How do courts calculate the damages caused by theft of trade secrets?
Determining the value of a stolen trade secret can be complex. Trade secrets are often products that a business has recently developed, with no history of traceable revenues. Defendants accused of misappropriating trade secrets will also point to other, independently valuable features of a product or service that they believe produce any profits they receive. And in competitive markets, it can be difficult to prove what would have happened to a plaintiff’s revenues absent disclosure of its trade secrets.
To deal with the variety of issues that can arise, federal and state law offer three different methods for calculating the damages attributable for theft of trade secrets.
Actual Loss: First, a business can recover the “actual loss caused” by trade secret misappropriation. Such damages attempt to put the business in the position it would have occupied had the theft never occurred. But calculations of actual loss can encounter problems of proof. For one thing, it can be difficult to identify which losses were “caused” by trade-secret misappropriation, as opposed to other factors.
Unjust Enrichment: Second, a business can recover the “unjust enrichment” a defendant received from a trade secret. Such damages prevent defendants from profiting by their wrongdoing. Awarding unjust enrichment also resolves some of the difficulties of proving actual loss. The defendant’s ability to profit can substantiate a trade secret’s value even in the absence of past sales by the plaintiff. But proving unjust enrichment presents its own challenges, as the defendant will inevitably attribute its profits to sources other than the trade secret.
Reasonable Royalty: Alternatively, a business can seek a “reasonable royalty” for use of its trade secret. Courts calculate such a royalty by imagining a hypothetical negotiation over the price at which the business would willingly license the relevant trade secret to another. Courts consider many factors in determining a reasonable rate, recognizing that neither party would enter a licensing deal that cost them more than they gained. In the rare instances where a business has a history of licensing its trade secrets, its past royalties provide strong, but not insurmountable evidence of the reasonable rate.
No single damages theory is right for all cases. Choosing the appropriate measure in any particular case will depend on a number of factors. Any business considering a lawsuit over theft of trade secrets should consult experienced counsel about which damages theory best fits its unique circumstances. Early analysis can identify the best strategies and determine what proof is necessary to successfully pursue it.
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