How much is a secret worth?

A jury in Virginia District Court has awarded damages of US$919 million for trade secret misappropriation against a South Korean company, Kolon Industries. Returning a verdict finding that Kolon illicitly made use of 149 such secrets, this works out at over $6 million per secret.

Kolon competes with market leader DuPont in the lucrative market for aramid fibers.  If that chemical name does not set your whiskers twitching, you might be familiar with the DuPont trademarks Kevlar and Nomex, which are the best known examples of aramids. These high-strength, lightweight materials are used most famously in bulletproof armour (Kevlar) and fireproof clothing (Nomex), but nowadays can be found in everything from racing canoes to the laces on football boots.  

(If Kevlar football laces are the answer, what on earth could the question have been, Merpel wonders? The days of jumpers for goalposts are long gone indeed.)

As reported by  Bloomberg, DuPont alleged in their trade secrets action that Kolon had hired former DuPont executives and engineers as consultants, and then conspired with them to steal DuPont's trade secrets relating to the manufacture of these fibers. The jury agreed.

A 'Nomex' hood - perfect for concealing your
features if you're planning to indulge in a spot
of economic espionage.

It seems DuPont became particularly suspicious when Kolon hired former DuPont engineer Michael Mitchell, who had previously been in charge of DuPont's marketing of Kevlar. Following a complaint to the FBI (who handle such cases under their economic espionage jurisdiction), Mr Mitchell's home was searched, and the Feds found proprietary DuPont information on his computer. Last year, Mitchell pleaded guilty to theft of trade secrets and obstruction of justice, resulting in an 18 month prison sentence and an undoubted strengthening of DuPont's case against Kolon.

Given the size of the award (which represents about a third of Kolon Industries' annual turnover, and a full four years worth of its operating profits), it is not surprising that Kolon plans to appeal.

Kolon, responding to the jury's verdict, denies that it sought or solicited any trade secrets from the ex-DuPont consultants it hired, or that it was aware that any information it received was in fact a trade secret. Kolon also claims that at least some of the information was in the public domain, presumably in the hope of at least whittling down the number of items regarded as secrets on appeal, leading to a corresponding reduction in damages.

INTA Special Report: Damages in Europe

After a gruelling 12-hour day at INTA yesterday, the AmeriKat was refreshed this morning with a delicious breakfast frittata in the fabulous company of friends from Reed Smith and one of her partners. The scrumptious egg, latte and sourdough feast fuelled her next two hours in one of the concurrent sessions entitled "Damages in Europe"- a subject dear to any IP litigator's heart. Now standing up at one of INTA's e-access computers (see if you can spy her), she has this report from the latest in the UK, Germany, Netherlands and France. (picture, right: the AmeriKat in the empty egg carton used in her morning's frittata).

Non-EU lawyers may be aware that the Harmonization Directive (originally 89/104 -- now 2008/95) attempted to harmonize trade mark law across the EU and to get rid of the negative effects of a non-uniform system. However the Harmonization Directive did not deal with damages or how damages were to be calculated. By Council Regulation 207/2009 there were still no provisions dealing with trade mark sanctions; the Regulation dealt only with what courts had competency, appeal rules to the now Court of Justice and provisions for injunctions. Although these Directives and Regulations may have harmonized more than was originally expected to be harmonized by the EU system, it was still lacking in dealing with calculations of damages. The Enforcement Directive (2004/48) was introduced to harmonize the means of and remedies in trade mark infringement actions. The recent December 2010 Report from the EU on the application of the Enforcement Directive stated that although solid grounds had been established for damages in trade mark actions, much more could be done (no kidding, says the AmeriKat!). The report also recognized that damages awarded in IP cases were and are still comparatively low and that rightsowners have felt that the low level of damages have not had the desired deterrent effect.

