Courts have long lamented that “computing damages in a trade secret case is not cut and dry,” Am. Sales Corp. v. Adventure Travel, Inc., 862 F. Supp. 1476, 1479 (E.D. Va. 1994), meaning that “every [trade secret] case requires a flexible and imaginative approach to the problem of damages,” Univ. Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 538 (5th Cir. 1974).
The federal Defend Trade Secrets Act (“DTSA”) and virtually every state’s version of the Uniform Trade Secrets Act (“UTSA”) (only New York has not adopted the UTSA) permits recovery of damages for (1) actual loss caused by the misappropriation; (2) unjust enrichment that is not addressed in computing damages for actual loss; or (3) a reasonable royalty for the misappropriator’s unauthorized disclosure or use of the trade secret. There has been little guidance from the courts, however, as to how to calculate these different, and sometimes competing damages calculations, many relying on the “flexible and imaginative approach” set forth in the Fifth Circuit’s 1974 pre-UTSA University Computing decision. Even more difficult is the case where a plaintiff’s damages are based on the defendant’s anticipated future use of the trade secret, given that those damages necessarily will involve speculation about the revenues the defendant will generate from its use of the trade secret.
A case last year in the Eastern District of Virginia highlights these issues, and provides a helpful analysis of how courts may treat claims for damages based on anticipated future use of a trade secret. In Steves and Sons, Inc. v. JELD-WEN, Inc., Steves and Sons, Inc. (“Steves”) sued door manufacturer JELD-WEN, Inc. (“JELD-WEN”) for violations of antitrust laws. JELD-WEN filed counterclaims alleging that Steves had hired former JELD-WEN employees who then disclosed confidential information to Steves about JELD-WEN’s costs and manufacturing plants. Steves allegedly used this confidential information to create a “feasibility study” to determine whether it should build its own manufacturing plant to compete against JELD-WEN. Even if Steves did not build its own manufacturing plant, JELD-WEN argued that Steves could use its confidential pricing information to gain a negotiating advantage when purchasing door skins from JELD-WEN or other manufacturers.
After JELD-WEN disclosed its damages calculations, Steves moved for summary judgment arguing, among other things, that JELD-WEN’s damages were too speculative because they were based on Steve’s anticipated future use of JELD-WEN’s trade secrets. JELD-WEN sought damages for unjust enrichment or, alternatively, a reasonable royalty based on Steve’s use of JELD-WEN’s trade secrets. JELD-WEN’s expert calculated damages under three scenarios: (1) if Steves used the trade secrets to build a manufacturing plant; (2) if Steves never built a plant; and (3) a reasonable royalty based on a hypothetical negotiation between JELD-WEN and Steves.
Utilizing the “flexible and imaginative” approach set forth in University Computing, the court denied Steves motion for summary judgment and permitted JELD-WEN to proceed to trial. The court specifically rejected Steves’ argument that JELD-WEN’s damages were improperly calculated based on anticipated future use of the misappropriated trade secrets, instead of on actual past use, and that they were also too speculative. The court stated that Steves’ attempt to narrow available damages to only actual past damages “would be illogical” because “[i]f Steves . . . actually built that plant, or even if it only took steps toward doing so, that conduct would necessarily flow from the Feasibility Study. From this perspective, Steves’ anticipated future use of the trade secrets based on the outcome of the Feasibility Study is part and parcel of the use of the trade secrets to complete that study, so those uses cannot be separated as neatly as Steves would like.”
The court recognized that in some cases, damages based on multiple predictions, like the production capacity of a plant and operating profits from that plant, are not favored in misappropriation cases because they are too speculative. However, the court found that the case did not involve untested products in an unknown market, but instead were modeled on JEN-WELD’s own manufacturing plants, which had operated successfully for many years. The predictions were therefore sufficiently based on reliable evidence and not too speculative.
As to JELD-WEN’s reasonable royalty, the court noted that such royalties are “by definition forward-looking because it contemplates a negotiation based on how the licensee will use the licensed information.” Accordingly, it is appropriate to incorporate both future earning and the loss of revenue and future worth to the owner in determining the present value of the technology for royalty purposes. The court held that Steves’ anticipated future use was supported by the evidence and therefore JELD-WEN could rely on those potential uses as part of its calculations.
The case ultimately proceeded to trial where a jury awarded JELD-WEN $1.2 million (JELD-WEN’s expert had calculated damages of approximately $10 million). After trial, JELD-WEN moved for a permanent injunction to prohibit Steves from using its trade secrets. The court denied JELD-WEN’s motion, holding that JELD-WEN had pursued and recovered damages and that granting injunctive relief would amount to a double recovery. The court also held that JELD-WEN’s damages award proved that it had an adequate remedy at law, and therefore could not satisfy each of the elements necessary for a permanent injunction.
The case (which has been appealed) is a helpful example showing that in certain circumstances, damages in trade secrets cases can include anticipated future use. The plaintiff will need to be able to prove that the defendant has already misappropriated the trade secrets and that its predictions and assumptions of anticipated future use are based on actual evidence, not mere speculations. Also, in pursuing a claim for damages based on anticipated future use, the plaintiff may give up any claim for injunctive relief to enjoin actual future use.