Blog April 28, 2022
Recent Developments in Trade Secrets Damages
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With the dramatic increase in trade secret cases since the 2016 passage of the Defend Trade Secrets Act (DTSA), and the large damages awards in many of these cases, it is now more crucial than ever to properly understand how to assess and calculate damages in trade secret cases. Trade secrets can mean big business for companies that hold them, and damages awards for trade secret misappropriation can reach into the hundreds of millions of dollars. For example, a jury in a recent New York trade secret misappropriation case awarded the plaintiffs an $855 million verdict.[i] In a recent webinar, Fish attorneys Esha Bandyopadhyay and Tommy Jacks discussed the current landscape of trade secret damages, both under the DTSA and various state laws, as well as some recent developments in trade secrets damages law. Below is a summary of those developments. For more information about trade secrets damages, please find a recording of the full webinar here.
Recent Conflicts between the DTSA and State Trade Secrets Laws
Congress's primary objective when passing the DTSA in 2016 was to achieve uniformity — a single national standard for trade secret misappropriation. Over four years later, that goal remains elusive. While the damages provisions of the DTSA and the Uniform Trade Secrets Act (UTSA) (variations of which have been adopted by every state except New York) are quite similar, other provisions in state statutes create "wrinkles" for DTSA litigants, particularly given the propensity of many courts to view and address DTSA claims through the prism of state trade secret law. However, federal courts have found opportunities to address such wrinkles. Just recently, courts have taken up conflicts between the DTSA and state trade secrets laws regarding extraterritoriality, inevitable disclosure, and the right of action by non-owners.
In Motorola Solutions, Inc. v. Hytera Communications Corp. Ltd., 436 F.Supp.3d 1150 (N.D. Ill. 2020), the Northern District of Illinois considered the extent to which the DTSA allows a plaintiff to recover damages for misappropriating activities that occur outside the United States. Motorola alleged that Hytera (a Chinese company) hired three Motorola engineers who brought with them thousands of trade secrets that enabled Hytera to manufacture functionally identical two-way radios that were sold throughout the world. Hytera filed a motion to exclude evidence of damages incurred outside the U.S.; the court denied the motion, ruling that the evidence would be provisionally admitted but agreeing to determine prior to charging the jury whether and to what extent they would be allowed to consider evidence of extraterritorial damages.
The court began by noting that, under Supreme Court precedent, there is a presumption that U.S. statutes have no extraterritorial application. However, that presumption can be overcome if it is clear that the statute in question was intended to apply to conduct occurring outside the U.S. that affects interests inside the U.S. falling within the scope of the statute's principle focus. The court then noted that the DTSA contains two pertinent sections in a single chapter — § 1836 (the damages provisions) and § 1837, which states that the Act "applies to conduct occurring outside the United States if...an act in furtherance of the offense was committed in the United States." Since "use" of the trade secret inside the U.S. would be "in furtherance of the offense" of misappropriation, and since the plaintiff established at trial that the defendants advertised, promoted, and marketed the products embodying the allegedly stolen trade secrets inside the U.S., the court held that the damages provisions of § 1836, being in the same chapter as the extraterritoriality provisions of § 1837, would permit the recovery of damages worldwide.
In Luminati Networks Litd. V. BIScience, Inc., 2019 WL 2084426 (E.D. TX 2019), the Eastern District of Texas clarified the scope of the phrase "act in furtherance." There, defendant BIScience argued that plaintiff Luminati failed to state a claim because it failed to allege any conduct occurring inside the U.S. relating to the alleged misappropriation, as required under the DTSA. The plaintiff responded that the sale of the defendant's competing residential proxy service using its trade secrets caused it harm in the U.S. and was, therefore, in furtherance of the defendant's misappropriation. The court held that the damages incurred by Luminati in the U.S., standing alone, are not acts "in furtherance of" BIScience's misappropriation. However, the plaintiff also alleged in its complaint that BIScience had used its trade secrets in Texas, which the court held would suffice.
For DTSA plaintiffs, the lesson from these two cases is clear: If you seek damages based on the defendant's global sales of its products incorporating your trade secrets, be sure to nail down the fact of the use of your trade secrets within the U.S.
