The Virginia Supreme Court has complicated the valuation of lost goodwill damages in trade secrets matters in its June 7, 2012 decision in 21st Century Systems, Inc. v. Perot Systems Government Services, Inc., No. 110114.
The matter arose from the departure of several employees from Perot Systems Government Services, Inc. (“Perot”), who subsequently joined a competitor company. Perot filed suit with multiple counts, including breach of fiduciary duty, breach of non-disclosure agreement, breach of non-competition and non-solicitation agreements, violation of Virginia’s business conspiracy act, and violation of Virginia’s Uniform Trade Secret Act. During trial, Perot provided evidence that several of the key employees had downloaded numerous Perot documents and accessed those files while working at the competitor. Defendants challenged the propriety of Perot’s damages expert, but the trial court denied the motion to strike, instead striking defendants’ counter expert for failure to adequately disclose his opinions prior to trial. The jury returned a verdict in favor of Perot on all claims, including $4 million in compensatory damages and $12 million in trebled damages, most of which was predicated upon lost goodwill damages.
The key issue on appeal was the propriety of Perot’s damages expert’s valuation of Perot’s lost goodwill damages. Perot’s expert had sought to follow the methodology used and accepted by the Virginia Supreme Court in Advanced Marine Enters. V. PRC Inc., 256 Va. 106, 501 S.E.2d 148 (1998). Specifically, the expert sought to calculate the difference between the price the business would sell for and the value of its non-goodwill assets. He did so by using the actual sale figures and Dell’s valuation of Perot’s goodwill, as reported in SEC filings. The majority on the Supreme Court took issue with this approach, noting that because the expert had used actual sale figures, “Perot was required to demonstrate that its sale price to Dell reflected an actual loss of goodwill as a result of the [misconduct].” The employees had departed in the summer of 2009, and the sale to Dell was completed in November 2009, but Perot introduced at trial no evidence regarding the diminution in value of Perot’s fair market value or identifiable assets during this time frame. To the contrary, the majority noted that Dell had paid a premium for Perot, and there was no evidence at trial that Dell discounted Perot as a result of the employee departures. As a result, the Court concluded that Perot had not, as a matter of law, demonstrated that it actually lost any goodwill.
The majority distinguished Advanced Marine, in which the plaintiff company lost employees to a competitor and was sold before the trial court decided the case. The record indicated that the price for the sale of the company did not change after the departure of the relevant employees. The expert in Advanced Marine did not look to the actual sales data, however, to determine the lost goodwill damages. Instead, the expert examined the sales of two comparable businesses, subtracted the value of each “comparable company’s” assets from its sales price to determine the goodwill associated with each comparable sale, and then apportioned this estimated goodwill figure among the number of employees. This derived figure was then applied to the departed employees of Advanced Marine. The Virginia Supreme Court approved of this methodology, noting that the departed group of employees had “goodwill value for purposes of maintaining the customer relationships necessary for contract retention.” No similar testimony was provided in the instant case, noted the majority.
Two justices dissented from the majority opinion. The dissents argued that the majority was applying a higher standard of proof to Perot than the Court had applied in Advanced Marine. The dissent noted that lost goodwill valuations are inherently difficult, but the methodology used by Perot’s expert was sensible and consistent with Advanced Marine.
It is difficult to make sense of the methodology accepted by the Virginia Supreme Court in Advanced Marine but rejected in 21st Century. In the former, the sales price did not reflect a lost valuation, but the Court accepted the analytically derived damages figures on the presumption, supported by testimony, that there would be future lost goodwill. In 21st Century, the actual sales data also did not reflect lost value, but the Court required that it do so to sustain a lost goodwill valuation. Parties claiming lost goodwill damages should thus be cautious in relying upon actual data, rather than analytically derived data, unless the actual data demonstrate the lost goodwill. Further, 21st Century cautions that there needs to be testimony regarding the existence of the lost goodwill, e.g., that departed employees will harm the relationships necessary to retain customers.