Assessing Damages for Misappropriation of Trade Secrets

• Publication year: 1998
• Pages: 71
• Citation: Vol. 27 No. 8 Pg. 71

27 Colo.Law. 71 Colorado Lawyer 1998.

1998, August, Pg. 71. Assessing Damages for Misappropriation of Trade Secrets

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71

Vol. 27, No. 8, Pg. 71

The Colorado Lawyer
August 1998
Vol. 27, No. 8 [Page 71]

Specialty Law Columns
Technology Law and Policy Review
Assessing Damages for Misappropriation of Trade Secrets
by Craig N. Johnson

In addition to injunctive remedies, a plaintiff may recover monetary damages for misappropriation of trade secrets under a variety of theories, including compensatory damages restitution, royalties, punitive damages, and attorney fees and costs. The appropriate damage theory depends on the nature of the trade secret at issue and the circumstances of its misappropriation.1

This article explores some of the alternative damage theories available in misappropriation cases under Colorado law, as well as some of the factual considerations to be taken into account when selecting the appropriate remedy

The Uniform Trade Secrets Act

Remedy Provisions

Colorado's Uniform Trade Secrets Act2 provides a remedy for any misappropriation of trade secrets, whether a claim is asserted under a tort theory or under a breach of contract theory, as in the case of an alleged breach of an agreement of confidentiality.3 Under the Trade Secrets Act, a plaintiff may recover compensatory damages and defendant's profits from the misappropriation. In the alternative, a plaintiff may recover a "reasonable royalty" as damages for the misappropriation

Specifically, the remedies provision of Colorado's Uniform Trade Secrets Act states:

Except to the extent that a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation renders a monetary recovery inequitable, a complainant is entitled to recover damages for misappropriation. Damages may include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator's unauthorized disclosure or use of a trade secret.4

Election of Remedies

Although some jurisdictions have held that a party injured by misappropriation must elect between the legal remedy of compensatory damages and the equitable remedy of restitution of the defendant's profits earned from the misappropriation,5 such an election is not necessary under Colorado law. Initially, Colorado's Uniform Trade Secrets Act specifically provides that an injured plaintiff may recover "both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation."6 [Emphasis added.] Moreover, Colorado courts have recognized that both compensatory damages and an accounting of a defendant's profits may be awarded where necessary to make a plaintiff whole.7

In Telex Corp. v. International Business Machine Corp.,8 for example, IBM brought a counterclaim against Telex alleging that Telex had engaged in unfair competition and misappropriation of IBM's trade secrets and confidential information. The district court awarded IBM $7.5 million in damages, consisting of $4.5 million in lost rentals that IBM would have realized but for the misappropriation, and an additional $3 million in damages for profits realized by Telex in marketing products that utilized IBM's trade secrets.

Applying Colorado law, the Tenth Circuit affirmed this award, stating:

The trial court was of the view that IBM should be recouped for the profit realized by Telex in connection with the marketing of its products to persons other than those who had been using IBM products, and attempted to do so by determining the extent to which Telex had been unjustly enriched. . . . Not to have allowed such would have been a denial to IBM of a substantial portion of the damage sustained by it in connection with the Aspen project. In sum, we are not inclined to disturb the award of the trial court of $7,500,000 in connection with the Aspen project.9

Thus, under Colorado law, a party aggrieved by misappropriation of its trade secrets may claim entitlement to both compensatory damages and recoupment of profits through the misappropriation of its trade secrets.

Measures of Compensatory Damages

Agreed Value

The first inquiry in determining a plaintiff's damages for misappropriation of trade secrets is whether there is a royalty agreement, or offer or counteroffer in anticipation thereof, wherein the parties express an agreed value for the trade secrets at issue.10 If there is no agreed value, the court will look to other extrinsic sources to determine the value of the claim.

R&D or "Head Start" Damages

Trade secrets are generally developed through substantial time and cost.11 The misappropriation of such trade secrets by another generally eliminates the initial investment in time and materials and enables it to bring its infringing product to the market more quickly. The loss of time and research and development ("R&D") costs is sometimes referred to as "head start" damages.12 Thus, a party may seek to recover the value of its R&D that was lost through misappropriation...