The inevitable disclosure doctrine presents another wrinkle for DTSA plaintiffs. In states that apply the doctrine, an employer may enjoin a former employee from working in a job that may result in the use of trade secrets without the need for proof or evidence. The doctrine does not apply in DTSA cases; under 18 U.S.C. § 1836(b)(3)(A), a court in a civil proceeding under the DTSA may grant injunctive relief, provided that the injunction does not "prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows." However, the DTSA does not preempt state trade secret laws, and since most suits filed under the DTSA also include claims based on state trade secret law, the ability of a plaintiff to rely on the inevitable disclosure doctrine boils down to a question of what state law applies. Federal courts in California have recently barred reliance on inevitable disclosure[ii], while courts in Illinois and Pennsylvania have declined to dismiss inevitable disclosure claims.[iii]
Right of Action by "Non-Owners"
By its terms, the DTSA, 18 U.S.C. § 1836(b)(1), provides that "[a]n owner of a trade secret may bring an action under this subsection." This language has led to disputes over the meaning of the word "owner" and whether the term includes "non-owners" who nonetheless have a legal right to possess the trade secret in question. In Advanced Fluid Systems, Inc. v. Huber, 958 F.3d 168 (3rd Cir. 2020), the court held that, under Pennsylvania's UTSA, a party need not be the "owner" of a trade secret in the traditional sense to bring an action against the misappropriating parties as long as the plaintiff was a lawful "possessor" of the trade secret. The court relied in part on a similar holding by the Fourth Circuit in a case applying Maryland's identically worded UTSA. DTM Research, L.L.C. v. AT & T Corp., 245 F.3d 327 (4th Cir. 2001).
Right to Trial by Jury in Unjust Enrichment Cases
Two Federal Circuit Court of Appeals panels have recently reached opposite conclusions on the question of whether a plaintiff has a right to a jury trial on the issue of disgorgement or restitution to return to the plaintiff a defendant's ill-gotten gains. On the "no" side was the panel in Texas Advanced Optoelectronic Solutions, Inc. v. Renesas Electronics America, Inc., 895 F. 3d 1304 (Fed. Cir. 2018), which held that, for Seventh Amendment purposes, patent, copyright, and trademark infringement claims are appropriate analogues to trade secret claims. The panel then held that, because no disgorgement remedy was available at law in 1791 for the former claims, no such remedy would have been available for trade secret misappropriation, either. On the "yes" side was the panel in TCL Technology Services, Ltd., v. Telefonaktiebolaget LM Ericsson, 943 F. 3d (Fed. Cir. 2019). According to that panel, even if monetary relief can be characterized as restitution, that does not end the inquiry, because restitution can be either legal or equitable. In the days of the divided bench, restitution was available in certain cases at law, and in certain others in equity. To determine which type of common law restitution the payment is more analogous to, courts should focus on the basis of the claim and the nature of the underlying remedies sought.
The takeaway is that, if you are a plaintiff in a combined patent/trade secrets case (and thus know that any appeal is headed to the Federal Circuit), you should submit your unjust enrichment claims to the jury. But if the jury finds damages, also submit the unjust enrichment claim to the court post-trial so that you have covered all bases.
Damages for Anticipated Future Use
In a summary judgment ruling, the Eastern District of Virginia ruled that trade secret damages can be obtained for anticipated future use of misappropriated trade secrets under both the DTSA and Texas's version of the UTSA. The case, Steves and Sons, Inc. v. JELD-WEN, 2018 WL 2172502 (E.D. Va. 2018), was intensely fact-specific. Steves and JELD-WEN were competitors in the manufacture and sale of plastic molded door skins for interior house doors. Steves sued JELD-WEN for antitrust violations, and JELD-WEN counterclaimed, asserting trade secrets claims. It alleged that Steves hired JELD-WEN employees who allegedly gave Steves JELD-WEN's trade secret financial data that enabled Steves to prepare a feasibility study analyzing the potential advantages of building a manufacturing facility to better compete against JELD-WEN. Steves moved for summary judgment, contending that, as a matter of law, JELD-WEN could not seek to recover damages for Steves' future use of JELD-WEN's trade secrets. The court held that, given the summary judgment evidence offered by JELD-WEN's damages expert, reasonable royalty damages could be appropriately awarded for Steves' future use of JELD-WEN's trade secret financial data. This case is significant because of its holding that damages under both an unjust enrichment theory and a reasonable royalty theory can be based on actual and future use of a misappropriated trade secret. The Court also appeared to approve of a certain degree of speculation in projecting damages based on such anticipated future use.
