November 30, 2018 Articles

Better Safe Than Sorry: Experts Should Apportion Damages in Trade Secret Cases

In trade secret misappropriation cases, experts should consider apportioning damages on a trade-secret-by-trade-secret basis; otherwise, they risk exclusion

by Travis S. Hunter and Renée M. Mosley

Trade secret claims commonly involve large-scale litigation with millions of dollars at stake. Heightened competition and increased employee mobility in certain industries have resulted in an explosion of trade secret litigation in recent years. See Bradford K. Newman, “Protecting Trade Secrets,” 17 Bus. L. Today, Nov./Dec. 2007. It is expected that trade secret cases will continue to increase, given the passage of the federal Defend Trade Secrets Act, 18 U.S.C. § 1836 (2016) (DTSA), two years ago. In total, there have been 1,104 new cases filed with DTSA claims in the two years since the DTSA became law, according to Docket Navigator. Twenty-one cases have been filed in the U.S. District Court for the District of Delaware, and most of these cases are either in the discovery stage or have been voluntarily dismissed. Id.

Often, however, an employee accused of trade secret misappropriation does not just “steal” one trade secret. Rather, multiple components of the former employer’s “secret sauce” are taken. This common fact pattern can present serious issues in calculating the damages attributable to each trade secret. Stated differently, if an employee steals four trade secrets, how much is each secret worth? Are damages potentially greater if a competitor obtains access to just one of the secrets as opposed to all four? How should a plaintiff separate the head start obtained from a defendant’s misappropriation from where the defendant would have been without engaging in wrongful conduct?

Having a trained damages expert who understands these potential issues is critically important. Given the increase in trade secret claims, it is important that trade secret litigants (and their experts) understand the importance of apportioning damages on a trade-secret-by-trade-secret basis. This is because a plaintiff’s recovery “must reflect the value attributable to the infringing features of the [trade secret], and no more.” In re Avaya Inc., No. 17-10089 (SMB), 2018 WL 1940381, at *8 (Bankr. S.D.N.Y. Apr. 23, 2018). Calculations of damages that fail to correct for factors not attributable to a defendant’s misconduct are generally inadmissible. Schiller & Schmidt, Inc. v. Nordisco Corp., 969 F.2d 410, 415–16 (7th Cir. 1992) (finding that damages expert “should have tried to separate the damages that resulted from the lawful entry of a powerful competitor . . . from the damages that resulted from particular forms of misconduct allegedly committed by that competitor”). If an expert does not properly apportion damages, the plaintiff risks exclusion of its damages expert and possibly losing its entire case.

Indeed, courts have held that experts must apportion damages on a trade-secret-by-trade-secret basis or risk exclusion. For example, in O2 Micro International Ltd. v. Monolithic Power Systems, Inc., 399 F. Supp. 2d 1064 (N.D. Cal. 2005), the plaintiff asserted misappropriation of 11 trade secrets under the California Uniform Trade Secret Act (CUTSA). The expert’s opinion did not apportion damages and provided a calculation based on the assumption that all of the trade secrets were misappropriated. The jury awarded 75 percent of the unjust enrichment damages sought even though it determined that only one of the misappropriated trade secrets resulted in unjust enrichment. After trial, however, the U.S. District Court for the Northern District of California granted a post-trial motion to vacate the jury’s award of $12 million in unjust enrichment damages for trade secret misappropriation. The court reasoned that the jury did not have a reasonable basis to conclude that the single trade secret was worth 75 percent of the damages sought. See also Steves & Sons, Inc. v. JELD-WEN, Inc., No. 3:16-CV-545, 2018 WL 2172502, at *15 (E.D. Va. May 10, 2018) (a DTSA case) (discussing O2 Micro and holding that “the standard with respect to reasonable royalty damages is considerably more lenient”); Ice Corp. v. Hamilton Sundstrand Corp., 615 F. Supp. 2d 1256 (D. Kan. 2009) (distinguishing O2 Micro and noting that the plaintiff was seeking lost profits rather than assigning a value to the trade secrets themselves).

