A federal Court of Appeals has recently affirmed that damages for trade secret misappropriation can include estimated costs for research and development (and also a hefty award of punitive damages). See Epic Systems Corporation v. Tata Consultancy Services, Ltd., Case Nos. 19-1528; 19-1613 (7th Cir., August 20, 2020). That case involved the Wisconsin version of the Uniform Trade Secrets Act (“UTSA”). See Wis. Stat. § 134.90(2). The award of R&D costs was affirmed and justified as a form of unjust enrichment.

Generally, the UTSA (and the federal version) allow for three categories of damages — actual costs, unjust enrichment, and a “reasonable royalty.” For example, the Wisconsin statute — § 134.90(4)(a) — states in part

“A court may award damages in addition to, or in lieu of, injunctive relief …. Damages may include both the actual loss caused by the violation and unjust enrichment caused by the violation that is not taken into account in computing actual loss. Damages may be measured exclusively by the imposition of liability for a reasonable royalty for a violation of sub. (2) if the complainant cannot by any other method of measurement prove an amount of damages which exceeds the reasonable royalty.”

In the Epic Systems case, the defendant — Tata Consultancy Services, Ltd. (“Tata”) — successfully gained access to an Epic Systems database and web portal and used that access to download thousands of pages of Epic Systems documents. Epic Systems is a leading developer of electronic-health-record software. The downloaded documents contained a variety of confidential information including various alleged trade secrets. Tata is a competitor of Epic Systems and previously developed its own electronic-health-record software which, at the time, was predominately sold in India. Tata’s plan was to use the downloaded Epic Systems documents to create a competing database and portal and to enter the US market by luring away Epic System clients. However, Tata failed to lure away any of Epic Systems’ clients

When Epic Systems discovered that its documents had been stolen, it filed suit alleging, among other things, misappropriation of trade secrets. However, because Tata had failed to lure away any of Epic Systems’ clients, when establishing its measure of damages for trade secret misappropriation, Epic Systems could not show “actual damages” — such as lost profits. Therefore, Epic Systems used an unjust enrichment theory. Through the use of expert witnesses, Epic Systems provided the jury with evidence that Tata avoided millions of dollars worth of research, development and testing costs by stealing Epic System’s documents. In this manner, Epic Systems argued that Tata was unjustly enriched.

Ultimately, the jury was convinced and awarded Epic Systems $140 million in damages based on the theory of unjust enrichment. This award was confirmed by the trial judge and was ultimately upheld by the Court of Appeals. The court affirmed that unjust enrichment can be proven in many different ways and that “avoided” R&D costs were one valid method.

As noted, the jury also awarded punitive damages. The initial amount was $700 million which was reduced to $280 million by the trial judge based on Wisconsin’s statutory limit on punitive damages. This was further reduced by the Court of Appeals based on due process arguments to no more than $140 million.

For more information or if you have questions about protecting your trade secrets or if you need to initiate trade secret litigation, contact the trade secret lawyers at Revision Legal at 231-714-0100.

The Three Measures of Trade Secret Damages Under the DTSA and UTSA

The federal Defend Trade Secrets Act (DTSA), 18 U.S.C. § 1836(b)(3)(B), and the Uniform Trade Secrets Act (UTSA) provide three alternative measures of damages for trade secret misappropriation: (1) actual loss caused by the misappropriation; (2) unjust enrichment of the defendant that is not captured by the actual loss calculation; and (3) a reasonable royalty where neither actual loss nor unjust enrichment can be established by any other method. Epic Systems Corporation v. Tata Consultancy Services, Ltd., 980 F.3d 1117 (7th Cir. 2020), provides one of the most detailed appellate analyses of the unjust enrichment measure, affirming that “avoided R&D costs” constitute a valid measure of unjust enrichment.

Building an Avoided-Cost Expert Case

Successfully presenting avoided-cost damages requires careful expert preparation. The plaintiff’s damages expert must credibly estimate what it would have cost the defendant to independently develop equivalent technology or information. This typically requires: (1) a detailed technical analysis of what the misappropriated trade secrets actually provided to the defendant; (2) an assessment of the state of the art in the relevant field to determine what R&D path the defendant would have taken absent the misappropriation; and (3) a compilation of the labor, capital, and time costs associated with that independent development path.

Defendants frequently challenge avoided-cost estimates on the grounds that the plaintiff’s expert speculated about what the defendant would have spent, that the estimate is too high because the defendant could have used cheaper methods, or that the alleged trade secrets were not actually valuable because the defendant had access to other sources of similar information. These challenges underscore the importance of engaging technically qualified experts who can withstand rigorous cross-examination.

Punitive Damages: The DTSA’s Two-Times Multiplier

Both the DTSA and most state UTSA versions authorize an award of punitive (or “exemplary”) damages of up to two times the compensatory damages award upon a finding of willful and malicious misappropriation. The Epic Systems case involved punitive damages initially set by the jury at five times compensatory damages before being reduced by the trial court under Wisconsin’s statutory cap, and then further reduced by the Seventh Circuit to a 1:1 ratio based on due process analysis under State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408 (2003). Ratios exceeding 4:1 are rarely upheld by appellate courts. Practitioners should set realistic expectations with clients about punitive damages even in cases of egregious misconduct.

Injunctive Relief in Trade Secret Cases

Damages are only part of the remedy in trade secret cases. Injunctive relief—court orders prohibiting further use or disclosure of the misappropriated information—is frequently the most important remedy for the trade secret owner. The DTSA and UTSA both authorize injunctive relief to prevent actual or threatened misappropriation. Under the DTSA, injunctions may not prevent a person from entering into an employment relationship or condition such employment solely on the basis of knowledge the person necessarily carries in their head. This “inevitable disclosure” limitation is an important constraint on injunctive relief in employee mobility cases.

Contact a Trade Secret Attorney

Trade secret litigation requires immediate action—delay allows the defendant to use or further disseminate the stolen information and may complicate the damages calculation. If you believe your trade secrets have been misappropriated or if you are defending against a trade secret claim, the attorneys at Revision Legal can help. Contact us at 231-714-0100.