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Defend Trade Secrets Act of 2015: Damages Computations via the Patent Litigation Blueprint

Defend Trade Secrets Act of 2015: Damages Computations via the Patent Litigation Blueprint

Jul 08, 2016

The Defend Trade Secrets Act of 2015 (DTSA) was enacted on May 11, 2016, through signature by President Obama. The DTSA amends the federal Economic Espionage Act of 1996 to create, for the first time, a federal civil remedy for the misappropriation of trade secrets.

Prior to the DTSA, most trade secrets claims in the United States were litigated in individual state courts under the Uniform Trade Secrets Act (UTSA). Much has been written about the DTSA by a variety of participants in the legal space.1 Most of these writings address nuances of the new law as compared to the UTSA.

This article explores how damages are determined under the UTSA and how this may change as trade secret cases are heard in the Federal Circuit. Specifically, we consider how the Federal Circuit may address financial damages for trade secret cases based on its historical treatment of patent litigation matters.

Total Market Value and Apportionment

The damages opinions presented in many patent litigation cases have run afoul of determinations that the infringing sales or royalty base includes value represented by non-patented items. Federal Circuit judges have aggressively supported concepts such as apportionment and quantification of the smallest salable unit (SSU) in the determination of an appropriate base.

While the identification of how a patent is embodied into a product or method is typically evident, a trade secret may not be similarly apparent. Specifically, the trade secret may not be apparent so as to prevent copying by competitors.

This difficulty may explain why apportionment of a revenue base in damages calculations is not typical. Instead, current practices for trade secrets require the plaintiff to quantify revenue while the defendant has the burden of proving deductible costs. Based on our research, there is no explicit requirement or opportunity for the plaintiff to reduce damages through an apportionment of the revenue.

At the most basic level, damages are established through the defendant’s identification of deductible costs which offset the plaintiff-sponsored revenues. For Federal Circuit judges who are accustomed to seeing a plaintiff’s proactive allocation of value and attributes within products accused of infringement, an inability or failure to isolate the contribution of a trade secret to overall value may result in disqualification of their experts’ opinion(s).

Frameworks for the Determination of Damages

The determination of damages awards through UTSA has typically been in the form of lost profits payable to the plaintiff based on a loss of sales, disgorgement of the ill-gotten gains of the defendant, or application of a royalty rate against a royalty base representative of the defendant’s sales or use of the trade secret.4 These damage awards also tend to include a future component to reflect the additional time that would have elapsed if the defendant had not received a shortcut through misappropriation.

Based on our experience, these types of calculations tend to be relatively unstructured, allowing the damages to reflect the unique aspects of the case.

Federal Circuit judges who have experience with patent disputes will recognize the structured analyses that are performed in the damages phases of trials: Panduit test for lost profits or Georgia Pacific in the case of reasonable royalties.

Based on this familiarity, Federal Circuit judges may attempt to evaluate trade secret cases in a similar manner.

Satisfaction of Panduit-like criteria may provide for lost profits awards for the trade secret owner or disgorgement calculations against the defendant. Historically, the assertion of a royalty by a trade secret owner has been the least prevalent form of damages failure to satisfy a higher threshold may result in a Georgia Pacificlike analysis in the determination of a royalty. Experts, counsel, and clients may be well-served to recognize and exploit this parallel when formulating damages opinions for trade secrets. A judge’s prior written opinions about patent litigation matters may provide useful guidance about how to efficiently present or defend a claim for trade secret misappropriation.

Summary

In summary, the Federal Circuit and the DTSA may dramatically affect how Wipfli clients, counsel, and experts address trade secret damages. Given the Federal Circuit’s longstanding reliance on Panduit and Georgia Pacific to guide the determination of damages for patents, it is reasonable to anticipate similar guidelines will develop for trade secret matters. 

Author(s)

Jacque_Allen
Allen E. Jacque, CFA, CFE
Senior Manager
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