By way of background, Article 13 of the Enforcement Directive states that when the judicial authorities set the damages that appropriate to the harm suffered:

(a) they shall take into account all appropriate aspects, such as the negative economic consequences, including lost profits, which the injured party has suffered, any unfair profits made by the infringer and, in appropriate cases, elements other than economic factors, such as the moral prejudice caused to the rightholder by the infringement; or

(b) as an alternative to (a), they may, in appropriate cases, set the damages as a lump sum on the basis of elements such as at least the amount of royalties or fees which would have been due if the infringer had requested authorisation to use the intellectual property right in question.

Claus Eckhartt, leader of the session, of Bardehle PagenBerg in Germany gave an overview of the European legislation and stated that proving the losses under Article 13, as with any IP case, can be incredibly difficult for a claimant. The factual basis of proving lost sales and/or unfair profits requires factual evidence and proof of causal links which can be problematic to prove. Claus stated this was especially so in countries like Germany where the standard of proof is high. The term "moral prejudice", i.e tarnishment to goodwill, and as Claus defined it the "abstract loss of consumer confidence" can actually be more detrimental to the brands than any assessment of loss profits. However, he said that "moral prejudice" damages are rarely awarded by European Courts.

Nick Bolter of the London office of Edwards Angell Palmer & Dodge explained that in the UK there are bifurcated proceedings, i.e. two trials - one for liability and one for damages. Nick stated that in the UK damages trials are very rare as often the defendant, having already lost on liability, will come to its senses and sit down to negotiate a damages settlement with the claimant as this would be the most cost effective route. Nick explained that a claimant can be awarded compensatory damages or an account of profits, but that the UK Courts have not awarded punitive damages in trade mark infringement claims (in line with the European courts and the Directive Guidelines). Nick explained that the choice for how a claimant wishes their damages to be assessed is made at an early stage of the damages proceedings. He also noted that claimants can sometimes be faced with clever accounting on the defendants side which make any profits made as a result of the infringement seemingly disappear, and thus the choice for an election can be difficult. Nick referred to the recent Patents County Court cases of the National Guild of Removers dealing with damages (National Guild of Removers v Christopher Silveria [2010] and Simon Jones, 9 February 2011). These were cases of IPKat favorite His Honour Judge Colin Birss QC who was described by Nick as being "extremely experienced IP lawyer and sensitive to IP issues" (the AmeriKat agrees). The judge stated in the former case that the "user principle" (lost royalties) is available in trade mark infringement and passing off cases, whereas previously the "user principle" was only available in patent cases. In the Simon Jones case, the judge increased the royalty rate by two-times the rate that the claimant would have been paid had the defendant approached the claimant before the infringement, because to make it 1:1 to would be unfair and would not recognize the harm caused. (The AmeriKat has to admit that she has not seen this opinion yet, so any comments on this are welcome!). Nick also referred to the Cipriani case which repeated the maximum of all cases - damages are to be determined on a case by case basis because they are so dependent on the facts of the case (yawn!).

Gregor Vos of Klos Morel Vos & Schaap in the Netherlands said that the damages provisions were based on the Benelux Treaty on IP (BTIP) and the Dutch Civil Code (DCC) and were dealt with in full court proceedings. Liability proceedings were usually dealt with by ex parte or summary judgments or additional full court proceedings where necessary. Gregor stated that the BTIP has two methods of assessment - any damage, including lost profit and account of profits - and a fixed amount on royalty (echoing Article 13). Damages under the DCC look at lossess, lost profits and all "reasonable" losses and account of profits. Gregor stated that the BTIP assessment requires bad faith and therefore the DCC assessment is a lower threshold and thus easier to prove. He also questioned whether with the implementation of the Enforcement Directive and TRIPS, if Dutch law under BTIP and DCC is compliant. Gregor stated that the assessment of damages for unlawful profit also includes "immaterial damage" which is an added percentage of the damages that are difficult to calculate. This will usually be between 10-30% extra. Gregor stated that it is impossible to predict whether the court will award 10% or 30% on any given day. In relation to an account of profits, Gregor stated that there is "no accumulation of lost profit and account of profits" since a 2000 copyright decision. He stated that although this was a copyright decision and arguably not relevant to trade mark law, the lower courts have upheld this decision in relation to trade mark cases. Echoing Nick, Gregor also commented on the circumstance when defendants can say that they have made "no profit" and Gregor questioned why defendants would ever infringe if it is so unprofitable. Gregor stated that the meaning of "profit" means the net profit with only direct costs being deducted (BCJ 24 October 2005 Dior/Delhaize).

