“No,” says the court in BladeRoom v Facebook et al.  “Yes,” says the court in O2 Micro v. Monolithic Power.

Can these different results be reconciled and can a rule for apportioning damages between trade secrets be derived from the inquiry? Yes and yes.

BladeRoom v. Facebook et al.

BladeRoom is ND of California case in which plaintiff BladeRoom asserted misappropriation of trade secrets under California’s version of the Uniform Trade Secret Act (CUTSA). The plaintiff’s damage expert’s opinion was that plaintiff should be awarded over $200 million lost profits and unjust enrichment damages resulting from defendant Emerson’s trade secret misappropriation. The defendant moved to exclude the opinion due to the expert’s failure to apportion damages on a trade secret-by-trade secret basis. The court denied the motion and allowed plaintiff to introduce the opinion at trial, stating:

It is true that under CUTSA, damages claimed for actual loss or unjust enrichment must be caused by the misappropriation alleged. Cal. Civ. Code § 3426.3. This portion of CUTSA does not require, however, that an expert assign damages amongst the trade secrets for his or her opinion to be admissible.

(Order, 5:15-cv-1370, Dkt. 745 at 14:1-4.)

Consistent with this ruling, the court rejected defendant Emerson’s proposed jury instruction that “[d]amages for misappropriation must be tied to each specific trade secret and to each specific combination of trade secrets.” (Dkts. 798 at 162:5-6 and 829 at 8:1-17.) Likewise, the verdict form given to the jury (which they ultimately returned in favor of plaintiff) did not require the jury to apportion damages between trade secrets.

(Jury Verdict, 5:15-cv-1370, Dkt. 867 at 3:12-16.)

O2 Micro v. Monolithic Power

O2 Micro is also a ND of California case in which plaintiff O2 Micro asserted misappropriation of trade secrets under CUTSA. The court granted a post-trial motion to vacate the jury’s award of $12 million unjust enrichment damages for trade secret misappropriation. In reaching this decision, the court cited the failure of plaintiff’s damage expert to assign damages between the 12 asserted trade secrets:

After the jury concluded that [defendant] did not misappropriate all of 02 Micro’s trade secrets, [O2 Micro’s damages] expert testimony regarding damages for misappropriation of all trade secret was useless to the jury.

O2 Micro Int’l Ltd. v. Monolithic Power Sys., Inc., 399 F. Supp. 2d 1064, 1077 (N.D. Cal. 2005) (emphasis added).

O2 Micro’s analysis is consistent with the comments to California’s model jury instructions, which state “[i]n cases involving more than one trade secret, the jury must answer all of the questions in the verdict form separately for each trade secret at issue.” CACI VF-4400 (Verdict Form for Misappropriation of Trade Secrets).

Can these two apparently opposing interpretations of trade secret damages be reconciled?

Yes. A damage expert is not required in every case to determine damages on a trade secret-by-trade secret basis. Whether they should be excused from doing so depends upon whether they are able to assume (i.e. rely on the jury finding) that misappropriation of any one or more of multiple asserted trade secrets could result in the same total amount of damages.

In BladeRoom, the damage expert based his opinion on the assumption that each of the asserted trade secrets was a “lock on the door” to defendant getting (and plaintiff losing) the construction deal at issue. Plaintiff’s counsel described the methodology in its brief as follows:

The technical experts have thus opined that each of these individual and combination Trade Secrets was a technical “lock on the door” to Emerson being awarded the Lulea 2 contract. Just as there can be multiple locks on a door, any one of which prevents the door from opening, there are multiple BladeRoom Trade Secrets or Combination Trade Secrets, any one (or more) of which would have prevented Emerson from entering into the Lulea 2 business with Facebook absent misappropriation. . . .

[M]isappropriation of any one or more of these “locks on the door” Trade Secrets by Defendants entitles BladeRoom to the full amount of damages flowing from that award of business to Emerson instead of to BladeRoom.

(Pl. Opp. Br., 5:15-cv-1370, Dkt. 559 at 10:16-11:4 (emphasis added).)

