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.

480.595.0943, mhaugen@eppsforensics.com

How to Measure Trade Secret Damages

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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 Methods

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 it).

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.