Rebecca Delorey of Gilbey Delorey in France (picture, right - the AmeriKat adorned in her French tribute dress) stated that the judges in France do not really award damages based on precise calculations. Damages are awarded in the liability trial so there is only one trial, not two. Therefore, along with proving infringement a claimant must also prove damages. Rebecca stated that the judges have full discretion on awards, so although there are no awards for punitive damages, damages awards can seem to be increased to reflect something akin to a recognition for punitive damages. Commercial loss in France can include loss resulting from sales of infringing goods, loss based on the volume of sales by infringer or profits which the IP holder would have realized had they themselves made the sale. Expert evidence can be requested by a judge to assist in determining the damages calculations but it is rare (4 March 2011, Pirelli decision). Commercial damages includes damages as a result of inferior product quality and tarnishment of brand image (DivX case - 12 January 2011). Loss calculated in relation to the profit made by the infringer is seldom refered to in decisions. Lump sums are awarded where they are expressly requested and documented, but they are not frequently requested (23 March 2011 - Danet case). Like in many jurisdictions, Rebecca stated that the damages awarded by courts may not enough to cover legal costs of the claimant.

The speakers then quickly touched on the costs in their respective jurisdictions. In Germany the legal fees (court fees and attorneys fees) are paid by the losing party and are calculated and reimbursed on the basis of a Fee Chart. The specific amount of reimbursement is dependent on the value of the litigation which is in turn calculated based on the annual turnover made of the mark, the reputation of the infringed mark and the extent of infringement. Claus stated that a case of average complexity and duration at first instance could cost around 20,000 to 25,000 Euros and thus the fees to be reimbursed would be about 50-60%. Costs in France are awarded at the discretion of the judge under the loser-pays principle and costs are usually awarded. Where they are not it is usually because the there is a counterclaim. Rebecca stated that the costs for a first instance simple trade mark claim is about 5,000-10,000 Euros, but it is not unusual to see a standard award of 2,500 Euros. The costs are dealt with, as in the Netherlands, by submitting an invoice to the judge but lawyers are reluctant to make their fees and invoices public. Gregor, in explaining the award of costs in the Netherlands referred to a case where a pizza delivery had been included on a lawyer's invoice submitted to the court. In the Netherlands, Gregor stated that there is a fixed costs recoverability system where a complete full trial has a cost cap of 25,000 Euros. Nick explained that costs in the UK are usually agreed by a party, but if not they are assessed by a court who usually awards the winning side between 65-75% of their costs. If a party has behaved particularly bad, an award of indemnity costs can be made which can be up to 100% of the winning-side's costs.

Rebecca closed with touching on the recent decision of the Webshipping case - DHL v Chronopost, 12 April 2011, Case-C-235/09 dealing with the referral from the Cour de Cassation dealing with the territorial scope of injunctions and coercive measures.

The AmeriKat was surprised by how few people were in the audience and even more so how few people had questions in a very uncertain area of the law in Europe. Why is this? Are people too cautious to share horror stories or is there just little to say because damages cases, at least in the UK, are few and far between in IP? Thoughts?

Some summary summer for Ricoh, while Jones groans

It's a good week for sorting out confidentiality cases. Only yesterday the IPKat finally sorted out the awesome decision in Imerman v Tchenguiz (here), and now he's catching up on Robert Andrew Jones v Ricoh UK Ltd [2010] EWHC 1743 (Ch), a Chancery Division for England and Wales decision of Mr Justice Roth midway through last month.

