August 24, 2022 Practice Points

Discovery Concerning the Date on Which a Trade Secret Was Incorporated into a Product and How it Might Inform Actual Loss Damages

How trade secret incorporation dates might be relevant to lost profits and loss of business value damages theories.

By Abel Teshome

Under the Defend Trade Secrets Act, the measures of monetary relief available to plaintiffs in trade secret misappropriation matters may include (1) actual losses caused by the misappropriation; (2) unjust enrichment caused by the misappropriation, e.g., disgorgement of at least some portion of the profits earned by the defendant; or (3) a reasonable royalty for the alleged misappropriator’s unauthorized use of the trade secret. See 18 U.S.C. § 1836(b)(3)(B). Calculating damages based on any of these measures can be a fact-intensive exercise aimed at assessing the economic footprint of an asserted trade secret. This Practice Point explores one discovery avenue that may assist practitioners and the trier of fact in assessing whether alleged misappropriated trade secrets added value to their commercial embodiments, thereby potentially indicating whether actual losses claimed by a plaintiff might (or might not) be attributable to the alleged misappropriation.

In some cases, plaintiffs seek actual damages under the premise that they would have generated incremental sales and profits but for a defendant’s alleged misappropriation. Particularly in cases where the parties-in-suit are head-to-head competitors, plaintiffs could argue that the alleged misappropriation was the driving force behind sales of the defendant’s accused product and, accordingly, caused the plaintiff’s claimed lost sales and profits. Conversely, defendants could argue that demand for products that embody the alleged misappropriated trade secret is driven by many unrelated factors and there is no causal nexus between the alleged misappropriation and the plaintiff’s claimed lost sales and profits. Information and documents that reveal the dates on which a plaintiff’s and/or defendant’s products began incorporating trade secret-based features, as well as the sales and profits generated by such products before and after incorporation, could be relevant to this inquiry.

A recent order from the United States District Court for the Central District of California addressed the potential relevance of such information to a plaintiff’s actual damages claims and a defendant’s rebuttals thereof. Specifically, on March 21, 2022, the court in Masimo Corp., et al. v. Apple Inc. issued an order requiring the Plaintiffs to produce discovery responses sufficient to understand “the date on which each [of Plaintiffs’ products] purportedly incorporating the alleged trade secrets was first sold.” Order, ECF No. 638, Masimo Corp., et al. v. Apple Inc., No. 8:20-cv-00048-JVS-JDE (C.D. Cal. March 21, 2022).

The discovery dispute in Masimo Corp. stemmed from an interrogatory served by Apple requesting “information about when Plaintiffs’ products incorporated the asserted trade secrets.” While the Plaintiffs identified which of their products purportedly incorporate the subject trade secrets and produced sales data for those products, Apple argued that the Plaintiffs’ response was deficient because it omitted “the earliest date on which Plaintiffs offered the products incorporating the alleged trade secrets for sale,” which Apple contended was directly relevant to its efforts to rebut Plaintiffs’ actual damages claims for lost profits and loss of business value. Specifically, the court considered Apple’s arguments that such information was “relevant to show whether the trade secrets have value (e.g., delay in incorporation may undermine value, time of incorporation may have effected [sic] demand) as well as overall damages and damages apportionment related to the trade secret-related features.”

After a review of the record, the court concluded that Apple met the required baseline relevance and agreed with Apple that when Plaintiffs first sold products embodying the asserted trade secrets is a consideration relevant to the damages theories advanced in the case. The court reasoned that discovery concerning the dates on which parties incorporated trade secret-based features could facilitate apportionment analyses—by both plaintiffs and defendants—showing the extent to which the trade secret-based features impacted consumer demand, if at all:

For example, if adding trade secrets-based features to existing products increased product demand, Plaintiffs may argue that those trade secrets added value and therefore misappropriation caused more damages. Conversely, Apple may attempt to show that trade secrets-based components had no effect on consumer demand or that applying proper apportionment results in little to no trade secrets-related damages. See, e.g., Attia v. Google LLC, 2018 WL 4202151, at *2 (N.D. Cal. Sept. 4, 2018) (defendant in a trade secret misappropriation case is “certainly entitled to discovery relating to the value or lack of value of the alleged trade secrets and plaintiffs’ other allegations of harm, including plaintiffs’ prior unsuccessful efforts to commercialize the alleged trade secrets and the financial benefits (or lack thereof) that plaintiffs obtained from the alleged trade secrets”).

To assess whether and the extent to which alleged misappropriated trade secrets had an effect on consumer demand and commercial success, counsel might consider pursuing information and documents that reveal the dates on which a plaintiff’s and/or defendant’s products began incorporating trade secret-based features as well as the sales and profits generated by such products before and after incorporation.

Abel Teshome is a managing director in the Intellectual Property practice of Ankura Consulting Group in Ann Arbor, Michigan.

The information provided in this article is for general informational purposes only and does not, and is not intended to, constitute legal advice.

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