August 8, 2018

The Federal Circuit Weighs in on Disgorgement

Holland & Knight Trade Secrets Blog
Steven D. Gordon | Suzanne M. Busser

The Federal Circuit recently held that a plaintiff seeking disgorgement of defendant's profits as a remedy for trade secret misappropriation has no right to a jury decision on the amount to be awarded; instead, the defendant is entitled to a decision by the trial court on that issue. Texas Advanced Optoelectronic Solutions, Inc. v. Renesas Electronics Am., 2018 WL 3358927 (Fed. Cir. 2018).

Both the Uniform Trade Secrets Act (UTSA), adopted by nearly all states, and the federal Defend Trade Secrets Act (DTSA), provide plaintiffs with several possible monetary remedies for misappropriation. A plaintiff can recover its actual loss caused by the misappropriation (i.e. loss damages) plus the unjust enrichment gained by the defendant to the extent that this unjust enrichment is not taken into account in computing actual loss (i.e. disgorgement damages). Alternatively, and in lieu of loss damages or disgorgement damages, a plaintiff may be entitled to receive "a reasonable royalty" on sales made by the defendant of the product incorporating the trade secret. Separately, a plaintiff may also be entitled to non-monetary damages, like an injunction.

Disgorgement is an equitable remedy used to prevent unjust enrichment by requiring a defendant to give up any profits it made as a result of illegal or wrongful acts. Disgorgement does not require that the plaintiff have suffered any damages at all. Rather, disgorgement is a tool used to prevent a defendant from benefitting from its illegal actions. Disgorgement can include not only the defendant's profits but also cost savings realized from its illegal use of the plaintiff's trade secret. For example, theft of trade secrets often allows competitors to take short-cuts to market.

Because the measure of recovery differs as between loss damages, disgorgement damages, and a reasonable royalty, those remedies can yield quite different figures. In the case before the Federal Circuit, for example, plaintiff dropped its claim for loss damages and sought disgorgement or a reasonable royalty. Its expert calculated that defendant's unlawful gain amounted to $48.7 million and that a reasonable royalty amounted to $17.2 million. Ultimately, a plaintiff has to elect its remedy if it seeks a reasonable royalty and another measure of trade secret damages.

The Federal Circuit noted that the plaintiff had a jury trial right as to whether trade secret misappropriation had occurred and as to the remedy of a reasonable royalty, which is a legal remedy. But, because disgorgement is an equitable remedy, it would normally be decided by the court unless a jury trial right exists under the Seventh Amendment. This means that jury would determine whether misappropriation occurred but the amount of disgorgement damages would have to be determined by the court.

The court's analysis turned on whether a claim for disgorgement could have been brought in the English courts of law in 1791, when the Seventh Amendment was adopted. The question was "whether disgorgement of defendant's profits...was available at law in 1791 for [trade secret misappropriation]?" The court engaged in a thorough review of historical precedent and concluded that claims for trade secret misappropriation were not recognized in American and English courts until the nineteenth century, after adoption of the Seventh Amendment. It also considered the history of analogous claims—for patent, copyright, or trademark infringement—and concluded that no disgorgement remedy was available at law in 1791 for them, either. Therefore, the court concluded that plaintiff has no Seventh Amendment right to a jury decision on its request for disgorgement of defendant's profits as a remedy for trade secret misappropriation.

However, the court was careful to distinguish the situation in which a plaintiff seeks loss damages or a reasonable royalty and offers evidence of defendant's profits as a case-specific proxy for plaintiff's losses or a reasonable royalty. In those cases, the jury would decide the claims for loss damages and/or a reasonable royalty. But, if the plaintiff also separately sought disgorgement, it appears—at least in the Federal Circuit—that any recovery based on this theory would remain for the judge, and not the jury, to decide.

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