Punitive damage and attorney fee awards in trade secret cases.

• Author: Dole, Richard F., Jr.

1. INTRODUCTION II. THE NATURE OF PUNITIVE DAMAGES III. AMERICAN TRADE SECRET LAW A. The Restatements B. The Uniform Trade Secrets Act C. The Uniform Act Punitive Damage and Attorney's Fee Provisions D. Nonuniform Amendments IV. CONSTITUTIONAL CONSIDERATIONS A. The Constitutional Right to a Jury Trial with Respect to Punitive Damages and Attorney's Fees B. Constitutional Limitations Upon the Award of Punitive Damages and Attorney's Fees 1. The Supreme Court Cases 2. The Constitutionality of the Uniform Act Punitive Damages and Attorney's Fees Provisions a. Willful and Malicious Misappropriation b. Application of the Gore/Campbell Guideposts V. OTHER FACTORS AFFECTING PUNITIVE DAMAGE AND Attorney's Fee Awards In Trade Secret Cases A. The Defendant's Inability-to-Pay Defense B. Exclusion of the Defendant's Profit From Misappropriation from Punitive Damages C. Either Inclusion or Exclusion of the Successful Plaintiffs Reasonable Attorney's Fees in Punitive Damages VI. CONCLUSION I. Introduction

   This article deals with the safeguards against excessive punitive damages and attorney's fee awards in American trade secret law. Because defendants frequently include former employees of the plaintiff, the effect of excessive liability upon the mobility of employees is a concern. (1) Following an overview of American trade secret liability, including the widely-enacted Uniform Trade Secrets Act, (2) the United States Supreme Court doctrine forbidding excessive punitive damages and other safeguards against imposition of excessive punitive damages and attorney's fees are discussed.

   Future development of the Supreme Court doctrine and additional experience with the Uniform Act could require reassessment. At the present time, however, the Act is calibrated to avoid constitutionally excessive punitive damage and attorney's fee awards with one exception. In cases with large compensatory damage recoveries and defendants without subjective evil intent, the Act's two times compensatory damages cap upon punitive damages (3) is too generous and is superseded by the Supreme Court's Gore/Campbell guideposts. (4)

2. THE NATURE OF PUNITIVE DAMAGES

   Punitive or exemplary damages are imposed for the commission of serious misconduct with a bad state of mind. (5) The Restatement of Torts (Second), for example, states "[p]unitive damages may be awarded for conduct that is outrageous, because of the defendant's evil motive or his reckless indifference to the rights of others." (6) Punitive damages are intended to punish the defendant and to deter future misconduct by the defendant and others. (7) The imposition of punitive damages is discretionary with the trier of fact. (8) In most states, (9) punitive damages can be awarded in tort actions for intentional or reckless misconduct, (10) including trade secret misappropriation. (11)

   The amount of punitive damages traditionally has been discretionary with the trier of fact, subject to review for excessiveness by the trial judge and on appeal. (12) A trial judge can order a successful plaintiff to choose between remitting excessive punitive damages and a new trial, (13) whereas an appellate court can reverse a judgment for excessive punitive damages (14) and remand the case for further proceedings. (15)

   On the other hand, under the "American rule," (16) a successful plaintiffs attorney's fees ordinarily are not recoverable compensatory damages. Each litigant bears its own attorney's fees under the American rule. (17) A punitive damage award, however, can reimburse a successful plaintiffs cost of litigation. (18)

3. AMERICAN TRADE SECRET LAW

   1. The Restatements

      American trade secret law derives from English common law. In the 1868 case of Peabody v. Norfolk, (19) the Massachusetts Supreme Judicial Court, relied upon English equity decisions in overruling a general demurrer to a supplemental bill in equity. (20) The supplemental bill requested an injunction against unauthorized use of the plaintiffs secret method for processing jute butts into gunny cloth by a businessman to whom the plaintiffs former employee wrongfully had disclosed it. (21)

      The 1939 first Restatement of Torts devoted three sections to state trade secret law. (22) Comment e. to [section] 757, which addressed remedies, did not mention punitive damages. (23) Due to the specialized nature of trade secret law, the 1979 second Restatement of Torts omitted coverage. (24) Restatement coverage was reinstituted by the 1995 Restatement of Unfair Competition which has seven sections on state trade secret law. (25) Section 45 on monetary relief focuses upon compensatory damages. (26) Comment i to [section] 45 refers readers to the Restatement of Torts (Second) for discussion of punitive damages. (27)

