On April 23, 2020, the California Court of Appeals affirmed a trial court decision refusing to order payment of a “reasonable royalty” as damages for misappropriation of a trade secret. For the first time in a published California appellate decision, the Ajaxo court applied a test used to determine royalties in patent cases to a trade secret misappropriation case. Ajaxo, Inc. v. E*Trade Financial Corporation, 261 Cal. Rptr. 3d 583 (Cal. Ct. App. 2020).
Under the California Uniform Trade Secrets Act (“CUTSA”), if a plaintiff is unable to prove damages or unjust enrichment caused by misappropriation, the “court may order payment of a reasonable royalty.” The Ajaxo court confirmed, as the CUTSA suggests, a court’s discretion to grant royalty payments.
But while the CUTSA gives judges the option to award reasonable royalty payments, it does not offer guidance on how to calculate them. In articulating a test for reasonable royalties, the Ajaxo court looked to principles of patent law and applied the 15-factor Georgia-Pacific test originally used to determine royalty rates in a patent-infringement dispute.[1]
The goal, as the court explained, is to determine the royalty rate the trade secret owner and licensee would have agreed upon at the time of the misappropriation by modeling a hypothetical negotiation between the parties. To that end, the Georgia-Pacific factors consider, among other inquiries:
- The relationship between the parties, including the commercial relationship between the trade secret owner and licensee, the licensor’s efforts to maintain his patent monopoly, and the exclusivity, duration, scope, and any special conditions of the license to use the trade secret.
- The objective value of the trade secret, including the established utility and profitability of the trade secret, the rates paid by the licensee for the use of other comparable trade secrets, the royalties received by the trade secret owner for the licensing of the trade secret, and any expert testimony.
- The value to the infringer, including the extent to which the infringer made use of the trade secret, the extent to which the trade secret promoted the sale of the licensee’s other products, and the portion of any profit that should be credited to the trade secret, rather than non-trade secret elements.
While some guidance is better than no guidance, the Ajaxo’s use of the 15-factor test does little to inject certainty into the calculation of reasonable royalties, even assuming a court chooses to award royalties in the first place. Rather, it confirms that courts have considerable discretion in addressing a request for royalties. The trial court in Ajaxo, for example, held Ajaxo failed to prove both that it was entitled to a royalty and what an appropriate amount of any royalty payment should be, notwithstanding its finding that Ajaxo had proven liability.
Litigants seeking to recover a reasonable royalty must take care to define their trade secret clearly, so that the court can apportion profits between the trade secret itself, and any other elements of the product. They must also provide substantial evidence of the objective value of their trade secret, as well as any specific value to the defendant. Ultimately, a litigant must persuade the judge of what a reasonable royalty payment should be by explaining how much a license for the trade secret would have cost the defendant, had it legitimately sought it.
Trade secret misappropriation impacts businesses across a variety of industries, and the consequences can be severe. A potential victim of trade secret theft should swiftly consult experienced litigation counsel.
FOOTNOTES
[1] See Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970).