“I feel… stupid,” Emilio says. “I can’t believe Verica did this to me. I can’t believe that I let her.”
He sighs, closes his eyes, and shakes his head in disbelief.
“This is not your fault, Emilio. We’ll get you through this mess.”
Emilio’s company, Nanoptic, is a budding superstar in the field of medical nanotechnology. Backed by robust investor support, the company has developed proprietary ways to use nanoparticles to deliver drugs to targeted cancer cells. Nanoptic’s meteoric growth is tied to the genius of its founder, your long-time client Emilio Quintero.
But fate dealt Nanoptic a cruel blow. The company teeters on the precipice of financial ruin, battered and bruised by illegal competition.
“Let’s review what happened,” you say. “Start at the beginning.”
At the same time sales were soaring, corporate discord arose. Rufus Johannson, Nanoptic’s Vice President of Sales, relentlessly challenged Emilio’s vision for growth. After months of infighting, Nanoptic fired Rufus and purchased his stock. Rufus left the company with a noncompete agreement and a seven-figure severance package.
The dispute was resolved, or so it seemed.
Unbeknown to anyone else, Rufus had a mole inside the company. That mole – Emilio’s administrative assistant, Verica Farkas – fed Rufus a steady stream of research and development, marketing plans, and other confidential information. Emilio depended on Verica’s weekly summaries of corporate activities, so no one suspected foul play when she accessed confidential information. She was, so it seemed, intensely devoted to Emilio and to the company.
About five months ago, Emilio began hearing about a new competitor, Slaytec Enterprises, with Rufus at the helm. Rufus was outside the noncompete term in his severance agreement so Emilio did not give much thought to the new competitor. Shortly afterwards, Verica abruptly left the company, ostensibly to care for her young children.
Customers couldn’t stop talking about Slaytec. Emilio was surprised at how quickly the competitor unveiled new products, many which contained features that mimicked those that Nanoptic developed after Rufus’ departure.
Emilio ordered a forensic investigation to determine if Rufus was hacking the company’s computers. He was floored when he learned that Verica had delivered mountains of confidential information to Rufus. The forensic proof was overwhelming and incontrovertible. In exchange for Nanoptic’s crown jewels, Verica received a six-figure payout and an equity position in Slaytec.
“I’ve really messed this up, Counselor,” Emilio says with a sigh. “What can we do?”
“The first thing we do is stop the bleeding. We need an injunction.”
Scott F. Gibson is a proud husband, father of four, and grandpa to the three cutest kids you’ll ever meet. He’s a partner with the Mesa, Arizona law firm of Denton Peterson Dunn, PLC. Since 2008, he has taught a class on trade secrets and restrictive covenants at the Sandra Day O’Connor College of Law at Arizona State University. He is a long-time member of DRI and its Employment and Labor Law Committee.
Both state and federal law protect trade secrets. All states except New York have adopted some form of the Uniform Trade Secrets Act; New York protects trade secrets based common principles derived from the Restatement of Torts. Since 2016, the Defend Trade Secrets Act has established a private civil cause of action in federal courts.
The UTSA and the DTSA define trade secrets similarly. A trade secret is information that (a) has independent economic value (b) because it is not generally known or (c) ascertainable by proper means by persons within the relevant industry and (d) is subject to efforts that are reasonable under the circumstances to protect its secrecy. See Uniform Trade Secrets Act § 1(4); 18 U.S.C. § 1839(3).
Both statutory schemes protect trade secrets from misappropriation by “improper means” such as theft, breach of fiduciary duty, or other dishonest means. And the UTSA and DTSA provide considerable authority to address misappropriation of trade secret information.
Critically, the UTSA and DTSA give courts the authority to issue an injunction to prevent the “actual or threatened misappropriation of a trade secret.” See UTSA § 2(a). Injunctive relief is the preferred remedy in trade secret cases “because it is the most effective way to prevent use or disclosure of a trade secret by a potential defendant that may extinguish its value.” Henry H. Perritt, Jr., Trade Secrets: A Practitioner’s Guide, 491 (Practicing Law Institute 1994).
A party seeking a preliminary injunction must establish four traditional equitable criteria: (1) a strong likelihood of success at trial on the merits; (2) irreparable harm that is not remediable by damages; (3) the balance of hardships favors the plaintiff; and (4) public policy favors granting the injunction. E.g., Justice v. Nat’l Collegiate Athletic Ass’n, 577 F.Supp. 356, 363 (D. Ariz. 1983).
In addition to injunctive relief, the DTSA authorizes an ex parte seizure of any “property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” 18 U.S.C. § 1836(b)(A)(1). The party seeking seizure must through show “extraordinary circumstances” justifying the need for the order by way of an affidavit or verified Complaint. 18 U.S.C. § 1836(b)(2).
