Damages in Misappropriation of Trade Secrets Cases
By Pamela Tahim
I recently second-chaired a jury trial with Tredway Lumsdaine & Doyle LLP (TLD”) partner and lead attorney Roy Jimenez, wherein the jury awarded over $13 million to our client, who was seeking damages for misappropriation of trade secrets. In the case we tried, TLD’s client was the plaintiff and a leading nationwide bankcard merchant company. Plaintiff had retained the defendant to create a proprietary software program to assist in the management of the plaintiff’s company. After signing a Non-Disclosure Agreement, the defendant was given access to the plaintiff’s confidential trade secrets including its business models.
A mere three months after terminating the relationship with the plaintiff, defendant was advertising the same business and confidential trade secret information obtained while working with plaintiff. The jury agreed with plaintiff’s expert witness that the value of the damages was the unjust enrichment of the discovery costs that plaintiff incurred to discover effective marketing strategies that enabled it to reach its level of sales and profits by the year the trade secrets were misappropriated by defendant. The discovery process of plaintiff, which occurred over many years led to the collective state of information about plaintiff’s business methods that enabled it to achieved its growth.
Many people have since asked me how did the jury come up with the $13 million verdict? The measure of damages in our lawsuit was based upon the theory of unjust enrichment, which has been long recognized as a measure of damages in cases involving misappropriation of trade secrets in employment law and business law disputes. However, for breach of non-disclosure agreements (NDA), there has been some confusion over the appropriate causes of action and how remedies should be calculated.
A recent decision on April 22, 2014, in the 6th District Court of Appeal in Grail Semiconductor Inc. v. Mitsubishi Elec. & Elecs. USA Inc., confirmed and clarified the damages available for a breach of a non-disclosure agreement (Grail Semiconductor, Inc. v. Mitsubishi Elec. & Electronics USA, Inc., 225 Cal. App. 4th 786, (2014)). Prior to Grail, California’s leading cases on breach of NDA damages were the Ajaxo opinions of 2005 and 2010. However, both decisions left open questions regarding whether unjust enrichment is available, and further, the basis for both breach of contract and unjust enrichment damages.
The Ajaxo decisions discuss unjust enrichment in association with breach of non-disclosure agreements. In 2005, the damages upheld for breach of contract were based on the development costs, plus the licensing fees that E*Trade initially offered Ajaxo (Ajaxo Inc. v. E*Trade Grp., Inc., 135 Cal. App. 4th 21 (2005)). However, there were existing questions about how the breach of contract damages could be calcualted if there was additional economic evidence available. Further, in 2010, Ajaxo II focused exclusively at the misappropriation claim and the damages available. The Court held that for a misappropriation of trade secrets, a plaintiff is entitled to unjust enrichment in the form of the defendant’s wrongful profit obtained from infringing sales or if it could not be “proved” then a reasonable royalty for the defendant’s sales (Ajaxo Inc. v. E*Trade Fin. Corp., 187 Cal. App. 4th 1295 (2010).
In Grail, these damage remedies were clarified. The plaintiff in Grail was an innovative company that developed a memory chip known as the semiconductor chip. In 2001, plaintiff shared its design with Mitsubishi under an NDA. However, Mitsubishi breached the NDA with Grail and passed the chip design to its subsidiary Renesas. Grail went to trial on the sole pleading of breach-of-contract claim. The plaintiff’s sole pleading of breach of contract greatly affected their outcome of damages and it is apparent from Grail the importance of pleading both breach of contract and misappropriation of trade secrets when there has been a breach of NDA.
Further, Grail establishes how damages should be calculated. In terms of contract damages, the Court decided that damages should be limited to the amount that the defendant would have paid upfront to honor the NDA and license the technology. Additionally, the benefit of pleading misappropriation is the availability of unjust enrichment damages. “Remedies under the UTSA for the misappropriation of trade secrets include injunctive relief, damages, royalties, punitive damages, and attorney fees. (§§ 3426.2–3426.4) Section 3426.3 provides several measures of damages upon proof of misappropriation of trade secrets. Under subdivision (a), a complainant may recover damages for the actual loss caused by misappropriation, as well as for any unjust enrichment not taken into account in computing actual loss damages.” Ajaxo Inc. v. E*Trade Grp., Inc., 135 Cal. App. 4th 21, 61, 37 Cal. Rptr. 3d 221, 252 (2005). Further, under subdivision (b), even when a complainant cannot prove damages with certainty, a plaintiff can receive a reasonable royalty rate.
Therefore, it is important for a plaintiff to utilize all the available strategies and claims when they are subject to a breach of non-disclosure agreement. Pleading solely a breach of contract claim could greatly limit the plaintiff’s recovery and Grail defines the available causes of action and how those damages should be calculated answering unsolved questions from the previous California case law. However, it is important to be cognizant of the fact that there are attorneys’ fees recoverable for UTSA claims for the prevailing party and if all the protections are not in place to ensure confidentiality, it may be better to just plead breach of contract. In our case, we were able to obtain unjust enrichment as a remedy because we plead the cause of action for misappropriation of trade secrets. In any such similar case, it is important to use attorneys experienced in this specific area of law to make sure that you plead the right causes of action to get the maximum damage recovery.