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	England and Wales High Court (Patents Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Patents Court) Decisions >> Mars UK Ltd v Teknowledge Ltd [1999] EWHC 226 (Pat) (11 June 1999) URL: http://www.bailii.org/ew/cases/EWHC/Patents/1999/226.html Cite as: [1999] 2 Costs LR 44, [1999] EWHC 226 (Pat), [2000] FSR 138

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		11th June, 1999

Jacob J

1. Mars are leaders in the design and manufacture of coin receiving and changing mechanisms. Such machines include discriminators whose function is to determine the authenticity and denomination of a coin fed in to the machine. Once upon a time discriminators of this general sort operated purely mechanically. They now work by using sensors consisting of coils which take a series of electrical measurements of a coin as it passes through the discriminator. There are sensors which measure the thickness, diameter, electrical resistivity and, most recently, inductance. The signals from the coils are compared with pre-determined sets of data for valid coins. This data is recorded in an electronic memory on a chip. Such a chip may be a PROM ("programmable read only memory") or an EEPROM ("electronically erasable programmable read only memory"). A PROM once programmed cannot be reprogrammed. An EEPROM can be reprogrammed to contain new data.
2. The discrimination process includes the use of algorithms (mathematical recipes) which combine the outputs of the sensors in an effective manner to ensure that each valid coin gives an ultimate set of outputs which can be distinguished from duds, foreign coins or other non-valid discs (collectively called "slugs" in the trade). Coins, even of a particular denomination, are not of course all identical. There may be variants arising from the mint (e.g. minor differences between different sorts of £1 coin or arising from a change of alloy by a mint). And coins, of course, wear. Each parameter measured therefore has to have a "window" of acceptable values. If two coins of a particular set of coinage have similar parameters then the window for each will have to be narrow. So also if there is a common form of slug which is close to a particular genuine coin. A very great deal of experimental work as well as skill and judgment is involved in determining appropriate windows for each coin of a given coinage. Mars have a vast collection of sets of coins for many countries of the world and have to keep under constant review the windows for the coins of any particular set.
3. Until about 1992 the Mars electronic coin discriminator, known as the Classic, used a PROM. So if a change of coinage were to occur and it was desired that the device should accept a new coin it was necessary to replace the PROM with a new PROM containing the data for the new coin, and perhaps new data for old coins (for instance when a narrower window was needed). This could also be done by writing to previously unused areas of an existing PROM.
4. In 1990 Mars set about designing a new discriminator which has become known as the Cashflow. The Cashflow has the ability to be reprogrammed for new coin data. It also can do other things with which I am not concerned. It uses an EEPROM. It is necessary to be able to communicate i.e. to read from and write to the EEPROM. This was not necessary or possible with a PROM. It was commercially necessary to make access difficult. For one thing, if it were possible easily to change what coins or slugs would pass the machine as genuine, that would be an open invitation to fraud. In addition to quality control considerations (which of course could affect the reputation of the Cashflow generally) Mars for commercial reasons also wanted to reserve to themselves and their approved agents the re-programming of Cashflow machines to take new kinds of coin or new variants of existing coins. I use the word "re-programming" but in the trade this activity is called "re-calibration".
5. Mars, for the Cashflow, therefore developed a data layout, a serial communications protocol and an encryption system. None of these are published directly by Mars. Mars recognised and intended that what they had done would be difficult but not impossible to "crack", i.e. that it would be difficult for some third party to work out how to communicate with the EEPROM of a Cashflow or to find out what windows were used by Mars for particular coins. Similarly the precise algorithms used by Mars are unpublished and are held within the microprocessor used in the discriminator. Mars would have liked to make it impossible for third parties to find out by reverse engineering how to re-calibrate their Cashflow discriminators, but this could not be done within a reasonable cost.
6. Mars have arranged for the alteration of discriminators in the field to be updated by a number of authorised service companies. These are independent of Mars. What they do is to hire from Mars a tool (at an ultimate cost of £99) which provides access to the EEPROMs of Cashflow machines. There is a fee of £9.50 per discriminator reprogrammed, though in some cases other amounts of about the same order are changed. A new discriminator costs about £30.00 The operators are not given all the unpublished information contained in the Cashflow machines.
7. The defendant is a small company based in Leicester which had its beginnings in the early 90s. Its moving spirits are Mr Hogan and Mr Rawding. The have developed great skills in the field of discriminators, as is clearly demonstrated by their history. They are they are approved agents for a number of companies, including Coin Controls who are also industry leaders. Last year they were given an award by BT for their work in discriminator re-programming.
8. Some time ago Teknowledge, by reverse engineering, learnt how to write to new PROMS or to write to new channels of old PROMs for updating the Mars Classic discriminators so that they can accept changes in the coinage. No complaint is made of that activity. It is also done by other companies. It is Teknowledge's activities in relation to the Cashflow which gives rise to this litigation. Only Teknowledge have, thus far, succeeded in reverse engineering the Cashflow.
9. Originally Mars claimed infringement of copyright, database right as well as breach of confidence and infringement of the rights conferred by s.296 of the Copyright Designs and Patents Act 1988. When the matter commenced before me I enquired whether it was really necessary to go in to the details of all these causes of action and the detailed technical facts relating to each one. As it seemed to me, reading their witness statements and their supplementary witness statements, neither Mr Hogan and Mr Rawding were in any way trying to hide what they had done. Mars hinted that they were "coy" but I could see no real basis for that. There is a difference between being deliberately incomplete and simply not covering everything which one's opponent would wish had been covered. More importantly it seemed clear from the witness statements (and Mr Vanhegan's excellent skeleton argument) that the real defences were not a denial of acts which would amount to infringement but a defence in relation to the copyright and data protection claims of a common law right to repair along the lines of that found by the House of Lords in British Leyland v Armstrong [1986] AC 577, and a denial of breach of confidence as a matter of law rather than fact. s.296 seemed to add nothing to the case. I asked whether sensible concessions could be made on both sides. These were indeed made and it is much to the credit of all concerned that they were. The concessions by Teknowledge were that, subject to a British Leyland defence, it has infringed:

