Modern Trends In Trade Secret Valuation As Derived From Damage Awards Under The DTSA And UTSA

Summary: The below article was written for the trade secret portion of topics at the 2020 AIPLA annual meeting. The article provides an overview of the Defend Trade Secrets Act (DTSA) and the Uniform Trade Secrets Act (UTSA), along with a meta analysis of recent damage awards under both statutes, as well as a review of recent cases which have involved DTSA claims.

I. Introduction

Historically, trade secret actions have been one of the most fascinating, and yet least understood areas of intellectual property; so much so that for years legal scholars could never quite place whether a cause for misappropriation of trade secrets was rooted in property, in tort, or some type of amalgamation of the two.¹ This was reflected in the great variety of definitions and interpretations by the various States that attempted to pin down exactly what a trade secret was in common law.

In an attempt to provide clarity and predictability in trade secret actions, in 1979 the Uniform Law Commission drafted the Uniform Trade Secrets Act (UTSA).  By 2020, 48 States had adopted some form of the UTSA. ² In 2016, Congress passed the Defend Trade Secrets Act (DTSA) providing for a non-exclusive federal civil cause of action for trade secret misappropriation. ³ Although these unified statutes have clarified the cause of action for misappropriation (or perhaps not) ⁴ , the proper calculation of trade secret damages continues to present difficulties.

This article examines trade secret damages by providing: 1) an overview of the DTSA and UTSA damage provisions with example cases; 2) a rough sketch of trade secret valuations based on damage awards over the last few decades under the UTSA and DTSA and; 3) recent real world examples of damage awards which have been issued since the DTSA was enacted.⁵

II. Damages Under the DTSA and UTSA 

The next portion will provide an overview of the DTSA and UTSA damages provisions, a look at the metadata involving DTSA and UTSA claims, and finally two real world cases and their outcomes.

A. Overview of the DTSA and UTSA Damage Provisions

“Use a flexible and imaginative approach when determining trade secret damages”

University Computing v. Lykes-Youngstown Corp.

The DTSA and UTSA possess near identical language in defining how damages may be measured for misappropriation, with both acts providing for either: 1) actual loss and unjust enrichment that is not taken into account in computing actual loss; or 2) reasonable royalties in lieu of damages. Both acts authorize exemplary damages, not to exceed twice the award amount in instances where the misappropriation is willful and malicious, as well as an award of attorneys fees. ⁶ However, a multitude of variations exist amongst States that have adopted the UTSA in determining the availability and valuation of demonstrably reasonable royalties, so the practitioner should be wary when requesting such relief. ⁷

1. Actual Loss Damages

Actual loss is measured by plaintiff’s lost profits…..generally.

Under the UTSA and DTSA, in instances where the plaintiff is a business, ”actual loss” is generally measured in lost profits. ⁸ Lost profits, as a general concept, will necessarily include actual loss damages, as well as those damages commonly associated with unjust enrichment. As a result, calculating lost profits is inherently difficult,⁹ and courts have developed several lost profit methodologies. ¹⁰

Generally, lost sales directly attributable to the misappropriation are a good starting point in determining lost profits. ¹¹ A defendant’s sales volume may be used as a metric of the actual loss, and a common method utilized by courts is to calculate the defendant’s sales volume due to the misappropriation multiplied by the plaintiff’s profit margin. ¹² Because the UTSA and DTSA allow recovery for both actual loss and unjust enrichment, “lost profits” should contain unjust enrichment considerations such as price erosion and convoyed sales, discussed infra.

In instances where the defendant has destroyed the entire value of the trade secret, usually through public disclosure, courts have measured actual loss as the actual value of the trade secret to the plaintiff. ¹³ However, it is not always the case that a plaintiff generates a profit prior to the misappropriation, thus creating a difficulty in using the plaintiff’s profit margin as a variable in the calculus. This is where a creative approach must be taken, and unjust enrichment enters the conversation. ¹⁴

2. Unjust Enrichment

Unjust enrichment damages are only limited by what you can reasonably prove

Both the UTSA and DTSA provide that unjust enrichment damages may be awarded by a court in conjunction with actual loss, so long as no “double counting” results. However, neither the UTSA or DTSA provide for the scope of these damages, resulting in some creative approaches. ¹⁵ Generally, unjust enrichment requires a “showing that a plaintiff conferred a benefit on a defendant that the defendant knew about and that allowing the defendant to retain the benefit without payment would be unjust.” ¹⁶ This “benefit conferred” is really only limited by the practitioners imagination and ability to establish causation.

Unjust enrichment is typically measured by a defendant’s profit which resulted from the misappropriation. ¹⁷ In addition to the defendant’s profits, lost profits may also include convoyed sales, ¹⁸ price erosion factors, and lost market value. ¹⁹ In instances where a competitor has received a “head start” as a result of the misappropriation, research, development, and marketing costs may also be considered. Note that actually getting to market may not be necessary, as recently the court in Steves & Sons, Inc. v. Jeld-Wen, Inc. opined that anticipated future use of a trade secret could be a reasonable measure of damages under a theory of unjust enrichment as well. ²⁰

In Steves & Sons, Inc. v. Jeld-Wen, Inc., Jeld-Wen brought several counter-claims, including misappropriation under the DTSA and Texas Uniform Trade Secrets Act (TUTSA).  Jeld-Wen’s expert testified that although Jeld-Wen suffered some actual loss, he did not have enough information to calculate those losses to a reasonable degree of certainty. Instead, the expert offered two different methods to determine damages: a first method under an unjust enrichment theory, a second method under a theory for reasonable royalties.  

