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Trading Secrets A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

$4.38 Million Verdict In Utah Federal Court For Malicious Trade Secrets Misappropriation

Posted in Data Theft, Trade Secrets

A Utah federal judge recently held that a jury’s compensatory damages award of $2.92 million for misappropriating trade secrets was supported by the evidence and was not excessive. Because the jury found by clear and convincing evidence that the misappropriation was willful and malicious, the court added $1.46 in exemplary damages. The total verdict: $4.38 million. Storagecraft Technology Corp. v. Kirby, Case No. 2:08-CV-921 (D.Utah, Sept. 27 and Dec. 4, 2012) (appeal pending).

STC developed and obtained a copyright on a source code. The company went to considerable lengths to maintain the code’s secrecy. No one could access the company’s technology without signing a confidentiality agreement, obtaining a license, and agreeing to pay a royalty. Kirby, a software engineer, resigned as a STC employee in late 2004. Shortly before he quit, he informed the company that he had stored the source code and related files on his laptop and desktop. When STC’s attorney communicated with him about returning this intellectual property, he responded that it would be deleted or returned. Not trusting him, the company sued him for misappropriation.

As part of the 2005 settlement of the case, Kirby represented and warranted that he had returned all of STC’s intellectual property. In addition, he promised that he would not use or disclose such property, and that he would cooperate with STC in preserving it. One year later, Kirby delivered to a company he knew to be a STC competitor and lawsuit adversary his entire backup file containing the source code and 100,000 emails he had sent or received while a STC employee.

When STC learned about this delivery, it sued Kirby for misappropriation, breach of contract and copyright infringement. At trial, evidence was introduced supporting STC’s claims, including a charge that Kirby was motivated by a desire to harm the company. The Utah Trade Secrets Act permits the use of a reasonable royalty as a basis for the computation of damages for trade secret misappropriation. STC’s trial expert testified that a reasonable royalty for an unrestricted license to the company’s source code was at least $4.5 million.

The jury discounted the expert’s calculations and awarded $2.9 million in compensatory damages. Based on the jury’s finding that Kirby had maliciously injured STC, the court added exemplary damages in an amount equal to 50% of the jury’s award. Kirby is appealing the judgment.

In a post-trial motion, Kirby argued that the jury verdict was contrary to the clear weight of the evidence, and that the compensatory damages award “was excessive, unreasonable, and should shock the conscience of [the] Court given the lack of evidence that Kirby proximately caused any ‘actual injury or loss’ to STC.” The court rejected Kirby’s argument and stated: “The very essence” of the parties’ prior settlement agreement “was Kirby’s covenant to return and protect all STC Intellectual Property.”

The ruling is of particular interest because, by upholding the reasonable royalties method of computing damages for misappropriation of trade secrets, STC did not have to show that Kirby actually profited from his misconduct (although there was evidence that the competitor to whom he disclosed STC’s trade secrets paid him a salary of $15,000 per month for some unspecified period). Moreover, STC was not required to prove what the competitor would have been willing to pay, if anything, for use of the confidential data.