THREE WISE MEN RULE ON DAMAGES FOR LOSS OF TRANSACTION THAT NEVER TOOK PLACE

Via BAILII the IPKat has just dredged up this decision, London General Holdings Ltd and others v USP plc and another [2005] EWCA Civ 931, which came up before three wise men -- Lords Justice Waller, Laws and Jacob of the Court of Appeal -- on Friday.

Back in 2002 LGH was found liable for infringing copyright in a document that was intended to be a template for a new scheme of providing extended warranties on goods to consumers by way of trust. The matter was referred for an inquiry into damages to the master, who ordered payment of a notional royalty in respect of a transaction in which LGH used a copy of the document to prepare its own draft documentation for a warranty scheme, incorporating a trust mechanism, that it sought to provide to a prospective client. The master also awarded damages to reflect the reduction in the price that USP had to offer for its services in order to secure a contract to provide a scheme to another company after LGH had already introduced its infringing document to it. Before the award of that contract, but after the reduction in price, LGH forwarded to that company a copy of USP's document, which was to be tailored to its needs if they won the contract. The master made no award in relation to this on the basis that, by that time, the trust mechanism that lay at the heart of the document had lost its force as a negotiating tool. In these proceedings LGH appealed against the award of damages in respect of the price reduction. In the event that the appeal was successful, USP cross-appealed against the amount of the notional royalty awarded.

The Court of Appeal, for whom Laws LJ delivered the main judgment, allowed both LGH's appeal and USP's cross-appeal. According to that court, the claimed loss was, as a matter of principle, beyond the scope of the protection afforded by the law of copyright. Where the copyright work was a written document, it was a basic principle that the nature of copyright infringement was the unauthorised use of the actual text of the document, not the pirating of the ideas contained in it. Iin this case, nothing in the discussions leading to the reduction in price turned on the actual text of the document itself. It was the idea of a trust that had mattered. However, under the circumstances, the notional royalty should itself be uplifted.

The IPKat was impressed by what Laws LJ said at the end of his judgment:

"This is, of necessity, a rough and ready exercise. We are required to put a value on a transaction which never took place – it is a notional royalty; and therefore, of course, the evidence is subjunctive: what this or that party would have done in circumstances which were not actually in Contemplation".

This is a refreshing admission that damages, and indeed many other IP valuations, are not the product of precise scientific analysis, whatever some self-proclaimed experts may say to the contrary.