Right: Ricoh's legal team -- or "relevant persons"?

Ricoh supplied office equipment to CMP -- which in turn provided assistance to other companies in procuring and running the machines it provided for them. Jones was the founder, principal shareholder, managing director of CMP and eventually the assignee of the causes of action which it owned when it went into liquidation. CMP's confidentiality agreement with Ricoh

* barred the manufacturer from using any "confidential information" [widely defined, naturally, but not, in the Kat's opinion, intolerably so] which CMP gave it, except for the purpose of evaluating the purchasing terms available to CMP with a view to Ricoh's entering into an agency agreement with CMP, and

* provided that no "relevant person" who remained in possession of any confidential information could contact any other such "relevant person" [the definition of "relevant person" was so wide that it could only have been drafted by an IP lawyer with reckless indifference to competition law: the term covered not just Ricoh and all associated companies in the worldwide Ricoh group, but also the "employees, agents or professional advisors" of any such company].

When chasing a tender to supply multifunctional devices to some European sites in which Bombardier, a major client, was a subsidiary, CMP found itself bidding in partnership with another manufacturer but against Ricoh, but this partnership proved unsuccessful. Bombardier's global group then issued a second invitation to tender, in which Ricoh was successful.

According to Jones, Ricoh had acted in breach of the confidentiality agreement. He sought damages on the basis that, if Ricoh had been unable to use CMP's confidential information in order to bid and win the tender on its own, it would have successfully bid together with CMP. So far as the second tender was concerned, Jones also sought, by an amendment to his original claim, damages under the rule in Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798 in respect of the sum CMP would have received from Ricoh to release it from its obligation of confidence, or at least an account of profits in respect of the benefit which Ricoh secured when it became Bombardier's global supplier.

Ricoh was most unhappy at this and retorted that the obligation not to communicate with any "relevant person" breached Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) and/or was in unreasonable restraint of trade and therefore unenforceable. As for the first tender invitation, even if there had been any breach of the confidentiality agreement the damages were irrecoverable as a matter of law, since Ricoh was not duty-bound to submit a joint bid with CMP. As for the second tender, there was no breach of the agreement on the evidence and, even if there had been, there was no justification for an account of profits.

Roth J agreed with Ricoh that the bar on sharing confidential information with any "relevant person" fell foul of Article 101(1) of the TFEU, giving the company summary judgment on that point. Among other reasons, the fact that Bombardier would be barred from receiving bids from Ricoh but could receive bids from other major suppliers was proof of its anticompetitive effect. Since this restriction amounted to a prohibition of competition and CMP was not acting as Ricoh's distributor or as a reseller, Ricoh and CMP were not operating at a different level of the distribution chain could not therefore rely on the Article 101(3) exemption for any agreement which "contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit" and which is soft and cuddly.

Ricoh wasn't so lucky regarding Jones's claim under the first tender invitation: since this concerned the assessment of damages where there was a breach of a negative obligation, Jones's claim was for damages for the loss allegedly caused by Ricoh's decision to use confidential information to bid alone -- not for Ricoh's failure to do something that it was not obliged to do. Such loss could only be assessed on the basis of what, on the balance of probabilities, would have happened if Ricoh hadn't taken its particular course of action. Factual issues such as this were not appropriate for summary determination and had to go to trial. However, Jones would have to provide security for Ricoh's costs since it was improbable that Jones's claim under this head would succeed.

Finally, Jones was not allowed to amend his application concerning his claim for account of profits claim (this claim not being sustainable), but he was allowed to do so regarding the claim for damages.

Says the IPKat, this looks like a remarkably bold and decisive application of Article 101(1) of the TFEU by a domestic law. It's not every day that a provision of the European Treaty furnishes a basis for summary judgment. He remembers the old days when British judges were so hesitant about applying provisions of European law, especially when they were raised as "Euro defences", that they would do almost anything to say there was an arguable case in the hope that the trial would end up before someone else ... Merpel adds, there's a lot more factual detail and legal analysis in the judgment than this little note suggests.