1. Mars' copyright and database right in the Coin Set Data by (a) reproducing lower limits and window widths in the course of developing its reprogramming software and (b) reproducing window widths in its reprogramming software and in customers' mechanisms which it has reprogrammed.

2. Mars' copyright in the Discrimination Algorithms and in the Program Code which implements the Discrimination Algorithms by reproducing the Discrimination Algorithms in its reprogramming software.

3. Mars' copyright in the Program Code which implements the HII serial communications protocol by reproducing the HII message structures and contents in its reprogramming software.

4. Mars' copyright in the Program Code by making transient copies of the Code during the course of developing and operating its reprogramming software.

On that basis Mars no longer advance a case under s.296. Nor do any issues arise as to whether Teknowledge's work results in inferior re-calibration. More generally, however, Teknowledge accept that if some-one were to make a poor job of reverse engineering that could, in principle, lead to badly re-programmed discriminators and hence to security problems of the sort whereby machines would pass slugs. This point was said to be relevant to Mars' attack on the applicability of the British Leyland defence but in the end I think it is not.

10. Teknowledge also were prepared to admit for the purposes of this action that:

"it knew and understood that the Claimant had included encryption within the Cashflow device and that by so introducing such encryption the Claimant was seeking to restrict persons from assessing and analysing how the Cashflow mechanism operated, but nothwithstanding such encryption the Defendant believed at all material times that it was entitled to assess and analyse the Cashflows the subject of this action."

For some reason I could not understand, Mars were not satisfied with this admission and so Messrs Rawding and, particularly Mr Hogan, were cross-examined on the point. Their evidence merely confirmed the admission.

11. In the result, I have to decide the following points:

1. Whether there is a common law defence to the otherwise conceded claims for copyright infringement and mis-use of data.

2. Whether the defendant's activities by way of reverse engineering amount to a breach of confidence in law.

3. Whether, if so, the common law defence applicable to (1) also applies to breach of confidence.

The British Leyland defence - is "re-calibration" within it?

12. The only activity of Teknowledge of which complaint is made is the "re-calibration" of Cashflow discriminators so that they will accept new, or new versions of old, coins. Complaint is not made of re-calibration done where, for some reason, a machine will no longer accept a coin it should accept and once did accept - where, for instance, somehow something has "drifted" from its intended and originally set value. I mention this because at one point a bit of Mr Vanhegan's cross-examination seemed to relate to this latter sort of "re-calibration" and Mr Silverleaf was minded to ask for leave to adduce further evidence relating to the point. On the agreed basis that the case was confined to the issue I have such stated, the further proposed evidence was unnecessary and it was not admitted.
13. Thus the question is whether the common law can override statutory rights by way of copyright and database rights to enable ultimate "consumers" and hence agents appointed by them or their behalf to adjust the discriminators to take new coins. The leading authorities on this area of law are British Leyland and Canon v Green Cartridge [1997] AC 728 both decided under the Copyright Act 1956. In broad terms, Leyland recognised a "spare parts" defence to copyright infringement and Canon held that any such defence should not be extended and in particular should not be extended to "consumables" such as copier cartridges.
14. Before considering the point in more detail I must deal with Mars' contention that the Leyland defence has not survived the passing of the Copyright Designs and Patents Act 1988 or the amendments to that Act arising from Community Directives. It is first necessary to identify what the 1988 Act actually did in relation to copyright and industrial articles. It set out the position for the future in s.51 - essentially abolishing industrial copyright as it had become recognised under the 1956 Act. Accordingly, for the future, in relation to industrial designs there is no need for a spare part exception - there is no right from which exception is needed. The Act also introduced, by Part III, unregistered design right. In relation to that s.213(3)(b) excludes from protection:

"features of shape or configuration of an article which-

(i) enable the article to be connected to, or placed in, around or against another article so that either article may perform its function, or

(ii) are dependent upon the appearance of another article of which the article is intended by the designer to form an integral part."