If you want to enjoin misappropriation or seize goods ex parte, you will need a compelling witness to persuade the court that you are entitled to the extraordinary relief. On the whole, lawyers and judges are smart people who aren’t good at math or science. Your witness must be able to explain the trade secret in common terms, describe how the trade secret differs from the general knowledge in the industry, and show why the trade secret deserves judicial protection.
In preparing your witness, remember the adage given to would be authors: Show, don’t tell. The witness must do more than make conclusory statements about the virtue of your position. Your witness must be able to describe your position coherently and convincingly so that the judge will conclude on her own that you are entitled to the relief sought.
You pull into your parking space at 6:47 a.m. The sun has just started to peak over the mountain and you are bone tired already. The past two weeks have been a whirlwind of activity from investigating claims and drafting pleadings to preparing witnesses and holding an evidentiary hearing the end of last week.
And so your litigation team is gathering to evaluate your damage claims. At 8:00 a.m. sharp, Emilio and Nanoptic’s general counsel, Myrtle Potter, join the meeting via Zoom. After a few pleasantries, you broach the reason for the meeting.
“Our damages theories will impact our discovery plan, settlement strategy, and trial preparations. The good news is that we have a lot of flexibility in calculating damage.”
Emilio gives a sigh of relief.
“We can recover damages based on the harm you have suffered and on the benefit that Rufus has received,” you explain. “As long as we don’t double count, we can recover damages using multiple theories.”
“Tell me more, Counselor.”
Courts have “considerable flexibility” in calculating appropriate damages for misappropriation of trade secrets. Restatement (Third) of Unfair Competition § 45, comment b. “The proper measure of damages for misappropriation of trade secrets cases can be elusive, and courts are encouraged to be ‘flexible’ and imaginative’” Computer Assoc. Int’l Inc. v. Am. Fundware, Inc., 831 F.Supp. 1516, 1526 (D. Colo. 1993).
This “flexible” and “imaginative” approach allows the court to tailor relief based on the specific nature of the case. So in addition to injunctive relief, a plaintiff may recover damages for the “actual loss caused by misappropriation” as well as for the defendant’s unjust enrichment “that is not taken into account in computing damages for actual loss.” UTSA § 3(a).
Courts typically use four different methods for calculating damages for misappropriation: (1) the plaintiff ’s loss from the misappropriation, (2) the defendant’s profits from sales attributable to the trade secret, (3) the savings the defendant enjoyed based on the misappropriation, and (4) a reasonable royalty for the defendant’s use of the trade secret. Restatement (Third) of Unfair Competition § 45, comment d. As long as no “double recovery” occurs, a plaintiff may recover damages both to compensate him for his losses and to deprive the defendant of his unjust enrichment.
“Our sales are down 17.8% over the last six months,” Emilio says. “Can we recover lost profits from those sales?”
Myrtle grimaces and shakes her head slowly.
“Torts class wasn’t my strongest subject in law school,” she says, “but I know that we have to show that the misappropriation caused our loss. I’m not sure we can do that.”
“Remember, the court has considerable flexibility in formulating a damage award,” you say. “Although we’re required to prove that Nanoptic suffered damages, the level of proof is relaxed. We have to prove that you suffered a loss, but don’t have to prove the amount of your loss with the same specificity required in typical tort cases. We only need evidence sufficient to allow the court to reasonably estimate your lost profits.”
Myrtle looks relieved.
“A good expert witness can help us prove your lost profits,” you continue. “I have a good relationship with an accountant who is a great teacher. She can provide clear testimony tying your lost sales to the misappropriation. I’ll reach out to her today.”
A successful plaintiff may recover its actual losses arising from the misappropriation. “The plaintiff ’s loss usually consists of profits lost on sales diverted from the plaintiff, loss of royalties or other income that would have been earned by the plaintiff but for the appropriation, or the value of the trade secret if it has been destroyed through a public disclosure by the defendant.” Restatement (Third) of Unfair Competition § 45, comment d.
Second, some states allow the court to assess a reasonable royalty as a measure of compensatory damages. The royalty is based on a hypothetical license for the trade secret technology, with the court often calculating the royalty using methods suggested under patent law. A 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.” Restatement (Third) of Unfair Competition § 45, comment g.
“Because the primary concern in most cases is to measure the value to the defendant of what he actually obtained from the plaintiff, the proper measure is to calculate 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.” University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 539 (5th Cir.1974). “Where there is a ‘real-world’ “comparable” close on point,’ the court may view that as the ‘starting point’ for the hypothetical negotiation.” Ajaxo, Inc. v. E*Trade Fin. Co., 48 Cal.App. 5th 129, 161 (Cal. App. 2020) quoting Oracle Am., Inc. v. Google Inc., 798 F.Supp. 2d 1111, 1121 (N.D.Cal. 2011).
