeal. The Court of Appeal put forward the following principles of damages assessment:

"When considering the damages which flow from sales of products which themselves misuse confidential information …it is legitimate to ask whether the defendant's sales caused the claimant to lose sales, and to award lost profits in respect of the claimant's lost sales. Similarly, given that such sales are to be treated as making use of confidential information, it is legitimate to award a reasonable royalty in respect of each such sale. That approach is not automatically legitimate, however, when considering "derived" products, the act which gives rise to the harm and thus to the claimant's right to be compensated in damages, is no longer the sale of the defendant's product, because that sale is not itself a wrongful act. In such cases, one must seek to determine instead what recoverable harm can be traced back to the initial wrongful use of the confidential information in order to develop the product."

"...where the misuse of confidential information has been the basis for developing a derived product which does not itself constitute a misuse, the consequences of the activity being wrongful are more limited. The consequences are likely to be the acceleration or facilitation of lawful competition. In such a case the proper measure of damages is the extent to which the claimant has been harmed by having to face such competition sooner, or to a greater extent than he otherwise might."

In the event, Rose J concluded that Besnet had saved themselves about six months in its development by starting with the information in the Fence Database and the appropriate figure for the quasi-consultancy fee was US$150,000. The six month head start did not though affect the date by which Bestnet were able to introduce the product onto the market, as a delay of that length caused by not using the confidential information would (in the words of the Court of Appeal) have been "absorbed by the need to wait for the mosquito season" for the purposes of carrying out field trials for World Health Organsiation approval. The appeals against these findings were dismissed.

Shopping tillLooking forward, and indeed elsewhere: in the Trade Secrets Directive, the term "derived product"" is not used, but the issue comes up under Article 4(5), which introduces the concept of "infringing goods". It provides that the "production, offering or placing on the market of infringing goods…shall also be considered an unlawful use of a trade secret where the person carrying out such activity knew, or ought, under the circumstances, to have known that the trade secret was used "unlawfully"…". Injunctions and corrective measures, including for the prohibition of the production and placing on the market of "infringing goods", is provided for in Article 12. Damages for unlawful, acquisition and use of a trade secret comes in under Article 14. The definition of infringing goods, in Article 2(4), has the important requirement that the design, characteristics, functioning, production process or marketing of the goods "significantly benefits" from trade secrets unlawfully acquired, used or disclosed.

Time will tell how the courts of EU Members States interpret the "significant benefit" test. It is doubtful that, on similar facts, a misuse that results in a six month shorter development phase, but in the end no earlier product launch due to seasonal effects on the approval process, would meet it. Damages for recoverable loss flowing from earlier, "upstream", misuse (such as facing earlier competition), however, should still be available in principle. Thus substantial divergence from English case law on these points seems unlikely.

If you have any questions on this article or would like to propose a subject to be addressed by Synapse please contact us.

1 [2016] EWCA Civ S41

2 Ocular Sciences Ltd. & Anr. v. Aspect Vision Care Ltd. & Ors. [1997] R.P.C. 289

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James Marhsall

James Marshall is a partner in our IP/IT group based in London

"Derived products are those that result from an earlier misuse of trade secrets, in the course of their development."