This is first in multi-part discussion of measuring the accounting period for trade secret damages. First up: untethering the liability requirement of secrecy from the damages goal of awarding as much as necessary (but no more than) to eliminate unfair competition.
Trade secrets qualify for protection only so long as they are not generally known or ascertainable through “proper means” such as independent invention, reverse-engineering, observing them in public use or obtaining them from public literature. See Uniform Trade Secrets Act (UTSA) § 1(4); id., cmt. Extending the protection of a trade secrets beyond this point contravenes the public interest in avoiding unnecessary restraints on exploitation of valuable information. Restatement 3d Unfair Competition, § 39 cmt. f.
One might conclude then that the cut-off for damages for trade secret misappropriation should be the end of the secrecy period (i.e., the period the trade secrets were not known or knowable through proper means). And there are some cases that taken this position, including the recent decision of the Delaware district court in Liqwd, Inc. and Olaplex v. L’Oreal USA, Inc., 1:17-cv-14, D.I. 1078 at 3 (D. Del. Aug. 20, 2019) (Memorandum and Judgement following entry of jury verdict). See also id. D.I. 1162 at 9, 2019 U.S. Dist. LEXIS 215668, at *12-13 (D. Del. Dec. 16, 2019) (Order denying plaintiffs’ motion to alter judgment); id. D.I. a1184 at 2 (D. Del. Mar. 24, 2020) (entry of final judgment).
However, the Liqwd decision to cut off damages as of the loss of secrecy may contravene the guiding principle that damages should last as long as necessary to deprive the defendant of a head start or other unfair commercial advantage that is attributable to misappropriation.
In some instances, damages should be awarded for an additional period of time after the trade secret’s loss of secrecy because this is necessary to eliminate the unfair advantage obtained through the pre-secrecy acts of misappropriation. A closer review of Liqwd provides a lens through which to understand the tension between these approaches. What may explain the result in Liqwd and cases like it is that they are improperly construing as one and the same thing the end date of the secrecy period and the end date of the damages accounting period. The former is directed to ensuring that business information is in fact secret and therefore qualifies for protection against misappropriation, while the latter is directed to the separate and different goal of eliminating any unfair commercial advantage due to trade secret misappropriation.
In Liqwd, the proprietary information at issue was initially protected under trade secret law and an NDA. The information was later disclosed in published patent applications. Following trial, the jury returned a verdict of willful trade secret misappropriation, willful patent infringement and breach of contract. The jury was instructed to award all damages suffered under each legal theory of liability and that the court would then calculate the total damages award to ensure there was no double recovery. The jury awarded compensatory damages of $22,265,000 for trade secret misappropriation and breach of contract and $24,960,000 for patent infringement.
At trial in Liqwd, the jury appears to have been properly instructed on the accounting period for trade secret damages, as follows:
TRADE SECRET DAMAGES – DAMAGES PERIOD
Olaplex may recover for the damages resulting from L’Oreal USA’s ability to get to the market sooner (or to gain some other commercial advantage), commonly known as a “head start.” Olaplex may recover damages for trade secret misappropriation for the time period that (1) you find that the trade secret information would be entitled to trade secret protection, plus (2) an additional “head start” period, if any, during which the trade secrets afforded defendant a competitive advantage by providing defendant a head start in its business.
The “head start” period is the time it would have taken L’Oreal USA to develop and bring to market the Infringing Product(s) absent any misappropriation (e.g., not using the alleged trade secrets until they were published).
Liqwd v. L’Oreal, No. 1:17-cv-14, D.I. 1056 at 42.
