The new Defend Trade Secrets Act (DTSA) became law on May 11, 2016 and applies to any misappropriation that occurs on or after that date.
Although the DTSA creates a federal, civil remedy for trade secret misappropriation, it does not preempt state law. This is going to encourage serious forum shopping, including, among other things, over the right to jury trial.
The federal law cedes to the jury the determination of all possible monetary damages claims. In comparison, the version of the Uniform Trade Secrets Act (UTSA) adopted by California (CUTSA), while giving the jury the issues of lost profits and unjust enrichment, reserves for the trial judge the determination whether and to what extent to award reasonable royalty damages.
Much of the DTSA is consistent with the UTSA, including their respective provisions on reasonable royalty damages. They both state that damages for misappropriation may include the actual loss and the unjust enrichment. They also contain substantially similar provisions on the availability of reasonable royalty damages.
[I]n lieu of damages measured by any other methods, the damages caused by the misappropriation measured by imposition of liability for a reasonable royalty for the misappropriator’s unauthorized disclosure or use of the trade secret[.]
In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator’s unauthorized disclosure or use of a trade secret.
Both the federal law and UTSA provide that reasonable royalty damages may be recovered “in lieu of” recovering actual losses or unjust enrichment. There are no published decisions interpreting this language in the freshly minted DTSA, but there are numerous federal diversity cases interpreting this language in the course of resolving claims brought under state trade secret statutes based on the UTSA. The great majority if not all of these cases hold that there is a right to jury trial on not just actual losses or unjust enrichment, but also awarding a reasonable royalty. In other words, based on these cases and their statutory interpretations, the UTSA and therefore the DTSA give to jurors (or the court in a bench trial) the issue of reasonable royalty damages to determine as a matter of disputed fact. For example:
- MSC.Software Corp. v. Altair Eng., Inc., 2016 WL 1714873, at *2 (E.D. Mich. Jan. 7, 2016) (held there is statutory right to jury trial on reasonable royalty damages under Michigan version of UTSA)
- Storagecraft Tech. Corp. v. Kirby, 2012 WL 6029128, at *2 (D. Utah Dec. 4, 2012) (affirmed jury reasonable royalty verdict under Utah version of UTSA)
- Secure Energy, Inc. v. Coal Synthetics, LLC, 708 F. Supp. 2d 923, (E.D. Mo. 2010) (interpreting Missouri version of UTSA, the court held that trade secret plaintiff entitled to argue reasonable royalty damages to jury).
This is not the case in California, reflecting perhaps the circumstances surrounding California’s adoption of the UTSA in 1984. At the time, the UTSA did not have any provision allowing for the recovery of damages measured as a reasonable royalty. As explained in Ajax, Inc. v. E*Trade Financial Corp., 187 Cal. App. 4th 1295 (2010), the California legislature filled the void by adding language intended to codify the common law principle that the reasonable royalty measure of damages was “only appropriate where the defendant has made no actual profits and the plaintiff is unable to prove a specific loss.” Id. at 1310 (citations omitted). The CUTSA states that reasonable royalties would be available if damages or unjust enrichment “could not be proved.”
Interestingly, the UTSA was corrected in 1985 to include the above “in lieu of” language recognizing reasonable royalty measure of damages. But the die had apparently been cast and courts interpreting the CUTSA’s “could not be proved” provision have held that “[a] reasonable royalty is a court-determined fee imposed upon a defendant for his or use of a misappropriated trade secret.” Id. at 1308 (remanding appeal of judgment entered upon trade secret jury verdict back to trial court to decide issue of reasonable royalty damages) (emphsis added). Moreover, the court’s consideration of a reasonable royalty is contingent upon and subsequent to the court excluding claims for actual losses and unjust enrichment as not supported by sufficient evidence as a matter of law, or, even if one or both of the actual loss or unjust enrichment claims is given to the jury to decide, they refuse to award either type of relief as a matter of fact. Id. Only then has it been shown the actual losses and unjust enrichment “could not be proved” under the CUTSA. Id. See Atlantic Inertial Systems, Inc. v. Condor Pacific Industries, 2015 WL 3825318, at *4 (C.D. Cal. June 8, 2015) (applying CUTSA with specific citations to Ajax, the trial court decided whether and to what extent to award reasonable royalty damages to trade se).
Flashing back to the trade secret claimant deciding upon pursuing a claim under the DTSA or California trade secret law, it is no small consideration that under California law reasonable royalties are not given to the jury and will be reached only after trial and as part of post-trial motions. A claimant may believe there is a greater likelihood of success if reasonable royalty damages are determined by the jury, but wherever they come out on this question, they are not going to want to incur the greater amount of time and money that it will take as a practical matter to resolve a claim for reasonable royalty damages under California trade secret law.