134rd Year no. 43
RECORDER
www.therecorder.com
MONDAY, NOVEMBER 14, 2011
Damages in trade secrets litigation
When sensitive information is misappropriated or disclosed,
plaintiffs face several roadblocks to recovery of resulting losses
Thad A. Davis, Ropes & Gray LLP, partner
Kyle A. Withers, Ropes & Gray LLP, associate
Litigation
T
he California Uniform Trade Secrets Act provides several remedies for the misappropriation of
trade secrets, including injunctive
relief, damages, reasonable royalties, punitive damages and attorneys fees. But actually proving damages — whether measured
by plaintiff’s actual loss or defendant’s unjust
enrichment — without relying on inadmissible speculation and conjecture by expert
witnesses has been difficult for plaintiffs in
the trade secrets context. We examine here
the difficulties plaintiffs face, and considerations of what redress may be more fruitful
than damages, as well as the challenge of
managing client perceptions and expectations when a client is the victim of trade secret theft. Such theft is usually combined
with a cluster of bad deeds, and teasing out
the actual damage from just the trade secrets,
especially where a plaintiff is a large player
in a given industry or segment, can prove
challenging.
DEFINITIONS OF ‘MISAPPROPRIATION’
AND ‘TRADE SECRET’
CUTSA provides definitions for both
misappropriation and trade secret.
Misappropriation means the “(1) acThad A. Davis is a partner and Kyle A.
Withers is an associate in the litigation
department in the San Francisco office of
Ropes & Gray.
quisition of a trade secret of another by
a person who knows or has reason to
know that the trade secret was acquired
by improper means; or (2) disclosure or
use of a trade secret of another without
express or implied consent by a person who: (A) used improper means to
acquire knowledge of the trade secret;
or (B) at the time of disclosure or use,
knew or had reason to know that his or
her knowledge of the trade secret was:
(i) derived from or through a person
who had utilized improper means to
acquire it; (ii) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (iii)
derived from or through a person who
owed a duty to the person seeking relief
to maintain its secrecy or limit its use;
or (C) Before a material change of his
or her position, knew or had to reason
to know that it was a trade secret and
that knowledge of it had been acquired
by accident or mistake.” Civ. Code
§3426.1(b).
Trade secret means “information, including a formula, pattern, compilation,
program, device, method, technique, or
process that: (1) derives independent
economic value, actual or potential,
from not being generally known to the
public or to other persons who can obtain economic value from its disclosure
or use; and (2) is the subject of efforts
that are reasonable under the circumstances to maintain its secrecy.” Civ.
Code §3426.1(d).
DAMAGES AVAILABLE UNDER CUTSA
A plaintiff may recover damages for
the “actual loss caused by misappropriation” and for the “unjust enrichment caused by misappropriation that
is not taken into account in computing damages for actual loss.” Civ. Code
§3426.3(a). If neither actual loss nor un-
just enrichment is provable, the court
may require the payment of a “reasonable royalty.” Civ. Code §3426.3(b). Further, if the misappropriation was “willful and malicious,” the court may award
exemplary damages in an amount no
greater than twice the actual loss or unjust enrichment. Civ. Code §3426.3(c).
DIFFICULTY OF PROVING DAMAGES
A plaintiff encounters several significant roadblocks during trade secrets
litigation in California. A plaintiff must
prove that the information is a trade
secret (as opposed to merely valuable
confidential and proprietary information), and that the defendant improperly acquired, disclosed or used the
trade secret. But a plaintiff’s greatest
challenge often arises in the latest stages of litigation: proving the actual loss
or unjust enrichment resulting from the
misappropriation, often by competing
theories and calculations from the parties’ expert witnesses.
First, a plaintiff may have difficulty
proving actual loss or unjust enrichment from the misappropriation if the
defendant acquired the trade secret, but
has not yet disclosed or used it. This is a
common fact pattern where the plaintiff
discovers the misappropriation shortly
after it occurs or while it is still ongoing, or where the defendant is still in the
early stages of establishing a competing business. In such cases, a plaintiff is
best served by seeking injunctive relief
rather than damages.
Second, a plaintiff may have difficulty proving actual loss or unjust enrichment from the misappropriation
if the defendant has used the trade
secret unsuccessfully without disclosing the trade secret to the public. This
is a common fact pattern in industries
with high barriers to entry, or where
the plaintiff’s unique position in the
competitive landscape, such as its size,
customer relations, or other attributes,
makes its product or services more appealing to customers for reasons other
than merely the existence of the trade
secret. For example, in Ajaxo v. E-Trade,
10 C.D.O.S. 11413, the jury found that
the value conferred upon the defendant
as a result of its willful and malicious
misappropriation of plaintiff’s trade
secrets was a net loss of approximately
$2.4 million and thus unjust enrichment was not provable. A plaintiff is
best served by seeking injunctive relief
or a reasonable royalty for the use of
the trade secret rather than damages in
such cases.
Third, a plaintiff may have difficulty
proving actual loss or unjust enrichment
from the misappropriation if the defendant has simultaneously misappropriated trade secrets and stolen other confidential and proprietary information. In
such cases, a plaintiff will have to prove
the actual loss and unjust enrichment
that resulted only from the misappropriation of trade secrets because CUTSA
pre-empts claims for the latter if they
arise out of the same nucleus of operative
facts. For example, in O2 Micro International v. Monolithic Power Systems, 399
F.Supp.2d 1064 (N.D.Cal. 2005), the court
granted defendants’ motion for judgment
as a matter of law with respect to unjust
enrichment because the plaintiff only introduced evidence regarding the cumulative value of 11 trade secrets, but the jury
found that the defendant had misappropriated only five of the 11 trade secrets.
As such, the court held that any award for
unjust enrichment would be “based on
speculation and guesswork.”
MANAGING CLIENT EXPECTATIONS
It is important that counsel manage
their clients’ expectations during trade
secrets litigation in California given the
difficulties that a plaintiff may experience in proving damages. Attorneys
should frequently remind their clients
that the primary goal of trade secrets
litigation is often to prevent further use
or disclosure of the trade secrets — not
to recover significant damages or punish the defendants for their wrongdoing. Further, although CUTSA provides
the possibility for the recovery of attorneys fees, attorneys should counsel
their clients that, unless the plaintiff
has suffered a significant loss from the
misappropriation or the defendant has
benefited substantially, the clients may
not recover damages sufficient to cover
their attorneys fees.
CONCLUSION
Despite the significant difficulty of
proving damages for the actual loss to
the plaintiff or the unjust enrichment of
the defendant from the misappropriation of trade secrets, clients often have
no choice but to file a complaint in order to protect their trade secrets from
further use and disclosure. In such circumstances, attorneys must adequately
manage their clients’ goals and expectations.
Reprinted with permission from the Novmember 14, 2011 edition of The Recorder. © Copyright 2011. ALM Media Properties, LLC. All rights reserved.
Further duplication without permission is prohibited. For information, call 415.490.1054 or cshively@alm.com.