To determine unjust enrichment damages, the expert calculated Steve’s potential gains in the event that it used the trade secrets to build a competing manufacturing facility.  The expert theorized that the misappropriation of important manufacturing processes would allow Steves to increase the facilities profitability, while also reducing costs. The expert concluded that these trade secrets would have required years of research and development, thus yielding a potential future profit of somewhere between $11.8 and $13.3 million. The trial court was persuaded that because the product in question was a well tested product, in a well known market, and based upon Jeld-Wen’s very own operation, this method of evaluating potential future gains was sufficient to overcome summary judgment and send to a jury. Although the jury did not award unjust enrichment damages in the case, they did award a reasonable royalty discussed infra. ²¹

In Pike v. Tex. EMC Mgmt. LLC, the misappropriated trade secret surrounded the use of “fly ash”, a waste byproduct from coal power plants, in the manufacture of cement. Fly ash was used to reduce the proportion of Portland cement needed, thus dramatically lowering cement manufacturing costs. However, at the time the trade secret was misappropriated, the plaintiff was still operating at a loss.  Thus, lost profits were non-existent. Instead, the jury was instructed to consider two measures of damages: 1) “the value, if any, that a reasonably prudent investor would have paid for the use of the Trade Secrets in Texas” and 2) “the costs saved by [the defendant] as a result of its use, if any, of the trade secrets in Texas.” ²² The jury awarded $1.5 million on each instruction.²³ The trial court set aside the award on the first instruction as a result of defendant’s motion for JNOV, finding that the plaintiff failed to present competent evidence at trial as to how much a reasonably prudent investor would have paid for the use of the trade secret.

On appeal, the 10th Circuit reversed, finding that the trial court erred in both its decision to set aside the jury’s finding as to the first instruction, and finding sufficient evidence existed to sustain the second instruction. At trial, the inventor testified that his personal investment in the entire business totaled $20 million. The appellate court opined that this testimony was insufficient to establish that the defendant saved $1.5 million in development costs, because the personal investment could have been used to finance other business expenses unrelated to the trade secrets in question. Therefore, this testimony lacked the requisite certainty in determining actual cost savings to the defendant. ²⁴

3. Reasonable Royalties

Reasonable royalties requires creativity, reasonable certainty, and a sound expert witness

As with unjust enrichment, the UTSA and DTSA are silent as to what qualifies as a “reasonable royalty”. University Computing v. Lykes-Youngstown Corporation is widely considered the de facto case analyzing issues involving the calculation of a reasonable royalty in instances of misappropriation. ²⁵ University Computing described a reasonable royalty as “that amount which the trier of fact estimates a person desiring to use a [trade secret] would be willing to pay for its use and a [trade secret] owner desiring to license the [trade secret] would be willing to accept.” ²⁶ University Computing borrows, ²⁷ by and large, the same thought experiment described in Georgia Pacific v. Plywood Corp., by asking the finder of fact to consider those qualitative factors which the parties would have used in a hypothetical royalty negotiation prior to any misappropriation. ²⁸ University Computing further advises triers utilize a “flexible and imaginative approach to the problem of damages”. ²⁹

Staying with Steves & Sons, Inc., the expert for Jeld-Wen postulated there were two possible quantitative scenarios to calculate a reasonable royalty: 1) an “incremental benefits approach” wherein the royalty was based on the benefits to Steves as a result of the misappropriation, regardless of whether Steves utilized the trade secret to build their own facility; or 2) a licensing comparables approach.

In scenario one, the expert valued the benefit of the trade secret at a royalty of between 2.8% and 13.4% per unit. Analyzing scenario two, the expert was only able to identify three comparable licensing agreements in the industry.  Considering the industry standards and applying the qualitative factors in Georgia-Pacific, the expert came to a royalty rate of 3%. The expert then applied that rate to future revenues for 10 years resulting in $9.9 million in reasonable royalty damages. The trial court agreed with Jeld-Wen that future consequences of the misappropriation is an appropriate consideration when determining a reasonable royalty, relying primarily on the language in Universal Computing.³⁰ Ultimately, Jen-Weld was only awarded $1.2 million by a jury in reasonable royalties for the misappropriation and future use of the trade secrets. ³¹

B. Meta analysis of valuing trade secrets as derived from damages awards under the UTSA and DTSA

Included below are a summary analysis from verdict results under the UTSA from 2000-2014 from Professor Rowe’s article “Unpacking Trade Secret Damages” published in the Fall 2017 Houston Law Review.³² Also included are the verdict results under the DTSA since its enactment, with those numbers coming from the annual Lex Machina trade secret report.³³

What the numbers say:

Plaintiffs have a hard time proving they have a valid trade secret, but if they can, they win more often than not.

