Damages Under the California Uniform Trade Secrets Act and the Federal Trade Secrets Act

Congress enacted the Defend Trade Secrets Act (“DTSA”) in 2016 to bring uniformity to trade secrets law, governed as it was by the laws of fifty separate jurisdictions.  Like the California Uniform Trade Secrets Act (“CUSTA”) the DTSA is modeled on the Uniform Trade Secrets Act.  Not surprisingly, early decisions interpreting the DTSA in California federal district courts relied on California and federal courts’ interpretation of the CUSTA.  Now there are several years of federal decisions applying the DTSA, and courts look to these decisions to apply both laws, particularly with regards to the issue of damages.  California practitioners litigating CUSTA claims in state or federal court would be advised to keep abreast of developments in federal courts interpreting the DTSA, and vice versa. Unjust Enrichment, Lost Profits, and a Reasonable Royalty

Both the DTSA and CUSTA provide for three types of damages: actual loss, unjust enrichment, and a reasonable royalty.  The statutes are subtly different in how a plaintiff can recover these damages.  Under the DTSA, a plaintiff can claim damages for actual loss and unjust enrichment to the extent not covered by actual loss; or in the alternative a reasonable royalty.  18 U.S.C. § 1836(b)(3)(B).  A federal plaintiff can plead these theories in the alternative and can recover under more than one theory so long as there is no double recovery.  Nephron Pharms. Corp. v. Hulsey, No. 6:18-cv-1573-Orl-31LRH, 2021 U.S. Dist. Lexis 57722 at *6-7 (M.D. Fla. January 11, 2021).

Under the CUSTA a plaintiff can also recover damages for actual loss or unjust enrichment “caused by misappropriation that is not taken into account in computing damages for actual loss.”  Cal. Civ. Code § 3426.3(a).  But a reasonable royalty is only allowed “if neither damages nor unjust enrichment caused by misappropriation are provable.”  Cal. Civ. Code § 3426.3(b).  Such measures are not “provable” if, for example, the defendant has not used the trade secret commercially or benefitted in a measurable way.  Ajaxo, Inc. v. E*Trade Financial Corp., 187 Cal. App. 4th 1295, 1310 (2010) (“Ajaxo II”).  A plaintiff can also recover a reasonable royalty if a jury rejects the evidence proffered on other measures.  Id., at 1313.

One pitfall looms for plaintiffs asserting multiple trade secrets – the need to apportion damages for each trade secret.  In Liveperson, Inc. v. [24]7.ai, Inc., No. 17-cv-01268-JST, 2018 U.S. Dist. Lexis 203571 (N.D. Cal. November 30, 2018), the court excluded an expert’s opinion that failed to apportion the damages accrued for each of the 28 trade secrets at issue – even though the initial trial would be a “bellweather trial in which only 15 of the 28 alleged trade secrets will be at issue, [and] the jury’s verdict will necessarily encompass fewer than all of the alleged trade secrets.”  Id., at *5-6.  While some courts may nonetheless allow evidence of damages without apportionment to go to a jury, Nephron, 2021 U.S. Dist. Lexis 57722, at *8-9, a plaintiff risks exclusion if it does not present a damages theory applicable should a jury find liability on only some of the trade secrets at issue.

Actual Loss

Damages for “actual loss” in trade secret actions can include the plaintiff’s lost profits.  Chromadex, Inc. v. Elysium Health, Inc., No. SACV 16-02277-CJC(DFMx), 2019 U.S. Dist. Lexis 221586, at *6-10 (N.D. Cal. October 9, 2019); see also Medipro Med. Staffing, LLC v. Certified Nursing Registry, Inc., No. B294391, 2021 Cal. App. Unpub. Lexis 731, at *28-29 (Cal. App. 2nd Dist. February 4, 2021) (unpublished decision stating that “damages for lost profits are a component of actual loss”).  Lost profits include the profits that the plaintiff would have earned but for the defendant’s infringement, minus associated expenses.  See 2 CACI 4409 (2021), Remedies for Misappropriation of Trade Secret, noting that “If the plaintiff’s claim of actual injury or loss is based on lost profits, give CACI No. 3903N, Lost Profits (Economic Damage).”  CACI 3903N instructs the jury to “determine the gross amount [name of plaintiff] would have received but for [name of defendant]’s conduct and then subtract from that amount the expenses . . . [name of plaintiff] would have had if [name of defendant]’s conduct had not occurred.”  2 CACI 3903N (2021).  Lost profit damages are difficult to prove.  “Although absolute certainty is not required, damages for lost profits will not be awarded based on hypothetical or speculative forecasts.”  Herrmann Int’l, Inc. v. Herrmann Int’l Eur., No. 1:17-cv-00073-MR, 2021 U.S. Dist. Lexis 42277, at *51-52 (W. D. N. C. March 6, 2021).  The typical method of calculating lost profits – determining net profits from sales the plaintiff would have made had the defendant not infringed – may not be feasible if data tracking sales made by the use of specific trade secrets is not available.  In some cases, a plaintiff’s quick action to recover its information will prevent it from suffering lost profits.  Brightview Grp., LP v. Teeters, SAG-19-2774, No. SAG-19-2774, 2021 U.S. Dist. Lexis 64487, at *58-59 (D. Md. March 29, 2021).  Such a plaintiff will need to show evidence that the misappropriation in fact imperiled future opportunities to defeat summary judgment on damages via lost profits.  Id.