This "must fit or must match" exception will cover some spare parts but not others, depending on how necessary it is to copy. It seems to me clear that in those circumstances Parliament has recently specifically considered the problem of spares - whereas under the 1911 and 1956 Acts it was really a legislative and judicial accident that they were covered and indeed no-one even so suggested until the 1970s. So, in relation to design right, it would clearly be wrong for the courts to invent any spare part exception. That would be to legislate.

15. As regards pre-Act works, there are transitional provisions. Schedule 1 paragraph 19, in dealing with designs (in addition to preserving the old law for 10 years only, subject to licences of right for the last 5 years) specifically provided by paragraph 19(9):

"Nothing in this paragraph affects the operation of any rule of law preventing or restricting the enforcement of copyright in relation to a design"

That has the effect of retaining the Leyland defence, which of course remained necessary in respect of pre-Act drawings for a period of 10 years. Were this not done, Armstrong and others would have had to stop making spares.

16. Thus in relation to industrial designs Parliament has specifically catered for the position in the Act. But this case is not concerned with industrial designs. The rights relied upon are computer programs, database rights and literary copyright (in the algorithms, copyright in which was not contested). Mr Vanhegan said that the common law defence extended to these too, the defence having been preserved by s.171(3):

"Nothing in this Part affects any rule of law preventing or restricting the enforcement of copyright, on grounds of public interest or otherwise."

17. Mr Silverleaf QC for Mars contended that there was no room for a spare parts or like exception in relation to computer programs and database rights because Parliament and the European Community had clearly considered the position as to defences and had provided a complete statutory code.
18. That code in relation to computer programs is contained in ss.50A-C of the Act. These provisions were inserted by the Copyright (Computer Programs) Regulations 1992. Those Regulations were made to implement Council Directive on the Legal Protection of Computer Programs 91/250/EEC. Nothing in the Directive, and consequently in ss.50A-C, provides for any "repair" or update exception, although a whole variety of detailed acts are permitted. Mr Silverleaf must, I think, be right about this. It is not for national judge-made laws (which may vary from country to country) to override or add to what are clearly intended to be Community wide rules. Were that not so, then there would be little point in having Directives requiring Member-States to align their laws in a specific area.
19. The same point applies, but rather differently, in relation to the database right added to the Act pursuant to the Directive on the Legal Protection of Databases. 96/9/EC I say "rather differently" because the Directive itself admits of a defence "where other exceptions to copyright which are traditionally authorised under national law are involved". Art.6(2)(d). But that provision is an option for Member States to adopt by way of limitation of database rights. It can hardly be for the judges of a particular Member State of their own to act as though they are exercising the option on behalf of that State. If Parliament had wanted to adopt an option in relation to the use of database rights for updating equipment, that is a matter for it, not the judges. I cannot regard s.171(3) as adopting such an option. Moreover it is far from certainly the case that the use of copyright in databases (which, before the Directive, were generally protected in the UK as literary works in form of compilations) was "traditionally authorised" in this country.
20. Accordingly I conclude that in relation to the rights relied upon here, there is no spare-parts or analogous defence. Even if that were wrong, however, I further conclude that the re-calibration activities here are not within the scope of any such defence. I turn to explain why.
21. In Leyland, the House of Lords permitted the manufacture of spare exhaust systems for motor cars, notwithstanding the fact that by so doing the defendant's were indirectly copying the plaintiff's copyright drawings. It is unnecessary to go to the leading speeches in that case because they have been authoritatively analysed by Lord Hoffmann in Canon. In the latter case, the Privy Council held that the "spare parts exception" applied only where it was plain and obvious that the replacement was analogous to a repair which an ordinary purchaser of an article would assume he could do for himself without infringing the manufacturer's rights, or that the exercise of monopoly power by means of copyright would be against consumers' interests.
22. Lord Hoffmann held that the spare parts exception:

"Cannot be regarded as truly founded upon any principle of the law of contract or property. It is instead an expression of what the House perceived as overriding public policy, namely the need to prevent a manufacturer from using copyright (as opposed to patents or design right) in order to control the aftermarket in spare parts."

