News & Noteworthy

A Competitor Has Stolen Your Trade Secrets – What Damages Can You Recover?

Posted on June 26, 2018

What damages may a business recover when its trade secrets are stolen and used by a competitor?  Traditionally, courts have allowed businesses to recover actual losses caused by the trade secret theft – such as lost opportunities for profit.  Are there other potential avenues of recovery?  For example, can a business recover the amount of costs the competitor avoided by not having to develop the stolen trade secret?  After all, the competitor avoided potentially onerous costs associated with years of research, development, trial and error by simply stealing the trade secret.  Recently, the appellate Federal court covering New York State asked New York State’s highest court, the Court of Appeals, this exact question – and the Court of Appeals said “no.”

The misappropriation of trade secrets occurs when a competitor improperly obtains and uses another’s formula, pattern, device or compilation of confidential business information that provides a competitive advantage.  In essence, it is a type of “unfair competition.”  E.J. Brooks Company v Cambridge Security Seals, 858 F3d 744 (2d Cir 2017), presented a quintessential theft of trade secrets claim.  Plaintiff manufactures plastic security seals (as seen here).  Several of plaintiff’s employees jumped ship to defendant, a direct competitor, and brought with them plaintiff’s confidential, fully-automated plastic seal manufacturing process, which defendant immediately began to use.  Plaintiff sued defendant for, among other things, misappropriation of trade secrets.  After trial, the jury found defendant liable to plaintiff for $3.9 million, which represented the amount of costs defendant “avoided” by stealing the manufacturing process rather than developing it.  Following an appeal of the award, the United States Court of Appeals for the Second Circuit asked the New York Court of Appeals whether, under New York law, “avoided costs” were an available form of damages for unfair competition claims.

In addressing the question in E.J. Brooks Co. v. Cambridge Sec. Seals, 2018 N.Y. Slip Op. 03171 (May 3, 2018), the Court of Appeals noted that the “fundamental purpose” of compensatory damages is to “make the victim whole” – in other words, to restore the injured party to the position it would have been in but for the misconduct.  The Court reiterated the long-standing rule that a victim of trade secret misappropriation is not entitled to recover the revenue or profits actually received by a defendant.  While those amounts might be relevant in determining plaintiff’s losses (e.g. “I would have earned what defendant earned”), the Court cautioned that there is “no presumption of law or of fact” that defendant’s profits, revenues, cost savings, etc. will approximate plaintiff’s losses.  Rather, plaintiff’s actual damages must be measured by plaintiff’s actual losses, like lost opportunity for profit and the loss of investment to develop the confidential trade secret.  The Court held a defendant’s “avoided costs” are not an available form of damages because they have no bearing on plaintiff’s lost profits.  The Court further held that while plaintiff’s investment costs in developing a trade secret can show the value plaintiff placed on the secret, defendant’s avoided costs are “wholly unsubstantial and imaginary” (maybe defendant would have been really efficient in developing the stolen secret) and not an adequate approximation of plaintiff’s investment losses.

If you have any questions about theft of trade secrets or other unfair competition that have affected you, please do not hesitate to contact us.