Figure 1 below summarizes all instances where trade secret misappropriation was found at the various stages of litigation from 2010-2019. Importantly, courts have found no liability for misappropriation at a higher rate than finding liability for misappropriation.  If misappropriation claims obtained via default judgment are considered and removed from the sample size, plaintiffs are only prevailing via any judgment vehicle 29% of the time.  The outlook brightens for plaintiffs at trial, where they prevail 52% of the time. If misappropriation is found, plaintiffs are successful in showing willful or malicious conduct 51% of the time.

Juries award VASTLY more than judges in compensatory damages, but judges award slightly more in reasonable royalties.

Figure 2 lists the total amounts awarded each year excluding awards for fees, costs, and interest. There is no significant statistical correlation between the number of cases filed in a given year and the amount awarded, [enf_note]Rachel Bailey, et al., Lex Machina Trade Secret Report, Lex Machina, April 2020, at 20.[/efn_note] and 2011 shows a disproportionately high award amount as a result of the $919 million award in E.I. Dupont de Nemours v. Kolon.³⁴ As reflected in Figure 1 supra, the overwhelming majority of cases are settled via default judgment or consent judgment.

YEAR	CASES	AMOUNT
2019	15	$105,053,787.76
2018	19	$71,942,498.80
2017	26	$208,229,086.81
2016	19	$166,044,957.50
2015	15	$248,791,792.62
2014	22	$82,511,654.97
2013	16	$11,976,357.73
2012	19	$54,904,414.01
2011	21	$1,213,429,864.98*
2010	24	$37,384,609.71

Figure 3 provides a breakdown of average damage award amount and type from UTSA federal cases from 2000 – 2014, and emphasizes the difference between bench and jury trial awards. In cases where compensatory damages issued, juries awarded on average 4,200% more in compensatory damages than judges. However, judges were far more generous in their calculation of a reasonable royalty, on average awarded 250% more than juries.

	Compensatory	Reasonable Royalty	Punitive	Attorney’s Fees
% Issued:	85.15%	4.73%	2.15%	7.97%
Bench (avg.)	$226,478.03	$1,133,813.07	$30,778.57	0
Jury (average)	$9,864,907.39	$434,578.12	$248,223.10	$900,477.57

Juries punish Plaintiffs if an NDA isn’t present.

Figure 4 makes plain the importance juries place on the existence of a non-disclosure agreement in establishing the existence of a trade secret. In instances where no NDA is in place, plaintiffs only have a 30% chance of receiving damages. That said, the existence of an NDA is not a surefire way to establish a trade secret, as 50% of cases which had an NDA nevertheless were awarded no damages.

	No NDA	NDA
No Damages	70.7% (29)	50.0% (45)
Damages Awarded	29.3 (12)	50.0% (45)
Total	100% (41)	100% (90)

Juries award more in damages when parties are in direct competition with one another

Although this should not be surprising since the overwhelming majority of trade secret cases involve direct competition, it cannot be understated the importance of establishing this fact to the jury or judge as damage awards were 300% higher when the parties were in direct competition, $11.2 million when direct competition was established compared to $3.2 million when non competition was not establish or not present.

C. Recent real world examples under the DTSA and UTSA

Since the implementation of the DTSA and the date of this article, only seven cases have gone to a jury, so the practical value of analyzing DTSA cases is limited. The cases discussed below included both DTSA and UTSA claims and (spoiler alert!) found misappropriation and awarded damages. The following summaries are based on a review of the publicly available court files.

Liqwd, Inc. et al. v. L’Oreal USA, Inc. et al. (D. Delaware 2017)

Who knew hair bleaching was so complex?

In 2014, a small California start up called Olaplex developed a new professional hair care product, which would prevent breakage of hair during hair coloring treatments.  The process of coloring hair is quite damaging, so Olaplex’s invention dramatically reduced the amount of damage hair suffers during these treatments. The product consists of a two-step system which is applied during the coloring or bleaching process.

Within the first year of Olaplex’s soft introduction into the market, it was already selling in excess of 100,000 treatments, and was making waves within the professional hair care industry on social media.  As Olaplex’s status grew, so did L’Oreal’s interest in this “holy grail of hair product development”.³⁷

According to the complaint, L’Oreal first attempted to hire away Olaplex’s key employees whom L’Oreal believed were responsible for the product’s development, but when that proved unsuccessful, in early 2015, L’Oreal contacted Olaplex’s CEO directly to discuss a possible acquisition wherein negotiations began in earnest.  Over several months the parties met and conferred, culminating in a formal meeting in May, 2015.  Prior to this meeting the parties executed a non-disclosure agreement effective May 15, 2015, along with a list of “talking points”, which included L’Oreal’s request for detailed technical information “in order to better understand the chemistry…”. ³⁸

On May 19, 2015, the parties formally met, and Olaplex provided L’Oreal a copy of a then unpublished patent application (Serial No. 14/713,885) which disclosed the use of maleic acid during hair bleaching. This information was disclosed to L’Oreal roughly six months before the patent was published in Germany and the USA. This provisional application contained the same disclosures as patents subsequently issued to Olaplex;  U.S. Patent Nos. 9,498,419 (the ‘419 patent) and 9,668,954 (the ‘954 patent).   In addition, the chief developer of Olaplex, Dr. Pressly met with L’Oreal representatives for several hours to discuss in detail the technology behind Olaplex, including the chemistry of the invention, how the ideal concentration of the active ingredient was determined, and the testing methodology for the product. ³⁹

