“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.

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