January 12, 2021 Articles

Damages in Trade Secret Matters: Lessons Learned in Patent Litigation

Valuation approaches that have been extensively vetted in the context of patent infringement damages can be useful starting points in trade secret litigation.

By Jim Pampinella and Chris Schulte

When key personnel change employers, confidentiality agreements are tested, and the security and value of critical trade secrets and patented technology can hang in the balance. At the same time, the potential unenforceability of employment contracts and non-competes may give rise to increased trade secret litigation as companies attempt to prevent “brain drain” from employee migration, especially in employee-friendly states such as California and New York. While these issues are increasingly common, the path for assessing corresponding financial damages, if any, is often elusive. This article examines the evolving topic of financial damages in trade secret litigation and the applicability of various lessons learned through years of evaluating damages in patent infringement matters.

Background

Federal court patent litigation has yielded several court-approved methods for proving damages in the intellectual property context. For example, in Panduit v. Stahlin Brothers, Inc., 575 F.2d 1152, 197 U.S.P.Q. 726 (6th Cir. 1978), the Sixth Circuit outlined a four-factor test for determining whether a patent holder suffered lost profits due to infringement of the patent in suit. In Georgia-Pacific v. United States Plywood, 318 F. Supp. 1116, 166 U.S.P.Q. 235 (S.D.N.Y. 1970), modified, 446 F.2d 295, 170 U.S.P.Q. 369 (2d Cir. 1971), cert. denied, 404 U.S. 870 (1971), the court prescribed 15 factors to assist in determining a reasonable royalty resulting from a hypothetical negotiation between the litigating parties. The Federal Circuit’s decision in Rite-Hite v. Kelley, 56 F.3d 1538, 1548 (Fed. Cir. 1995), addressed issues pertaining to the entire market value rule (EMVR) when the patent in suit covers only one feature or characteristic of the products at issue, and Uniloc v. Microsoft, 632 F.3d 1292 (Fed. Cir. 2011), further addressed the EMVR, as well as the suitability of comparable license agreements to assist in the determination of a reasonable royalty. EMVR, combined with the hypothetical negotiation construct, have allowed experts the flexibility to enhance damages, which has resulted in the Federal Circuit reining in lucrative awards in certain venues and providing further guidance on apportionment-related issues.

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