After this formal meeting, negotiations between L’Oreal and Olaplex continued, but by September 2015, L’Oreal stated it was no longer interested in purchasing Olaplex. To Olaplex it became clear why when L’Oreal placed three different products on the market; all advertising their ability to reduce hair damage during the coloring or bleaching process via a two step application, and just like Olaplex, utilizing maleic acid as the active ingredient. L’Oreal’s instructions and ratios for use of the product were nearly identical to Olaplex as well. ⁴⁰

Olaplex brought suit pursuant to the terms of the NDA on January 5, 2017, in Delaware federal district court, alleging breach of the ‘419 patent, the ‘954 patent, misappropriation of trade secrets under the Defend Trade Secrets Act, misappropriation of trade secrets under the Delaware Trade Secrets Act, breach of the NDA, and requesting permanent injunctive relief. ⁴¹

Over the following three years, the parties engaged in significant discovery, depositions of various expert witnesses, numerous motions, and multiple appeals to the Federal Circuit. ⁴² The major points during the course of litigation were as follows: L’Oreal responded to Olaplex’s complaint, and filed for post grant review proceedings with the Patent Trial and Appeal Board (PTAB) by challenging the ‘419 patent on January 30, 2017. ⁴³ On June 27, 2018, the PTAB found that the ‘419 patent was obvious in light of the prior art. ⁴⁴ The PTAB made factual findings that Olaplex established L’Oreal would not have developed products using maleic acid without having access to Olaplex’s confidential information, but deemed this evidence irrelevant as a matter of law because Olaplex had failed to establish that L’Oreal had copied a specific product. ⁴⁵ On February 1, 2018, L’Oreal challenged the ‘954 patent in yet another post-grant review before the PTAB, and on July 30, 2019, the PTAB issued a 106 page final written decision finding all but three dependent claims in the ‘954 unpatentable. Interestingly, this time the PTAB held that L’Oreal did not use the trade secret of maleic acid to develop its product, based upon a laboratory notebook provided by L’Oreal which tended to show that L’Oreal did not copy Olaplex’s trade secret, as it was already researching this solution a month prior to the May 19, 2015 meeting.⁴⁶ Olaplex is currently appealing that decision.⁴⁷

After a six day trial, on August 12, 2019, a jury found that L’Oreal willfully infringed both the ‘419 and ‘954 patents, willfully misappropriated Olaplex’s trade secrets under both the DTSA and Delaware TSA, and breached the terms of the NDA.  The jury awarded $22,265,000 for the trade secret misappropriation and $22,265,000 for the breach of the NDA.  Infringement of the ‘419 patent was awarded $21,810,000 and infringement of the ‘954 patent was awarded $24,960,000. ⁴⁸

The amount awarded by the jury for the misappropriation was the exact amount opined by Olaplex’s expert witness George Strong.  Mr. Strong testified that L’Oreal gained a 20-32 month advantage based on the laboratory notebook analysis conducted by L’Oreal’s expert, and calculated the damages based on 20 months of damages arising from the misappropriation and breach of the NDA. ⁴⁹

According to L’Oreal’s appeal brief on the issue of lost profits, and as noted by the district court, Olaplex’s proof of lost profits was “…skinny. I mean good grief.” ⁵⁰ Apparently at trial, Mr. Strong testified that in order to develop a methodology to calculate lost profits “we just poured [the accused products] …all into the same vat and counted up how much of it was sold by L’Oreal and the three different brands and said, well, that extra would have been sold by Olaplex in the world without improper competition”. ⁵¹ Mr. Strong testified that he believed Olaplex would have charged a 33% higher price without the existing price erosion ($.08 per milliliter vs. $.06). Furthermore, Olaplex proffered evidence through their technical expert that the market only consisted of two players: Olaplex and L’Oreal. ⁵²

To ensure that the damages award did not result in a double recovery, the court found that the damages for trade secrets and breach of contract were limited to the time the defendants possessed the trade secrets.  The ‘419 patent application was published 256 days after the jury found Olaplex conveyed its trade secrets to L’Oreal. The court noted that Olaplex offered no specific testimony concerning the value of any information received at the May 19 meeting other than the active ingredient was maleic acid, which was disclosed in the ‘419 patent.  

In reviewing the jury verdict, the district court expressed that by definition, there can be no further trade secret damages after the date a trade secret is made public. ⁵³ The court recalculated the award for misappropriation and breach of contract by dividing the jury’s damages award for those two claims by the number of days in twenty months to determine the per day damages, totaling $37,108.33. The court then multiplied this per day damage award by the number of days between the day the trade secret was disclosed, May 19, 2015, and the day it was published, February 5, 2016, totaling $9,499,732.48. ⁵⁴

The court allowed a full award of exemplary damages in an amount twice the misappropriation award totalling $18,999,464.96 plus attorneys fees and costs. The court affirmed the jury’s award of $24,960,000.00 for the infringement claims, and ordered a one time award for willfulness in the same amount, which included the judgment for willful misappropriation and breach of contract.

