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The Data Series Part 2: Damages for data misuse

Another week, and another data audit that we have been asked to help with at KL. It certainly seems like a recurring theme for organisations… Read more

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Another week, and another data audit that we have been asked to help with at KL. It certainly seems like a recurring theme for organisations that licence-in large amounts of data. Given the rise of such audits, we wanted to publish our thoughts on damages claims for data misuse under English contract law, and to emphasise the importance of dealing with such audits properly.

This article follows on from our first article on ‘top tips for data licensees’ and will look at some fundamental issues relating to damages for data misuse. The series will continue with articles focusing on non-financial remedies in respect of data misuse, practical tips on dealing with audits, and drafting tips for data licences.

No harm, no foul

A basic principle of English contract law is that a damages claim for breach of contract should put the innocent party into the position that it would have been had the breach not occurred. In other words, the innocent party should be compensated for the actual loss suffered, but the party in breach should not be punished or penalised in excess of that loss. Sometimes these damages are called ‘expectation damages’ as the aim is to put the innocent party in the position it expected.

However, in the case of misuse of data, the expectation principle often does not help data licensors. If you take a case where data that is widely available on a commercial basis is licensed to a licensee for purpose X, but the licensee also uses the data for purpose Y. The licensor is not materially worse off from the additional use – it would, of course, have charged more at the outset to allow the licensee to use the data for purpose Y, but it didn’t. The licensee has paid the licence fees in full and on time; and the licensor might be reluctant to bring an IP infringement claim for an account of profits – as the data might not attract IP rights and the licensor is unlikely to want this tested in court.

In the above scenario, the licensor’s claim for breach of contract on the expectation damages principle would be for the minor (and likely indirect) damages flowing from the data being less valuable as a result of the dilution of wider use and deployment. However, the licensor might try to claim damages on an alternative basis: negotiating damages. This is why the increasing prevalence of data audits might cause alarm for licensees.

No Parking

For many years the leading authority on “negotiating damages” was the Wrotham Park case[1] – and indeed the damages were known as ‘Wrotham Park’ damages. However, in the One Step case[2] in 2018, the Supreme Court clarified the law regarding when these damages are available – and also told us to call them “negotiating damages”, not “Wrotham Park” damages.

The general situation in which a “negotiating damages” claim may be brought is:

“where the loss suffered … is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset. That may be the position where the breach of contract results in the loss of a valuable asset created or protected by the right which was infringed.”

Importantly, negotiating damages is in fact seen as an evidential technique to calculate damages under the expectation principle, rather than an alternative measure of damages. The remedy is the licence fee that would have been charged in respect of the misuse or, if there is no market, what a willing licensor and willing licensee would have agreed acting reasonably (but not necessarily what the particular parties would have agreed).

The historical basis for this type of claim is interference with land, and Wrotham Park itself expanded this to restrictive covenants. However, case law has been clear that this remedy also applies to tangible property and IP cases. Between then and the One Step case, however, there has been increasing uncertainty as to what exactly constitutes a ‘right which can be considered an asset’ – it is not much of a leap to class every contractual right an asset in some form.

The One Step judgment provides guidance on when this right applies, paraphrased as being cases where the claimant: (i) has an interest in the observance of his rights beyond financial reparation; (ii) would be entitled to specific enforcement of those rights; and (iii) has suffered pecuniary loss.

Data damages

For data licensors this guidance helps significantly and, in a situation where IP does not subsist in the misused dataset, it keeps ‘data’ within the remit of negotiating damages for contractual breach.

This analysis is fundamental to compensation in the context of data audits. In the case of a minor licence breach, it places the ‘standard’ price list at the centre of the discussions. However, in scenarios where the misuse in question is material (for example, because the data is not widely commercially available, or the licensor would not ordinarily licence the use in question), the analysis changes. In such situations, a data licensor could potentially rely on negotiating damages to request significant licence fees over and above the standard scale for normally permitted commercial use. This would be on the basis that, acting reasonably, those damages are what the licensor would have required in order to grant a licence for the use in question.

The Observer Effect

That said, there are still limits to the helpfulness of the One Step case. Most obviously, the damages are circular. A licensee might argue that it would not have paid very much for the extra licence fee for activity Y because, absent negotiating damages as an evidential technique, the licensor would not be able to show a quantum of loss for its damages claim. Negotiating damages allows quantum to be crystallised, but the hypothetical licence fee might be low in a world without negotiating damages, and high in a world with them. Much like the observer effect in physics stating that observation of a phenomenon changes the phenomenon, negotiating damages cannot observe the hypothetical licence fee, without modifying it.

Similarly, it is academically unclear how remoteness, causation and mitigation work in this context. For example, what would the licensor need to show regarding remoteness and causation to recover the hypothetical licence fee, and what could it do to mitigate its losses? These are rarely important issues in most commercial settings, as both parties are looking for a go-forward commercial resolution, while the licensor’s sales targets and quarter ends are likely to be in play. From the licensee’s perspective, the potential discount on the settlement it might get by placing doubt on the remoteness, causation or mitigation of the licensor’s claim, would likely be more than offset by the resultant retraction of future licence fee discounts, the reduction in any remaining goodwill, and the internal management cost of on-going litigation uncertainty as the dispute continues.

Extrapolation

This series will continue with an array of data articles, returning to more practical considerations in the coming months: non-financial remedies in respect of data misuse; dealing with an audit and negotiating consequences; and contract drafting tips for licensees.

Feel free to reach out on areas you would specifically like to see covered.

[1] Wrotham Park v Parkside Homes [1974]

[2] Morris Garner v One Step [2018]