In a more recent case, the U.S. District Court for the Northern District of California granted a motion to exclude an expert for his failure to apportion damages. Waymo v. Uber Techs., Inc., No. C 17-00939 WHA, 2017 WL 5148390 (N.D. Cal. Nov. 6, 2017). There, the expert relied on an “acceleration” theory to measure the incremental future profits that resulted from the alleged misappropriation. The court excluded the expert’s analysis because a “glaring problem” was his failure to “apportion the alleged acceleration of [the defendant]’s development timeline between legitimate benefits and trade secret misappropriation.”

In yet another case, Alcatel USA, Inc. v. Cisco Systems, Inc., 239 F. Supp. 2d 660 (E.D. Tex. 2002), a plaintiff lost its entire case because its expert failed to apportion damages. The U.S. District Court for the Eastern District of Texas granted the defendant’s renewed motion for summary judgment for lack of remedy, finding that the expert failed to apportion damages. The court noted that the plaintiff had “ample opportunity” to present a successful damages theory after three and a half years of case development, including the defendant’s first motion for summary judgment for lack of remedy, submission of the damages expert’s report, and oral arguments on Alcatel’s damage theory.

Although in rare instances strict apportionment may not be required, caution is still warranted. For example, in BladeRoom Group Ltd. v. Facebook, Inc., No. 5:15-cv-01370-EJD (N.D. Cal. Apr. 3, 2018), the plaintiff alleged misappropriation of trade secrets under the California Uniform Trade Secrets Act. The defendant moved to exclude the plaintiff’s expert opinion due to the expert’s failure to apportion damages on a trade-secret-by-trade-secret basis. The expert opined that the plaintiff should be awarded over $200 million in lost profits and unjust enrichment damages for the defendant’s trade secret misappropriation. The U.S. District Court for the Northern District of California denied the defendant’s motion, with the following explanation:

It is true that under CUTSA, damages claimed for actual loss or unjust enrichment must be caused by the misappropriation alleged. Cal. Civ. Code § 3426.3. This portion of CUTSA does not require, however, that an expert assign damages amongst the trade secrets for his or her opinion to be admissible.

BladeRoom, No. 5:15-cv-01370-EJD, slip op. at 14.

The distinguishing fact between BladeRoom and the court’s prior opinions in O2 Micro and Waymo is that the BladeRoom expert’s opinion assumed that each asserted trade secret served as a “lock on the door” to the contract at issue. Plaintiff’s Opposing Brief, BladeRoom, No. 5:15-cv-1370, D.I. 559 at 4:16–22. Essentially, this theory means that if any one of the trade secrets was misappropriated, then the plaintiff would still be awarded the same amount of damages. Relying on O2 Micro, the court warned the plaintiff that it must prove every hypothesis on which the expert relied, noting that the expert relied on a “chain of assumptions to connect his damages opinion to the alleged misconduct.” BladeRoom, No. 5:15-cv-01370-EJD.

In sum, even though experts are not required to determine damages on a trade-secret-by-trade-secret basis in every case, it is nevertheless best practice for an expert to apportion damages among trade secrets where appropriate. Even in cases in which an expert chooses not to apportion damages, plaintiffs are still required to prove every hypothesis on which the expert relies.

Apportionment of damages is particularly important at the summary judgment stage, especially if the plaintiff has had ample opportunity to develop its damages theory. Due to the timing of expert reports, a plaintiff faces losing its entire case on a motion for summary judgment if the expert does not properly apportion damages on a trade-secret-by-trade-secret basis. In addition, if a judge grants a motion for summary judgment on some secrets but not others, or if the jury concludes that only a subset of the trade secrets was misappropriated, the plaintiff may be left without a damages expert; the damages expert would be unable to narrow the potential damages to the trade secrets remaining in the case because such analysis was not contained in the expert report.
 

Travis S. Hunter is a director and Renée M. Mosley is an associate of Richards, Layton & Finger, P.A., in Wilmington, Delaware.


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