23. This is important. It means that the "spare parts" exception is founded on public policy and is yet another example of the general public policy defence to copyright claims which are recognised in my own judgment in Hyde Park Residence v Yelland. 2nd Feb. 1999, unrep. Mr Vanhegan boldly suggested that I should not follow the authoritative analysis in Canon of the speeches in Leyland. He had to so contend because such economic evidence as there is in this case (to which I refer more below) is far too sketchy to show that public policy considerations overwhelmingly override Mars' statutory rights. The test I suggested in Hyde Park, namely that "the court should be reasonably certain that no-right thinking member of society would quarrel with the result" is not satisfied, even though, as the evidence shows, some people in the trade of re-calibrating older machines think they ought to be able to do this in the case of new machines.
24. One advantage of Lord Hoffmann's analysis of the spare parts defence is that it leads to a more rational result even in the case of spares. No issues of quality arose in Leyland, but suppose the part concerned were of vital importance to safety - inferior brake pads for commercial aeroplanes for example (a real example, as I recall from my practice at the Bar). It is difficult to suppose that the result would have been the same, yet if one goes by property or contract concepts, one cannot distinguish between cases where it is in the public interest for the spare to be made available and where it definitely is not.
25. I therefore conclude that there is no overwhelming public policy reason entitling those who purchase machines with discriminators to use Mars copyright and database rights to convert those machines for new coins. In so holding I also bear in mind what Lord Hoffmann also said in Canon:

"It is of course a strong thing (not to say constitutionally questionable) for a judicially-declared head of public policy to be treated as overriding or qualifying an express statutory right. Their Lordships therefore think that the prospect of any extension of the British Leyland exception should be treated with some caution."

26. Lord Hoffmann pointed out that the kind of economic question involved is not really "one to be solved by broad generalisation and that the Courts are ill equipped to pronounce upon such matters". I mention that here because I heard some evidence about costs and prices. Teknowledge's prices are perhaps somewhat less than that of Mars, though it is not clear by how much in the case of Cashflow re-calibration. On the other hand, Mars have considerably greater overheads in creating and maintaining the various copyright works and databases concerned. None of these figures are precisely quantified, nor are any figures available for Mars' ongoing costs for research in to even better discriminators. Nor do I have any direct evidence from "consumers" (i.e. ultimate purchasers) as to their expectations concerning reprogramming for new coins and in particular as to whether, when buying, they "factor in" a need to go to Mars for such re-programming. Such consumers might know that earlier machines could be re-programmed by third parties, but it does not follow that they would expect this to be possible for any new machine - indeed it was not possible for some time.
27. What is clear is that the purchasers of discriminators are not the ordinary consumer: they are not the ordinary man who bought an ordinary article. The example of repair by a blacksmith fastened on to by Lord Bridge in British Leyland has no compelling analogy with this case. This is so for two reasons. Firstly those who buy, or have, sophisticated devices operated and controlled by computer programs normally look to the original manufacturer for repair and maintenance, and updating of the programs involved. When they buy the article they have no expectation of a handy "computer blacksmith" for updating the program, rather they expect updates to come from the manufacturer. Secondly, altering the machine so that it will respond to different coins is, to my mind, even further from the concept of repair then the supply of consumables such as the cartridges considered in Canon. Consumables run out quickly and one expects to have to buy more. Changes in coinage have nothing to with the operation of the machine at all. One expects that something may have to be done about accepting new coins, but I see no reason why one should expect to be able freely to use the manufacturer's intellectual property rights if one wants one's machine altered.
28. Thus I conclude that there is no common law defence available in this case.

Breach of Confidence

29. Since this point was fully argued, I go on to decide it. It is a point of considerable significance to any activity involving reverse engineering - a process almost as old as man-made artefacts themselves. A reverse-engineer of any sort (whether one who intends just to copy or one who intends to learn how to make improvements) must start by examining the article, and if necessary, taking it apart to find out how it is made and works . This is true whether the article is mechanical or electrical. In the case of computer programs or chips with stored information the process may not involve physical de-construction: examination by electronic testing may do. But it comes to the same thing. The proposition is this: that if the reverse engineer, working on an article which he has come by lawfully, discovers that the maker put in some form of encryption, then he is put on notice that the maker regards what is encrypted is confidential. So the encrypted information is to be regarded in law as a trade secret and treated as such. It is unlawful, being a breach of confidence, for anyone, without lawful excuse, to de-cipher the code. So far as I can see the contention must equally apply if the reverse engineer discovers a physical lock in the device and decides to pick that lock - anything which the maker obviously and deliberately put in the way of discovering how the thing works is enough to give rise to an obligation of confidence. Mere difficulty in doing the job is not enough - there must be some element of deliberate difficulty put in the way. Mars make no bones about the far-reaching nature of their case. In the words of their closing submissions "the issue is whether it is possible to impose confidentiality upon someone who receives information by purchasing an article in the open market."
30. I turn to examine whether the authorities support Mars' contentions. I begin with the well-known formulation of the case of action in breach of confidence by Megarry J in Coco v Clark: [1969] RPC 41 at p.46

"First, the information itself, in the words of Lord Greene MR in the Saltman case on p.215, must 'have the necessary quality of confidence about it.' Secondly, that information must have been imparted in circumstances importing an obligation of confidence. Thirdly there must be an unauthorised use of that information to the detriment of the party communicating it."

