As we have previously reported, courts across the country are adjourning most appearances, including trials, and hearing only “emergency matters” during the current COVID-19 crisis. As a result, obtaining emergency injunctive relief may be more difficult than in normal circumstances. And attempting to obtain injunctive relief to enforce non-compete agreements against employees who are laid off, while permissible in a majority of states, may be particularly difficult now given that we are quickly entering (if not already in) a period of high unemployment. At the same time, some employers are loosening security measures in the name of convenience and efficiency for remote workers, potentially making trade secret misappropriation easier (we have provided tips for avoiding just that). But that does not mean employers are out of luck if an employee (or someone else) misappropriates its trade secrets or steals its customers. Companies that are genuinely and immediately harmed by trade secret misappropriation and breach of restrictive covenants should still seriously consider seeking injunctive relief, particularly if the activity is causing significant harm to their business. Damages are always an available, if not immediate, remedy, however, where injunctive relief may not be practical.
While we continue to recommend seeking injunctive relief where there is evidence of actual or threatened trade secret misappropriation or a violation of restrictive covenants, if that is not a viable option under current conditions, employers can still seek to recover monetary damages once the courts are back in regular session. Indeed, obtaining injunctive relief does not waive damages, so an aggrieved party can, in appropriate cases, obtain damages in addition to injunctive relief, particularly if the injunctive relief was delayed or does not fully remediate the harm. The prospect of significant damages—including the potential for exemplary damages and attorneys’ fees—may prove a valuable deterrent, especially when access to injunctive relief may be more limited. Further, the filing of a complaint seeking damages and injunctive relief may have the desired impact on discontinuing the wrongdoer’s conduct. That can be followed by a motion for preliminary injunction and expedited discovery on regular notice.
In addition to seeking injunctive relief on regular notice, the threat of a large damage award against the wrongdoer can also be effective. Proving damages caused by a violation of restrictive covenants is well-established. While numerous theories are recognized, such damages are frequently calculated by analyzing the plaintiff’s lost profits caused by the defendant’s wrongful conduct. For example, in the event of a stolen customer relationship, what are the profits that the plaintiff would have received “but for” defendant’s unlawful conduct. Relevant factors may include the appropriate damages period (i.e., how long would the client reasonably have continued making orders), past order volume, revenues, and profits; and current and future market conditions (i.e., would the client have ordered the same amount going forward). In the current environment, the economic impact of COVID-19 may also be a relevant consideration. A good damages expert will be able to harness these inputs, work with the client and counsel to identify other relevant factors, and present a damages analysis that provides a reasonable estimate of the client’s damages.
Proving damages resulting from trade secret misappropriation can be more difficult. The Uniform Trade Secrets Act (UTSA), which has been widely adopted by most state legislatures (with the sole exception being New York), provides that “damages” may be awarded for “actual loss” or “unjust enrichment” that is “caused by” misappropriation, and that in lieu of other measures a court may “impose liability for a reasonable royalty for the misappropriator’s unauthorized disclosure or use of the trade secret.” UTSA § 3(a). The damages provision in the Defend Trade Secret Act (DTSA) borrows the same language. 18 U.S.C. § 1836(b)(3)(B)(i)-(ii). And, while there is less guidance and precedent to rely on for determining damages resulting from trade secret misappropriation than there is for patent, trademark, and copyright infringement, there are widely-accepted established categories of damages for trade secret misappropriation: actual loss, unjust enrichment, reasonable royalties, and, in some cases, exemplary damages and/or attorneys’ fees.
- The goal of awarding damages for Actual Loss is to compensate the plaintiff for any harm caused by the defendant (as opposed to gains or unjust enrichment benefiting the defendant). Actual loss may be measured in various ways, including lost profits (both past and demonstrable/non-speculative future lost profits) from lost sales or price erosion, increased costs incurred as a result of the misappropriation (which sometimes are set forth as a separate measure of actual loss or are sometimes used as a measure of lost profits), research and development costs; lost royalties (whether in the form of a fully paid up lump sum payment for access to the trade secrets or a running royalty for use made by the misappropriator), and diminution or destruction of value (the value of the defendant’s business or the value of the trade secret). Many of the same factors discussed above are relevant here too.
- A monetary award for the misappropriator’s Unjust Enrichment is intended to prevent the unjust enrichment and is measured by the amount of benefit obtained by the misappropriator. Unjust enrichment can include not only the misappropriator’s profits and investor value, but also avoided royalties and avoided development costs or so-called “head start” damages. Again, many of the same factors discussed above are relevant here as well.
- Reasonable Royalties, while sometimes positioned as a component of measuring actual loss and other times positioned as a component of measuring unjust enrichment, are also available “in lieu of measuring damages by other methods” as provided in the DTSA and UTSA. A reasonable royalty is intended to provide an objective measure of value based on the amount that a willing buyer would pay and a willing seller would accept, neither being under any need for an immediate sale or purchase.
- Exemplary Damages and/or Attorneys’ Fees are generally available, but usually only upon a showing of bad faith or willfulness.
There are, however, state-specific nuances. Different states have adopted slightly different versions of the UTSA, and even where the language is the same, some states interpret it differently. Sometimes, a courts’ analyses of the DTSA in a particular jurisdiction will rely on existing UTSA precedents from that jurisdiction, thereby compounding any differences. California and a few other states allow recovery of a reasonable royalty only if damages are not provable by the other methods or if the value of such would be less than the royalty. And these are just a few of many nuances.
The analysis is further complicated where the misappropriation occurs in a nascent industry and/or the trade secrets are related to products that have not yet been commercialized. In those instances, there is often no baseline level of profits to use as a comparator, or where the advantage gained by a competitor is a so-called “head start” on getting to market, and thus measures other than lost profits and unjust enrichment will be more appropriate.
This is particularly apt where the trade secrets are what is called “negative know how” or, in layman’s terms, “what did not work.” The archetypal example of this is WD-40, which stands for “Water Displacement perfected on the 40th try.” In other words, there were 39 rejected formulas before the formula was finally perfected. Knowing those earlier attempts—even though they did not work—and therefore knowing to avoid them, would necessarily save substantial time in the development of a competing product, thereby providing the competitor with a substantial head start and perhaps millions, if not billions, of dollars in avoided research and development costs.
Because of all of these nuances, and the calculations and assumptions that necessarily must go into each individual damages analysis, litigants generally will hire economic or accounting experts to work closely with their counsel to analyze and quantify their trade secret damages, just as they would in the case of improper solicitations.
Entire papers could be written on the subject of trade secret damages (in fact, the Sedona Conference is currently taking on that endeavor and expects its final product to be published this summer). In sum, however, a failure to obtain injunctive relief, or a delay in obtaining injunctive relief, does not mean an aggrieved party is out of luck. Damages remain on the table, those damages can be measured in multiple ways, and they can be substantial.