9-2 MONETARY RELIEF

• Jurisdiction: United States

9-2 Monetary Relief

TUTSA offers the trade secret plaintiff three avenues to recover damages for misappropriation: (1) the "actual loss caused by misappropriation"; (2) the "unjust enrichment caused by misappropriation"; or (3) "a reasonable royalty for a misappropriator's unauthorized disclosure or use of a trade secret."³ As the Fifth Circuit summarized: "[d]amages in misappropriation cases can take several forms: the value of plaintiff's lost profits; the defendant's actual profits from the use of the secret, the value that a reasonably prudent investor would have paid for the trade secret; the development costs the defendant avoided incurring through misappropriation; and a 'reasonable royalty.'"⁴ Such damages do not preclude injunctive relieve since, as TUTSA makes clear, the plaintiff can receive monetary damages "[i]n addition to or in lieu of injunctive relief."⁵ Trade secret damages are only available for the time period over which the trade secret is entitled to protection and for any additional time necessary to eliminate the misappropriator's unfair advantage.⁶

9-2:1 "Actual Loss" by the Plaintiff

This first avenue for establishing trade secret damages is proving the plaintiff's "actual loss caused by misappropriation."⁷ Under both TUTSA and DTSA, the "loss of value to the plaintiff is usually measured by lost profits."⁸ "Lost profits are damages for the loss of net income to a business, and a calculation of lost profits damages must be based on net profits, not gross revenue or gross profits."⁹ "Net profits are defined as what remains in the conduct of business after deducting from its total receipts all of the expenses incurred in carrying on the business."¹⁰

Texas law recognizes two methods of proving lost profits: (1) the before-and-after method and (2) the yardstick method.¹¹ At least one Texas case also suggests that a plaintiff may establish lost profits by applying its own profit margin to the defendant's sales.¹² Still, the court also noted that it was "mystified as to why [plaintiff's experts] did not conduct a more straightforward 'before-and-after' analysis of plaintiff's lost profits."¹³ Under the former, the plaintiff compares its profits "before and after" the misappropriation.¹⁴ Under the latter, the plaintiff's lost profits "are estimated by studying the profits of business operations that are closely comparable to the plaintiff's operations."¹⁵ This method of calculation is appropriate where "the plaintiff's business is relatively new and thus has insufficient historical profits from which to employ the before-and-after method."¹⁶

Although Texas courts have held that lost profits do not have to be "susceptible of exact calculation," plaintiffs do have to demonstrate the amount "with reasonable certainty, by competent evidence."¹⁷ Under either method, a plaintiff cannot rely on "uncertain or speculative" evidence.¹⁸ This means that the amount of lost profits must be ascertainable from objective facts, and a "bare assertion" of lost contracts will not suffice.¹⁹ To seek lost profits as a measure of damages, "a party must introduce 'objective facts, figures or data from which the amount of lost profits can be ascertained.'"²⁰ The primary way in which the plaintiff can establish lost sales is through the testimony of an expert or an employee with knowledge of lost sales. For example, the plaintiff could have its CEO or an expert testify that the company lost sales as a result of the defendant's misappropriation.²¹

The lost profits method of proving damages often goes unused by trade secret plaintiffs since, according to the Fifth Circuit, unless the plaintiff can offer such evidence of specific lost sales, "the loss to the plaintiff is not particularly helpful in assessing [trade secret] damages."²² In fact, "[w]here there was no evidence of any sales lost by the plaintiff or gained by the defendant due to the misappropriation, the Fifth Circuit held it was proper for the district court to instruct the jury that in arriving at the proper damages it should consider" something other than lost profits, such as "the development costs incurred by the plaintiff."²³

9-2:2 "Unjust Enrichment" by the Defendant

Another method of proving damages is the "unjust enrichment [to the defendant] caused by misappropriation that is not taken into account in computing actual loss."²⁴ Unjust enrichment measures the value of the trade secret to the defendant by looking to, among other things, the benefit obtained by the defendant as a result of the misappropriation.²⁵ According to the Texas Supreme Court, the "[v]alue [of the trade secret] to the defendant may be measured by the defendant's actual profits resulting from the use or disclosure of the trade secret (unjust enrichment), the value a reasonably prudent investor would have paid for the trade secret, or development costs that were saved."²⁶ To show the defendant's unjust enrichment, the plaintiff must offer evidence that the defendant has received the benefits of plaintiffs' research and development, technical guidance, and other valuable support without compensating the plaintiff.²⁷

