Can trade secret damages actually exceed the value of the stolen technology to the infringer? Yes, according to the “avoided costs” theory of damages, which is currently on appeal in the Second Circuit.
Damages in trade secrets cases can be notoriously difficult to quantify. This is particularly true where the plaintiff has suffered no direct harm in the form of lost profits. But federal courts have increasingly endorsed the “avoided costs” damages remedy, which may arguably leave a plaintiff with substantial damages and in a better position than had the misappropriation never occurred.
A form of unjust enrichment, the “avoided costs” theory seeks to recover “the wrongful gain to the party that misappropriated the trade secret.” Syntel Sterling Best Shores Mauritius Ltd. v. TriZetto Grp., Inc., No. 15 CIV. 211 (LGS), 2021 WL 1553926, at *7 (S.D.N.Y. Apr. 20, 2021). This “wrongful gain” may be quantified as the research and development funds saved by the defendant, which the plaintiff may recover in full. Id. at *6-7. Notably, a plaintiff may use its own research and development costs as a proxy for what the defendant “saved” by virtue of the misappropriation. Id. at *7. In effect, this may allow the harmed party to recover all research and development costs associated with the misappropriated technology. This outcome may arguably leave the plaintiff better off than had the misappropriation never occurred: the plaintiff may continue to reap the benefits of its own technology while having its research costs subsidized by the infringer. Nonetheless, the “avoided costs” remedy has been endorsed as a proper measure of damages in a trade secrets case. Id.
Syntel Sterling offers a choice example. In that case, TriZetto accused Syntel of misappropriating trade secrets under the Defend Trade Secrets Act (“DSTA”). Id. at *1. The trade secrets included software tools aimed at improving complex installation, upgrading, and customization processes relating to the autonomous management of health insurance claims. Id. After establishing liability, TriZetto sought damages, the amount that Syntal saved in development costs, using TriZetto’s own development costs as a proxy. Id. at *7. In doing so, TriZetto argued that Syntal benefited from the misappropriation with “early entry” into complex consulting market without having had to develop the necessary technology required for such services. Id. at *8. At trial, TriZetto sought more than $284 million in “avoided cost” damages, which the jury awarded in full. Id. at *1.
Post-trial, Syntal moved for a judgment as a matter of law on all claims. Id. *1. In seeking to undo the damages award, Syntal first argued that TriZetto should not receive the total value of a trade secret when TriZetto still received value from the trade secrets. Id. at *7. In other words, the total “avoided damages” award overcompensated TriZetto, who was still making money from the misappropriated technology. See id. In rejecting this argument, the district court held that the DTSA expressly permits the recovery of unjust enrichment damages, which should not logically depend on the “continuing value of the trade secret to the claimant,” and “do not require a corresponding loss to the plaintiff[.]”. Id. It rather was aimed at disgorging a wrongdoer from ill-gotten gains. Id.
Syntel next argued that “avoided costs” should not be awarded when the claimant’s “actual loss” (in the form of lost profits) and Syntal’s “actual enrichment” (in the form of increased revenues) could easily be measured. Id. But the court rejected these arguments as well. Id. In rejecting the “actual loss” argument, the court held that the DTSA expressly allows recovery of both actual loss and unjust enrichment, so long as there is no double counting. Id. In rejecting the “actual enrichment” argument, the court acknowledged that measuring actual enrichment to Syntel may be one way to measure unjust enrichment damages, but awarding “avoided costs” may be a more appropriate measure of damages where the infringer (Syntel) enjoyed only modest profit or even no profit. Id. The wrongdoer, not the aggrieved party, should bear the business risk that the wrongful use of the secrets will not be profitable. Id.
Syntel Sterling is currently pending on appeal before the Second Circuit. It remains to be seen whether TriZetto’s damages theory will be upheld. But if upheld, the Second Circuit will affirm the nature of the “avoided cost” remedy, allowing a claimant to recover its entire research and development costs associated with the misappropriated technology. This is true even if the claimant itself retains profitable use of the trade secrets; the claimant otherwise suffered only modest (but measurable) direct financial harm, and the defendant itself benefited little from the misappropriation.
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Please contact Alto Litigation partners Bryan Ketroser (bryan@altolit.com) or Bahram Seyedin-Noor (bahram@altolit.com) if you require counseling on a trade secret litigation matter.
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