19 July, 2017
The recent English High Court decision (1) Marathon Asset Management LLP (2) Marathon Asset Management (Services) Ltd v (1) James Seddon (2) Luke Bridgeman (2017) & Ors [2017] EWHC 300 (Comm) sheds light on how to assess damages for breach of duty of confidence under contract and general law for removing confidential information from a previous employer. The law in this area has long been unsettled and Marathon has established some useful guidelines for handling cases of a similar nature.
The facts
The Plaintiffs (Marathon) carry on an investment management business. There was a long running dispute between the firm’s three founders which had ultimately led to one of them leaving, followed by employees in his team. They have since set up a competing business. The judgment concerned Marathon’s claim against two of the former employees, Bridgeman and Seddon, for taking confidential documents belonging to the company in a USB drive when they resigned.
It was common ground that most of the documents which were stored on the USB drive were never actually used after Bridgeman and Seddon left Marathon’s employment. Although Bridgeman made some use of a few of the files, it was not alleged that the company had suffered any financial loss for such use. However, it was the Plaintiffs’ case that irrespective of what use was actually made of any of the files or that no loss had been shown, the Defendants unlawfully took its confidential information and must pay for the value of what they took – which Marathon estimated at £15,000,000.
Although the English Court found that both Bridgeman and Seddon were in breach of their duty of confidence owed to the Plaintiffs in contract and under the general law, it rejected the basis on which Marathon had claimed substantial damages and held that it was only entitled to nominal damages of £1.
Quantifying damages
Company had suffered no financial loss and Defendants had not benefited from financial gain
Justice Leggatt considered a wide array of case precedents and conducted an extensive and thorough analysis on how to quantify damages in this case.
To begin with, Justice Leggatt took the view that Marathon’s only interest in maintaining confidentiality in its business information was financial. Since Marathon had not alleged or attempted to show that the unlawful copying of confidential information or any subsequent misuse of that information by the Defendants had caused it to suffer any financial loss, it appeared that no injury had been sustained for which the company was entitled to be compensated in damages.
Further, an extensive forensic investigation had been carried out and established that most of the files copied by the Defendants were never accessed. Based on the results of the investigation, the Court found that the Defendants had not made any financial gain from the copied files.
In quantifying damages, Justice Leggatt had also found that the act of taking away a USB drive on which confidential information was stored was not analogous to that of conversion of goods. The Defendants did not deprive the company of anything nor make themselves any better by the act of copying electronic files. Moreover, the Court pointed out that the law does not provide compensation for exposure to a risk of injury.
In the circumstances, the Court was of the view that the only purpose of an award of damages or other financial remedy would be to punish the Defendants. However, punishment and deterrence are not purposes for which damages for civil wrongs can be awarded under English law. Therefore, the Court found no reason in principle why the Defendants should be ordered to pay any substantial damages to Marathon.
The User Principle
In support of his decision that Marathon was not entitled to substantial damages, Justice Leggatt discussed at length the “user principle”: a claimant who had not suffered loss might be awarded a financial remedy where the defendant’s wrong consisted in using the claimant’s property for the defendant’s own purposes. In such a case, damages might be awarded representing the value of such use to the defendant.
(i) Wrotham Park Estate Co. Ltd. V Parkside Homes Ltd. and Others [1972 W. No. 512]
Wrotham Park Estate Co. Ltd. V Parkside Homes Ltd. and Others [1972 W. No. 512] was cited and the decision is noteworthy for two main reasons:-
(1) It has extended the range of cases in which damages might be assessed by reference to the defendant’s gain rather than any loss suffered by the claimant; and
(2) In quantifying the damages awarded, the Court employed the concept of a hypothetical bargain between the parties to license the invasion of the claimant’s right.
In Wrotham, an estate was sold subject to the restrictive covenant “not to develop the said land for building purposes except in strict accordance with a lay-out plan to be first submitted to and approved in writing by the vendor…”. A developer built on the land without submitting the lay-out plan to the vendor and 14 houses were built and sold.
The company which owned the estate had not suffered any financial damage and conceded that the development of the land had not diminished the value of the estate. The Court considered quite a number of cases of a similar nature and concluded that an award of substantial damages was justifiable. It was held that a just remedy would be “such a sum of money as might reasonably have been demanded by the plaintiffs from the developer as a quid pro quo for relaxing the covenant”.
To assess the amount of damage, Brightman J imagined a process of negotiation resulting in a bargain between the landowner and the developer, and estimated that the landowner would reasonably have required 5% of the profit made by the developer for relaxing the covenant.
However, Justice Leggatt had reservations in applying this hypothetical bargain approach in Marathon because it was difficult to assess the market value of Marathon’s confidential information, for there was no active market for assets of the relevant kind. Justice Leggatt also emphasized that the nature of the damage in Wrotham was not compensatory, but represented a gain made by the defendant from its wrongful act.
(ii) Attorney General v. Blake (Jonathan Cape Ltd Third Party) [2001] 1 AC 268
Justice Leggatt went on to consider Attorney General v. Blake (Jonathan Cape Ltd Third Party) [2001] 1 AC 268, which is a House of Lords decision confirming the nature of the damage awarded to the claimant in Wrotham.
In Blake, a former employee of the British intelligence unit was also a double agent for the Soviet Union. He was subsequently convicted for spying, but managed to escape from prison and went to live in Moscow. He later wrote an autobiography which included information he had acquired from his employment with the British Intelligence and received some £60,000 from a publisher.
The House of Lords held in Blake that contract damages are not always narrowly confined to compensation for financial loss, but in a suitable case, damages may be measured by the benefit gained by a wrongdoer from the breach. Having said that, Lord Nicholls emphasized that this kind of damages based on accounting for profits will only be available in exceptional cases where the remedies of damages, specific performance and injunction are inadequate.
Matching the remedy to the wrong
Justice Leggatt commented that Marathon’s argument failed to match the remedy to the wrong. He was of the opinion that if the breach of duty for which damages were being assessed was the retention of Marathon’s files, what should be considered was what price would have been agreed in a hypothetical negotiation simply to permit the Defendants to retain the files on USB drives until the dates when the files were returned. As the files would not have any value if the Defendants were only allowed to store them on the USB drive but not allowed to use them, no reasonable person in the Defendants’ position would have agreed to pay more than a token sum for such permission.
In the present case, Marathon had chosen not to seek a remedy for any use actually made by Bridgeman of any information in the files which he copied but to seek licence fee damages based solely on his breaches of duty in (i) copying the files and (ii) retaining the files until the dates when they were returned.
Justice Leggatt was of the view that if Marathon had advanced an alternative claim to assess damages on “account of time, trouble and expenses which the Defendants had saved themselves by making wrongful use of Marathon’s confidential information”, such an exercise could have been carried out. However, Marathon had expressly disavowed such a claim and relied entirely on the licence fee claim. As a result, the Court ruled that Marathon was only entitled to nominal damages of £1.
Conclusion and implications
Marathon provides a comprehensive analysis and useful guidance to quantifying damages in misuse of information cases. Although Marathon is not strictly binding on the Hong Kong Courts, the position of the Hong Kong Courts in breach of confidence claims in employment generally follows that of the English Court. Hence, the reasoning and the decision of Justice Leggatt in Marathon has high persuasive value for future cases of a similar nature before the Hong Kong Courts.
Paul Kwan, Partner, Deacons
