In May 2018, in a narrow 4-3 decision, the New York Court of Appeals held in E.J. Brooks Co. v. Cambridge Sec. Seals, 2018 N.Y. Slip Op. 03171, that a wrongdoer who misappropriates a trade secret may not be sued for the development costs it avoided by stealing the confidential information. It matters not, the Court ruled, whether plaintiff sued for theft of a trade secret, unfair competition, or unjust enrichment. Ignoring contrary authority in the Restatement (Third) of Unfair Competition and case law in other states, the Court of Appeals held that compensatory damages “must return the plaintiff, as nearly as possible, to the position it would have been in had the wrongdoing not occurred-but do no more.” Id. at *1.
The majority reasoned that the development costs a wrongdoer avoids by engaging in theft of trade secrets are not a proper measure of damages because they reflect the defendant’s gains, not the plaintiff’s losses: “In fact, it is neither automatically nor presumptively the case that the costs avoided by the defendant will be an adequate approximation of the plaintiff’s investment losses, any more than it can be presumed that the defendant’s sales would approximate those of the plaintiff.” Id. at *4.
The dissent adopted a more common sense approach to measuring the proper remedy:
“In a trade secret case, the plaintiff’s loss is the loss in value of the trade secret; that loss can be measured in several ways, but all correspond to the plaintiff’s loss, even though they may differ in amount, just as a damage award based on royalties predicated on a hypothetical license may not yield the same – or even a similar – amount as damages based on the plaintiff’s lost profits. Of course, plaintiffs will often want to prove lost profits as a measurement of damages, but that may be difficult or impossible to do, because factors exogenous to the theft (e.g., changes in demand, changes in costs, other competition, leak of the trade secret by the defendant to others) make the estimation of lost profits difficult or unreliable. Plaintiffs may be constrained, for practical or legal reasons, to a hypothesized royalty when, for example, there is a history of the licensing of that or other secrets by the plaintiff, evidencing the plaintiff’s practice of monetizing secrets and providing yardsticks for estimating a royalty. But a plaintiff’s costs of development or the costs a defendant avoided by stealing the secret are also appropriate measures because those are reasonably related to the value of the trade secret. It is of no moment that they may not be the same dollar number as a lost-profits analysis might show: as anyone who has ever retained an expert to determine lost profits knows, no two experts are likely to arrive at the same figure. Again, the law does not require such exactitude in recompensing a wrong (citations omitted).”
The dissent concluded:
“a trader secret’s value to the plaintiff is in its confidentiality and exclusive use, but the use is exclusive only so long as competitors are unwilling to fund the costs to develop the product independently. That is precisely what the defendant has avoided by stealing it, and what the plaintiff has lost due to the theft (citation omitted). “ Id. at *8-9.
For those whose trade secrets are misappropriated, the message is clear. When proving lost profits is problematic, and using a hypothetical license analysis is impracticable, carefully consider choosing a different legal forum in which damages based on avoided costs will be recoverable. In New York, such damages are unavailable. And as a result, sometimes, in New York, crime will indeed pay.
Joe DiBenedetto recently retired from Winston & Strawn LLP, after spending 46 years in its Manhattan office as a capital partner specializing in commercial litigation. He formed JDB Mediation LLC to further develop his mediation and arbitration practice, which is centered in Manhattan and its surrounding counties (including Westchester, Nassau, and Suffolk). Joe DiBenedetto’s experience, training, and other credentials are more fully described at www.JDBMediation.com