Application of Patent Law Damages Analysis to Trade Secret Misappropriation Claims: Apportionment, Alternatives, and Other Common Limitations on Damages

• Publication year: 2002
• Citation: Vol. 25 No. 03

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 25, No. 4SPRING 2002

Application of Patent Law Damages Analysis to Trade Secret Misappropriation Claims: Apportionment, Alternatives, and Other Common Limitations on Damages

Douglas G. Smith(fn*)

Table of Contents

I. The Intersection of Patent and Trade Secret Law...................................................................................824

II. Analysis of Lost Profits Damages.............................826

A. The Panduit Factors......................................................827

B. Reliable Economic Analysis and Reconstruction of the Market.........................................................................834

III. Analysis of Unjust Enrichment Damages.................836

IV. Analysis of Royalty Damages....................................841

V. Disaggregation and Apportionment of Damages...........................................................................844

VI. Other Common Limitations Based on the Relationship Between the Parties............................858

VII. Limitations on the Duration of the Damages Period...............................................................................862

VIII. Conclusion.....................................................................865

Trade secret misappropriation claims are increasingly utilized as a mechanism for enforcing intellectual property rights.(fn1) While the law governing patent infringement claims has been developed over the entire length of our nation's history, trade secret law remains comparatively undeveloped. This is particularly true in the area of damages analysis, where the Supreme Court and the Federal Circuit have laid down bright-line rules in constructing a body of precedent that may be used in applying judicial scrutiny to damages claims in the context of patent infringement. This body of precedent stands in stark contrast to the patchwork of decisions by various courts applying the law of different states in analyzing claims for trade secret misappropriation.(fn2) In part because trade secret law is based on state law, there is a greater diversity in the rules that may be applicable in the context of trade secret damages claims despite efforts to provide a basis for uniform rules.(fn3) Moreover, at bottom, the number of cases addressing damages-related issues in the context of trade secret misappropriation is far fewer than those addressing damages in the context of patent infringement claims.

While better-developed patent law rules may not be applicable to trade secret misappropriation claims in every context, application of uniform criteria is particularly appropriate in the context of damages analysis. After all, the rules governing damages ultimately flow from economic principles that should not depend upon jurisdictional idiosyncrasies. Indeed, courts analyzing trade secret claims have intermittently applied frameworks developed in evaluating patent infringement claims. Nonetheless, despite the close parallels, the law regarding trade secret damages remains relatively undeveloped in many respects.(fn4)

This article attempts to demonstrate how damages principles that have been developed in the context of patent infringement claims can be adapted and applied in the context of trade secret claims. Courts should look more readily to the well-developed body of patent law in fashioning the rules governing damages in trade secret misappropriation cases. Adoption of such principles, modified where necessary to better fit the trade secret context, is likely to have the salutary effect of increasing the scrutiny given trade secret damages claims-weeding out those claims that are not sufficiently reliable to justify their submission to a jury.(fn5)

Courts in patent infringement cases have developed rigorous standards for testing and constraining damages claims.(fn6) Increasingly, courts exclude methodologically flawed damages theories under traditional damages principles or under the rubric of Daubert v. Merrell Dow Pharmaceuticals, Inc.(fn7) Arguably, such rigorous standards are even more appropriate in the context of trade secrets, which by their very nature, are often less concrete and intangible in terms of their value than a patent, which by definition must define a complete and workable process or machine.(fn8) Trade secrets often relate to some small part of a process or machine and, by their very existence as "secrets," may not be as readily subject to valuation in the marketplace. Because plaintiffs increasingly invoke both trade secret law and these factors inherent in trade secret claims, applying such rigorous standards is both appropriate and desirable. Indeed, recent trade secret cases have increasingly applied either traditional damages principles or the standards for determining the reliability of proffered expert testimony under Daubert to exclude fundamentally flawed damage claims.(fn9)

The specific patent law principles that may be adopted and applied to trade secret claims are myriad. For example, the law governing apportionment and disaggregation of damages is particularly well-developed in patent cases. Similarly, courts have issued numerous decisions evaluating the existence of acceptable noninfringing alternatives or substitutes and their effect in limiting or completely barring certain categories of damages. Finally, courts in patent cases have identified numerous factors that are relevant in valuing intellectual property. Chief among these are the Georgia-Pacific factors, which are applied in determining royalty damages. These same principles may be applied effectively to trade secret damage claims.

Part I of this article discusses the case law acknowledging the applicability of patent law precedents in the context of trade secret damage claims. Part II discusses the application of patent law precedents regarding lost profits as a measure of damages. Part III analyzes the applicability of patent law damages principles in the context of unjust enrichment as a measure of damages. Part IV then proceeds to examine how patent law principles are frequently applied in the context of royalty damages. Part V discusses the case law relating to disaggregation and apportionment of damages in the context of patent and trade secret claims. Part VI discusses certain common limitations on damages based on the relationship between the parties. Part VII analyzes certain limitations relating to the duration of the damages period. Finally, Part VIII offers a brief conclusion.

I. The Intersection of Patent and Trade Secret Law

The number of cases explicitly addressing the intersection between patent and trade secret damages is surprisingly low. Nonetheless, certain often-cited cases analyzing trade secret damages do address the obvious parallels. The most prominent among these is University Computing Co. v. Lykes-Youngstown Corp.(fn10) In University Computing, the Fifth Circuit broadly stated that "[i]t seems 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, just as patent infringement cases are used by analogy to determine the damages for copy-right infringement.'"(fn11)

The University Computing decision is particularly comprehensive, addressing various measures of damages for trade secret misappropriation, including lost profits, unjust enrichment and royalty damages. In support of its assertion that courts should look to patent infringement cases when evaluating damages claims for trade secret misappropriation, the court cited the Third Circuit's decision in International Industries v. Warren Petroleum Corp.(fn12) In that case, the court applied patent law principles in evaluating a claim for trade secret damages based on an unjust enrichment theory.(fn13) Taken together, University Computing and International Industries are perhaps the two cases most frequently cited for the proposition that patent law damages analysis should be applied in evaluating trade secret damages claims. Nonetheless, subsequent decisions have also occasionally recognized that "trade secrets cases are analogous to patent infringement as concerns measure of damages."(fn14)

Patent law precedents provide a wealth of guidance for evaluating trade secret damages claims. While the Federal Circuit has observed that the "determination of a damage award is not an exact science,"(fn15) that court and other federal courts have developed a fairly robust body of precedent and have outlined a variety of clear legal principles that courts routinely apply in scrutinizing patent damages claims. Application of these patent law precedents to trade secret claims may provide significant guidance in an area of the law that is currently relatively amorphous at best. Nonetheless, despite decisions such as University Computing and International Industries, courts evaluating trade secret claims have not relied upon such precedents as frequently as one might expect.

II. Analysis of Lost Profits Damages

Under the Uniform Trade Secrets Act and other trade secret law, plaintiffs are permitted to recover damages measured by the plaintiffs alleged lost profits, the defendant's unjust enrichment, or a reasonable royalty.(fn16) Plaintiffs may recover both lost profits and unjust...