There are other means of proving an actual loss.   For example, a plaintiff can assert that it suffered a lower market share due to the infringement.  See Oakwood Labs, LLC v. Thanoo, 999 F.3d 892, 914 (3rdCir. 2021) (noting that the defendant’s “rapid market entry into a sector of the pharmaceutical industry with few competitors may well deprive [the plaintiff] of market share”).  A plaintiff may also suffer a diminution in value of its trade secrets, though such damages claims can also be stricken as speculative if not supported by expert testimony clearly showing the loss in value.  Anastasia Beverly Hills, Inc. v. Chisato Katoh Daiko, No. CV 07-3008-GHK, 2008 U.S. Dist. LEXIS 126469, at *3 (C.D. Cal. October 8, 2008).

Unjust Enrichment

Unjust enrichment is a more common type of trade secrets damages.  The California Court of Appeal has opined that “[a] defendant’s unjust enrichment is typically measured by the defendant’s profits flowing from the misappropriation.  A defendant’s profits often represent profits the plaintiff would otherwise have earned.”  Ajaxo II, 187 Cal. App. 4th at 1305.  In such cases, “[a] defendant’s unjust enrichment might be calculated based upon cost savings or increased productivity resulting from use of the secret.  Increased market share is another way to measure the benefit to the defendant.”  Id. (internal citation omitted).  But the difficulties in determining the lost profits flowing from trade secret misappropriation equally apply to determining a defendant’s “unjust” profits earned from that misappropriation.  Id.

The Court of Appeal had earlier examined avoided development costs as damages for breach of a non-disclosure agreement.  Ajaxo v. E*Trade Group Inc., 135 Cal. App. 4th 21, 56-57 (2005) (“Ajaxo I”).  There, the court noted that while unjust enrichment is often “used as a synonym for restitution”, it can also include the return of any “value” or “benefit” received, regardless of whether such was conferred directly by the plaintiff on the defendant.  Id., at 56.  Avoided development costs have become a recognized form of damages for misappropriation of trade secrets under the DTSA.  “Unjust enrichment damages include what the parties call ‘avoided costs’–i.e., the development costs that [defendant] avoided incurring when it misappropriated [plaintiff’s] trade secrets.  These avoided costs are recoverable as damages for unjust enrichment under the DTSA and its state law counterparts derived from the Uniform Trade Secrets Act.”  Syntel Sterling Best Shores Mauritius Ltd. v. Trizetto Grp., Inc., No. 15 Civ. 211, 2021 U.S. Dist. Lexis 75875, at *23-24 (S.D.N.Y. April 20, 2021) (citing cases).  That the trade secrets are still of continuing value to the plaintiff does not prevent the plaintiff from recovering the full value of their use from the defendant.  Id. at 24-25.  Such recovery is not considered a double recovery, because “unjust enrichment damages derive from a policy of preventing wrongdoers from keeping ill-gotten gains, and therefore do not require a corresponding loss to the plaintiff.”  Id.  Moreover, both actual loss and unjust enrichment can be awarded so long as there is no double counting.  Lightening Box Games Pty., Ltd. v. Plaor, Inc., No. 17-cv-03764-EDL, 2017 U.S. Dist. Lexis 222529 (N.D. Cal. December 29, 2017), report and recommendation adopted, 2018 U.S. Dist. Lexis 220160 (N.D. Cal. Feb. 27, 2018); Syntel, 2021 U.S. Dist. Lexis 75875, at *26 (“The DTSA expressly permits the award of both actual loss and unjust enrichment, as long as there is no double counting.  See 18 U.S.C. § 1836(b)(3)(B).  The award of one does not preclude the other.”)  A plaintiff will need to provide a reliable method for calculating the dollar value of the time and resources a trade secrets defendant saved using the plaintiff’s trade secrets.  Brightview, 2021 U.S. Dist. Lexis 64487, at *63-64.

