How Should Litigators Establish Evidence in Trade Secret Cases? Part Two: Damages

As discussed in part one of this series, trade secret litigation presents a minefield of evidentiary challenges. But while the act of misappropriation is often simple enough to demonstrate, calculating the precise value of damages can be extremely difficult. Lawyers must be able to articulate the different cognizable forms of damage available to their client, supported by the requisite forms of evidence.

A “flexible and imaginative” approach is applied to the calculation of damages in misappropriation of trade secrets cases. Each case is controlled by its own peculiar facts and circumstances. The Texas courts note that while damages may be ascertained with precision in some cases, lack of certainty will not preclude recovery.

TUTSA simplifies things (to an extent). Under the statute, a successful plaintiff can obtain injunctive relief and damages, which can include the actual loss caused by the misappropriation and the unjust enrichment to the defendant that is not taken into account in computing actual loss. Alternatively, damages may be measured by imposition of a reasonable royalty. Furthermore, exemplary damages capped at two-times actual damages may be awarded for willful and malicious misappropriation proven by clear and convincing evidence.

I. Plaintiff’s lost value

Loss of value to the plaintiff is usually measured by lost profits. To recover lost profits, a party must introduce “objective facts, figures, or data from which the amount of lost profits can be ascertained.” Reasonable certainty is required to prove lost profits.

Critically, the plaintiff must come forward with evidence of causation pinpointing the profits it lost as a result of the misappropriation; evidence of the defendant’s profits writ large, without connection to their misappropriation, is not sufficient.

Moreover, in cases where a single, large transaction has been lost to the defendant, a plaintiff will typically be able to come forward with evidence establishing a complete calculation of lost profits.

This approach has its limitations. First, the trade secret’s value to the plaintiff is an appropriate measure of damages only when the defendant has in some way destroyed the value of the secret. Second, unless some specific injury to the plaintiff can be established, the loss of value to the plaintiff is not a particularly helpful approach in assessing damages.

II. Defendant’s gained value

Value to the defendant may be measured by the defendant’s actual profits resulting from the use or disclosure of the trade secret (unjust enrichment), the value a reasonably prudent investor would have paid for the trade secret, or development costs that were saved. This is usually the accepted approach where the secret has not been destroyed and where the plaintiff is unable to prove specific injury.

A plaintiff can recover the defendant’s actual profits resulting from the use or disclosure of the trade secret. However, given that this method requires proof of actual profits, plaintiffs routinely have difficulty establishing this measure of damages.

To avoid these problems, a plaintiff can seek damages measured by the costs saved by the defendant. This is typically shown through saved development costs. While this method has the benefit of being readily ascertainable, this measure may be inadequate to fully compensate the plaintiff for the misappropriation as it fails to take into account the commercial context in which the misappropriation occurred.

III. Reasonable royalty

The reasonable royalty model is calculated based on what a willing buyer and seller would settle on as the value of the trade secret. Because the precise value of a trade secret may be difficult to determine, the proper measure is to calculate what the parties would have agreed to as a fair price for licensing the defendant to put the trade secret to the use the defendant intended at the time the misappropriation took place. This royalty is calculated based on a fictional negotiation of what a willing licensor and licensee would have settled on as the value of the trade secret at the beginning of the infringement.

The Fifth Circuit has articulated standards to be considered: the resulting and foreseeable changes in the parties’ competitive posture; prices past purchasers or licensees may have paid; the total value of the secret to the plaintiff, including development costs and importance to the plaintiff’s business; the nature and extent of the use the defendant intended for the secret; and whatever other unique factors might have affected the parties’ agreement, such as the ready availability of alternative processes.

While a measure of uncertainty is tolerated in computing damages for trade secret cases, when there is objective evidence from which more certainty can be gleaned, it is incumbent on the plaintiff to produce that evidence. The evidence used to calculate the reasonable royalty must be probative of the value a hypothetical buyer would place on the trade secret.

IV. Evidence establishing damages

Plaintiff’s lost value: objective facts, figures, or data from which lost profits can be ascertained, with reasonable certainty required. Causation is key—must attribute profits lost to the misappropriation. Best used for single or definite number of transactions.

Defendant’s gained value: actual profits must be tied to the misappropriated secret; generalized evidence (revenues, overall net profits) is insufficient. Avoided costs include the costs to plaintiff to develop the trade secret but are often inadequate.

Reasonable royalty: calculated using the Lykes-Youngstown factors—changes in competitive posture, prices past licensees paid, total value of the secret, nature and extent of defendant’s use, and other unique factors.