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VC firm accused of stealing business plan must pay damages, not profits

A venture capital company that breached the confidentiality of businessmen who came to it with a proposition should only have to pay damages as compensation and not a share of their profits from the deal, the High Court has ruled.29 Mar 2010

Duncan Vercoe and John Pratt approached VC firm Rutland Fund Management Limited with a plan to buy a pawnbroking business called H&T. Rutland liked the proposal but had concerns about the two men's demands that they each be given senior management roles in the company after its acquisition.

Two contracts between the men and Rutland were signed covering, amongst other things, the confidentiality of the information the men brought to the company and defining the purposes for which that information could be used.

Rutland went ahead and bought the company without the men's involvement and subsequently floated it on the stock market, making a profit of £29 million.

Vercoe and Pratt sued Rutland and the High Court said that by using the confidential information provided to it in a way prohibited by the two contracts it had agreed with the men, Rutland had breached those contracts and the confidentiality agreements contained within them.

Mr Justice Sales said that in relation to their confidentiality claim they were not entitled to receive damages based on a share of the profits made from the floating of H&T. He said that in some confidentiality cases a party can choose payouts based on an account of profits or damages based on the price of the other party's release from its obligations.

He said, though, that this was not one of those cases, and that he would only award damages based on a reasonable price of Rutland's release from its obligations at the time that it proceeded without the two men.

"I consider that an award of an account of the profits made by [Rutland] would not be an appropriate remedy in relation to [Vercoe and Pratt's] breach of confidence claim," said Mr Justice Sales. "There was no fiduciary relationship between RFML and [the men]. Nor did [they] provide RFML with information about a secret design or process analogous to other forms of intellectual property."

"The relationship between them was founded upon a contractual relationship, in which each side bargained at arm's length to define the obligations to be accepted by RFML in respect of the business idea or opportunity which Mr Vercoe and Mr Pratt had identified," he said.

The judge said that Vercoe and Pratt were not entitled to a share of the profits made on the deal, but to a damages payout similar to what would have been paid to them before the deal took place to buy Rutland out of its contractual obligations and obligations of confidence to them.

"The extent of [the Rutland companies'] liability is not measured by the extent of the profits made by each of them but by the reasonable price to buy release from Mr Vercoe's and Mr Pratt's rights," the ruling said. "The fair outcome is that they should each be jointly and severally liable to Mr Vercoe and Mr Pratt for the damages representing that price."

The judge said that this buyout would most likely have been in the form of promised equity in H&T, rather than cash.

"In all probability any commercial deal between RFML [Rutland], Mr Pratt and Mr Vercoe would have been concluded on the basis of an equity allocation by RFML to each of them," he said in his ruling. "In my view, it is then appropriate to assess the damages payable by RFML by reference to the amount of the equity allocation which would have represented a reasonable price for RFML to buy release from Mr Pratt's then Mr Vercoe's contractual rights at the relevant times."

Each one per cent of equity in H&T was worth £344,000 at the price at which the company was floated, the ruling said.

Mr Justice Sales said that the company would have awarded Pratt 2.5% of the company and Vercoe 5% to relieve itself of its confidentiality obligations to them. This translated into £860,000 and £1.72m respectively.