THJ Systems Ltd & Anor v. Sheridan & Anor [2024] EWHC 3195 (Ch) addressed two key issues in respect of damages related to (i) breach of contract and (ii) copyright infringement, following a determination of liability in favour of the Claimants by the High Court in April 2023 and the Court of Appeal in November 2023. On 16 December 2024, Master Kaye handed down judgment and emphasised the need for robust evidence to support such claims.
The Claim
In 2009, Andrew Mitchell (a director and shareholder of the English claimant company THJ Systems Ltd (“THJ”)) developed a software to facilitate options trading (“ONE Software”). ONE Software displays financial information about the performance of options in the market. Some of the information produced by ONE Software was displayed in the form of a table of ‘call’ and ‘put’ positions, which are displayed side by side with a graphic representation of the ‘risk profile’ (the “Risk and Price Charts”). Daniel Sheridan, an experienced options trader, ran a U.S.-based mentoring business, Sheridan Options Mentoring (“SOM”), which utilised ONE Software.
In 2010/2011, Mr Mitchell and Mr Sheridan set up OptionNet LLP (“OptionNet”), a limited liability partnership, for their mutual benefit. OptionNet was formed by a suite of agreements, including a partnership agreement (the “LLP Agreement”) and software licencing agreements, to allow for a collaboration which would leverage ONE Software for a wider customer base; Mr Mitchell and THJ (the “Claimants”) were to provide the software, and Mr Sheridan and SOM (the “Defendants”) were to advertise and promote it to their clients.
By 2015, the relationship had soured, and by 2016, THJ had terminated the Defendants’ licence to ONE Software and Mr Sheridan was removed from the OptionNet partnership. THJ and OptionNet subsequently claimed for alleged passing off and copyright infringement due to Mr Sheridan’s and SOM’s continued use of ONE Software and its Risk and Price Charts post-termination and claimed also for breach of contract for their failure to adequately advertise ONE Software in accordance with the terms of the LLP Agreement. The Claimants contended that the Defendants misrepresented ONE Software, and in particular the Risk and Price Charts, as their own and failed to display the required copyright notices during presentations and seminars.
In April 2023, the High Court ruled in favour of the Claimants, determining that (i) the Defendants had breached their advertising obligations under the LLP Agreement, (ii) Mr Sheridan’s expulsion from OptionNet was valid and (iii) the licences granted to the Defendants had terminated in January 2016. With respect to the claim for copyright infringement, the High Court determined that copyright subsisted in the Risk and Price Charts (albeit narrowly) but held that such copyright had not been infringed.
The High Court decision was appealed, and in November 2023, the Court of Appeal acknowledged the existence of copyright in ONE Software but limited the scope of the copyright to the Risk and Price Charts. The first instance judgment was overturned, and it was held that the post-termination use of the Risk and Price Charts by the Defendants did constitute an infringement, leading the Court of Appeal to order an inquiry as to damages or an account of profits (the “Court of Appeal Judgment”).
The December 2024 High Court Judgment
In its determination of the subsequent inquiries as to damages related to the (i) Defendants’ breach of their advertising obligations and (ii) copyright infringement of the Risk and Price Charts, the High Court ruled as follows:
- Advertising Breaches: The Claimants argued that, had the Defendants complied with their advertising obligations under the LLP Agreement (including to display the ONE Software logo in a prominent and visible position on materials used by the Defendants when providing mentoring and training services), both THJ and ONE Software would have become known to 2,000 additional customers over a three-year period. The High Court found the Claimants’ assumptions about expected growth in ONE Software subscribers to be reasonable. Relying on the compensatory principle for assessing remedies for contractual breach (by which the innocent party should be put in the position that it would have been in had the contract been performed as intended), the High Court considered that, even though the Claimants’ assumptions involved a degree of speculation, their assumptions were modest, well-reasoned and erred on the conservative side (supported by evidence, including revenue streams and competitor software comparisons) and awarded the full amount of damages sought for the advertising breaches.
- Copyright Infringement: The Claimants sought to recover damages (i) for the sale of licences for ONE Software which they claim they would have received had customers not been directed to the Defendants, or (ii) on the basis of a reasonable royalty (which the Defendants would have been required to pay to the Claimants for the use of the software). The Claimants contended that the Risk and Price Charts were so integral to ONE Software that, without them, it held no commercial value. However, the High Court restated the Court of Appeal Judgment that the copyright subsisted in only that one part of ONE Software and that the Risk and Price Charts had a low degree of creativity, conferring only a narrow degree of copyright protection. Therefore, the High Court determined that, in the absence of a comparable commercial licence for ONE Software, there was no evidence upon which to base any future hypothetical licence. The High Court was unable to determine what portion of the Defendants’ profits were made due to the infringing act and rejected the claim for damages based on copyright infringement as there was no clear demonstration of the infringing profits attributable to the Risk and Price Charts.
- Additional Damages: The High Court did consider the question of additional damages, which would only potentially have been payable had the Claimants been entitled to damages for copyright infringement. Given the ongoing nature of the dispute until November 2023, the Defendants’ failure to remove all historic material, including the Risk and Price Charts, was not a “flagrant” breach deserving additional damages. The High Court emphasised the context of the business relationship between the parties and the ongoing dispute regarding the validity of the agreements. The High Court also noted that this was not a usual copyright infringement claim where a third party has used the Claimants’ copyright without permission, but rather, the Defendants had (for a time) the use of ONE Software for proper purposes with the agreement of the Claimants.
- Lost Management Time: The Claimants argued that the dispute had prevented Mr Mitchell from spending time on the business activities of THJ and OptionNet and sought to recover damages for lost management time. The High Court accepted that a claim for damages for lost management time is, in principle, possible, but found that Mr Mitchell had chosen to undertake disclosure activities alone, and there was a lack of substantiated evidence showing the impact that his contributions (or lack thereof) had on the businesses. Ultimately, the High Court held that there was insufficient evidence to demonstrate that the asserted diversion of management time from revenue-generating activities of THJ and OptionNet due to the Defendants’ breaches resulted in a disruption to the businesses.
Comment
The judgment underscores the importance of presenting robust financial evidence in claims for damages arising from claims for breach of contract and copyright infringement. While claimants may rely on reasonable assumptions, they must still provide credible proof for compensatory damages. The High Court’s skepticism about assumptions in damage calculations shows that courts critically assess claims based on forecasts and speculation. Without sufficient evidence, even valid copyright infringement claims may result in no damages being awarded. THJ Systems v. Sheridan also highlights the potential financial repercussions of misrepresenting proprietary software.
Marcus Holding, London Trainee Solicitor, contributed to the drafting of this alert.
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