APPRAISING THE UNKNOWN: HOW COURTS CALCULATE THEFT OF TRADE SECRET DAMAGES
By some estimates, theft of trade secrets costs US businesses between $180bn and $450bn each year. But how do US courts calculate the value of a trade secret in the context of a lawsuit? That calculation can be challenging because trade secrets are, by definition, secret. They lose protection if they become ‘generally known’ or ‘readily ascertainable’ in the relevant industry. Consequently, trade secrets are not widely available and have no market price.
Many different types of information, moreover, can qualify as a trade secret, so there are necessarily multiple ways to value them. The varied nature of trade secrets can also create other complex challenges when attempting to quantify the harm caused by misappropriation. For example, if a trade secret is embodied in a new product that lacks a history of revenues, it can be difficult to determine what evidence best predicts that product’s future profitability.
To address the variety of issues that can arise in proving damages in trade-secret cases, courts generally permit three different methods for calculating damages: (i) actual loss; (ii) unjust enrichment, i.e., a defendant’s ill-gotten gains; and (iii) a reasonable royalty based on what a licensee would have paid if it had properly licensed the trade secret. These methods are recognised under the federal Defend Trade Secrets Act and the Uniform Trade Secrets Act that has been enacted in some form in 48 states plus the District of Columbia. Each method has potential advantages and shortcomings. Determining which method provides the most reliable calculation depends on the circumstances of each case.
Apr-Jun 2022 issue
MoloLamken LLP