The 3 types of trade secret misappropriation damages claims an expert can help prove

Part four of a six-part series on getting the full value of economic experts in IP litigation

Expert witnesses can make or break your intellectual property litigation. This series addresses how to get the most out of an economic expert to establish plaintiff’s case for damages for infringement of its intellectual property. (Part 1, Part 2 and Part 3 of the series can be found on Today’s article focuses on trademark infringement.

A successful trade secret misappropriation plaintiff claim establishes that a defendant acquired a plaintiff’s trade secret by improper means. The plaintiff can recover damages if the defendant has used or disclosed the trade secret and harmed the plaintiff, either by destroying the secrecy and/or using the secret in competition with the plaintiff.

Many states have adopted some form of the Uniform Trade Secrets Act (UTSA). The UTSA damages provision provides that remedies for misappropriation of a trade secret can include “both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss.” The three types of trade secret misappropriation damages claims that an expert can help to prove include the following.

1. Actual damages

Actual damages in trade secret cases may include lost profits, which are typically calculated as net profits (meaning gross profits minus overhead and expenses required to run the business). Another calculation of actual damages is the defendant’s own profits, which are disgorged to plaintiff.

Additional theories delve further into how the plaintiff (the former trade secret holder) was affected by defendant’s conduct, and courts have used many methods to make plaintiffs whole. If the plaintiff was formerly able to command a higher price for her product by using the trade secret, and disclosure by the defendant eroded the price, the plaintiff may also be able to recover losses attributable to price erosion or to increased costs caused by the defendant’s misappropriation, including marketing and advertising costs to recapture the market share taken by defendant. Economic experts are used to analyze the investment value of the trade secret and the loss of business value resulting from the misappropriation. Where the market is damaged due to defendant’s disclosure of the trade secret, the plaintiff may also recover certain provable future profits based on historical data or the fair market value of the trade secret if the defendant has disclosed the secret publicly. To calculate damages, an expert can consider both the plaintiff’s historical data and defendant’s own profit margins earned on products sold using the misappropriated process.



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2. Reasonable royalty

In circumstances where the plaintiff and defendant are not direct competitors, the lost profits analysis may result in an artificially low damages number that would not compensate plaintiff sufficiently for the loss. There, a reasonable royalty structure can be used as a measure of damages. The reasonable royalty rate is determined by constructing a hypothetical negotiation for licensing the trade secret between the parties at the time infringement began. The law presumes this hypothetical negotiation occurred and that plaintiff, who ordinarily would not license his trade secret to the defendant, did so willingly for a bargained-for price. The following factors help determine a reasonably negotiated rate. Not all factors may apply, or with equal effect; however, the net result can never fall below the last factor, the statutory minimum:

  1. The owner’s royalties for licensing the trade secret
  2. Rates the licensee paid for other comparable technology
  3. The license’s nature and scope
  4. The licensor and licensee’s commercial relationship
  5. Increased sales of licensee’s other products by selling with products made using the trade secret (“Products”)
  6. The term of the license
  7. The Products’ profitability, commercial success, and current popularity
  8. The advantage of Products over others
  9. The nature of the Products as owned and produced by the licensor, and benefits to those using it
  10. How the infringer used the trade secret, and any evidence proving that use’s value
  11. The portion of the profit or selling price customary to allow the trade secret’s use
  12. The portion of the profit credited to the trade secret, the manufacturing process, business risks or significant features the infringer added
  13. Expert opinion testimony
  14. The amount that a licensee and licensor would have agreed upon if both had tried to reach an agreement

Using these factors, the expert reaches a royalty expressed as a percentage of defendant’s sales (e.g., 5 percent reasonable royalty), a per-unit amount (e.g., 60 cents per widget) or a flat sum. That number is applied to defendant’s infringing sales to derive a damages figure. That figure is then adjusted for interest. An economic expert helps establish the reasonable royalty for the industry and evaluates the above factors.

3. Unjust enrichment

This theory seeks to return the benefit a defendant received from the unlawful misappropriation. The plaintiff receives the portion of the defendant’s profits attributable to the misappropriation. The plaintiff must prove defendant’s acts were improper uses of the trade secret, must connect the trade secret to the defendant’s profits either in the production or promotion of the defendant’s product, and assess the net profits from the defendant’s acts.

Unjust enrichment can include compensatory damages as a substitute for—or in addition to—lost profits. These include the plaintiff’s costs to develop the trade secret; the time and costs saved by the defendant from not having to develop its own method (“head-start damages”); diminished value of plaintiff’s business or stock; and a reasonable royalty, based either on the actual royalties paid to the plaintiff or a hypothetical royalty as discussed above.

In some circumstances, the plaintiff may recover damages for the defendant’s acts outside of the United States. In addition, a court may ask a jury to make a finding regarding whether the defendant’s conduct was willful or motivated by malice rather than competition. If the jury finds it was, the court may enhance the damages paid to the plaintiff as a penalty. Additionally, where a defendant’s misappropriation was a breach of an express or implied duty of confidentiality (e.g., nondisclosure agreement), the breach may result in a separate award of damages under contract law.

Contributing Author

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Devon Zastrow Newman

Devon Zastrow Newman is a shareholder in the Portland office of Schwabe, Williamson & Wyatt, P.C., where she leads the Intellectual Property Litigation Group. She...

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