In a recent article, we covered the different types of damages business owners can seek as reparations from other parties who infringe on trade secrets, which are protected by the Texas Uniform Trade Secrets Act, or TUTSA. In this article, we look at how the courts determine the value of these damages – vital information if you are seeking an equitable resolution for the misappropriation of your trade secrets.
Five Ways the Courts Assess Monetary Damages for Stolen Trade Secrets
Frequently, one of the most difficult aspects of trade secret-related cases for plaintiffs is proving how much the theft harmed your business.
1. Actual Damages or Lost Profits
A common measure of damages is to estimate the profits lost as a result of the misappropriation. One method is to add the profit margin of your business, as a multiplier, to the sales volume of the defendant (considering that sales volume as though it were your own). The resulting figure may prove an indication of the profits you lost due to the misappropriation of trade secrets.
Once you calculate your lost profits, it may be possible to pursue further damages in addition to the baseline value of said lost profits. For example, plaintiffs may be able to obtain additional damages in the forms of overhead and administrative costs accrued due to the loss of trade secrets. Plaintiffs may also be able to seek compensation for efforts their business made to counteract misappropriated trade secrets, such as advertising campaigns aimed at recouping lost market share.
2. Unjust Enrichment
Actual damages calculate your lost profits; unjust enrichment takes the defendant’s profits into account. Frequently, unjust enrichment damages are requested either in place of, or in conjunction with, lost profits damages.
To calculate how much a plaintiff is owed in unjust enrichment damages, courts often look to how much the defendant's profits increased due to the misappropriation of a trade secret, and how much time in research and development the defendant saved as a result of that theft.
For example, if you spent 10 years and invested half a million dollars developing a unique formula or method, and a former employee takes that method and competes against you, they have profited from your hard work, and you may be able to recover those profits.
3. Diminution of Value
A lesser-used calculation, diminution of value generally relies on expert testimony to estimate the amount a trade secret’s value has been eroded by the loss of its secrecy. It can be a useful measure when more traditional measures of damages cannot be easily established or do not accurately reflect the economic loss. It is difficult to monetize, however, and courts often reject such valuations as too speculative.
4. A Reasonable Royalty
In lieu of damages measured by other methods, the courts may assess damages either based on actual royalties paid to the plaintiff, or hypothetical royalties the parties would have negotiated had they entered into a licensing agreement at the time of the misappropriation.
5. Exemplary Damages
If willful and malicious misappropriation – defined as "intentional misappropriation resulting from the conscious disregard of the rights of the owner of the trade secret" – can be proven through clear and convincing evidence, exemplary damages may be awarded.
For example, if a defendant steals a trade secret to knowingly start up a competing business and then seeks to cover up the theft by fabricating evidence, the courts may consider that willful and malicious misappropriation. In that event, exemplary damages may be awarded not as compensation to the plaintiff but as a punishment to the defendant. Exemplary damages are limited to twice the amount of any compensatory damages.
In some trade secrets cases, courts may also award attorney’s fees, especially for claims brought in bad faith or where willful and malicious misappropriation was proven.
At Hendershot Cowart P.C., we understand just how important trade secrets are to your company's success. We will fight aggressively for your rights in and out of the courtroom, helping you pursue the most decisive path forward in your trade secrets case.