Alternative, But Not Incompatible, Measures of Monetary Relief for Trade Secret Misappropriation
Under the Defend Trade Secrets Act (“DTSA”) and most state statutes adopting the Uniform Trade Secrets Act, the measures of monetary relief available to plaintiffs in trade secret misappropriation matters may include actual losses caused by the misappropriation, unjust enrichment caused by the misappropriation, or – “in lieu of” the aforementioned measures – a reasonable royalty for the alleged misappropriator’s unauthorized use of the trade secret. [1]
A recent decision from the United States District Court for the Middle District of Florida attempted to clarify the boundaries of reasonable royalty damages under the DTSA and the Florida Uniform Trade Secrets Act (“FUTSA”). Specifically, the court in Nephron Pharmaceuticals Corp. et al. v. Jennifer Shelly Hulsey et al. addressed whether the statutes’ use of the term “in lieu of” precludes plaintiffs from presenting reasonable royalty damages theories while, at the same time, presenting damages theories based on the plaintiffs’ actual loss or the defendants’ unjust enrichment.
In Nephron Pharmaceuticals, the plaintiffs’ damages expert proffered two alternative damages theories. [2] First, the plaintiffs’ expert attempted to quantify the defendants’ unjust enrichment by reference to the profits earned on sales to certain customers. Second, the expert advanced a reasonable royalty theory based on the construction of a hypothetical negotiation between the parties. The defendants moved to exclude the plaintiffs’ damages expert, arguing that a “royalty is available only ‘in the absence of actual loss or unjust enrichment’ and not where, as in this case, Plaintiffs have calculated and sought disgorgement as damages.” [3] Not surprisingly, the court found this argument unpersuasive, opining that “[w]hile the statutes clearly preclude recovery under an unjust enrichment and a reasonable royalty theory, nothing in the text suggests that [plaintiff] can only obtain a reasonable royalty if it fails to prove actual damages or unjust enrichment. According to the plain language of the DTSA and FUTSA, [a plaintiff] has the option of pursuing these theories in the alternative.” [4]
To the extent supported by the record and the particular facts of a case, plaintiffs’ counsel might consider pursuing reasonable royalty damages as it is an available remedy for alleged trade secret misappropriation. This “belt and suspenders” approach could mitigate the risk of a finding, after protracted litigation, that alleged misappropriation did not result in either actual losses by a plaintiff or unjust enrichment by a defendant.
A 2018 decision from the United States District Court for the Eastern District of Virginia in the well-known case Steves & Sons, Inc. v. JELD-WEN, Inc. provides an example. In Steves & Sons, the claims brought by the counterclaim plaintiff included allegations of trade secret misappropriation under DTSA and the Texas Uniform Trade Secrets Act. The counterclaim plaintiff’s damages expert presented three separate theories based on unjust enrichment or reasonable royalty scenarios. [5] First, the counterclaim plaintiff sought unjust enrichment relief measured by reference to the counterclaim defendant’s purported gains “in the event that it uses the trade secrets” to build a manufacturing plant to produce commercial embodiments of the trade secrets, including reductions in per-unit component costs that would be achievable by this future manufacturing plant (“Scenario One”). Second, the counterclaim plaintiff sought unjust enrichment relief by reference to the purported benefits that had accrued, and would continue to accrue, to the counterclaim defendant even if it never built a manufacturing plant, including avoided costs to perform a feasibility study and plant-level cost information that may help the counterclaim defendant negotiate lower prices with suppliers (“Scenario Two”). Lastly, the counterclaim plaintiff sought reasonable royalty damages as an alternative if it were unable to prove unjust enrichment. The counterclaim defendant moved for summary judgment, arguing that neither Scenario One nor Scenario Two identified any benefit that it had actually retained, as those unjust enrichment scenarios were based on gains that could result only if certain future events were to take place. In its order on the motion for summary judgment, the court called into question certain evidence and assumptions underlying the Scenario One and Scenario Two unjust enrichment claims and noted that, even though the evidence was sufficient to prevent summary judgment, the counterclaim plaintiff would “need to present compelling evidence” at trial. [6] The jury ultimately found certain of the alleged trade secrets to be misappropriated but declined to award unjust enrichment, opting instead for a reasonable royalty damages award.
In short, reasonable royalty damages could serve as a flexible alternative damages theory in the event that the trier of fact finds that the alleged misappropriation has not resulted in unjust enrichment by the defendant.
[1] See 18 U.S.C. § 1836(b)(3)(B); Uniform Trade Secrets Act § (3)(a).
[2] Order, ECF No. 210, Nephron Pharm. Corp. v. Hulsey, No. 6:18-cv-1573-Orl-31LRH (M.D. Fla. January 11, 2021).
[3] Defs.’ Mot. to Exclude Opinions of Carrie L. Distler, ECF No. 158, Nephron Pharm. Corp. v. Hulsey, No. 6:18-cv-1573-Orl-31LRH (M.D. Fla. September 28, 2020).
[4] Order, ECF No. 210, Nephron Pharm. Corp. v. Hulsey, No. 6:18-cv-1573-Orl-31LRH (M.D. Fla. January 11, 2021).
[5] Steves & Sons, Inc. v. JELD-WEN, Inc., No. 3:16-cv-545, 2018 U.S. Dist. LEXIS 80306 (E.D. Va. May 10, 2018).
[6] Steves & Sons, Inc. v. JELD-WEN, Inc., Civil Action No. 3:16-cv-545, 2018 U.S. Dist. LEXIS 80306 (E.D. Va. May 10, 2018).
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