Whether under the federal Defend Trade Secrets Act (“DTSA”) or under state law uniform trade secrets acts (“UTSA”), assessing monetary damages in trade secret misappropriation cases is rarely easy. By definition, trade secrets lose their value once they lose their secrecy, but the lost value is often difficult to monetize. Calculating damages for misappropriation should account for the lost value of the trade secret “asset,” but courts often lose sight of this calculus in fixing damages. Lost profits, unjust enrichment, and reasonable royalties are common measures of damages in trade secret misappropriation cases, but there is another rarely considered measure of damages: the diminution in value of a plaintiff’s trade secret caused by the misappropriation. Damages for the diminution in value of a trade secret are a form of compensatory damages, though some courts will grant injunctive relief due to the difficulty in valuing the diminution of trade secrets. Aerodynamics Inc. v. Caesars Entm't Operating Co., No. 2:15-cv-01344-JAD-PAL, 2015 U.S. Dist. LEXIS 129588, at *1 (D. Nev. Sep. 24, 2015). DTSA (and most UTSA statutes), of course, recognize compensatory damages as a viable theory. 18 U.S.C. § 1836(b)(3)(B). When courts have assessed trade-secret diminution theories, they have emphasized the critical importance of a quality expert and an almost asset-sale like economic valuation of the trade secrets.
Background
As is often the case with complex theories, a court’s rejection of an argument provides helpful guidance as to what the court requires for a viable theory. The diminution theory of trade secrets damages is no exception. Courts recognize the theory as a possible avenue of recovery, but frequently reject it as too speculative. Applying these lessons learned is critical for trade secret plaintiffs when advancing a diminution theory of compensatory damages. For example, in Medtronic MiniMed, Inc. v. Nova Biomedical Corp., the United States District Court for the Central District of California recognized the potential of a diminution theory, but required more particularized evidence of the diminution. There, plaintiffs filed trade secret misappropriation and other claims against several defendants related to certain technology used in blood glucose meters that communicated wirelessly with plaintiffs’ insulin pumps. At trial, plaintiffs sought to introduce three separate damages valuations: (1) the direct costs incurred by plaintiffs associated with the confusion in the marketplace caused by defendants’ misappropriation and marketing of plaintiffs’ trade secret technology totaling $1.4 million; (2) the diminution in value of plaintiffs’ trade secrets associated with defendants’ misappropriation ranging from $2.5 million to $13.8 million; and (3) unjust enrichment in the amount of defendants’ profits earned from the sale of products containing plaintiffs’ trade secrets ranging from $89.8 million to $149.4 million.[1] Plaintiffs’ expert witness based his estimate of the diminution in value of plaintiffs’ trade secrets on plaintiffs’ lost licensing fees, i.e., “the use of the trade secrets by a competitor would . . . reduce the value of the trade secrets and result in lower future contract payments . . .”[2]
In their motion in limine to exclude plaintiffs’ expert testimony at trial, defendants argued that plaintiffs’ expert failed to opine on the measure of damages attributable to each claim, and failed to itemize separately the measure of damages attributable to each of the three defendants Nova Biomedical Corporation, CSS Medical and Sanvita.[3] In opposition, plaintiffs argued that apportionment of damages among claims was not necessary because their damages flowed from defendants’ misconduct, not from legal theories, and that the same essential set of alleged facts substantiated each claim.[4]
But the Court granted defendants’ motion in limine and excluded plaintiffs’ expert from opining on the diminution in value of plaintiffs’ trade secrets “unless he limits his estimate to the diminution in value for which [each] Defendant is responsible.”[5] Interestingly, the Court did not express any opinion on whether plaintiffs’ expert improperly failed to itemize the measure of damages attributable to each cause of action. It is unclear from the record whether and how plaintiffs complied with the order and itemized damages attributable to each defendant separately at trial, as the trial transcripts and related documents are sealed. Nevertheless, California recognizes diminution in value as a legitimate means of establishing damages in trade secret cases, provided that damages against each defendant are itemized separately (and ideally substantiated by expert testimony). Though perhaps not required, parties are also well-advised to separate their damages attributable to each claim.