Both Kats wonder whetherWrotham Park damages fall within the provision of the IP Enforcement Directive 2004/48. Probably they don't have to, since (i) breach of contract in an IP case isn't really an IP infringement but a contract matter and (ii) it's not clear if confidential information is IP for the purposes of the Directive.

Lance-corporal Jones here

Incorporeal Jones here

Jones the Cat here

Wrotham Park here

Big award in claim for profits of pawn

It's not often that any court gets to consider the basis on which pecuniary remedies for breach of an obligation of confidentiality are assessed, which is why Vercoe, Pratt and MAS Corporation Limited v Rutland Fund Management Limited and others [2010] EWHC 424 (Ch), a decision last month from Mr Justice Sales, in the Chancery Division, England and Wales, is so gripping.

In this action Vercoe and Pratt sought compensation for breach of contract, confidence and fiduciary duty against a group of Rutland companies in respect of their acquisition of two pawnbroking companies, Harvey and Thompson Ltd and Svensk Pantbelaning (the target companies). Having identified the target companies as a business opportunity, the claimants wanted to acquire them, to join their management team and obtain equity shares. Accordingly they approached several venture capital companies about their idea, including Rutland. Before actually speaking to Rutland, they entered a disclosure agreement which provided that they would disclose confidential information to Rutland on the basis that Rutland could use it only to assess whether it was interested in the proposal. This confidential information included the claimants' business plan, which identified the claimants' proposed management roles. Rutland liked the idea and made some funding proposals, which the claimants accepted. After some negotiation the same parties entered into a further confidentiality agreement, which was signed on similar terms to the earlier one.

Subsequently Rutland agreed to buy the target companies for itself. At this juncture Rutland told Pratt that he was to have no role in the management of the target companies or any further part in the transaction. After some further and inconclusive discussions with Vercoe in which the possibility of him having some role other than that expressed in the business plan was explored, Rutland told him they wouldn't be wanting his services either. Rutland then completed the purchase, developed the business and made substantial profits when it floated Harvey and Thompson Ltd on the London Stock Exchange's Alternative Investment Market in 2006.

Vercoe and Pratt then claimed that Rutland had acted in breach of the confidentiality agreements by (i) proceeding to acquire the target companies without them and (ii) making use of confidential information in breach of obligations of confidence. They also alleged breach of fiduciary duties in relation to the information which they had imparted to them. Rutland disagreed. In its view Pratt had accepted that he should play no part in the transaction, while Vercoe had first acquiesced in Rutland's use of the confidential information for a transaction in which he was to take a lesser role, that he had then acted unreasonably and had effectively removed himself from the transaction.

Mr Justice Sales gave judgment in favour of the claimants.

The claim for breach of a contractual covenant

* Rutland was in breach of the confidentiality agreements by acquiring H&T without the claimants: it could not proceed with the acquisition without appointing Pratt and Vercoe to the roles specified for them in the business plan, or to equivalent roles.

* If Rutland wanted to proceed with a different plan, it should have asked the claimants for their consent.

* On the facts, neither Pratt nor Vercoe had waived their rights under the agreements and Vercoe had not acted unreasonably since he had a legitimate concern that his post-acquisition role would not be at an appropriate level. Accordingly, both Pratt and Vercoe were entitled to damages for breach of contract.

* The parties had agreed that damages should be assessed by reference to the sum which Rutland should have agreed to pay Pratt and Vercoe for their consent to its use of the confidential information for a purpose other than the business plan. Establishing damages for breach of a negative contractual covenant itself required assessment of a fair price for release or relaxation of the covenant. In this instance a reasonable price for buying a release from the covenant was £860,000 plus a 2.5% equity in Svensk Pantbelaning to Pratt, and £1.72 million plus a 5% equity to Vercoe.

