The number of civil and criminal trade secret cases filed have substantially increased in recent years. In April of 2019, a former Garrett Popcorn employee was accused of stealing trade secrets, and just days before, an ex-GE engineer reportedly stole trade secrets for China. The rise in trade secrets cases has led the Trump administration to threaten an increase in tariffs due to economic challenges resulting from Chinese companies that demand trade secrets in exchange for business.
Many factors contribute to the growth in trade secret misappropriation including disruptive technology, recent trade secret theft laws (e.g. the Defense of Trade Secrets Act of 2016) and the sometimes ambiguous definition of trade secrets.
As of now, trade secrets are still defined as confidential information used by a business to maintain a competitive advantage. A trade secret could be anything from a formula or design to a process or technique—a rather wide scope for one type of intellectual property.
[Editor’s Note: Learn about the protection of other types of intellectual property in the article, “Intellectual Property, Cybersecurity and Creativity” by Meghan Nugent.]
In addition to these factors, trade secrets cases are made more complex by their numerous legal claims:
All parties to these matters must understand the available damages remedies and the role that a damages expert plays in these cases.
The court may grant three possible remedies to the plaintiff:
Damages provisions of federal and state statutes may vary, so a damages expert should determine damages on a case-by-case basis and disaggregate them among trade secrets or other legal claims. Calculating actual loss, unjust enrichment and reasonable royalty, therefore, is an arduous task.
[Editor’s Note: Are you concerned about protecting intellectual property under Chapter 11? Learn about licensor relief and more in “The Intersection of IP and Bankruptcy.”]
The goal in estimating actual loss is to make the plaintiff “whole”. Essentially, this would restore the plaintiff to their original position before a trade secret misappropriation took place.
When calculating unjust enrichment in trade secrets cases, the goal is to attempt to expel any monetary or business gains from the defendant, such as
Actual loss and unjust enrichment could not be accurately calculated. Now what? A less popular method is using the reasonable royalty method, in which the damages are calculated based on the royalty income that the plaintiff would have earned had it licensed the subject trade secrets to the defendant.
The reasonable royalty method calculates an amount based on the assumption of a third-party licensor paying a third-party licensee. This could be based on documentation between defendant and plaintiff or a rate comparison of similar licensing agreements.
A royalty rate is typically documented as a unit amount, lump sum or percentage of gross revenue, net revenue or cost savings. Trade secrets are generally licensed either on a stand-alone basis, or as part of a patent or broader IP license agreement. It is difficult to find relevant third-party trade secrets license agreements to rely upon to properly analyze reasonable royalty; therefore, this method is used less in analyzing trade secrets damages in comparison to the plaintiff’s actual loss or defendant’s unjust enrichment.
Damages experts can measure economic loss in numerous ways, but the most important factor in calculating damages is an adherence to the unique facts and circumstances of the individual trade secrets case as these cases continue to grow.
[Editor’s Note: To learn how more about keeping your company’s intellectual property safe, check out the webinar “Leveraging & Protecting Trade Secrets in the 21st Century.”]
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Shawn Fox is the national managing director of forensic and valuation services practice at Sikich LLC, the country’s 28th largest Certified Public Accounting firm. He has 22 years of experience providing fraud and forensic accounting, dispute advisory, and valuation services to the business and legal community involved in high profile disputes and investigations. Shawn directs…
David Wharton, CPA, CFE, CFF, is a senior manager for dispute advisory services in the Kansas City offices of Sikich. He has more than 12 years of experience providing forensic accounting, dispute advisory and financial consulting services to the business and legal community. David’s experience covers a wide array of complex matters including: commercial litigation,…
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