In another win for Olaplex, on October 17, 2019, the Federal circuit reversed the PTAB’s invalidation of the ‘419 patent with instruction to the PTAB to rereview the obviousness issue in light of the fact that L’Oreal’s use of Olaplex’s trade secret was objective indicia of nonobviousness. ⁵⁵

The parties were unable to agree upon a final proposed judgement, ⁵⁶ so on March 24, 2020, the court issued the Final Judgment awarding $24,960,000.00 in compensatory damages for all four of Olaplex’s causes of action; $24,960,000.00 in exemplary damages arising from the willful infringement and misappropriation; $13,514,913.00 in attorneys fees; $2,732,930 in prejudgment interest calculated upon the compensatory damages award, and $2,813.49 post-judgment interest per day. ⁵⁷ The court further ordered that L’Oreal was permanently enjoined from making, using or selling the infringing products. ⁵⁸

Post Trial:

Currently, the ‘419 patent is undergoing a remanded analysis by the PTAB for obviousness, and recently in another PGR,  the PTAB issued a 106 page order invalidating all but three dependent claims in the ‘954 patent, which is now being appealed by Olaplex. ⁵⁹ Olaplex has now filed a separate lawsuit asserting trade secret misappropriation against the parent company of L’Oreal USA in California federal court. ⁶⁰ L’Oreal has filed an appeal with the Federal Circuit contesting several issues, including the damages calculations. ⁶¹

Although Olaplex may sustain the trade secret damages on appeal, the newest invalidation of the ‘954 patent as obvious and factual findings by the PTAB that L’Oreal did not copy Olaplex may ultimately spell doom for the ‘419 patent. Although it would appear that L’Oreal lost the fight, it may nonetheless end up winning the hair care war. 

Citcon USA LLC v. Riverpay Inc., et al.

The future seems to lie in single payment systems. In the United States, we can use our phone to pay for just about anything, anywhere. And while in the U.S. we possess a plethora of options for mobile pay, a lack of uniformity exists with merchants who accept them.  However, overseas in China, the king of all apps has a name: WeChat.  WeChat is your Venmo payment service, Facebook platform, Whatsapp messaging service, Youtube, Uber, and even Tinder, all rolled into one. That merchants understand WeChat is the first barrier to entry to tap into the Chinese market when Chinese nationals go on holiday to the US and abroad is unsurprising.

Enter Citcon USA LLC (“Citcon”) … founded in 2015, Citcon focused on bringing U.S. based merchant’s the ability to process Chinese payment systems such as WeChat and Alipay. Of course with such a huge potential market in the burgeoning Chinese middle class, competition was sure to arise, even from within.

According to Citcon’s complaint, in September 2016 Citcon’s VP of Engineering Kenny Shi (“Shi”) created a Dropbox account which he embedded into Citcon’s source code, generating a backup of customer transactions which Shi and Citcon’s head of operations York Hua (“Hua”) controlled. Riverpay, Inc. (“Riverpay”) was founded in March 2017, and by April 2017, was already processing WeChat and Alipay transactions.   Only a few short months after Riverpay’s creation, on June 7, 2017, Hua resigned from Citcon to work for Riverpay full time, taking a Citcon point of sale device with him, which was never returned. In September of 2017, RiverPay successfully raised roughly $10 million in venture fund investment, presumably on their amazing ability to rapidly access the WeChat payment market. Due to Riverpays rapid growth, Hua began seeking to persuade talent directly from Citcon to Riverpay, even bragging to a prospective hire that Riverpay possessed highly confidential information regarding Citcon’s current and prospective clients. By the end of December 2017, Citcon began to receive notices from current and prospective clients of an ongoing smear campaign from a “Terry Liu”, espousing a myriad of purported security vulnerabilities within Citcon’s database, urging them to use a different service.

As a result of these anonymous emails, Citcon began an internal investigation which uncovered the embedded Dropbox key, with Shi and Hua’s digital signature attached. When confronted, Shi denied culpability and pointed the finger at Hua. Citcon further discovered that Hua had not only retained, but exercised his root level access to Citcon’s MySQL database subsequent to his resignation some six months prior. 

In early 2018, Riverpays’ CEO and founder Ryan Zheng (“Zheng”), attempted to negotiate terms with Citcon, offering to either divide the existing market between the two companies, or form a merger between Citcon and RiverPay. Zheng also just happened to be a majority shareholder of DinoLab, a programming contractor for Citcon. Zheng warned there would be “a bloody fight” if a compromise wasn’t reached. Both offers by Riverapy were rejected by Citcon, and on May 2, 2018, Citcon filed suit in the Northern District of California seeking compensation under a variety of claims, including trade secret misappropriation under the DTSA and the CUTSA. A few days after this filing, on May 5, 2018, Citcon suffered a cyberattack, wherein Citcon’s payment systems were directed to issue over $100,000 in refunds to customers. ⁶²

The case was tried to a jury in December 2019. At trial, Plaintiff’s expert testified that three “modules” were directly copied by RiverPay, Hua and Shi. ⁶³ Defendant’s expert countered that the code was not a trade secret because some, but not all, of the allegedly misappropriated source code was either publicly available or written by DinoLab.⁶⁴ The plot thickened however, when Citcon presented evidence Hua had done more than simply copy the source code repository, but had a malicious plan in place prior to his departure. ⁶⁵ While employed by Citcon, Hua accessed the Citcon’s github repository; there, he injected fake comments in the code and merged branches without revision history commits in an attempt to establish that the code was owned not by Citcon, but instead DinoLab. ⁶⁶

After two days of deliberation the jury returned a verdict in favor of the Plaintiff, finding that RiverPay acted with malice, oppression or fraud in the misappropriation of the source code, and found that Hua did in fact misappropriate Citcon’s source code as well as the point of sale device. Hua was ordered to pay $301.76 for the conversion of the point of sale device. The jury found that the defendants did not misappropriate any business plans, customers lists, or transaction data. 

