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Trade Secret Damages

Trade Secret Damages. John Marshall Law School IP440 - Trade Secrets Law October 17, 2007. Aron Levko IP Practice Leader. Basis for Economic Damages. Trade secret holder (TSH) must prove : Causality – liability link to damages

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Trade Secret Damages

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  1. Trade Secret Damages John Marshall Law School IP440 - Trade Secrets Law October 17, 2007 Aron Levko IP Practice Leader

  2. Basis for Economic Damages • Trade secret holder (TSH) must prove: • Causality – liability link to damages • Misappropriation of the trade secrets is the reason either the TSH is harmed or the defendant unjustly benefits. • Trade Secrets are valuable

  3. Economic Remedies Available to TSH • Goal is to restore the TSH to its position “but for” the misappropriation, when an injunction alone doesn’t satisfy the inequity suffered. However, should basis of recovery be expectation or reliance? • Two alternative measures: • TSH’s actual economic damages, or > Defendant’s unjust gain • Additional recoveries: • Punitive damages • Attorney fees • Prejudgment interest Plaintiff may choose an approach that maximizes the recovery

  4. Specific Damages Components • TSH actual economic damages (with mitigation): • Lost profits & price erosion (including convoyed sales) • Lost business value • Out of pocket expenses/ Increased costs • Reasonable royalties • Defendant’s unjust gain: • Unjust enrichment, including: • Unjust profits • Increased business value • Avoidance of reasonable royalties • Cost avoidance • Reduced time to market

  5. Lost Profits • In order to claim Lost Profits all quasi-Panduit tests must be satisfied: • Demand for the products at issue due to the TS • No acceptable, non-infringing substitutes • Adequate manufacturing and marketing capabilities • Sufficient data to quantify lost profits

  6. Lost Profits __ Lost Profits Incremental Revenues Incremental Costs __ __ • Incremental revenues are sales that would have been made, but for the actions of the infringer, including: • Convoyed sales • Adjustments for price erosion • Incremental costs are costs that would have been associated with the incremental sales.

  7. Example A: Lost Profits Calculation • Case Facts – Big Pop (BP) v. Small Drink (SD): • SD is found to misappropriate BP’s trade secrets. • SD’s misappropriation results in 1 million units of sale at $0.40/unit. • BP’s unit sales during same period were at $0.50/unit. • BP’s incremental unit cost was $0.35/unit. Need to consider price elasticity because of BP’s higher price BP’s Lost Profits: 1,000,000 x $.15 = $150,000

  8. Unjust Enrichment • Plaintiff obligated to calculate Defendant’s revenues, with Defendant’s burden to prove costs • Practice Tip: Plaintiff should present an estimate of the incremental costs in its damages claim • Evaluate Plaintiff’s R&D and other capital expenditures related to the trade secrets • Can serve as a proxy for the Defendant’s cost avoidance • Reduced time to market establishes damages period.

  9. Example B: Unjust Enrichment • Case Facts – Idaho, Inc. (IDI) v. Small Potato (SP): • SP is found to misappropriate IDI’s trade secrets related to the blade used to cut the potatoes. • SP’s misappropriation results in 1 billion lbs. of sales • SP’s production process and profits are as follows: Packaging Quality Control Unseasoned - Profit: $0.20 / lb Washing Washing Sizing Sorting Sorting Peeling Cutting Drying Seasoned - Profit: $0.50 / lb Seasoning

  10. Example B: Unjust Enrichment (continued) Why the difference?

  11. Example C: Unjust Enrichment • Case Facts – Texas Telco (TT) v. Maverick Routers (MR): • MR misappropriated TT’s router trade secrets shortly after receiving seed financing for $20 million. • Subsequent to the misappropriation and within 12 months, MR secured 2 additional rounds of financing ($40 million each round). Increased Value: $140 million How much of the increase in value is attributable to the trade secrets?

  12. Example C: Unjust Enrichment (continued) Key points: • MR could not raise funds without the trade secrets. • In addition to the trade secrets, MR advanced commercialization efforts that contributed to the value.

  13. Key Takeaways • Establish causal link to damages • Identify most appropriate economic remedies • Avoid redundancies • Plaintiffs should show incremental profis in UE • Consider expectation v. reliance • Consider subtleties in the damages analysis • Satisfy all quasi-Panduit factors for lost profits • Reflect price elasticity in calculating lost profits • Identify profit contribution from trade secrets

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