This formulation has received high approval, e.g. through Lord Griffiths in Spycatcher (AG v Guardian [1990] 1 AC 109 at p.168).

31. So, starting with the first requirement, does the encrypted information in the Cashflow, have the "necessary quality of confidence"? I think the answer is clearly "no." The Cashflow is on the market. Anyone can buy it. And anyone with the skills to de-encrypt has access to the information. The fact that only a few have those skills is, as it seems to me, neither here nor there. Anyone can acquire the skills and anyway, a buyer is free to go to a man who has them. Mars suggest that the owner, although he owns the machine, does not own the information within it. That is too glib. What the owner has is the full right of ownership. With that goes an entitlement "to dismantle the machine to find out how it works and tell anyone he pleases" (a right recognised by Morritt J in Alfa Laval v Wincanton [1990] FSR 583.).
32. In so holding, I am of course not saying that were anyone to steal the information direct from Mars, thus saving themselves reverse engineering and de-encryption, would not be liable for breach of confidence. The un-encrypted information remains confidential in the sense that in that form it has never been published. It is the sort of information which, if illegitimately taken, can give rise to the "springboard" (Roxburgh's graphic adjectival noun in Terrapin v Builders Supply [1960] RPC 128) ) type of the action for breach of confidence. The law of confidence merely prevents a party from taking a leap forwards by by-passing "special labours in respect of the product in order to discover its secret" (Francis Gurry, Breach of Confidence (1984)).
33. I turn to the second requirement, that of communication in circumstances importing an obligation of confidence. Mars say that such circumstances are to be inferred from the fact that the student of the Cashflow finds encryption. They say the fact of encryption is equivalent to a notice saying "confidential - you may not de-encrypt." And they go on to say that if such an express notice were given, the examiner of the machine would come under a duty of confidence. I think they are wrong on both counts. As pure matter of common sense I cannot see why the mere fact of encryption makes that which is encrypted confidential or why anyone who de-encrypts something in code, should necessarily be taken to be receiving information in confidence. He will appreciate that the source of the information did not want him to have access, but that is all. He has no other relationship with that source. Nor do the circumstances have an analogy with eavesdropping or secret long-lens photography (see Laws J in Hellewell v Chief Constable of Derbyshire [1995] 1 WLR 804 at p.807) or telephone tapping. In that sort of case the snooper not only knows he is prying into other people's business but he has used some surreptitious means to do so. There is nothing surreptitious in taking a thing apart to find out how it is made.
34. In so holding I am applying the "reasonable man" test suggested by Megarry J in Coco:

"It seems to me that if the circumstances are such that any reasonable man standing in the shoes of the recipient of the information would have realised that upon reasonable grounds the information was being given to him in confidence, then that should suffice to impose upon him the equitable obligation of confidence."

Megarry J was contemplating a case of an actual transfer of information from one man to another: this case is just about finding out information from a product on the market. I do not think doing that would be regarded as anything other than fair game for competitors.

35. I should mention here part of the speech of Lord Goff in Spycatcher (Attorney General v Guardian Newspapers [1990] 1 AC 109 at p.281) for it was heavily relied upon by Mars:

"I start with the broad general principle (which I do not intend in any way to be definitive) that a duty of confidence arises when confidential information comes to the knowledge of a person (the confidant) in circumstances where he has notice, or is held to have agreed, that the information is confidential, with the effect that it would be just in all the circumstances that he should be precluded from disclosing the information to others. I have used the word "notice" advisedly, in order to avoid the (here unnecessary) question of the extent to which actual knowledge is necessary; though I of course understand knowledge to include circumstances where the confidant has deliberately closed his eyes to the obvious. The existence of this broad principle reflects the fact that there is such a public interest in the maintenance of confidences, that the law will provide remedies for their protection.

I realise that, in the vast majority of cases, in particular those concerned with trade secrets, the duty of confidence will arise from a transaction or relationship between the parties - often a contract, in which event the duty may arise by reason of either an express or an implied term of that contract. It is in such cases as these that the expressions "confider" and "confidant" are perhaps most aptly employed.. But it is well settled that a duty of confidence may arise in equity independently of such cases; and I have expressed the circumstances in which the duty arises in broad terms, not merely to embrace those cases where a third party receives information from a person who is under a duty of confidence in respect of it, knowing that it has been disclosed by that person to him in breach of his duty of confidence, but also to include certain situations, beloved of law teachers - where an obviously confidential document is wafted by an electric fan out of a window into a crowded street, or where an obviously confidential document, such as a private diary, is dropped in a public place, and is then picked up by a passer-by"

Mars rely upon Lord Goff's reference to an "obviously confidential document" fortuitously coming into the hands of a non-intended recipient. English and American Insurance v Herbert Smith [1988] FSR 232 is an actual example of that. But this case is in no way comparable. The recipient (the customer) is an intended recipient of the article containing the information.. There is nothing obviously confidential about the machine he gets. There is no marking "confidential" and indeed there is not even any indication of encryption. By the time one gets to find out about the encryption it is, in my judgment, far too late to impose a duty of confidence. I do not think even an express statement would work to override the buyer's entitlement to find out how his machine worked.

