In a case involving the misappropriation of a trade secret, there is
rarely a specific agreement between parties that establishes the
scope of financial damages in the event of a tort.
MICHAEL HAUGEN, CPA/CFF, CFE
EPPS FORENSIC CONSULTING PLLC
Please call or email me directly with your questions regarding this
article or to discuss your financial expert witness needs.
How to Measure Trade Secret
Atrade secret is a form of intellec- tual property, and in the most ba- sic sense, a competitive advantage
that has economic value.
Defend Trade Secrets Act of 2016
The recent Defend Trade Secrets Act of
2016 creates federal civil remedies for
trade secret misappropriation. Among
them is a financial damages award.
Financial Damages Calculation
There are several methods to measure
financial damages as a remedy to trade
secret misappropriation. The method applied depends upon the unique facts and
circumstances of each case. For example, it may be influenced by the legal
remedies available, the records and information available to support a specific
fact pattern, and the trade secret itself
(e.g. its nature, how plaintiff uses it and/
or how defendant did or intends to use
Whether serving as counsel to plaintiff or defendant, an understanding of the
basic approach to some of the more
common methodologies applied to
measure trade secret damages can help
strengthen your position in a given case.
As plaintiff’s counsel, it may assist in the
process of deciding the best way to
present a particular damages claim. As
defense counsel, it may assist in raising
an understanding of how to build a defense to a particular damages claim.
Value of the Trade Secret
One way to measure damages stemming
from trade secret misappropriation re-
lates to the financial value of the trade
secret itself. It compares the value of
the trade secret to Plaintiff both before
and after the misappropriation; separate
and distinct from any measurement of
lost profit. Such a valuation may require
significant estimates and/or assumptions.
Assessing Lost Profits
An alternative to measuring a trade secret’s decline in value due to misappropriation is to calculate Plaintiff’s lost
profits, whether due to a decrease in
revenue or an increase in expense resulting from the trade secret theft.
Demonstration of such loss may include an analysis of plaintiff’s revenues
and expenses both before and after the
misappropriation. While this can be a
direct way to measure damages, its application may be limited for any number of reasons.
One instance where trade secret damages are not measured as plaintiff’s lost
profit may be a case where they are unable to document a specific loss of revenue or increase in cost associated with
the trade secret theft. Another instance
may be that, for confidentiality reasons,
plaintiff prefers to not disclose detailed
revenue and cost data necessary to
substantiate the lost profits calculation.
These examples highlight two of the
many factors considered in evaluating
how trade secret damages are measured.
Unjust Enrichment by the Defendant
Another potential method of measuring
trade secret damages is to consider un-
just enrichment realized by the defen-
dant. To the extent not captured by a
measurement of plaintiff’s loss, such
amounts can be additive. Through the
discovery process the plaintiff would
seek to obtain documentation and infor-
mation from the defendant showing how
they benefitted by the trade secret. This
may take the form of additional profits
achieved by the defendant, whether by
increased revenue or decreased cost,
because of the stolen trade secret.
Licensing Royalty Method
In some cases, the best way to measure
damages may be through application
of a reasonable royalty. The goal is to
compensate plaintiff for the licensing
compensation that would have been
realized, had the trademark been licensed rather than misappropriated.
A reasonable royalty method may be
applied because of its simplicity from
a record production standpoint, or if
defendant has realized increased revenues through use of the trade secret,
but those increased revenues have not
led to a reasonable level of profits.
Measuring Trade Secret Damages
In summary, there are a variety of methods available to measure trade secret
damages. This article highlights only a
few of many approaches and issues considered measuring such losses. To build
the strongest case possible, whether on
the offense or defense, attorneys should
work with their experts and client to
carefully assess the strength and weak-nesses of a given method in the context
of the specific facts and circumstances
of a case.