The court may then adjust the “realworld comparable” up or down for other comparable data points. Ajaxo, 48 Cal. App. 5th at 161. Courts “examine a broad range of factors including the effect on the parties’ competitive posture; the terms of other licenses; the value of the secret to the plaintiff, including the cost of its development; and the nature and extent of the defendant’s intended use.” Trade Secret Case Management Judicial Guide § 2.6.2.2.2 at 2-44 (Federal Judicial Center 2023)
Emilio perks up.
“Before all this mess arose, we were in negotiations with MysticNano to license some of our technology. I did my MBA with their CEO, Merwin Johansen, and we’ve remained friends after school. Our companies service different segments of the market, so it seemed like a win-win for us to share the technology – for a fee.”
That’s a good starting point for our discussions on royalties,” you say. “Let’s gather any documentation you have about the negotiations.”
“And I’m certain that Merwin would be willing to testify about those negotiations,” Emilo says. “He’s aware of what Rufus did… and he’s nearly as upset about it as I am.”
“A hypothetical license is intriguing,” Myrtle says. “But what about our lost profits? What do we need to show to recover lost profits?”
“I’m glad you asked,” you say.
Misappropriation of a trade secret is a tort. But because misappropriation typically occurs in secret, the level of proof is relaxed. As in any other tort case, the plaintiff must show a causal link “between the fact of its damages (if not their precise amount) and the defendant’s misappropriation.” Marc J. Pensabene & Christopher E. Loh, How to Assess Trade Secret Damages, Managing Intellectual Property (June 1, 2006) located at http:// www.managingip.com/Article/1254372/ How-to-assess-trade-secret-damages. html.
“The general rule that prohibits evidence of speculative profits does not apply to uncertainty as the amount of the profits which would have been derived, but to uncertainty or speculation as to whether loss of profits was the result of the wrong and whether any such profits would have been derived at all.” Tri-Ton International v. Velto, 525 F.2d 432, 437 (9th Cir. 1975). Nonetheless, a claim for lost profits “must be supported by some financial data which permit an estimate of the actual loss to be made with reasonable certitude and exactness.” Home Pride Foods v. Johnson, 262 Neb. 701, 711, 634 N.W.2d 774 (2001).
Under appropriate circumstances, the court may presume that the plaintiff would have made all the sales in the area if the defendant had not misappropriated the trade secret. Clark v. Bunker, 453 F.2d 1006, 1011 (9th Cir. 1972).
“Recovering our lost profits is a good start,” Myrtle says, “but the harm goes much deeper than that. Without our stolen trade secrets, Slaytec would be another competitor scrambling to catch up with Nanoptic. But instead, we have a competitor that is using our proprietary techniques to compete against us.” Emilio nods in agreement.
“It’s particularly unfair because Slaytec didn’t have to spend any time or resources to develop those techniques,” he says.
“You’re right,” you say. “It is unfair. And that’s one reason why the law gives courts lots of flexibility in calculating damages in trade secret cases.”
You explain that in addition to awarding damages to compensate for a plaintiff’s loss, the law also allows a successful plaintiff to recover damages based on the defendant’s unjust enrichment. That recovery may take various forms, ranging from the defendant’s profits attributable to the trade secret to so-called “head start” damages to a reasonable royalty for use of the trade secret.
Emilio rubs his chin and grins for the first time in weeks.
Flexibility is key in determining damages associated with the defendant’s unjust enrichment. That flexibility manifests itself in many forms. For example, a plaintiff may recover the profits that the defendant earned on “sales that are attributable to the trade secret.” Restatement (Third) of Unfair Competition § 45, comment d.
In addition, the trade secret owner may recover damages under the “standard of comparison,” which measures the savings that the defendant enjoyed by using the misappropriated trade secret. Id. These damages for “saved costs of development” quantify the benefit received from the defendant’s “ability to avoid incurring certain research and development costs by using the confidential information and trade secrets.” Sabre GLBL, Inc. v. Shan, 779 F. App’x 843, 851 (3d Cir. 2019).
But the trade secret owner is not limited to recovering the saved costs of development. The court may also award head start damages representing the defendant’s “unjust enrichment specifically arising from any temporal advantage obtained by the misappropriation.” Alifax Holding Spa v. Alcor Scientific, Inc., 387 F. Supp. 3d 170, 171 (D. R.I. 2019).
Head start damages quantify the defendant’s increase in value from being “further along than it otherwise would have been in developing and commercializing its products and services.” Sabre GLBL, 779 F. App’x at 851. “Establishing damages for the benefit conferred does not require proof that the defendant has succeeded in making a profit and can be based on the value of what was received.” Trade Secret Case Management Judicial Guide § 2.6.2 at 2-46.
