Once a defendant’s theft of trade secrets has been proven, courts and juries must decide how to compensate the plaintiff. The California Uniform Trade Secrets Act (CUTSA) provides successful plaintiffs with a few options. First, a plaintiff may seek the actual losses it suffered as a result of defendant’s misappropriation. Cal. Civ. Code § 3426.3(a). In the alternative, a plaintiff can measure their damages in terms of the defendant’s unjust enrichment, i.e. the benefits it acquired from plaintiff’s trade secret. Id. The first approach measures damages in terms of plaintiff’s losses; the second approach measures damages in terms of defendant’s ill-gotten gains.
Sometimes, however, neither method will be sufficient. Indeed, there are many cases in which a defendant has either not utilized the stolen secret commercially or has not benefitted from its use of the trade secret in any way that can be measured in monetary terms. In those cases, the plaintiff would be unable to present any sufficient evidence to support a monetary award measured by the defendant’s unjust enrichment. Likewise, a plaintiff's actual losses may be speculative or nonexistent. See Ajaxo Inc. v. E*Trade Fin. Corp., 187 Cal. App. 4th 1295, 1310 (2010). In these types of cases, whether the parties stipulate to the lack of proof or a court rules that the evidence is insufficient, the first two measures of damages provided by CUTSA would not be “provable,” and a third option becomes available: a reasonable royalty. Id.
Significantly, a reasonable royalty is only available if damages or unjust enrichment are not provable. California law differs on this point from both the Uniform Act and Federal patent law, neither of which requires actual damages and unjust enrichment to be unprovable before a reasonable royalty may be imposed. Cacique, Inc. v. Robert Reiser & Co., Inc., 169 F.3d 619, 623 (9th Cir. 1999); Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1529 (1997).
Calculating a Reasonable Royalty: It’s All Hypothetical
The calculation of a reasonable royalty begins with a hypothetical negotiation between the trade secret owner and the infringer at the time the misappropriation occurred. It approximates the price that would be set by a willing buyer and a willing seller for the use of the trade secret. When calculating a reasonable royalty, Courts consider factors such as similar license agreements in the industry, anticipated profits, the trade secret’s contribution to the product, the nature of the market, the parties’ competitive positions, and development costs of similar trade secrets. Ajaxo, Inc. v. E*Trade Fin. Corp., 48 Cal. App. 5th 129, 166 (2020). In total there are fifteen factors courts may consider in determining the proper royalty, which were first identified in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970), modified sub nom. Georgia-Pac. Corp. v. U.S. Plywood-Champion Papers, Inc., 446 F.2d 295 (2d Cir. 1971), commonly referred to as the “Georgia-Pacific factors.” Id. at 161. “As with any hypothetical inquiry informed by a range of evidentiary factors, the reasonable royalty offers no promise of mathematical precision. It is a purely theoretical measure, appropriate where no established royalty can be proved. Id. at 162 (cleaned up).
No Profits, No Problem
California courts have explicitly recognized that reasonable royalties can be awarded even when the misappropriator does not make any profit. See Ajaxo Inc. v. E*Trade Fin. Corp., 187 Cal. App. 4th at 1311. This approach ensures that the trade secret owner is compensated for the value of the misappropriated information, regardless of the infringer’s financial condition.
For example, in Ajaxo Inc. v. E*Trade Financial Corp., the court explained that evidence of negotiations between the parties and comparable licensing agreements could serve as a basis for determining a reasonable royalty, even if the infringer did not generate profits from the misappropriation. Ajaxo Inc., 187 Cal. App. 4th at 1313. Similarly, in Altavion, Inc. v. Konica Minolta Systems Laboratory, Inc., the court upheld a reasonable royalty award based on the “equitable” value of the misappropriated trade secrets, even though the technology was never commercialized. Altavion, Inc. v. Konica Minolta Systems Laboratory, Inc., 226 Cal. App. 4th 26, 68 (2014). This equitable value was what the license price should have been, had the parties negotiated a fair license at the time of the beginning of the infringement. Id.
This approach is consistent with courts’ calculation of reasonable royalties in other cases of intellectual property misappropriation or misuse. For example, in patent cases, “a reasonable royalty rate . . . is based not on the infringer’s profit, but on the royalty to which a willing licensor and a willing licensee would have agreed at the time of infringement.” Radio Steel & Mfg. Co. v. MTD Products, Inc., 788 F.2d 1554, 1557 (Fed. Cir. 1986). Optimistic business projections may be taken into account when determining the likely outcome of a hypothetical negotiation, even if reality never meets expectations and the infringer loses money on the product. Interactive Pictures Corp. v. Infinite Pictures, Inc., 274 F.3d 1371, 1384-85 (Fed. Cir. 2001).
Also, while reasonable royalties are often calculated by determining the royalty that would have been paid for each infringing unit sold by the defendant during the time the trade secret was being used—which may be difficult when the infringing product has not yet gone to market—the royalty may also be the hypothetical lump-sum payment a licensee would pay up-front for the continuing right to use the plaintiff’s intellectual property. Pelican International, Inc. v. Hobie Cat Co., 655 F. Supp. 3d 1002, 1042 (S.D. Cal. 2003). For example, in, the 02 Micro Int’l Ltd. v. Monolithic Power Sys., Inc., the plaintiff was unable to prove unjust enrichment or damages, but the court affirmed an award of a reasonable royalty based on an estimated one-time “paid-up royalty” of $900,0000. 399 F. Supp. 2d 1064, 1078 (N.D. Cal. 2005), amended sub nom. O2 Micro Int’l Ltd. v. Monolithic Power Sys., Inc., 420 F. Supp. 2d 1070 (N.D. Cal. 2006), aff’d, 221 F. App’x 996 (Fed. Cir. 2007), and aff'd, 221 F. App’x 996 (Fed. Cir. 2007). In that case, plaintiff’s expert opined that the parties would have negotiated a lump-sum payment with the belief that the trade secret would remain valuable for two years. Defendant balked, arguing that the secret was made public a mere six months after the misappropriation, and therefore the reasonable royalty should be reduced by seventy-five percent. The court disagreed, explaining “parties often enter into an agreement not knowing when the trade secret will become public; it is something the parties consider, and sometimes risk, during their negotiations.” Id. This is a good reminder that a hypothetical negotiation over a royalty need not take into consideration the ultimate real-world success or failure of the hypothetical licensee.
Takeaways
If the plaintiff in a trade secret misappropriation case cannot prove either actual losses, or unjust enrichment, a reasonable royalty is available. A reasonable royalty can be calculated regardless of whether the defendant was able to successfully commercialize the trade secret.
Plaintiffs should be prepared to show the value of a hypothetical license for their trade secret.
Defendants should not rely on a its lack of profits to argue a royalty is unreasonable.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.
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