The claim for breach of confidence

* Although Rutland had used the information about the business opportunity in breach of iits obligations of confidence, the extent of those obligations was the same as those under the confidentiality agreements and therefore merged with them.

* Where the same facts give rise to both a breach of confidence and a breach of contract, the relationship is effectively governed by the terms of the contract to which the parties have agreed, rather than to the law of breach of confidence.

* Whether an award of an account of profits was appropriate depended on whether the claimant's interest in performance of an obligation made it just and equitable that the defendant should retain no benefit from his breach of that obligation. However, where the breach was not proprietary in nature, and there was no special reason why the defendant should not have been entitled to adopt a commercial approach in deciding how to behave in relation to that right, the appropriate remedy was likely to be an award of damages assessed by reference to a reasonable buy-out fee.

* On the facts here, an account of profits was not appropriate but damages would be assessed on the same basis as for the breach of the contractual covenants.

* There was no fiduciary relationship between Rutland and the claimants since, on the facts, they were independently advised and had not reposed trust and confidence in Rutland.

The IPKat is saddened by the fact that, though the confidentiality agreements were signed in 2003 and breached in 2004, it was not until late 2009 that the trial took place, with judgment being given nearly four months later. The factual background was complex and, while the judge held the claimants entitled to wait until 2008 to commence proceedings on the basis that they wouldn't want to sue unless there was something worthwhile suing for, he observed that the passage of time meant that memories have dimmed and that he had to treat with circumspection the evidence in the witness statements -- compiled years after the relevant events -- and in the oral evidence at trial.

Rutland here
The Rutland Cat here
The Rutland Panther here
Rutland Fund Management here
Rutland Fun Management here
The Pawnbroker here

From when must a threat be compensated?

A threat to bring a patent infringement action is highly likely to influence the commercial conduct of the person threatened, which is why the law of some countries, including the UK, provides that the making of a groundless threat to sue is, within certain carefully prescribed limits, an actionable wrong in itself.

Right: an angry Smurf, not to be confused with a threatening Smurfit

An interesting recent threats decision is LB Europe Ltd (trading as DuPont Liquid Packaging Systems) and another v Smurfit Bag In A Box SA and another, a Patents Court (England and Wales) decision of Roger Wyand QC, sitting more than a week ago as a deputy judge of the High Court [noted by LexisNexis Butterworths' subscription-only service].

In short, following a vigorously-litigated fall-out between LB and patentee Smurfit over 'bag-in-a-box' drinks containers, it was finally established that Smurfit's patent was valid but that LB had not infringed it. Since LB had pursued Smurfit for making groundless threats to sue for patent infringement, the question arose as to how much LB could recover by way of damages. An inquiry as to damages was ordered, in which the question arose as to the date from which, in the absence of the threats, LB would have been able to fulfil orders to supply its own two lines of non-infringing products to its customer (incidentally, the second claimant) for use in the latter's product lines. Since the initial threat of infringement proceedings was made against the second claimant in June 2005, it could be argued that this was the time from which damages caused by the threat should be assessed. Smurfit however argued that, since LB's own product had not yet been developed into a commercially viable product by then, it would be wrong to award damages from the date of the initial threat. Roger Wyand QC held that, on the evidence, if no unjustified threats had been made by Smurfit, LB's two product lines would have been in use in January and June 2006 respectively.

This seems perfectly sensible to the IPKat: since patent threats damages are just like any other civil damages, their assessment must take into account the loss actually suffered by the wrongful deed. Merpel says, it seems that while the IP Enforcement Directive requires EU Member States to provide for damages that are not merely compensatory but which take into account the prejudice suffered by the claimant, the old principles for assessment of damages are gone -- but this seems to apply only to damage caused to the IP owner, not damage caused by the IP owner.

Smurfits here and here
Smurfs here and here