The Liqwd jury instruction faithfully tracks the comment to Section 3 of the UTSA and related commentary. “[A] monetary recovery for trade secret misappropriation is appropriate only for the period in which information is entitled to protection as a trade secret, plus the additional period, if any, in which a misappropriator retains an advantage over good faith competitors because of misappropriation.” UTSA, § 3 cmt. “Monetary relief based on the defendant’s use of the information after the loss of secrecy [e.g. public disclosure in a patent application] is therefore appropriate only to the extent necessary to remedy a head start or other unfair advantage attributable to the defendant’s prior access to the information.” Rest 3d Unfair Competition § 45 cmt. h. (modified); see also id. Reporters Notes cmt. h. (citing UTSA § 3 cmt. and collecting cases).
The Liqwd jury appears to have followed these instructions, awarding as part of their verdict $22,265,000 for trade secret misappropriation. The verdict is the same amount calculated by plaintiff’s expert for sales diverted from plaintiff over a 20 month period commencing with the August 2016 launch of accused products using the trade secrets up through March 2018. The expert testified that this period represented the head start obtained by defendants due to their unauthorized use of the trade secrets. See Liqwd v. L’Oreal., No. 1:17-cv-14, D.I. 1078, at 2. The expert’s testimony, including the expert’s adjustment for duplicative patent infringement damages incepting towards the end of the head start period, is depicted in the following slide:
However, following the entry of the jury’s verdict, the district court issued its Memorandum and Judgment limiting the award of trade secret damages to the 9 month period prior to the disclosure of the trade secrets in a published patent application, and thereby reduced the award of compensatory damages for trade secret misappropriation from $22,265,000 (covering the full 20 month head start period) to $9,499,733 (limiting coverage to the 9 month secrecy period). See Liqwd v. L’Oreal., No. 1:17-cv-14, D.I. 1078, at 2. The court explained this was necessary because “there can be no further trade secret damages after the date the trade secret is made public” “[A]ny advantage defendants gained started on the date they became aware of the trade secret and ended when the information was no longer a trade secret.” Id. at 3.
Plaintiff moved to alter or amend the judgment sufficient to award misappropriation damages for the entire 20 month head start period. Plaintiff argued that “[t]he law is well-settled that a trade secret plaintiff may recover damages suffered even after the trade secret is made public.” Id., 1:17-cv-14, D.I. 1094, at 12. Plaintiff added: “Recovery beyond the ‘secrecy’ period is permitted when the misappropriation of the secret, when it was a secret, provided defendant with an ‘advantage’ or a ‘head start’ that it enjoyed even after the secret was published.” Id. (collecting cases and legal commentary). The district court denied the motion and subsequently entered final judgment, from which the plaintiffs and defendants have appealed.
Similar to the result in Liqwd, Second Circuit interpreted New York law in Web Graphics, Inc. v. Jos. Hunkeler, Ltd., 682 F.2d 59, 60 (2d Cir. 1982), as not allowing the extension of injunctive relief beyond the secrecy period to address any unfair head start. In Web Graphics, the Second Circuit reviewed the district court’s denial of appellant’s motion for preliminary injunction enjoining misappropriation of its trade secrets. The appellee argued that the district court’s ruling was well-founded based on the Second Circuit’s prior decisions Conmar and Timely Products that pre-existing trade secret rights terminate upon disclosure in published patent application or issued patent. Appellant, in response, asked the Second Circuit to limit or modify its earlier decisions to the extent they prevented extension of the injunction as necessary to deny a misappropriator the benefit of his misconduct. The Second Circuit declined the appellant’s invitation and affirmed the denial of the motion for preliminary injunction, explaining that in Web Graphics the injunction was not sought “during the length of the head start period.” Instead, in the view of the Second Circuit, the asserted head start period expired before trial and therefore the district court properly refused to enter an injunction. “We leave for another day the appealing question of whether this court should limit Conmar and Timely Products to their facts and approve a ‘head start’ rule which would deny a misappropriator of trade secrets the benefit of his misconduct.” Id. (emphasis added).
In contrast, other cases have extended the accounting period because the misappropriation of the trade secrets provided defendant with an advantage or head start that it continued to enjoy even after secrecy was lost. The extended recovery allowed by the courts in these decisions is up until, but no longer than, the time necessary to eliminate the post-secrecy commercial advantage.