The court in BladeRoom allowed the damage expert’s testimony to go to the jury with the warning that plaintiff would be required to prove the hypotheses upon which the damage expert was relying. Based on the favorable jury verdict, the jury found that each of the asserted trade secrets served as a “lock on the door.” Whether the court deems the proofs sufficient to support these findings is yet to be determined – defendant Emerson has a pending JMOL motion challenging among other things the sufficiency of the evidence to support the damages award. (Def. Mot for JMOL, 5:15-cv-1370, Dkt 898 at 31.)

In comparison, in O2 Micro, the damage expert did not employ a “lock on the door” methodology. He did not assume that misappropriation of any one of the 12 trade secrets asserted in the case was a “lock” that would have prevented the “door” to defendant’s enrichment from “opening” absent misappropriation. He testified to a unitary sum for unjust enrichment damages in reliance on the jury finding misappropriation of all 12 trade secrets. When the jury found only 5 trade secrets to have been misappropriated, there was no evidence upon which the damage award could have been based.

The damage expert’s testimony in O2 Micro was rendered “useless” by his failure to assign damages on a trade secret-by-secret basis. But this does not mean O2 Micro is inconsistent with BladeRoom. Unlike his counterpart in BladeRoom, the damage expert In O2 Micro did not rely on foundational testimony showing that misappropriation of any one or more of multiple asserted trade secrets could result in the same total amount of damages. O2 Micro teaches that absent foundational testimony like that relied upon in BladeRoom, a damage expert will be required to apportion damages amongst trade secrets.

Yesterday evening, the district court in the trade secret litigation Waymo v. Uber et al [3:17-cv-939-WHA] issued revised jury instructions on trade secret misappropriation and proposed special verdict form (Dkt. #2499). The revised instructions retain the requirement in earlier drafts of the instructions that Waymo must show Uber actually used the improperly acquired trade secrets in order to recover unjust enrichment damages.

With due respect to the very hard work of the court and the parties, and recognizing full well that the district court has the final say on such matters, the current draft instructions do not incorporate — perhaps intentionally, perhaps not — the lessons learned by the Western District of Wisconsin in Epic Systems v. Tata Consultancy Services [3:14-cv-748-WMC] in the course of instructing a jury on awarding unjust enrichment damages on an acquisition-based misappropriation theory.

Epic Systems and its relevance to the “use” issues in the Waymo litigation is the subject of my earlier post Acquisition-based misappropriation depends upon how “use” is “used” (LinkedIn Dec. 22, 2017). The key rulings in Epic Systems:

Of particular relevance to the Waymo litigation is that the district court in Epic Systems initially instructed the jury that recovery of unjust enrichment damages is contingent upon showing actual use of the trade secrets. There was little or no explanation in these initial instructions of what is meant by “use.”  Upon listening to testimony on damages, however, the district court in Epic Systems decided it needed to issue a supplemental damage instruction to clarify that “use” does not require showing the trade secret was used to develop a successful competing product. (Dkt. #898 at 92:18-93:1)

The point is that the law makes clear that you don’t necessarily have to be successful in order to have used and be entitled to — and to be deemed to have been benefited by the development, market or sale of a competitive product. You don’t have to be successful if you’ve used it to develop, market or sell a competitive product. That’s enough. You don’t have to be — you don’t have to prove that it was successfully developed, marketed or sold.

This important clarification is missing from the current Waymo instructions. Without it, a defendant could avoid unjust enrichment damages on the grounds that there is no evidence that it “used” the trade secret to successfully develop, market or sell a competing product.

True enough, the district court in Waymo added new instruction XVI (Dkt. #2449 at 8), which cautions that “use” is not limited to “direct copying but can include studying and consulting” and “studying may constitute use even though the two designs differed.”  The underlying intent may have been the same as that which motivated the district court in Epic Systems to issue a supplemental instruction.  However motivated, the Waymo instruction falls  short of sufficiently warding off argument or evidence designed to narrow “use” to successful competition.

It may help to break down in chronological fashion how the district court in Epic Systems came to believe further explanation was necessary.

The district court started out by rejecting the plaintiff’s offer of proof of compensatory damages as not sufficiently anchored in evidence of use by defendant, stating in Epic Systems, Order on Offer of Proof Damages, at *5:

In other words, while the court is open to a “use” theory which is broader than specific evidence that Epic’s “confidential and trade secret information was incorporated into TCS’s Med Mantra product” [], plaintiff must tie its damages theory to that use. Otherwise, all the jury has is Britven’s assessment of the total value to TCS of Epic’ confidential information without any way to discount that total value to reflect TCS’s actual benefit.