This method of calculating damages also includes the value of any costs that a defendant saved by using or relying on plaintiff's research and development without compensating the plaintiff.²⁸ In these circumstances, courts use a "standard of comparison" measure to determine plaintiff's damages.²⁹

In seeking damages under this theory, however, the plaintiff should take care to determine whether the specific defendant from whom unjust enrichment damages are sought is subject to disgorgement. Under Texas law, compensatory damages repay the plaintiff for its actual loss incurred from the defendant's wrong; they are not designed to deter wrongful behavior.³⁰ This principle applies with equal force in trade secret cases, where a plaintiff could recover a windfall by seeking a co-defendant's profits where that co-defendant did not, in fact, compete with the plaintiff.³¹

This problem often arises where the trade secret plaintiff seeks disgorgement from a former employee who left to work for a competitor. The Restatement illustrates the issue with a simple example.³² In that illustration, one of the plaintiff's engineers leaves to work for a competitor and, in the course of his new employment, divulges the plaintiff's trade secrets.³³ As a result, the competitor uses those trade secrets in its products and earns a $5 million profit.³⁴ Because the "[e]ngineer obtains no profit from divulging the trade secret," he "is not liable to [the plaintiff] in restitution because [e]ngineer has not been unjustly enriched."³⁵

9-2:3 Reasonable Royalty³⁶

"Absent proof of a specific injury, the plaintiff can seek damages measured by a 'reasonable royalty.'"³⁷ The reasonable royalty measure of damages is, thus, an alternative to all other trade secret damages theories.³⁸ This measure of damages is "in essence, a proxy for the value of what the defendant appropriated, but [] not simply a percentage of the defendant's actual profits."³⁹ To calculate the royalty amount, courts imagine a hypothetical negotiation with the goal of establishing a fair price of what a hypothetical license for the trade secret would have been at the time of the misappropriation.⁴⁰ To determine this amount, the court typically considers a range of factors, including:

• the prices past purchasers or licensees may have paid for the use of the secret;
• the total value of the secret to the plaintiffs, including the development costs and the importance of the secret to their business;
• the nature and extent of the use the defendant intended for the secret; and
• various other factors that may be unique to any particular case and might have been considered in a hypothetical negotiation between the parties.⁴¹

Beyond these factors, in assessing a reasonable royalty, the court can consider what would be a customary royalty in the industry for the trade secret.⁴² It can also consider the commercial success of the defendant's products in establishing the royalty amount.⁴³ Courts, however, will not base a "reasonable royalty" on the amount for which the plaintiff would have licensed the trade secret to a competitor to prevent the competitor from entering the industry, since this is not a "market value."⁴⁴

9-2:4 Apportionment of Damages

Because a trade secret plaintiff may only recover those damages that are caused by the alleged misappropriation, the plaintiff must apportion its damages. Over a century ago, in Garretson v. Clark, the U.S. Supreme Court set the standard for apportioning intellectual property damages. In that case, the plaintiff sought to recover all profits from the defendants' sale of its mops, even though the plaintiff's sole intellectual property related to a method to attach the mop head to the mop handle. The Supreme Court rejected the plaintiff's damages theory, holding that the plaintiff "must in every case give evidence tending to separate or apportion the defendant's profits and the patentee's damages between the patented feature and the unpatented features."⁴⁵ In reaching this conclusion the Court recited the rule that:

[w]hen a patent is for an improvement and not for an entirely new machine or contrivance, the patentee must show in what particulars his improvement has added to the usefulness of the machine or contrivance. He must separate its results distinctly from those of the other parts, so that the benefits derived from it may be distinctly seen and appreciated.⁴⁶

The apportionment doctrine is as alive today as it was in 1884. Although that case occurred in the patent context, it is generally accepted that "the proper measure of damages in the case of a trade secret appropriation is to be determined by reference to the analogous line of cases involving patent infringement."⁴⁷ In fact, apportionment of trade secret damages has been incorporated into the Restatement, which describes the...