London,
06
June
2018
|
17:47
Europe/Amsterdam

Damages for breach of confidentiality: a step backwards for businesses

When a current or former employee breaches post-termination restrictions (such as a non-compete clause) or their ongoing confidentiality obligations, an employer may decide as an alternative to, or in addition to the pursuit of an injunction, to pursue a damages claim against the offending employee. But it can be difficult to prove any financial losses resulting from the employee's breaches. Employers were given another potential avenue by the Court of Appeal who had previously indicated that "Wrotham Park" damages (representing the amount the employee would have had to pay to be released from their restrictions) might be available in such cases. However, the Supreme Court has now indicated that such damages are only available in limited circumstances.

In Morris-Garner and another v One Step (Support) Ltd, the Supreme Court allowed an appeal against a decision awarding Wrotham Park damages (also called "negotiating damages") for breach of non-compete and non-solicitation terms (in the context of the sale of a business).

Negotiating damages will generally only be awarded where:

  • the defendant deliberately breached its contractual obligations for its own reward;
  • it is difficult for the claimant to establish financial loss from that breach; and
  • the claimant has a legitimate interest in preventing the defendant's profit-making activity in breach of contract.

The Court held that such damages can only be claimed where the breach "results in the loss of a valuable asset created or protected by the right which was infringed, as for example in the cases concerned with the breach of a restrictive covenant over land, an intellectual property agreement or a confidentiality agreement".

The Court held that the losses alleged in this case (loss of profits and client goodwill) did not meet that test. The case suggests that negotiating damages will not normally be available in relation to claims for breach of post-termination restrictions, although they may be available in breach of confidence claims.

The case highlights the fact that claiming damages for breach of post-termination restrictions is often fraught with difficulty for an employer. It is therefore essential to take advice swiftly on learning of any potential breaches so that the opportunity to obtain an injunction is not lost through delay.

If you would like more information on how the points raised could impact you, please contact Head of Employment Jane Amphlett