The district court also described to counsel what it wanted to see in a sidebar outside the presence of the jury:

The jury was then instructed about the evidence of “use” required to award unjust enrichment damages:

In the course of introducing their evidence and testimony on damages, counsel advanced different interpretations of “use,” compelling the court to issue a supplemental instruction:

The jury then received (and ultimately rendered) a special verdict on damages that called out specific benefits anchored in use by the defendant:

In post-trial motions, defendant challenged the verdict as lacking sufficient evidence, but plaintiff successfully characterized the challenge as erroneously trying read back into “use” the requirement “that Epic had to prove that TCS then ‘used’ the comparative analysis either to improve or market its medical software products. But that is not the standard required under the law, and it is not the standard on which the jury was instructed.” (Pl. Opp. to Post-Trial Mot., Dkt. #926 at 56.)  The district court agreed (but did reduce the compensatory award by $100 million on other grounds), see Epic Systems, Order on Post-Trial Motions, at *4-5.

Bringing this back to Waymo litigation, Epic Systems is on point in that it awarded significant unjust enrichment damages on what for all practical purposes was an acquisition-based theory of misappropriation.  It rejected the argument by the plaintiff that “use” should not be a required to show unjust enrichment damages — which may be the approach Waymo is taking in its litigation.  It also rejects the idea that “use’ requires a showing that the trade secret or confidential information was used by defendant to develop a successful competitive product — which may be the approach Uber is taking in its defense of Waymo’s unjust enrichment claims. It therefore might be worth it for the parties and the court in Waymo to borrow the “use” instructions ultimately issued in Epic Systems.

 

Jury trial on reasonable royalty? Courtesy Google Images
Right to jury trial on reasonable royalty damages differs depending on whether suit brought under DTSA or California version of UTSA

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. Continue Reading Unlike California, New Federal Trade Secret Law Offers Right to Jury Trial on Reasonable Royalty Damages

This post summarizes Proportionality Compels Early Disclosure of Patent Damages, found here, first published by the IP Law Section, State Bar of California in connection with the March 23, 2016 seminar “Patent Disputes for our Time: New Realities, New Approaches.” 

Patent litigation norm: bludgeon one another before determining case value
Patent litigation norm: bludgeon one another before determining case value

The Dec 2015 amendments to the Federal Rules of Civil Procedure call for greater effort on the part of the court and the parties to ensure that the time and expense invested in a case is proportional to value of the case.  The typical practice in patent litigation of bludgeoning first and valuing later presents a particularly compelling focus for the renewed emphasis on achieving proportionality.

Since there is a direct causal relationship between early disclosure of patent damages and achieving proportionality, the high likelihood is that courts, going forward, will strictly enforce the requirement that a patent plaintiff provide its damage computations in its Rule 26(a) initial disclosures.  To avoid prejudice to the patent plaintiff, any such early disclosures should be non-binding and subject to revision as the case proceeds. Continue Reading Amendments to Civil Procedure Rules: Ending Patent Practice of Bludgeoning First and Valuing Later

While the pendulum has clearly swung in favor of limiting recovery of patent infringement damages, most notably in patent cases where non-practicing entities seek reasonable royalty damages, lost profits damages are not among the casualties.

Photo of Judge Alsup in Chambers
Hon. William Alsup: courtesy Google Images

United States District Court Judge William Alsup (ND Cal) is a notoriously hard grader when it comes to determining whether to allow patent infringement damage studies to go to the jury.  He nonetheless allowed expert studies calculating lost profits on the infringer’s sales to go to the jury in his Order in Plantronics v. Aliph, 3:09-cv-1714 (ND Cal).  His analysis confirms that, notwithstanding current trends favoring aggressive judicial gatekeeping over expert damage studies in patent cases, lost profits are recoverable so long as they are supported by an appropriate market reconstruction theory.

Quick note: this post focuses on patent cases between competing operating companies separate and apart from patent cases brought by non-practicing entities (NPEs) sometimes called “trolls.”  While in NPE cases there are compelling policies favoring aggressive use of the entire market value rule and related apportionment rules to limit reasonable royalty damages, these same policies are nowhere near as strong in competitor patent litigation.

