The value of confidential information

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Every business holds and develops a body of confidential information which is viewed as a key asset in establishing a commercial edge in its market.  Many will take care to identify and label information as confidential and contractually restrict employees, sub-contractors and agents not to use it for their own benefit during their contracts and beyond.

Examples of confidential information include client lists, marketing plans, financial information, design drawings, personnel information and ‘trade secrets’ such as scientific formulae or, in the case of Coca Cola, the recipe.

Essentially, confidential information is a form of intellectual property right which is legally protected from misuse and for which damages can be claimed by a party whose rights have been infringed.

Claims for misuse of confidential information most commonly arise when employees join a rival organisation or leave to set up a competing business. Technology makes it easy for employees to copy and download large amounts of information from an employer’s computer system and subsequently use it in a competing business. Upon discovery of such misuse, the owners of confidential information will apply for an injunction to stop further misuse and seek damages in compensation.

Traditionally, under English law, a claimant had to either establish an actual loss or a financial gain by the defendant arising from the defendant’s misuse of the confidential information in order to receive anything other than nominal damages, usually £1.

The Courts recognised that this strict approach was unsatisfactory in many cases where it was impossible to demonstrate such proof but nonetheless the claimant had been the victim of a serious wrong. As a result, the Courts developed ’Licence Fee Damages’, calculated by reference to the hypothetical licence fee which the defendant would be required to pay to use the confidential information that was taken. This allowed claimants to receive meaningful compensation despite not having suffered an actual loss arising from the misuse. Equally, defendants would not get away unscathed if their misuse, though deeply reprehensible, did not benefit them financially.

As regards claiming damages for misuse of confidential information, the owners tend to overvalue the financial worth of the information, based on the perceived licence fee they would have charged for a licence to permit its use. This has led to claims for ‘jackpot damages’ in such cases that bear no reality to the value of the misused information.

In the recent case of Marathon Asset Management v Seddon & Bridgeman, Marathon operated an investment fund business including a Global Fund. Prior to leaving employment, Mr Bridgeman downloaded 40,000 documents to a USB stick, around 37,000 of which were emails from his account. Seddon copied 33 documents to a common drive to pass on to Bridgeman. The Judge found that only a tiny number of the total files taken by the defendants were subsequently accessed by them and that the defendants had not made use of the information, other than to copy and remove it.

Marathon contended that the information accessed was highly valuable to the defendants and sought Licence Fee Damages of £15million as it could identify any loss it had suffered nor demonstrate any gain made by the defendants from the misuse.

Marathon said it would never have licensed the use of the information and the Court took the view that any damages based on a hypothetical negotiation would be wholly fictional. In any event, as the misuse had been limited to copying and removing the information, the Court found that even if a licence had been granted, the fee would be nominal. In the circumstances, the Court awarded Marathon the princely sum of £1 in damages.

So, in terms of a financial remedy, where does the Marathon decision leave claimants who have suffered data theft? Claimants will have to carefully assess the true value of their confidential information and whether there is commercial merit in pursuing claims against defendants, especially where it is difficult to demonstrate any actual financial loss to the claimant or gain to the defendant.

Litigation in confidential cases frequently incurs substantial costs and often the defendants are ex employees with limited assets against which any judgment for damages and costs can be enforced.

Prevention is better than cure. Technology, together with good internal procedures, can assist in identifying unusual or suspicious activity when data is downloaded on a large scale or taken from certain parts of the system. When senior staff are leave an employer, it is good practice to review their computer use in the months leading up to their departure.

If, despite having taking precautions, you find information has been taken by departing employees or others then contact our Dispute Resolution team immediately and we will advise on the steps you can take to limit the damage to your business.