Interestingly, the jury issued unjust enrichment damages for $1.5 million and punitive damages only against RiverPay, despite finding misappropriation by Hua.⁶⁷ A powerpoint slide attached to the Plaintiffs post-verdict brief references calculating damages based upon Riverpay’s average monthly revenue during the time period of the misappropriation, but because the court records are largely under seal, it is difficult to know if this was in fact the methodology used to determine the award amount. ⁶⁸ A determination of the amount of punitive damages, if any, remains outstanding. ⁶⁹

III. CONCLUSION

In view of the increase in DTSA filings and district courts orders concerning trade secret theft, it is apparent that trade secret claims are alive and well.  Although the road to recovery for plaintiffs in trade secret actions is long and arduous, it can be a very effective means of seeking near total compensation for the injured party. 

In considering whether to pursue legal claims to adjudicate trade secret disputes, consider the following:

1) Lack of actual damages does not bar recovery. Both the DTSA and UTSA provide that actual damages are just one of the remedies that can be sought under the umbrella of “lost profits”, and unjust enrichment damages are not only regularly awarded, but in most instances offer the bulk of damage awards.

2) Implementing an imaginative approach to calculating damages under a theory of unjust enrichment, or reasonable royalties when lost profits are overly speculative can be effective. In particular, providing multiple alternatives to calculating these damages that a jury or judge can consider can be advantageous.

3) Expert witnesses still reign supreme in convincing not only the judge, but the jury what lost profits constitute.

4) The decision to have a bench or jury trial should be considered at the onset if lost profits cannot be readily ascertained.

