Wishbone, chin and spine -- and we're talking about a car?

For all you motor enthusiasts out there, this has been an interesting week for cars and IP (see KatPost on VW and trade mark issues here, not to mention the post previous to this one). In preparing this post, this Kat (being rather naive where motoring matters are concerned) has learnt all manner of new-fandangled motoring terms such as 'rearward chin' and 'profiled foot' to delight her friends in after-dinner party conversation and to dazzle in future work trivia nights.

The proceedings which attracted her attention related to a claim by Force India Formula One Team Ltd (Force India) against several defendants for misuse of confidential information and copyright infringement relating to the design of a half-size wind tunnel model of a Formula 1 (F1) racing car.

1 Malaysia Racing Team SDN and its English subsidiary 1 Malaysia Racing Team (UK) Limited (the first and second defendants) operated a Formula 1 team under the name of ‘Lotus’. During his career, Mr Michael Gascoyne (the third defendant) had worked as a designer and technical director for both Force India and Lotus. Aerolab SRL (Aerolab, the fourth defendant) and its parent company Fondmetal Technologies SRL (Fondmetal, the fifth defendant) operated a wind tunnel and had worked as external aerodynamic design consultants for a number of F1 teams.

In 2008, Force India entered into a Development Contract with Aerolab. The key terms were:

1. The duration of the Development Contract was until 31 December 2009 (clause 2).
2. Aerolab was obliged to deal with Force India in the utmost good faith and to use its best endeavours to ensure that its staff did likewise (clause 3(c)).
3. Intellectual property (including copyrights and designs) created or developed by Aerolab pursuant to the Development Contract became the sole property of Force India (clause 3(h)).
4. The agreed fee for this work was €246,833 per month in 2008 and €253,400 per month in 2009 (clause 4).
5. The Development Contract was governed by and to be construed in accordance with English law and the parties agreed to submit to the exclusive jurisdiction of the English courts (clause 8(e)).
6. Aerolab and its employees were under a duty of confidentiality and an obligation of non-disclosure (clause 5).

Aerolab terminated the Development Contract in 2009 and started working for Lotus. Force India claimed that Aerolab’s design of a half-size wind tunnel model of a F1 racing car had been subsequently used in a car that Aerolab had designed for Lotus. In particular, Force India alleged copying of 71 designs. Of these, 57 were designs or precursors of designs for wind tunnel model parts and 14 are assemblies or combinations of individual model part designs. Of the 57 individual model part designs, 36 were for aerodynamic components, the full size equivalents of 25 of which were visible on the Force India F1 car during the 2009 season. The remaining 21 out of 57 were mechanical wind tunnel model parts which have no equivalent in a full size car.

Lotus did not dispute that some its employees had engaged in some copying of computer files containing Force India designs. There were four areas of dispute:

1. How much copying took place?
2. To what extent was the copying actionable?
3. Which Lotus companies were liable?
4. What sum should be awarded to Force India as compensation?

Aerolab made a cross-claim against Force India in relation to an unpaid debt. In particular, it contended that it had terminated the Development Contract after Force India's repudiatory breach by persistent non-payment of sums due to it.

The matter came before Arnold J in the Chancery Division of the High Court: Force India Formula One Team Ltd v 1 Malaysia Racing Team SDN BHD & Ors [2012] EWHC 616 (Ch) (21 March 2012). Be warned the judgment is a long one of 86 pages owing to the factual complexities in bringing a case of this nature.

Misuse of confidential information
As specified in Coco v AN Clark (Engineers) Ltd [1968] FSR 415, to establish an action for breach of confidence, it is necessary to demonstrate that: (a) the information itself had to have the necessary quality of confidence; (b) the information was communicated in circumstances importing an obligation of confidence; and (c) there was an unauthorised use of the information to the detriment of the party communicating it (at [215]). In relation to information gained by employees during their employment, Faccenda Chicken Ltd v Fowler [1987] Ch 117 established that, after the termination of an employment contract which did not include an enforceable restrictive covenant, a former employee could use a third party's information which formed part of his or her own skill, knowledge and experience learned during the course of his employment, provided that it was not a trade secret of his former employer (at [225]).

Arnold J then analysed the evidence to determine which of the designs complained of by Force India were: (a) already in the public domain; (b) derived from Aerolab's employees' own skill and knowledge; or (c) were confidential information which had been misused by Lotus employees. This all makes quite a read for the car enthusiast. In relation to the last category, Arnold J found that these designs were for the front wing endplate and turning vane; for the front wing transition element; the rear wing; the forward bargeboard; chin fences; vortex generator; rearview mirror; front spine; drive shaft; limit cams and shaft clamps; and lower wishbone flexure.

