The cost approach is a method of calculating damages in trade secret litigation. This framework is based on the premise that, when negotiating intellectual property rights, rational negotiators will consider the cost of acceptable alternatives to an intellectual property license.
With respect to trade secret litigation, the cost approach can inform the determination of a defendant’s unjust enrichment. The cost approach can also serve as a starting point for determining a reasonable royalty when neither the plaintiff’s actual loss, nor the defendant’s unjust enrichment are “provable.” See, e.g., Ajaxo Inc. v. E*Trade Fin. Corp., 187 Cal. App. 4th 1295 (Cal. Ct. App. 2010); The Defend Trade Secrets Act of 2016, Pub. L. 114-153 (2016).
While both the plaintiff and defendant in trade secret litigation may point to their research and development (R&D) investments as the value of the subject trade secrets or the efforts deployed to avoid their misappropriation, this historical approach can be subject to challenge. An additional challenge for the R&D cost argument is that companies may not diligently track R&D expenditures. Moreover, it can be difficult to compartmentalize R&D efforts into discrete categories after the fact. As such, a generally accepted application of the cost approach focuses on quantifying the incremental development costs and risks that the defendant would have incurred to develop an alternative product without access to the subject trade secrets.