1. Elizabeth A. Rowe, Unpacking Trade Secret Damages, 55  Hous. L. Rev. 155 (Fall 2017).
2. New York and North Carolina have not formally adopted the UTSA. New York has not enacted any legislation governing trade secrets, and instead relies upon New York common law. North Carolina has enacted the “North Carolina Trade Secret Protection Act” (NCTSPA). N.C. Gen. Stat § 66-152. Under the NCTSPA damages are limited to either actual damages measured by the economic loss, or unjust enrichment, whichever is greater. N.C. Gen. Stat § 66-152.
3. 18 U.S.C. § 1836 (2020).
4. See Daniel Roland et al., Three years later: How the Defending Trade Secrets Act Complicated the Law Instead of Making It More Uniform, Finnegan, July/August 2019.
5. Unfortunately, real world examples under the DTSA are still extremely limited. Because the DTSA was only passed a handful of years ago, few cases have gone to trial, and many are still pending appeal.  Additionally, due to the very nature of trade secret misappropriation claims, most Plaintiffs file complaints under seal, and corresponding final judicial orders are heavily redacted in order to maintain the trade secrets and their valuation.
6. 18 U.S.C. § 1836(3)(B) (2020); UTSA § 3(a) (amended 1985).
7. See Bryan Wilson, et al., Calculating Trade Secret Damages: Overview and Defense Strategies, AIPLA 2011 Spring Meeting, Appendix A, available athttps://media2.mofo.com/documents/110500tradesecretdamages.pdf
8. See Jermode Nates et al., Damages in Tort Actions § 1.01 (Matthew Bender & Co., Inc. 2017).
9. See David S. Almeling et al., Disputed Issues in Awarding Unjust Enrichment Damages in Trade Secret Cases, 19 Sedona Conf. J. 667 (2018).
10. Curtiss-Wright Corp. v. Edel-Brown Tool & Die Co., 407 N.W.2d 319, 326-27 (Mass. 1980).
11. See University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518 (5th Cir. 1974).
12. Michael A. Rosenhouse, Annotation, Proper Measure and Elements of Damages for Misappropriation of Trade Secret, 11 A.L.R.4th 12 (2010).
13.  See Precision Plating v. Martin Marietta, 435 F.2d 1262 (5th Cir. 1970) (Public disclosure of the trade secret by subcontractor under a confidentiality agreement was held to constitute a complete destruction of the trade secret. Because no established market existed to value the trade secret, the trial court determined fair market value by determining the investment value, i.e. the amount a “reasonably prudent investor” would have paid for use of the trade secret.).
14. See Pike v. Tex. EMC Mgmt. LLC, Case No. 17-0557 (Tex. June 19, 2020) (Plaintiffs profit margin could not be calculated as the Plaintiff never generated a profit.).
15. See Memorandum Opinion, ECF 1581, Steves & Sons, Inc. v. Jeld-Wen, Inc., Civil Action No. 3:16-cf-545 (E.D. Va. May 10, 2018) (“As a result, unjust enrichment awards can in some sense “serve a legitimate deterrent function,” because “a misappropriation claim involves an allegation of theft, and it is not unknown to require a thief to return not only what was stolen, but any additional consequential profits he or she reaped as a result of his or her wrongful actions.” citing Russo v. Ballard Med. Prods., 550 F.3d 1004, 1021 (10th Cir. 2008)).
16. Quality Auto Painting Ctr. of Roselle, Inc. v. State Farm Indem. Co., 870 F.3d 1262, 1277 (11th Cir. 2017).
17. See Ajaxo, Inc. v. E*Trade Financial Corp., 115 Cal. Rpt. 3d 168, 176-77 (Ct. App. 2010).
18. In the context of patent infringement, the Federal circuit has defined convoyed sales as “the relationship between the sale of a patented product and a functionally associated non-patented product” and is regularly calculated in determining unjust enrichment damages. Am. Seating Co. v. USSC Grp., Inc., 514 F.3d 1262, 1268 (Fed. Cir. 2008). Therefore, it is reasonable to conclude that convoyed sales, if properly established, is a valid metric in calculating lost profits.
19. For a much more complete discussion on methodologies to evaluate unjust enrichment damages see David S. Almeling et al., Disputed Issues in Awarding Unjust Enrichment Damages in Trade Secret Cases, 19 Sedona Conf. J. 667 (2018).
20. Memorandum Opinion, ECF 1581, Steves & Sons, Inc. v. Jeld-Wen, Inc., Civil Action No. 3:16-cf-545 (E.D. Va. May 10, 2018).
21. Steves & Son is a fascinating case as it involves the first instance of a private divestiture suit under the Clayton Act (15 U.S.C. § 18). Jeld-Wen was awarded reasonable royalties for the misappropriation and future use of the trade secret, but found guilty of violating antitrust law, and ordered to divest itself of its Towanda manufacturing facility.
22. Pike v. Texas EMC Management, LLC, 579 S.W.3d 390, 420 (Tex. App. 2017).
23. In this author’s opinion, the first instruction in Pike likely directs the jury to consider a reasonable royalty, although it is not expressly stated as such. Traditionally “the value that a reasonably prudent investor would have paid for the trade secret” is a valid inquiry in considering unjust enrichment damages. See Bohnsack v. Varco, L.P., 668 F.3d 262, 280 (5th Cir. 2012). However, the instruction in Pike actually reads “…[the amount] that a reasonably prudent investor would have paid for the use of the Trade Secrets…” (emphasis added). This added language “for the use of” removes from consideration the wholesale purchase of the secret by our hypothetical investor, and instead asks how much the reasonably prudent investor would have paid for a license to use the secret.  If it were determined that this instruction asks to determine a reasonable royalty, then the trial court would have been precluded from awarding damages on both instructions pursuant to the TUTSA. Whether the instruction constituted a reasonable royalty award was never appealed, however it presents an important consideration when framing the language of jury instructions.
24. Pike v. Texas EMC Management, LLC, 579 S.W.3d 390, 420 (Tex. App. 2017). Although the 10th circuit reversed the finding on the first instruction and ordered the $1.5 million jury verdict reinstated, this issue was never actually briefed by either party. As a result the Texas Supreme Court reversed, finding the appellate court lacked jurisdiction to make findings on that issue. In the end, the Plaintiff walked away with $0 after the initial award of $3 million for trade secret misappropriation.