36. Mars relied upon three other cases, namely Francome v Mirror, [1984] 1 WLR 892 Creation Records v News Group, [1997] EMLR 134 and Shelley films v Rex Features. [1994] EMLR 444 None of them come near to assisting their case. Francome was a case of evesdropping by illegal phone tapping. No-one suggested that what was said in private was other than confidential or that the recipients of the information in the illegal phonetaps did not know this. The defence, such as it was, was iniquity. Creation was a case where, on the evidence, a photographer had got himself to a place where he should not have been (and knew he should not have been). The owner of a Cashflow is in no way in an analogous position. Shelley was much the same.
37. In the result I unhesitatingly reject Mars' claim based on breach of confidence. The suggestion that either Mr Rawding or Mr Hogan were acting unconscionably is completely rejected. It follows that the third question for my decision does not arise.
38. By way of conclusion I have to say that it seems a great pity this case has come to trial. Messrs Rawding and Hogan openly told Mars that they had reverse-engineered. It seems that the parties thereafter developed unwarranted suspicions, on Mars' side to the effect that TK did not want to be appointed agents for the Cashflow except on special terms and on Teknowledge's side that Mars had no genuine intention of considering them as agents. An amicable solution was not, I think, encouraged by the letter before action, which, to my mind, was, in the circumstances, too heavy handed, for instance by its references to potential criminal activities. I hope that now that things have come into the open, it will be possible for a sensible arrangement to be reached.

Friday, 11th June, 1999

MR. JUSTICE JACOB:

39. I have, following judgment in the action, a considerable dispute about the costs. All the other remaining matters, save for one to be considered next, have been agreed.
40. What happened in the action was that the Claimants succeeded in their claims for infringement of copyright and like rights but failed in their action for breach of confidence. They accept that so far as the latter is concerned they should not recover any costs. They do not accept that they should pay the costs of the Defendant who won on that issue. Both sides have agreed that, whatever else I do, there should be an apportionment if (which is disputed) there is to be a payment of costs by the Defendant at all. So the first issue I have to decide is what should be done about the Defendant's claim for their costs for the breach of confidence issue.
41. The next issue is whether or not there should be an amount payable on account before the costs are assessed pursuant to the provisions of CPR 44.3(8). This in part raises a general question and in part a question specific to this case. The general question is what the normal rule should be after a full trial. Before the CPR, if costs were sent off to taxation there was no power to order interim payment. But now there is such a power. Should the court normally order an interim payment? The question peculiar to this case is this: if the general rule is that there should be an interim amount ordered, should that rule be departed from here? The final issue relates to quantum. I have an affidavit from Miss Marsland, a partner in Clifford Chance, the Claimant's solicitors, who indicated that Mars' costs of this action had been over £550,000 on a full solicitor/client basis. That to my mind is an extraordinarily large amount.
42. Under CPR 44.4(1) when the court is assessing costs the court will not allow costs "which have been unreasonably incurred or are unreasonable in amount." So if I order an amount paid on account, I have to form a rough view as to the ultimate amount of assessed costs in respect of which an interim payment is to be made.
43. I turn to the first question, whether or not the Defendants should get their costs of the issue of breach of confidence. Mr. Silverleaf says that the test must be whether or not the claim was unreasonably advanced. He points to CPR Part 44.3(4) and (5). (4) reads:

"In deciding what order (if any) to make about costs, the court must have regard to all the circumstances, including --

(a) the conduct of all the parties;

(b) whether a party has succeeded on part of his case, even if he has not been wholly successful; and

(c) any payment into court or admissible offer to settle made by a party which is drawn to the court's attention (whether or not made in accordance with Part 36)."

6. (5) requires the court in assessing the conduct of the parties to consider things which it did not do under the previous rules. Necessarily applications about costs are likely to take more time. Nonetheless that may achieve more overall justice. The conduct of the parties under rule (5) includes the following:

"(a) conduct before, as well as during, the proceedings, and in particular the extent to which the parties followed any relevant pre-action protocol;

(b) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;

(c) the manner in which a party has pursued or defended his case or a particular allegation or issue;

(d) whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim."