At least three highlights of the lost profit rulings in Plantronics:

  • Reasonable royalty apportionment rules don’t apply to lost profits
  • You can use the patent owner’s market share in the reconstructed market to calculate lost profits
  • You can recover lost profits under a market share theory even if there are acceptable, non-infringing substitutes

So let’s break this down.

Continue Reading Lost Profit Damages Alive and Well in Patent Cases

Vringo bought Lycos patents on search technology that keys ads to user search queries, then sued Google.  At the recently completed trial, Vringo convinced a Virgina jury to award, see page 11 of its Nov. 6 verdict, a reasonable royalty of 3.5% of that portion of Google’s revenue purportedly connected to the stolen technology, which the jury calculated as $15.8 million.

While the verdict (which to-date has not been entered as the court’s final judgment) might look like it satisfies the increasingly strict limitations against using unduly large revenue bases to calculate reasonable royalty damages, this may not be the case.

Vringo’s damage theory is effectively captured in the following trial exhibit:

Vringo introduced Google documents that supported Vringo’s theory that it’s search technology provided a quantifiable increase in revenue:

This approach appears to comply with the rule that patent royalty damages may be assessed against only the smallest portion of overall revenue attributable to the patented technology.  Vringo assessed what might be considered a small royalty percentage against only a “smaller” portion ($14 billion) of Google’s overall ad revenue.  Yet Vringo was nonetheless able to introduce the OVERALL revenue ($70 billion) to the jury, effectively bringing in entire market value through the back door.  See why after the jump.

Continue Reading Court Lets Vringo Bring in Entire Market Value Through Back Door

Apple founder Steve Jobs famously questioned the value of market research:

A lot of times, people don’t know what they want until you show it to them.

Business Week Online, 1988.

We built [the Mac] for ourselves. We were the group of people who were going to judge whether it was great or not. We weren’t going to go out and do market research.

Playboy, 1985.

While this philosophy served Apple well in creating product categories such as the Mac and iPhone, the same cannot be said for Apple’s attempts to enforce its intellectual property rights.

Apple sued Motorola for infringing Apple’s patents on specific features used in cell phones and tablets, seeking tens of millions of dollars as a reasonable royalty for the unauthorized use of the patented features based on the opinion of Apple’s damage expert. However, the trial judge, Richard Posner (pictured to the left – who blogs by the way), recently excluded these opinions as unreliable based largely upon the failure of the expert to properly investigate consumer preferences. (Judge Posner’s Opinion dated May 22, 2012.)

While success in the markets in which Apple competes may not require asking consumers what they want, success in the courtroom, in particular the recovery of money damages for lost royalties on infringing sales, very much hinges on evidence that these questions were asked.

So how did Judge Posner and other jurists like him get so far off the Jobs path?

Continue Reading Steve Jobs vs. Judge Posner: Ask What Customers Want? (Yes, if You Want Patent Damages)

The Federal Circuit’s recent decision affirming the patent jury verdict in Funai v. Daewoo effectively increases the money damages that can be recovered by millions if not tens of millions of dollars.  (Full disclosure: I tried the case and among other things was responsible for the damages evidence introduced at trial.)

Background: The Accounting Period for Patent Damages Does Not Compensate All Economic Harm

In situations where the patent owner sells a product that practices the patented invention and a competitor sells an infringing product, an economist pegs the beginning of the economic harm resulting from infringement (lost sales, reduced prices, etc.) to the date the infringing sales began.

However, the accounting period for patent infringement damages usually begins much later – not until notice is given in compliance with the patent marking statute, see 35 U.S.C. sec. 287(a).  Any and all economic harm that predates notice is excluded from recovery under the statute. 

More Background: The Earlier the Notice, the Earlier the Accounting Period Begins, the Much Larger the Damages

The earlier the statutory notice, the further back in time you can go to collect damages on infringing sales.  We’ve previously demonstrated in The Shifting Sands of Price Erosion that even slight adjustments in how early the accounting period begins can increase by tens of millions of dollars price erosion damages alone.

Funai Relaxes the Notice Requirements and Effectively Expands The Accounting Period to Capture Infringing Sales That Are Earlier In Time

More after the jump.

Continue Reading Patent Marking Ruling Means Bigger Damages