For example, in TurnKey Sols. Corp. v. Hewlett Packard Enter. Co., 2017 U.S. Dist. LEXIS 126076, at *18 (D. Colo. Aug. 9, 2017), the court denied defendant Hewlett Packard Enterprise’s motion for summary judgment limiting plaintiff TurnKey’s damages for trade secret misappropriation and breach of confidentiality agreement to the period prior to the publication of the trade secrets in plaintiff’s patent application. In reaching this decision, the court stated:
To the extent HPE is requesting that this Court limit TurnKey’s damage award based on the publication of the patent application, the Court declines to do so. The patent application does not necessarily absolve HPE of all post-publication damages that flow from its alleged pre-publication misappropriation.
Id. at *17-18.
The court did not look to the Uniform Act, Restatement, or their progeny for legal support. Instead, the court relied upon Ninth Circuit precedent distinguishing between patent infringement liability and liability for breach of confidential relationships based upon unauthorized use of confidential information pre-dating the publication of a patent application. See id. at *18, citing Engelhard Indus., Inc. v. Research Instrumental Corp., 324 F.2d 347, 352 (9th Cir. 1963) (“[W]here, in advance of the granting of a patent, an invention is disclosed to one who, in breach of the confidence thus reposed, manufactures and sells articles embodying the invention, such person should be held liable for the profits and damages resulting therefrom, not under the patent statutes, but upon the principle that equity will not permit one to unjustly enrich himself at the expense of another.”).
Similarly, in Federal Express Corp. v. Accu-Sort Sys., Inc., 2005 WL 8156707, at *18 (W.D. Tenn. Mar. 30, 2005), the court denied defendant Accu-Sort’s motion for entry of summary judgment “that the time for which FedEx can claim damages ends when FedEx published its patent documents [disclosing] the information at issue in this case.” Id. at *17. The court recognized generally that “FedEx cannot claim trade secret protection for any information that has been made available to the public by way of a patent,” but further recognized that “an act of misappropriation can cause plaintiff to lose profits, or a defendant to receive illicit gains, after the trade secret is made public.” Id. (collecting cases). “[I]f the ‘head start’ gained by the defendant through misappropriation continues to disadvantage the plaintiff after the date plaintiff receives its patent, the plaintiff may collect damages for profits that accrue during this ‘extra’ limited time period.” Id.
The Federal Express court cited comments to Section 3 of the Uniform Act and Section 45 of Restatement as further “support[ing] the position that damages are not cut off automatically when a patent issues for formerly secret information.” Id. at *18, citing Uniform Act § 3 cmt. and Rest. 3d Unfair Comp. § 45 cmt. h. The court concluded:
FedEx may legitimately claim damages for any “head start” Accu-Sort may have obtained through the use of protected information. Whether and to what extent any such damages may be measured by profits Accu-Sort made after FedEx sought or received its patents remains a disputed question of fact. Therefore, this court declines to find as a matter of law that FedEx cannot recover damages for any period after the patent applications or issuance of the patents covering the allegedly secret information.
Id. (emphasis added).
Guidance on when and how to limit the duration of the trade secret damages is not necessarily consistent and sometimes not available. This makes it harder to predict in a particular matter the length of time that will be allowed for recovery of trade secret damages.
A possible solution, one which is well-grounded in UTSA principles and related commentaries, is focusing on eliminating the commercial advantage gained from actionable misappropriation. The duration of the period to recover damages extends up until the time that this has occurred, but no longer. Depending upon the facts in a particular case, this test may extend the cut-off for damages beyond the secrecy period (as discussed in this article), or, alternatively, may cut-off damages before the end of the secrecy period (as will be discussed in the next article). Giving primacy to the elimination of any unfair commercial advantage is not only consistent with core principles of trade secret law but also mitigates against confusion that otherwise exists regarding when and how the loss of secrecy factors into the determination of the accounting period.