What questions should manufacturers ask themselves as they enter in arrangements with external design partners asks Andrew Jackson from Thomas Eggar LLP.
The Court of Appeal considered the approach Courts ought to take when awarding compensation for the misuse of confidential information. It reinforces that manufacturers’ reliance on confidentiality protection alone may be insufficient, especially when you are dealing with a technically sophisticated counterparty.
In 2008, Force India and Aerolab (an aerodynamics design company) entered into a development agreement for the design of a new F1 racing car, which contained both confidentiality and exclusivity clauses. Under the agreement, Aerolab used Force India’s confidential information when creating Computer Aided Design” (“CAD”) files for the design of a new F1 car.
A dispute arose when ForceIndia fell behind on payment, amounting to a breach of contract. Following this, Aerolab started working for a rival FI team, Lotus and referred to the CAD files created for ForceIndia as a basis for the new designs.
The High Court Decision
The High Court held that Aerolab had misused Force India’s confidential information. Damages were assessed at €25,000 and calculated with reference to the benefit that Lotus had gained from the misuse of Force India’s confidential information when Aerolab created the new designs for Lotus. This benefit was calculated with reference to the amount of time saved by Aerolab by misusing the confidential information and this would be the cost of engaging a consultant to produce equivalent designs. The amount of compensation was not calculated with reference to a notional licence fee which Force India would have received for granting Aerolab its consent to use the files.
The sum of €25,000 was then offset against the sum of €846,230 which represented the unpaid fees due under the original agreement. ForceIndiaappealed the decision alleging that the measure of compensation was flawed as it eliminated any “systematic copying” of ForceIndia’s CAD files and that Aerolab’s employees had treated them as their own.
The Court of Appeal Decision
The Court of Appeal dismissed the appeal. In relation to Force India’s allegation that it should be compensated for the misuse of all of the confidential information in the CAD files, the Court of Appeal upheld the original decision. Damages were awarded by reference to the actual confidential information misused, which only concerned parts of Force India’s aerodynamic system that were opportunistically copied by Aerolab’s draftsman in the designing phase.
What does this all mean for manufacturers?
The relatively low value of the compensation awarded resulted from the fact that Force India did not plead that it had suffered any loss as a result of the misuse of the confidential information and, instead, focused upon the benefit derived by Team Lotus. Lord Justice Lewison also noted that had a breach of the exclusivity clause been pleaded by Force India, it is likely that damages would have been higher.
This reinforces that great care needs to be taken when pleading confidentiality cases.
Crucially, for the manufacturing sector, it also emphasises that when entering into contracts that are technology-heavy, manufacturers should acknowledge the potential limitations of claims for breach of confidence and ensure that they have other contractual safeguards in place such as non-compete, non-solicitation and exclusivity clauses, i.e. apply a belt and braces approach to contractual drafting with potential design partners.