A jury may quantify these avoided development costs by looking at the costs to the plaintiff, though such damages might be more accurately considered as “actual loss” rather than “unjust enrichment”.  Caudill Seed & Warehouse Co. v. Jarrow Formulas, 3:13-CV-082-CRS, 2020 U.S. Dist. Lexis 10119, *75-84 (W.D. Ky. June 9, 2020).  Such a measure has also been characterized as “head-start damages” – the value of the “head-start” that the defendant obtained by using the trade secrets.  Epic Sys. Corp. v. Tata Consultancy Servs., 980 F.3d 1117, 1129-1130 (7th Cir. 2020).  Head-start damages can be limited to the time in which the defendant benefitted from the head-start.  AMS Sensors, USA, Inc. v. Renesas Elecs. Am., 4:08-cv-00451, 2021 U.S. Dist. Lexis 36056, at *15-19 (E.D. Tex. February 26, 2021) (finding that “the head-start duration is for the factfinder to determine what that ‘marketing advantage or head start’ was neutralized”).

Reasonable Royalty

Under both the DTSA and CUSTA, a plaintiff can recover a reasonable royalty for the defendant’s use of the trade secrets, which is a “court-determined fee imposed upon a defendant for his or her use of a misappropriated trade secret.”  Ajaxo II, 187 Cal App. 4th at 1308.  Unlike the DTSA, the CUSTA expressly provides that the reasonable royalty can be imposed “no longer than the period of time the use could have been prohibited.”  Cal. Civ. Code §3426.3(b).  In 2020 the California Court of Appeal sought to provide guidance to litigants in a decision affirming the trial court’s finding that the plaintiff was not entitled to a royalty.  Ajaxo, Inc. v. E*Trade Financial Corp, 48 Cal. App. 5th 129 (2020) (“Ajaxo III”).  Noting that the reasonable royalty “approximates ‘the price that would be set by a willing buyer and a willing seller for the use of the trade secret made by the defendant’” the Court of Appeal looked to federal precedent to guide courts in determining the royalty.  Id., at 160-161.  In particular, it looked to the Fifth Circuit’s decision University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518 (5th Cir. 1974), and the 15 factors listed in the well-known decision Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970) (the “Georgia Pacific” factors) used to set reasonable royalty in patent infringement cases.  Ajaxo III, 48 Cal. App. 5th at 161.

University Computing analyzed the damages allowable under Georgia trade secret law, which it found to be modeled on the Restatement, Torts §757.  University Computing, 504 F.2d at 534.  It found that “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.”  Id., at 539.  It declared that “every case requires a flexible and imaginative approach to the problem of damages” and identified several factors to examine, including a previously agreed upon licensing price, resulting and foreseeable changes in the parties’ competitive posture, the prices past purchasers or licensees paid, the total value of the secret to the plaintiff, including its development costs, or the availability of alternate processes.  Id., at 538-539.  Importantly, University Computing held that “the defendant must have actually put the trade secret to some commercial use.”  IdUniversity Computing has been described as “a leading case on calculating a reasonable royalty,” Hermann, 2021 U.S. Dist. Lexis 42277, at *49; see also Airfacts, Inc. v. de Amezaga, 502 F. Supp. 3d 1027, 1040-1041 (D. Md. 2020) (“The leading case on calculation of a reasonable royalty in the trade secret context is [University Computing]” and has been cited by numerous federal courts addressing a reasonable royalty under the DTSA as well as other state law claims. 

The California Court of Appeal also stated that the Georgia Pacific factors could be used to adjust upward or downward for other data points, where there is a “real-world ‘comparable’ close on point” that can be used as a starting point.  Ajaxo III, 48 Cal. App. 5th at 161.  These factors include existing license agreements, licensing negotiations, the duration of the license, the profitability of the product, as well as expert testimony. 

The court’s invocation of federal standards for analyzing a reasonable royalty for trade secrets misappropriation opens up a wealth of cases and standards – the Georgia-Pacific factors alone have been applied in thousands of cases and practice guides, too numerous to cite or summarize here.  Damages analysis under both the state CUSTA and the federal DTSA will continue to be intertwined as case law under both laws develop.

Jaideep Venkatesan is a Partner at Bergeson, LLP. He practices intellectual property and complex business litigation.