Damages for Anticipated Future Use of Trade Secrets

In a recent summary judgment ruling that has received little publicity, the District Court for the Eastern District of Virginia may have quietly made a significant impact on damages law in the context of trade secret cases. The Court determined that trade secret damages can be obtained for anticipated future use of misappropriated trade secrets under both the Defend Trade Secrets Act (DTSA) and Texas's version of the Uniform Trade Secrets Act (TUTSA). Specifically, in Steves and Sons, Inc. v. JELD-WEN, INC., the Court reasoned that damages under both an unjust enrichment theory and a reasonable royalty theory can be based on actual and future use of a misappropriated trade secret. The Court also appeared to approve of a certain degree of speculation in projecting damages based on such anticipated future use.

As with many cases involving misappropriation of trade secrets, this case revolved around the hiring of a competitor's former employees. Steves and Sons retained the services of two former employees of JELD-WEN. Notably, however, JELD-WEN did not initiate this lawsuit. Instead, Steves and Sons sued JELD-WEN, asserting antitrust and contract claims. JELD-WEN then brought counterclaims of trade secret misappropriation, alleging that the employees retained by Steves and Sons used JELD-WEN's trade secrets to create certain deliverables for Steves and Sons, including by contacting current JELD-WEN employees to obtain alleged trade secret information. JELD-WEN sought damages for Steves and Sons’ unjust enrichment or, alternatively, a reasonable royalty based on Steves and Son's use of the deliverables that the employees had prepared by virtue of JELD-WEN's trade secrets.

Steves and Sons moved for summary judgment, arguing in relevant part that JELD-WEN'S damages assertions should be disposed of because they were based on future use—rather than any actual use—€”of the trade secrets. In denying Steves and Sons’ summary judgment motion, the Court may have clarified an otherwise murky area of trade secret damages law.

Trade Secret Damages Are Not Limited to Actual Use of Trade Secrets

As a threshold question, the Court evaluated whether trade secret damages must be limited to actual use of the misappropriated trade secrets. The Court concluded that it was "illogical" to do so in this case. Specifically, the Court reasoned that because Steves and Sons had already commissioned certain deliverables from former JELD-WEN employees, anticipated future use of the trade secrets "necessarily flow[ed] directly from" those deliverables and was thus "part and parcel of the [actual] use of the trade secrets to complete" further deliverables. The Court noted that JELD-WEN had presented evidence demonstrating that Steves and Sons intended to utilize the deliverables to continue furthering its business interests and that JELD-WEN had, therefore, demonstrated potential continued use of its trade secrets by Steves and Sons beyond the preparation of the initial deliverables. Thus, the Court concluded that anticipated future use of misappropriated trade secrets is fair game in trade secret damages calculations.

In other words, the Court appeared to state that a plaintiff may be able to obtain trade secret damages based largely on a reasonably foreseeable future use of trade secrets. The Court did not cite any aspect of the DTSA or the TUTSA to support this interpretation. Indeed, this interpretation appears to go beyond the language of both statutes, which only provide for damages "caused by the misappropriation of the trade secret," see, e.g., 18 U.S.C. 1836(b)(3)—not damages that could be caused one day in the future.

Nevertheless, having concluded that damages claims can be based on a reasonably foreseeable future use of trade secrets, the Court next evaluated JELD-WEN's theories of unjust enrichment and reasonable royalty based on such future use.

1. Unjust Enrichment

JELD-WEN's expert identified two scenarios in which Steves and Sons might potentially benefit in the future from further misappropriation of the alleged trade secret information. In one scenario, JELD-WEN's expert projected damages based on the assumption that Steves and Sons would use JELD-WEN's secrets to become JELD-WEN's direct competitor. The Court concluded that JELD-WEN's expert's projections were "not very speculative because they simply estimate[d] Steves' expected profits within a business model mostly replicated from JELD-WEN's operations."

JELD-WEN's expert also considered the possibility that Steves and Sons would use "financial information misappropriated from JELD-€“WEN" in potentially improving Steves and Sons's bargaining position to obtain better pricing from vendors. Although the Court noted that the "link between the misappropriated financial information and the . . . pricing negotiations seems dubious at best" and stated that bestowing "an ambiguous benefit in future negotiations that have not yet occurred is speculative," the Court concluded that JELD-€“WEN's evidence of potential further use of its trade secret information was sufficient to avoid summary judgment.

2. Reasonable Royalty

JELD-WEN's expert also provided an alternative damages theory based on a reasonable royalty approach. In addition to reiterating the analysis stated above with respect to JELD-WEN's unjust enrichment theory, the Court reasoned that future use of trade secrets "is a clear factor in the reasonably royalty analysis" and JELD-WEN could, therefore "properly rely on those potential uses as parts of its calculations."

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For many trade secret plaintiffs, once misappropriation has occurred, the harm has already taken place, and no amount of monetary damages can fully rectify that injury. Giving plaintiffs the ability to obtain damages before further harm takes place may arm them with a brand new tool. Indeed, the potential to take preemptive action with respect to one's trade secrets may prove to be a game-changer when evaluating whether to embark on legal action.

Authors: Esha Bandopadhyay, Karan Jhurani