“What about attorneys’ fees?” Myrtle asks. “Are fees available as a remedy and, if so, what do we need to show?”
“We don’t have a presumptive right to recover fees if we are successful,” you note. “But the UTSA gives an opening to recover both attorneys’ fees and exemplary damages. I don’t want to give any false expectations. It’s an uphill battle to prove our case. But I believe we have a reasonable opportunity to make the required showing.”
You explain that the UTSA authorizes an award of attorneys’ fees and exemplary damages for “willful and malicious” misappropriation of trade secrets, which requires you to show an elevated type of misappropriation.
Misappropriation is an intentional tort. When a jury finds misappropriation, it necessarily finds that the defendant’s actions were deliberate. But the law distinguishes between “ordinary” misappropriation (which is intentional) and “willful and malicious” misappropriation (which is “something more” than intentional). Even if a defendant’s “misappropriation was improper, it does not necessarily follow that the misappropriation was willful and malicious.” API Ams. Inc., v. Miller, 380 F.Supp.3d 1141, 1151 n. 6 (D. Kan. 2019).
The relevant question is, what constitutes “something more?”
The majority approach finds that a defendant’s acts are “willful” when they are “done with actual or constructive knowledge of the probable consequences” and “malicious” when the defendant acted “with intent to cause injury.” KPM Analytics N. Am. Corp. v. Blue Sun Scientific, LLC, 729 F.Supp. 3d 84, 104 (D.Mass. 2024) quoting 1 Roger M. Milgrim, Milgrim on Trade Secrets § 1.01[2][c][iv][C]; see also Nucar Consulting, Inc. v. Doyle, 2005 Del. Ch. LEXIS 43, at *49-50 (Del. Ch. April 5, 2005) (willfulness is “an awareness, either actual or constructive, or one’s conduct and a realization of its probable consequences” and malice is “ill-will, hatred or intent to cause injury”).
The minority view finds actions “malicious” based on the defendant’s “conscious disregard for the rights of another” Steves & Sons., Inc. v. Jeld-Wen, Inc., 988 F.3d 690, 726-27 (4th Cir. 2021). Under the majority view, “malice may be proven either expressly by direct evidence probative of the existence of ill-will, or by implication from indirect evidence.” Int’l Med. Devices, Inc. v. Conrell, 2024 U.S. Dist. LEXIS 56663, at *20-22 (C.D.Cal. Mar. 28, 2024).
It’s important to note that the statute does not implicate the state standards for awarding punitive damages. See Yeti by Molly, Ltd. v. Deckers Outdoor Corp., 259 F.3d 1101, 1111 (9th Cir. 2001) (“We conclude that the Montana legislature did not incorporate the definition of punitive damages into the trade secrets act”); Zawels v. Edutronics, Inc., 520 N.W. 2d 520, 524 (Ct. App. Minn. 1994) (the “plain language” of the statute shows that exemplary damages under the UTSA differ from an award of punitive damages).
Because the UTSA does not implicate the state standards for punitive damages, a plaintiff has an easier pathway to an award of exemplary damages. See Orca Comm’s Unlimited, LLC v. Noder, 236 Ariz. 180, 183 ¶ 13 (2014) (statute “does not adopt the common law or impose a heightened standard of proof for a punitive damages award”); Bimbo Bakeries United States v. Sycamore, 2017 U.S. Dist. LEXIS 157050 (D. Utah Sept. 23, 2017) (legislature did not deviate from the standard burden of proof and the court will not presume to do so). And so a plaintiff need not prove clear and convincing evidence to receive exemplary damages.
We have a strong basis for claiming exemplary damages,” you note. “Rufus knew that Verica had a confidentiality agreement with Nanoptic – he signed the same agreement with the company.”
“And they used confidential bids to undercut our proposals to our existing customers,” Emilio notes. “Rufus was angry when he left the company. I’m certain that we’ll find other examples of willful and malicious conduct.”
Emilio reviews some of the most egregious pieces of evidence that the forensic review disclosed thus far: Verica’s secret drop box account used to ferry confidential information to Rufus; her condescending SMS messages mocking company executives; emails contemplating the best ways to hurt Nanoptic. Her electronic communications with Rufus outlined a fertile field for discovery.
Electronic data lives forever. It’s exhilarating when the evidence favors your case. You turn to your associate, who has been taking notes during the meeting. “Let’s talk after the call. I’d like your input, but I have a good idea on the direction our discovery needs to go.”
Emilio nods his head and grins. “Go get ‘em, Tiger. Let’s bring down the bad guys.
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