Head Start Damages
Head start damages are damages a defendant in a trade secret case owes to a plaintiff for the time and money the defendant saved by using the plaintiff's trade secrets as a shortcut to getting its product to market. Such damages generally are limited to the amount of time it would have taken the defendant to develop the product in the absence of the misappropriation. But what about cases in which the plaintiff's trade secrets become publicly known before the head start period ends? Does the plaintiff still get the full head start damages, or must they be cut off the moment secrecy is lost?
The District of Delaware answered that question in Liqwid, Inc. v. L'Oreal America, Inc., 2018 U.S. Dist. LEXIS 162347 (D. Del. 2018). There, the plaintiff had developed "Olaplex" — a bonding solution designed to protect hair from chemicals contained in other products. The plaintiff's licensor had filed a patent application on the product that had not yet been published. In the meantime, however, Liqwid had been approached by L'Oreal about a possible acquisition and disclosed its unpublished patent application to L'Oreal under an NDA. L'Oreal declined to acquire the plaintiff, and soon thereafter introduced its own version of a similar product. Liqwid filed suit asserting claims for patent infringement, trade secret misappropriation, and breach of contract. A jury returned a verdict totaling $91 million, of which $22 million was for Liqwid's trade secret claim. However, the court held that, although the evidence established that L'Oreal had a head start of 20 to 32 months because of its having learned from Liqwid's unpublished patent application, the "secrecy" of the trade secret information had been lost once the patent application was published. The court thus reduced the trade secret damages from $22 million to $9.5 million, finding that the relevant secrecy period was limited to the six months prior to the publication of the patent application.
Apportionment of Damages among Multiple Trade Secrets
The Northern District of California recently took up the issue of whether damages must be apportioned among trade secrets if the factfinder determines that not all of a plaintiff's alleged trade secrets actually constitute protectable trade secret information. In 02 Micro Inter. Ltd. v. Monolithic Power Systems, Inc., 399 F.Supp.2d 1064 (N.D. Cal. 2005), the court warned the plaintiff before trial that if it failed to obtain trade secret findings on all of its alleged trade secrets, it would lose its trade secrets damages award unless it presented expert evidence apportioning the damages on a trade secret-by-trade secret basis. Despite the court's express admonition, the plaintiff did not offer expert testimony on apportionment, causing the court to vacate the jury's trade secrets damages award after the jury found that only some of the alleged trade secrets were protectable. Notably, however, more recently, in Bladeroom Group Ltd. v. Facebook, Inc., 2018 U.S. Dist. LEXIS 57730; 2018 WL 1611835 (N.D. Cal. April 3, 2018), the same court reached the opposite conclusion, holding that the California UTSA does not require that an expert assign damages amongst trade secrets for his or her opinion to be admissible.
[i] See Syntel Sterling Best Shores Mauritius Ltd. et al. v. The Trizetto Group Inc. et al., No. 1:15-cv-00211 (S.D.N.Y. October 27, 2020)
[ii] See UCAR Tech. (USA) Inc. v. Yan Li, No. 5:17-CV-01704-EJD, 2017 WL 6405620 (N.D. Cal. Dec. 15, 2017); Human Longevity, Inc. v. J. Craig Venter Inst., Inc., No. 18CV1656-WQH-LL, 2018 WL 6617633 (S.D. Cal. Dec. 18, 2018)
[iii] See Packaging Corp. of Am., Inc. v. Croner, No. 19-CV-03286, 2020 WL 43011 (N.D. Ill. Jan. 3, 2020); Gen. Elec. Co. v. Uptake Techs., Inc., 394 F. Supp. 3d 815 (N.D. Ill. 2019); Jazz Pharm., Inc. v. Synchrony Grp., LLC, 343 F. Supp. 3d 434 (E.D. Pa. 2018); Pittsburgh Logistics Sys., Inc. v. LaserShip, Inc., No. 2:18 CV-1382, 2019 WL 2443035 (W.D. Pa. June 12, 2019)
Authors: Esha Bandyopadhyay and Tommy Jacks
The opinions expressed are those of the authors on the date noted above and do not necessarily reflect the views of Fish & Richardson P.C., any other of its lawyers, its clients, or any of its or their respective affiliates. This post is for general information purposes only and is not intended to be and should not be taken as legal advice. No attorney-client relationship is formed.
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