   2. The Uniform Trade Secrets Act

      The Uniform Trade Secrets Act (28) (Uniform Act) was proposed by the Uniform Law Commission (ULC) (29) to fill the gap left by the Restatement of Torts (Second) by elaborating the common-law principles reflected in the 1939 Restatement. (30) The ULC initially approved the Uniform Act in 1979. (31) Four official amendments were adopted in 1985 that did not directly alter the provisions dealing with punitive damages and award of attorney's fees. (32)

      In the 1995 Restatement of Unfair Competition, the American Law Institute adopted a definition of "trade secret" consistent with the Uniform Act. (33) Although there have been nonuniform amendments, (34) the ULC reports the Uniform Act as having been enacted in 47 states. (35)

   3. The Uniform Act Punitive Damage and Attorney's Fee Provisions

      Uniform Act [section] 3(b) provides, "If willful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice any award made under subsection (a)." (36) An Official Comment to [section] 3 states in part, "[t]his provision follows federal patent law in leaving discretionary trebling to the judge even though there may be a jury, compare 35 U.S.C. [section] 284 (1976)." (37)

      The 1979 version of [section] (3)(a) authorizes recovery of both the loss and unjust enrichment damages caused by misappropriation. (38) A 1985 Official Amendment provides for recovery of a reasonable royalty in lieu of other damages. (39) If reasonable royalty damages are not sought, two times the total loss and unjust enrichment damages recovered is the cap upon punitive damages. (40) If reasonable royalty damages are recovered, the cap is two times their amount. (41)

      The Uniform Act does not address the plaintiffs burden of proof. The burden of proof generally required for punitive damages by an enacting state applies. (42) Although most states require either clear and convincing evidence or proof beyond a reasonable doubt, a number of states retain the traditional preponderance of the evidence burden of proof. (43) The Uniform Act also does not address the plaintiffs burden of proof with respect to attorney's fees. The preponderance of the evidence standard typically applies. (44) Finally, the Uniform Act does not alter a state's position on whether punitive damages can be awarded if compensatory damages are not recovered. (45)

      Uniform Act [section] 4 provides in part, "[i]f ... willful and malicious misappropriation exists, the court may award reasonable attorney's fees to the prevailing party." (46) This aspect of [section] 4 authorizes award of reasonable attorney's fees to a prevailing plaintiff. Awards can include attorney's fees incurred prior to filing suit (47) and on appeal, (48) but are limited to attorney's fees related to successful trade secret misappropriation claims. (49) An Official Comment observes, "[a]gain, patent law is followed in allowing the judge to determine whether attorney's fees should be awarded even if there is a jury, compare 35 U.S.C. [section] 285 (1976)." (50)

      In view of the clarity with which the Uniform Act makes the award of punitive damages and a successful plaintiffs reasonable attorney fees discretionary even though "willful and malicious misappropriation" has been proved, (51) the Rhode Island Supreme Court decision in McFarland v. Brier (52) is difficult to understand. The Rhode Island Court treated both awards as automatic upon a finding of willful and malicious misappropriation, with punitive damages automatically imposed at the cap level! (53)

   4. Nonuniform Amendments

      James Pooley has commented, "[t]he major drawback of the Uniform Trade Secrets Act is that it is not uniform." (54) Although Pooley overstates its significance, nonuniformity there surely is. To begin with, four states omit the punitive damages provision (55) and six states omit the attorney's fees provision. (56)

      To the extent that the [section] 3(b) punitive damage provision was modified, the most common change was alteration of the two times other damages cap upon punitive damages. Four states deleted the cap, (57) one state raised it, (58) and three states lowered it. (59) Four states replaced the "willful and malicious misappropriation" prerequisite to the award of punitive damages with a condition intended to express the common law, like "willful, wanton, or reckless disregard of the plaintiffs rights." (60) Two other states modified the prerequisite: Oregon adopted "willful or malicious" (61) and Vermont adopted "malicious." (62) Finally, four states authorized a jury as well as a judge to award punitive damages. (63) In addition to these express changes in the punitive damage provision, in the five states that retain the 1979 version of the Uniform Act, reasonable royalty damages are not an alternative basis for computing the punitive damages cap. (64)

      Insofar as the [section] 4 attorney's fees provision was retained but modified, four states also authorized a court to award costs to a prevailing plaintiff, (65) with California and New Jersey defining "costs" to include the reasonable fees of expert witnesses. (66) Two states altered the "willful and malicious misappropriation"...