By contrast, in cases where the alleged losses attributable to diminution in value are “too speculative,” damages may be precluded, as was the case in Anastasia Beverly Hills, Inc. v. Daiko.[6] The Court in Anastasia, however, did not explain how or why plaintiffs’ diminution in value damages were “too speculative,” though the Court awarded damages for lost profits of $115,608 and damages for unjust enrichment in the amount of $1,416,577.[7]
Further, where the alleged diminution in value “is essentially a financial loss by plaintiffs,” such losses may be considered insufficient by themselves to constitute compensable injury.[8] In Farhang v. Indian Institute of Technology, Kharagpur, for example, plaintiffs argued that defendant’s misappropriation and failure to return plaintiffs’ patented technology deprived plaintiffs “from making the necessary and required representations regarding the trade secret status or confidentiality of the Technology that would be required in any basic asset sale, license or joint venture agreement.”[9] However, the Ninth Circuit dismissed plaintiffs’ appeal because “the purported misappropriation of trade secrets occurred exclusively in India” and because “the alleged diminution in value is essentially a financial loss by plaintiffs, which is not in itself, sufficient to constitute a direct effect.”[10] Farhang suggests that where the misappropriation occurs in the United States and where the diminution in value results in more than an unsubstantiated financial loss, such as by a quantifiable loss in licensing revenues or future contract payments, such damages may be recoverable.[11] As another court has explained, “[w]here a regular and established business is injured, interrupted, or destroyed [by the misappropriation], the measure of damages is the diminution in value of the business by reason of the wrongful act, with interest; it is the net loss and not diminution in gross income or sales.”[12]
Similarly, in Collelo v. Geographic Services, the Supreme Court of Virginia considered whether the circuit court erred in granting a motion to strike filed by the defendants and dismissing the suit by the plaintiff against the defendants alleging, among other claims, violations of the Virginia Uniform Trade Secrets Act. Collelo v. Geographic Servs., 727 S.E.2d 55, 60 (Va. 2012). When discussing the expert testimony provided during trial, the court noted the expert did not testify as to the actual value of the plaintiff’s trade secrets or the actual diminution in value of either the plaintiff’s trade secrets or the plaintiff itself as a result of the defendants’ actions. Id. at 74.
Finally, the plaintiff’s cost to obtain or develop its trade secret may also be a form of compensable damages when the plaintiff is unable to prove specific injury. See, e.g., Salsbury Labs. Inc. v. Merieux Labs., Inc., 908 F.2d 706, 714 (11th Cir. 1990) (confirming the award of $1 million in damages “representing the savings in research, development and marketing” costs that the defendant did not have to expend as a result of misappropriating the trade secrets); University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 538 (5th Cir. 1974) (considering the cost of development of the trade secret as one factor to consider in determining damages). In fact, some courts have held that a plaintiff’s actual costs incurred in developing its trade secret may be “inadequate in that it fails to take into account the commercial context in which the misappropriation occurred.”[13]
Takeaways
The diminution in value of a plaintiff’s trade secrets and plaintiff’s cost in developing its trade secrets can be useful alternative measures of damages when other damages metrics such as lost profits or reasonable royalties cannot easily be established. Most courts continue to fall back on familiar damages theories such as plaintiff’s lost profits or the defendant’s profits as the result of misappropriation. However, in certain circumstances, the diminution in value and/or the cost of developing the trade secret may constitute better measures of economic reality. Once the bell of trade secret misappropriation is rung, it cannot be unrung and the only make-whole damages theory may be to value the diminution. Itemized specificity of the diminution from a testifying expert is typically required to establish such damages.
FOOTNOTES
[1] Medtronic MiniMed, Inc. v. Nova Biomedical Corp., 2009 WL 10670877, at *9 (C.D. Cal. Aug. 18, 2009).
[2] Id. at *10.
[3] Medtronic MiniMed, Inc. v. Nova Biomedical Corp., No. 08-cv-788 (C.D. Cal.), Defendants’ Memo. in support of Motion in Limine No. 9 (Jul. 2, 2009) (ECF 392 at 2).
[4] Plaintiffs’ Opposition to Defendants’ Motion in Limine No. 9 (Jul. 7, 2009) (ECF 416 at 2).
[5] Medtronic, 2009 WL 10670877, at *10.
[6] 2008 WL 11339105, at *1 (C.D. Cal. Oct. 8, 2008).
[7] Anastasia Beverly Hills, Inc. v. Daiko, No. 07-cv-3008 (C.D. Cal.), Minute Order, (ECF 111 at 1).
[8] Farhang v. Indian Institute of Technology, Kharagpur, 529 Fed. Appx. 812, at *813 (9th Cir. 2013) (unpublished).
[9] Id.
[10] Id. (internal quotations and citation omitted).
[11] See also, Wellness Coaches USA, LLC v. MGM Resorts Int’l., 2015 WL 5146701, at *6 (D. Nev. Sep. 1, 2015) (“[L]oss of a property interest and diminution in value of trade secrets and confidential information are the types of harms that are not readily addressed through payment of economic damages . . .”); Dudick, ex rel. Susquehana Precision, Inc. v. Vaccaro, 2007 WL 1847435, at *5 (M.D. Pa. Jun. 25, 2007) (holding that the plaintiff adequately alleged damages for trade secret misappropriation in the form of the “diminution in value and impairment of the integrity of” the plaintiff’s trade secret information); Reading Radio, Inc. v. Fink, 833 A.2d 199, 207 (Pa. Super. 2003) (stating that “the diminution valuation requires that an appraiser value the same [property] at two points in time, i.e., a ‘before and after’ analysis.”).
[12] West Plains, L.L.C. v. Retzlaff Grain Company Inc., 2016 WL 3387165, at *5 (D. Neb. May 9, 2016) (emphasis in original).
[13] University Computing, 504 F.2d at 538.