Who was liable for these misuses of confidential information? Aerolab and FondTech accepted (at [338]) that they were liable for any misuse of confidential information found to have been made by their respective employees. Arnold J noted (at [338]) that Aerolab's liability was in contract, whereas FondTech's liability was in equity, also finding that Mr Gascoygne was not liable for the above breaches of confidential information. This was because the method by which Aerolab and FondTech created the designs was not the subject of any agreement with Mr Gascoyne. On the contrary, Arnold J noted that Mr Gascoyne relied on Aerolab and FondTech to use their own professional skill and knowledge to create the designs. As Arnold J had rejected the claim against Mr Gascoygne, it followed that Lotus could not be liable for authorising Mr Gascoygne to act as its agent.

Copyright Infringement
Force India claimed that each of its CAD files was a copyright work, that Aerolab and FondTech created CAD files which reproduced substantial parts of its CAD files and that 1 Malaysia UK made electronic copies of the Aerolab/FondTech CAD files in the UK, thereby infringing Force India's UK copyrights. There was no dispute as to subsistence and ownership of copyright in the Force India CAD files. There was some discussion as to whether these were artistic or literary works. In the view of Arnold J (at [370]) they comprised both: he found (at [373]) that the Aerolab/FondTech CAD files did reproduce a substantial part of the corresponding Force India CAD files for the following parts: the vortex generator, rear brake duct lower element and rear view mirror. Accordingly, the copyright claim succeeded to that extent, but not otherwise.

Quantum
Arnold J observed (at [374]) that it was very difficult to find a clear, accurate and comprehensive statement of the principles applicable to the assessment of damages or equitable compensation for breach of confidence. In his view, the case law was very confused, and none of the existing commentaries deal entirely satisfactorily with it. Accordingly, he began by sketching the contours of the problem, then examine the authorities, then draw some general conclusions and finally address a couple of specific issues which arise in this case.

From such an analysis, Arnold J believed (at [386]) that the cases established the following principles for the assessment of such damages:

1. The overriding principle is that the damages are compensatory.
2. The primary basis for the assessment is to consider what sum would have arrived at in negotiations between the parties, had each been making reasonable use of their respective bargaining positions, bearing in mind the information available to the parties and the commercial context at the time that notional negotiation should have taken place.
3. The fact that one or both parties would not in practice have agreed to make a deal is irrelevant.
4. As a general rule, the assessment is to be made as at the date of the breach
5. Where there has been nothing like an actual negotiation between the parties, it is reasonable for the court to look at the eventual outcome and to consider whether or not that is a useful guide to what the parties would have thought at the time of their hypothetical bargain.
6. The court can take into account other relevant factors, and in particular delay on the part of the claimant in asserting its rights.

For Arnold J (at [424]), the same approach was to be adopted to the assessment of damages or equitable compensation whether the obligation of confidentiality which has been breached is contractual or equitable. Where the claimant exploited the confidential information by manufacturing and selling products for profit, and his profits had been diminished as a result of the breach, then he could recover his loss of profit. Where the claimant exploited the confidential information by granting licences to others, and his licence revenue had been diminished as a result of the breach, he could recover the lost revenue. Where the claimant would have 'sold' the confidential information but for the breach, he could recover the market value of the information as between a willing seller and a willing buyer. Where the claimant could not prove he has suffered financial loss in any of these ways, he could recover such sum as would be negotiated between a willing licensor and a willing licensee acting reasonably as at the date of the breach for permission to use the confidential information which had been misused in the manner in which the defendant had used it.

Looking at matters in the round, Arnold J considered (at [424]) that a willing licensor and a willing licensee acting reasonably would have negotiated a fee of €25,000. This figure was fair, equitable, effective, proportionate and dissuasive, as required by Article 3 of Council Directive 2004/48 on the enforcement of intellectual property rights. This sum was to be set off (at [463]) against the €846,230 which Force India owed Aerolab under the Development Contract.

The IPKat thinks that this case is a timely reminder of the importance of having sufficient factual evidence to support each limb of a breach of confidence action. As noted above, Force India complained about 71 designs, of which only 11 survived judicial scrutiny.

Merpel, always liking to know what a remedy for infringement might be worth, is grateful to Arnold J for his helpful summary on compensation for breach of confidence.