Seventh Circuit Affirms the Availability of Head Start Damages in Trade Secrets Cases

See Epic Systems Corp. v. Tata Consultancy Services, Ltd., Nos. 19-1528 & 19-1613 (7th Cir., 8/20/2020).

Trade secret plaintiffs can pursue a number of damages theories to address the harms caused by the theft of valuable proprietary information. The federal Defend Trade Secrets Act (DTSA) provides for three measures of damages: (1) the actual loss caused by the misappropriation; (2) any unjust enrichment caused by the misappropriation; or (3) a reasonable royalty for the unauthorized disclosure or use of the trade secrets. The same measures also are available under most jurisdiction’s versions of the Uniform Trade Secrets Act (UTSA). Attempts to determine “actual loss” commonly focus on a victim’s lost profits, which are calculated first by determining lost revenue and then deducting the incremental costs that would have been incurred in producing the lost revenue. While that sounds relatively straightforward, there are a number of external factors that can affect the calculation of lost profits damages. Moreover, proving lost profits can be especially difficult in situations involving startups and new businesses without an established track record. In the right cases, unjust enrichment damages can provide plaintiffs with more significant recovery, as illustrated in the Epic Systems case.

In Epic Systems, defendant TCS improperly downloaded thousands of documents containing Epic’s confidential information and trade secrets and used that information to attempt to steal away a major client and compete against Epic in the US market for health record software. Because the attempt to steal away the major client was unsuccessful, seeking damages based on “actual loss” would not have yielded damages sufficient to compensate Epic for the theft of its trade secrets. Consequently, Epic sought unjust enrichment damages, and based this theory on a calculation of “the value TCS received by avoiding research and development costs they would have incurred without the stolen information.” Epic presented expert testimony regarding its costs in developing the stolen trade secret information, as well as evidence showing that specific trade secret information was actually used by TCS. In this way, Epic proved the value of the “head start” obtained by TCS from the misappropriation and laid a foundation for the jury’s $140 million verdict.

The Seventh Circuit affirmed, explaining that while unjust enrichment damages must focus on the “benefit conferred upon the defendant…the reasonable value of the benefit conferred upon a defendant can be measured in a variety of ways.” Citing earlier trade secrets cases, the court held that “calculating the benefit conferred on a defendant to determine unjust enrichment damages is a context-specific analysis” and that “the jury could award avoided research and development costs based on TCS gaining ‘a significant head start in [its] operation.’” Significantly, the Seventh Circuit rejected the argument that awarding avoided research and development costs improperly focuses on a plaintiff’s cost as opposed to the defendant’s benefit. Because the jury was presented with evidence that TCS actually used the misappropriated trade secrets in a number of ways, the jury could properly conclude that $140 million in avoided research and development costs were a reasonable valuation of the unjust “head start” TCS received from the stolen trade secret information.

It is well-recognized that research and development costs present a substantial barrier to entry in a number of industries and sectors, and this fact could incentivize unscrupulous competitors to avoid R&D through misappropriation. Given the significant investment companies make in R&D – especially in the industrial, technological, healthcare and pharmaceutical sectors – the availability of substantial “head start” damages in trade secret cases can serve as a powerful deterrent to misappropriation. Of course, this deterrent is only available if companies carefully guard their trade secret information through the adoption of comprehensive policies and procedures designed to protect the information from unauthorized acquisition, disclosure, or use (which Epic did through the implementation of a number of strict security protocols).