Approaches to Damages in Trade Secret Cases

In Damages, Practice articles, Reasonable Royalty, Unjust enrichment on October 20, 2010 at 7:59 pm
Trade Secrets NL 03-01-2006
Image by Bernard Flach via Flickr

Once a trade secret lawsuit progress beyond the preliminary injunction stage, the key battleground usually shifts to damages.  Assessing damages can be particularly difficult in a trade secret case because of the problematic uncertainty in measuring the value of trade secrets.  Marc Pensabene and Christopher Loh summarized some of the flexible approaches that plaintiffs and defendants might pursue in arguing for and against trade secrets damages calculations.

From the plaintiff’s perspective, the authors offer the following aggressive approaches (not all of which have been accepted by California courts):

  • In calculating lost profits, argue that the amounts should include not only lost sales that were diverted from the plaintiff to the defendant, but also losses attributable to price erosion or to increased costs cause by the misappropriation, such as the costs of an advertising campaign to recoup market share stolen by defendant
  • Argue for provable future profits, overhead costs, general and administrative expenses, lost profits on reorder or spare parts or other natural follow-on items
  • Ask the court to calculate plaintiff’s lost profits by applying the defendant’s profit margins to the plaintiff’s lost sales
  • In seeking unjust enrichment, if the defendant does not incorporate the trade secret into a product but rather uses it to promote its existing products or to develop new and different products, ask for a portion from those products
  • If plaintiff is unable to prove lost profits or unjust enrichment, seek development costs (so-called “head-start” damages), the diminution of the value of the plaintiff’s business or stock, or a reasonable royalty based either on the actual royalties that have been paid to the plaintiff, or a hypothetical royalty that the litigants would have negotiated at the time of the misappropriation
  • If the misappropriation resulted in the breach of an express or implied duty of confidentiality, seek separate and independent contract law damages.

The battleground for defendants usually involves challenging or reducing the claimed damages by arguing that plaintiff’s have not met their burden of showing causation, showing that the claimed damages are unrelated to the trade secret, offsetting the claimed amount through incurred expenses, shortening the accounting period, and arguing that the claimed amount constitutes impermissible double recovery.  The authors outline the following approaches:

  • Attack causation by arguing that plaintiff would have suffered the claimed losses regardless of the defendant’s misappropriation
  • Cleave the damages by affirmatively demonstrating which of defendant’s profits are related to the trade secret and which are not
  • Where possible limit discovery to the relevant financial data that bears a direct relationship to the trade secret
  • Offset unjust enrichment calculations with incremental expenses including salaries, advertising and certain taxes
  • Argue for a limitation of the accounting period for the damages to the time it would have taken to independently develop the trade secret; the time it would have taken to reverse engineer the trade secret from products or services already on the market; the period during which the trade secret is protected by a confidentiality agreement; and the time prior to the trade secret’s authorized discovery (e.g., an issued patent)
  • Watch for plaintiff’s attempts at double recovery: e.g., claims for reasonable royalty in addition to claims for profits


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