7. What Mr. Silverleaf says is that I should take into account the fact that the Claimants won and got an order stopping the Defendant doing what it was doing. The fact that one of the reasons he advanced for getting that order failed does not mean that they did not basically win. So I should say that it was reasonable for them to raise, pursue or contest the particular allegation or issue, namely the action for breach of confidence. I take that into account, but I think the claim was only barely reasonable. Yes, it was to some extent arguable, but I cannot see how the Claimants could have thought they could have won the action under the law of confidence if they had lost on their copyright claim. It was an unnecessary allegation and I think it should not have been run for that reason too. I think accordingly the Defendants should be given credit for their costs of that issue.
8. I now turn to the second issue, whether or not there should be an order for interim payment. The first thing to do is to consider what the general rule should be, interim payment or not. There is no guidance given in the Rules other than that the court may order a payment on account. There is no guidance in the Practice Direction. So I approach the matter as a question of principle. Where a party has won and has got an order for costs the only reason that he does not get the money straightaway is because of the need for a detailed assessment. Nobody knows how much it should be. If the detailed assessment were carried out instantly he would get the order instantly. So the successful party is entitled to the money. In principle he ought to get it as soon as possible. It does not seem to me to be a good reason for keeping him out of some of his costs that you need time to work out the total amount. A payment of some lesser amount which he will almost certainly collect is a closer approximation to justice. So I hold that where a party is successful the court should on a rough and ready basis also normally order an amount to be paid on account, the amount being a lesser sum than the likely full amount.
9. This is likely to have practical advantages in another way. The motive for trying to prolong a detailed assessment, namely putting off the evil day when payment has to be made, will be considerably reduced when he who has to pay can only put off the evil day in respect of a considerably reduced sum. Moreover the whole point of the detailed assessment as a commercial matter may become less important with the result that there will be less detailed assessments than there used to be of taxations of costs. Thus I start from the proposition that there should be an interim payment in general. However, the court has a discretion. In exercising that discretion the court must take into account all the circumstances of the particular case. One of those is that the Defendant may wish to appeal. Another is dealing with the case in a way which is proportionate to the financial position of each party, one of the matters which one must consider in allowing the overriding objective of enabling the court to deal with the cases justly. The overriding objective applies as much to the exercise of the costs discretion as to any other discretion given under the Rules. This is a case, for example, where there is a wealthy successful party and a financially weak unsuccessful party. That is one thing that should be taken into account. Other things that might be taken into account are the likelihood of an appeal or possibly successful appeal. For example, there may be a case in which a claimant is financially weak. Even if it succeeds there might be an appeal by the defendant and the claimant needs the money to respond to the appeal. That would be a particularly good reason for ordering a payment on account.
10. I turn now specifically therefore to this case. As I said, the Defendant is financially not strong. Mr. Silverleaf for the Claimant said the onus lay on the Defendant to put forward its financial details in full detail, not only in respect of its own money but in respect of the moneys of the two principal directors. I was told by Mr. Vanhegan on instructions that the Defendants' turnover is about £360,000 a year. I was also incidentally told there had been numbers of Mars devices which have been reprogrammed by them, about 200 of the one in dispute and 200 of another one which may or may not also be affected by the order, on the figures I was given at trial about £9 a machine or £8 a machine. I conclude that we are not talking big money. It would be disproportionate to require the Defendants to go to the expense of putting in detailed evidence as to their position. Is that sufficient reason for putting off the day when the Defendants must pay costs, as I think they must? I do not think it is, although I am minded to order payment of costs on an instalment basis. What I do not want to see is the Defendants put in a position where they are unable to appeal if that is what they intend.
11. I turn then to the question of how much. First, I have to order a detailed assessment. The parties have agreed that it should be done on the basis of apportioning the costs of the Claimants. The rival views are the Claimants suggestion of somewhere between 80% and 90% of their costs and the Defendants 2 to 25% The figure is in no way easy to come to. I do not have detailed figures and indeed if one went into that exercise it would probably not be appropriate. I can say this, that I think probably a day of the trial was spent on the confidence issue with legal argument and some technical materials. I think the appropriate figure is that the Claimants should have two-thirds of their costs.
12. I now turn to the amount of the interim payment on the basis that they are going to get two-thirds of their assessed costs. The interim payment asked for in Miss Marsland's affidavit is £200,000. That is on the basis that she confidently indicates that the recovery would be between 60% and 80% of the £550,000 bill submitted to the Claimant. She has taken into account a reduction in respect of the confidential information point, but only on the basis of no credit towards the Defendant's costs of that issue. It is assumed in that that there should be no reduction in respect of the conduct of the parties. Mr. Vanhegan says there should be a very considerable reduction on the overall figure. He says that the court should have regard to the conduct before the proceedings as well as during and that the Claimants behaved unreasonably, particularly before the proceedings. Mr. Silverleaf says the Defendants behaved unreasonably, particularly in relation to the issues of copyright and other rights subsistence and the issue of infringement.