25. University Computing v. Lykes-Youngstown Corporation, 504 F.2d 518 (5th Cir. 1974).
26. Id. at 537 n.31.
27. Id. at 539. (“…the trier of fact should consider such factors as the resulting and foreseeable changes in the parties’ competitive posture; that prices past purchasers or licensees may have paid; the total value of the secret to the plaintiff, including the plaintiff’s development costs and the importance of the secret to the plaintiff’s business; the nature and extent of the use the defendant intended for the secret; and finally whatever other unique factors in the particular case which might have affected the parties’ agreement, such as the ready availability of alternative processes.”).
28. Georgia-Pacific v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970) (Providing a series of factors one should consider in calculating reasonable royalties for claims involving patent infringement.).  Many state courts have adopted the Georgia-Pactific factors in considering reasonable royalties for trade secret misappropriation, however, these factors are used only as a guide and not as an exhaustive list for calculating royalty rates.
29. Univ. Computing, 504 F.2d at 539.
30. Memorandum Opinion, ECF 1581 at 30-31, Steves & Sons, Inc. v. Jeld-Wen, Inc., Civil Action No. 3:16-cf-545 (E.D. Va. May. 10, 2018).
31. Amended Final Judgment Order, ECF 1852 at 11, Steves & Sons, Inc. v. Jeld-Wen, Inc., Civil Action No. 3:16-cf-545 (E.D. Va. May. 10, 2018).
32. Elizabeth A. Rowe, Unpacking Trade Secret Damages, 55  Hous. L. Rev. 155, 168 n.81 (Fall 2017).
33. Rachel Bailey, et al., Lex Machina Trade Secret Report, Lex Machina, (April 2020).
34. E.I. Dupont de Nemours v. Kolon involved the misappropriation of kevlar manufacturing secrets by South Korean industrial company Kolon. The case involved corporate espionage, destruction of evidence, and a formal investigation by the F.B.I. In 2014 the 4th Circuit overturned the 2011 verdict as a result of evidentiary deficiencies. 564 F. App’x 710 (4th cir. 2014). The parties settled for $250 million and Kolon pled guilty to a federal charge of conspiracy to convert trade secrets resulting in $85 million in criminal penalties. See FBI, Kolon Industries Inc. Pleads Guilty for Conspiring to Steal DuPont Trade Secrets Involving Kevlar Technology, (April 30, 2015), available here
35. Rachel Bailey, et al., Lex Machina Trade Secret Report, Lex Machina, April 2020, at 20.
36. Third Amended Compl., ECF 861 at 2, Liqwd, Inc., and Olaplex LLC, v. L’Oreal USA, Inc. et al., No. 17-CV-0014-JFB-SRF (D. Del. 2017).
37.  Id. Note: L’Oreal is the world’s largest cosmetic and personal care company with revenue exceeding 25 billion annually.
38. Id. at ¶¶ 27-46.
39. Id. at ¶¶ 47-55. Note: The trade secrets and confidential information were fully redacted in the complaint.
40. Id. at ¶¶ 56-79.
41. Id.
42. 1202 docket entries to date.
43. L’Oreal USA, Inc. v. Liqwd, Inc., Patent No. 9,498,419, PGR2017-00012.
44. L’Oreal USA, Inc. v. Liqwd, Inc., decision of the Patent Trial and Appeal Board, Patent No. 9,498,419, PGR2017-00012, paper 102 (challenging the validity of the ‘419 patent).
45. In short, the PTAB relied upon Iron Grip Barbell Co. v. USA Sports, Inc., 392 F.3d 1317, 1325 (Fed. Cir. 2004), but misinterpreted Iron Grip Barbell Co. as requiring copying an entire existing product in conducting an obviousness analysis. “But where there is evidence of actual copying efforts, that evidence is always relevant.” Liqwd, Inc., v. L’Oreal USA, Inc., 941 F.3d 1133, 1138 (Fed. Cir. 2019).
46. L’Oreal USA, Inc. v. Liqwd, Inc., decision of the Patent Trial and Appeal Board, Patent No. 9,668,954, PGR2018-00025, Paper 78, (PTAB July 30, 2019). The PTAB found that claims 1-13, 19-23, 29, and 30 were obvious in light of the prior art.
47. Federal Circuit Docket Nos. 19-2410 (appeal) and 20-1014 (cross-appeal), consolidated at No. 19-2280.
48. Jury Verdict Form, ECF 1060, Liqwd, Inc., and Olaplex LLC, v. L’Oreal USA, Inc. et al., No. 17-CV-0014-JFB-SRF (D. Del. 2017).
49. Mem. and J., ECF 1078, Liqwd, Inc., and Olaplex LLC, v. L’Oreal USA, Inc. et al., No. 17-CV-0014-JFB-SRF (D. Del. 2017).
50. Opening Br. for Appellants L’Oreal USA, Inc et al.  at 61, ECF 41, Liqwd, Inc. v. L’Oreal USA, Inc., Docket No. 20-1382 (Fed. Cir. Jan. 23, 2020).
51. Id. at 77.
52. L’Oreal contested this by advocating over a dozen direct competitors existed in the marketplace during the time period it was selling the competing product. Id.
53. Mem. and J. at 3, ECF 1078, Liqwd, Inc., and Olaplex LLC, v. L’Oreal USA, Inc. et al., No. 17-CV-0014-JFB-SRF (D. Del. 2017).
54. Id.
55. Liqwd, Inc. v. L’Oreal USA, Inc., 720 F. App’x 623 (Fed. Cir. 2018).
56.  Order, ECF 20, Liqwd, Inc., and Olaplex LLC, v. L’Oreal USA, Inc. et al., Docket No.: 20-1382 (Fed. Cir. January 23, 2020).
57. Final J., ECF 1184, Liqwd, Inc., and Olaplex LLC, v. L’Oreal USA, Inc. et al., No. 17-CV-0014-JFB-SRF (D. Del. 2017).
58. Liqwd, Inc. et al. v. L’Oréal S.A.., No. 2:19-cv-05869-RGK-RAO (C.D. Cal. 2019).
59. Federal Circuit Docket Nos. 19-2410 (appeal) and 20-1014 (cross-appeal), consolidated at Docket No. 19-2280.
60. Liqwd, Inc. et al. v. L’Oréal S.A.., No. 2:19-cv-05869-RGK-RAO (C.D. Cal. 2019). 
61. Liqwd, Inc., and Olaplex LLC, v. L’Oreal USA, Inc. et al., Docket No.: 20-1382 (Fed. Cir. January 23, 2020).
62. Third Am. Compl. at 1-12, ECF 103, Citcon USA LLC v. Riverpay Inc., et al., Case 5:18-cv-02585-NC (January 14, 2019 N.D. Cal.).
63. Id. at 1,  ECF 353.
64. Id. at ECF 330.
65. Pl. post verdict Br., at 10-13, ECF 533
66. Commits are used by code repositories such as github in order to track changes to the code.
67. Id., at 6, ECF 487.
68. Pl. post verdict Br., at 10-13, ECF 553
69. Plaintiff has requested the full double recovery of $3 million in their post verdict brief. Pl. post verdict Br., at 10-13, ECF 553.