[BreachExchange] Theft of confidential information results in only nominal damages for employer

[Audrey McNeil]

http://www.jdsupra.com/legalnews/theft-of-confidential-information-70414/

An employer was awarded only nominal damages from former employees who
copied the employer’s confidential information but made no use, or limited
use, of that information and did not cause any damage to the employer. So
called "Wrotham Park" damages reflect how much the innocent party would
have asked for to release the defaulting party from an obligation, had it
been asked, and can be a useful remedy where it is difficult to show
financial loss. The judgment provides a useful review of the court's
approach to damages where liability and breach of duty are easily
established but showing loss to a claimant is more difficult: Marathon
Asset Management LLP & anr v Seddon & anr [2017] EWHC 300 (Comm)

Marathon is an investment management firm. It sued two former fund managers
for GBP 15 million after information regarding Marathon's clients,
portfolios and business operations was copied onto USB drives from company
servers when the managers left the firm. The two ex-employees had resigned
to set up a rival fund management business.

It was common ground that only a small number of the copied files were ever
accessed and that little or no use was ever made of the confidential
information. The ex-employees returned the USBs when these proceedings were
threatened.

Assessing damages when it is difficult to show a loss – the "Wrotham Park"
approach

Marathon asserted that it did not matter what use was made of the files or
that they had suffered no apparent loss: the defendants had unlawfully
taken its confidential information and they should pay for the value of
what they took, which Marathon estimated at GBP 15 million.

Marathon asked the court to assess damages using the approach in Wrotham
Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798, where the court
employed the concept of a 'hypothetical bargain' between the parties to
license the invasion of the claimant's right. In that case, Brightman J
awarded damages for breach of a restrictive covenant attaching to land,
assessed by reference to the contract-breaker's gain from the breach, at 5%
of the anticipated profit from the wrongful development. The judge
considered this to be the sum that the claimant, acting reasonably, could
have demanded from the defendant for relaxing the restrictive covenant. Of
the various labels, rather than 'Wrotham Park', 'hypothetical bargain' or
'negotiation' damages, Leggatt J preferred the term 'licence fee' damages
and used this in this judgment.

As confidential information had been misused, licence fee damages or an
account of profits were both potentially available as remedies.  Leggatt J
noted that Marathon abandoned its claim for an account of profits no doubt
given the lack of evidence that the defendants made any profit from any
wrongful use of Marathon's confidential information.

No loss and no gain

Leggatt J found the defendants liable for breaches of their contractual and
common law duties of confidence in copying and retaining the confidential
files. However, Leggatt J decided that as the misuse of confidential
information by the defendants had neither caused Marathon to suffer any
financial loss nor resulted in the defendants making any financial gain, it
was hard to see how Marathon could be entitled to any remedy other than
nominal damages.

Leggatt J concluded that the defendants did not copy files from any of the
USB drives to any undisclosed computer or other device and decided that
there was a "vast gulf between the extent of the use which Marathon says
could potentially have been made of the files… and the very limited use
which the evidence shows was in fact made of them". The judge acknowledged
that, save in very limited circumstances, punishment and deterrence are not
purposes for which damages for civil wrongs can be awarded in English law.

Marathon's wider conspiracy claim also failed, as the copying and retention
of files caused Marathon no loss, which is an essential element in the tort
of conspiracy.

Other claims also rejected

Marathon raised a number of arguments, each of which was rejected:

Marathon contended that the conduct of the defendants in copying and
retaining Marathon's confidential files was analogous to the conversion or
detention of goods and gave rise to a claim for damages representing the
value of the information taken. Leggatt J could not see how the defendants
actions had made them better off or Marathon worse off.

By copying Marathon's files onto USB drives which were retained on leaving
Marathon's employment, the defendants exposed Marathon to the risk of loss
and acquired the opportunity for financial gain. Leggatt J dismissed this
argument as threadbare noting that the law does not compensate people for
being exposed to a risk of injury.

Marathon argued that where the use of confidential information and its
consequent impact was uncertain, a just solution would be to require the
defendant to pay a sum representing the value of the information assessed
at the point when the breach of duty occurred on the assumption that the
information would thereafter be exploited. Although the judge recognised
certain legal principles which assist a claimant who has difficulties
proving loss (the difficulty of estimation should not be allowed to deprive
a claimant of a remedy; where the defendant has destroyed or wrongfully
prevented the claimant from adducing the relevant evidence, the court will
make presumptions in favour of the claimant), in circumstances where it was
established to a high degree of certainty that the files were never
accessed or little use was made of them, Leggatt J could not justify
awarding damages.

Leggatt J held that Marathon's approach to the assessment of licence fee
damages was flawed for a fundamental reason, namely a failure to identify
accurately the wrong for which licence fee damages were being sought and to
match the remedy to the wrong.  In formulating its claim for licence fee
damages, Marathon chose to focus its trigger date for the "hypothetical
negotiation" of the licence fee as at the date when the files were "copied"
rather that when they were "retained" or "made use of" (to the limited
extent that they were). However, when the files were copied, no misuse of
the confidential information had occurred and the court would not assume
future wrongdoing when assessing a remedy.

In a protracted and no doubt expensive case, Leggatt J held that Marathon
had "missed the jackpot" of GBP 15 million and awarded nominal damages of
GBP 1 from each defendant.

Comment

The case provides a comprehensive review of the court's approach to damages
in circumstances where liability and breach of duty is easily established,
but establishing a loss to the claimant or gain to the defendant is less
clear-cut.

The judgment serves as a warning that even in cases of clear breach of
contractual and common law duties of confidence, employers will struggle to
assert significant losses for the removal of company documents.  The case
reinforces the importance of employers considering the practical protocols
and steps they can take to protect their business around the time of a
resignation.

Leggatt J sets out a framework for an 'account of profits' and 'licence
fee' damages and this is likely to be a useful resource later this year
when the Supreme Court considers the case of One Step (Support) Ltd v
Morris-Garner1 (covered in the May 2016 Litigation Review), where the Court
of Appeal declined to interfere with a decision to award licence fee
damages as a remedy for breaches of covenants not to carry on business
competing with the claimant and not to solicit customers of the claimant,
as well as for wrongful use of market research.
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