13. I turn therefore to the pre-action conduct. I think that there is some truth in what Mr. Vanhegan submits. As I indicated in my judgment, the letter before action began by putting this dispute in the field of criminal law, which it manifestly was not, whatever the technicalities of the Copyright Act. Secondly, there was the threat of personal liability in respect of the directors and finally and extremely oddly there was the offer to enter into a commercial relationship with the Defendants, all in the same letter. It is a long and detailed letter but required an answer in three days only. No one could possibly have suggested that this little company doing this little bit of work was threatening the position of Mars to the extent that it needed resolution in three days. The letter set the whole thing off on the wrong foot.
14. The pre-action correspondence included reference to matters which Mars had alleged in respect of the Classic to customers of the Defendants, namely BT. There were also plainly going to be, if the matter proceeded to litigation, issues as to what the Defendants had actually done. The Defendants were requested to offer access to an independent expert who would be subject to confidentiality requirements. Mars named the individual, Mr. Roy Durrant, in their letter of 24th July 1997 and indicated what jobs he wanted to do. By way of reply the Defendant's solicitors asked whether Mr. Durrant was independent. To my mind oddly, a full explanation (e.g. by way of a C.V.) was not supplied. All the Defendants were told was that Mr. Durrant is a self-employed consultant. What they were not told, as I am told was the fact, was that Mr. Durrant had -- to the extent I know not what even now -- been previously engaged as a self-employed consultant to Mars. That, I think, should have been said. The result in the end was that there was no independent inspection. Instead the Defendants offered a without prejudice meeting to resolve the dispute. They contemplated in their letter of 18th September technical or other information being disclosed and they contemplated that two senior people from Mars would attend. They were at that time, it is fair to say, maintaining they had not infringed copyright. The response to that letter was firstly, an indication that more time was required to consider it, and then these proceedings.
15. I have to say I think that, given the circumstances of this large company, given the circumstances that the Defendants were trying to co-operate, trying to negotiate, that it was heavy handed to start these proceedings. Of course once proceedings start, positions polarise. I think in the detailed assessment of costs which I have to consider broadly here in the context of the amount to be paid on account that conduct should be taken into account to reduce Mars' claim.
16. On the other hand Mars say that the Defendants too were unreasonable. First of all, they simply denied infringement right until the last minute and, secondly, they put Mars to considerable expense in relation to proof of subsistence of the copyright works. I think there is quite a lot to be said for that. To that extent I think the Defendants were not terribly helpful. I bear in mind also, however, that Mars adjusted their case from time to time, particularly in relation to the coin set data and the late addition of the algorithms claim. Mars say that they spent a lot of money on these issues because they were technically very complicated and a lot of discovery was involved. In the way they did things I am sure that is probably so, but the question which has to be considered is whether the way they did things was the most reasonable way of dealing with it. And even if it was the most reasonable way of dealing with it, whether before going ahead and spending all that money, it would not have been better to write to the Defendants saying, 'this is going to cost a lot of money, why do you not make an admission.' Mr. Silverleaf says it was self-evident it was going to cost a lot of money, that every defendant in a copyright case knows that if he puts subsistence in issue the story of the creation of the copyright work will have to be gone into with all the necessary discovery. In a case such as this all the necessary technical complication would be expensive.
17. In general I think it is right that in any copyright case defendants who decide to put subsistence in issue are putting into the litigation what may be a significant amount of costs. They may or may not have cause to do so. All they can be expected to expect, however, is what reasonable costs are likely to be involved. If a party who has to prove subsistence has to go through a wholly unexpected exercise or an exercise of wholly unexpected costs it seems to me that defendant should be given an opportunity of considering his position before those costs are expended. Take this case. Mars claimed copyright in the coin set data. The way that Mars generate that data is in fact quite complicated. Before going through the exercise of discovery and the like it would in my judgment have been sensible to point out that this was going to be an expensive exercise and perhaps also to indicate briefly what was involved. The same goes for the algorithms and for the other rights relied upon. For one party to run up unforeseeably large bills without warning the other side seems to me to be a matter to be taken into account in a detailed assessment, that is part of the "manner in which a party has pursued or defended his case" under 44.3.5.
18. I therefore expect that in the assessment of Mars' costs they will not recover the 60 per cent that they have in mind. I believe that the sort of figure they will be more likely to be getting is something of the order of 40 per cent. It follows that of the £550,000 they are likely to be given only 40 per cent as assessed costs. It is against that background that I now come to work out what the interim payment should be. 40 per cent is about £200,000 or just over. I have ordered 60 per cent of that figure which brings it down further. I think the appropriate figure that I should be ordering by way of interim payment, particularly having regard to what I am going to do next by way of how that is to be paid, in the special circumstances of this case, is £80,000, namely two-thirds of the costs which, on a rough estimate, Mars will be awarded. I am quite conscious it is a somewhat arbitrary figure. I think it has got to be paid in instalments. Subject to what might be said by Mr. Vanhegan as to the ability of his clients to pay, what I am going to propose is that they pay £30,000 within the first month and thereafter £10,000 per month. Meanwhile the matter can go for detailed assessment.

(Liberty to apply, leave to appeal on costs and substantive issues).

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