1. *connectedthinking Trade Secret Damages John Marshall Law School IP440 - Trade Secrets Law October 17, 2007 Aron Levko IP Practice Leader

2. PricewaterhouseCoopers November 18, 2004 Page 2 Basis for Economic Damages Trade secret holder (TSH) must prove: Causality – liability link to damages Misappropriation of the trade secrets is the reason either the TSH is harmed or the defendant unjustly benefits. Trade Secrets are valuable

3. PricewaterhouseCoopers November 18, 2004 Page 3 Economic Remedies Available to TSH Goal is to restore the TSH to its position but for the misappropriation, when an injunction alone doesnt satisfy the inequity suffered. However, should basis of recovery be expectation or reliance? Two alternative measures: TSHs actual economic damages, or > Defendants unjust gain Additional recoveries: -Punitive damages -Attorney fees -Prejudgment interest Plaintiff may choose an approach that maximizes the recovery

4. PricewaterhouseCoopers November 18, 2004 Page 4 Specific Damages Components TSH actual economic damages (with mitigation): Lost profits & price erosion (including convoyed sales) Lost business value Out of pocket expenses/ Increased costs Reasonable royalties Defendants unjust gain: Unjust enrichment, including: Unjust profits Increased business value Avoidance of reasonable royalties Cost avoidance Reduced time to market

5. PricewaterhouseCoopers November 18, 2004 Page 5 Lost Profits In order to claim Lost Profits all quasi-Panduit tests must be satisfied: Demand for the products at issue due to the TS No acceptable, non-infringing substitutes Adequate manufacturing and marketing capabilities Sufficient data to quantify lost profits

6. PricewaterhouseCoopers November 18, 2004 Page 6 Lost Profits Incremental revenues are sales that would have been made, but for the actions of the infringer, including: -Convoyed sales -Adjustments for price erosion Incremental costs are costs that would have been associated with the incremental sales. Incremental Revenues Incremental Costs Lost Profits __

7. PricewaterhouseCoopers November 18, 2004 Page 7 Example A: Lost Profits Calculation Case Facts – Big Pop (BP) v. Small Drink (SD): -SD is found to misappropriate BPs trade secrets. -SDs misappropriation results in 1 million units of sale at $0.40/unit. -BPs unit sales during same period were at $0.50/unit. -BPs incremental unit cost was $0.35/unit. BPs Lost Profits: 1,000,000 x $.15 = $150,000 Need to consider price elasticity because of BPs higher price

8. PricewaterhouseCoopers November 18, 2004 Page 8 Unjust Enrichment Plaintiff obligated to calculate Defendants revenues, with Defendants burden to prove costs Practice Tip: Plaintiff should present an estimate of the incremental costs in its damages claim Evaluate Plaintiffs R&D and other capital expenditures related to the trade secrets -Can serve as a proxy for the Defendants cost avoidance Reduced time to market establishes damages period.

9. PricewaterhouseCoopers November 18, 2004 Page 9 Example B: Unjust Enrichment Case Facts – Idaho, Inc. (IDI) v. Small Potato (SP): -SP is found to misappropriate IDIs trade secrets related to the blade used to cut the potatoes. -SPs misappropriation results in 1 billion lbs. of sales -SPs production process and profits are as follows: Sizing Sorting Washing Peeling Washing Cutting Sorting Drying Quality Control Seasoning Packaging Unseasoned - Profit: $0.20 / lb Seasoned - Profit: $0.50 / lb

10. PricewaterhouseCoopers November 18, 2004 Page 10 Example B: Unjust Enrichment Why the difference? (continued)

11. PricewaterhouseCoopers November 18, 2004 Page 11 Example C: Unjust Enrichment Case Facts – Texas Telco (TT) v. Maverick Routers (MR): -MR misappropriated TTs router trade secrets shortly after receiving seed financing for $20 million. -Subsequent to the misappropriation and within 12 months, MR secured 2 additional rounds of financing ($40 million each round). Financing Round Investment Amount Equity percentage Implied Value of Enterprise Seed$20 million100%$20 million 1st Round$40 million50%$80 million 2nd Round$40 million25%$160 million Increased Value: $140 million How much of the increase in value is attributable to the trade secrets?

12. PricewaterhouseCoopers November 18, 2004 Page 12 Example C: Unjust Enrichment Key points: MR could not raise funds without the trade secrets. In addition to the trade secrets, MR advanced commercialization efforts that contributed to the value. (continued)

13. PricewaterhouseCoopers November 18, 2004 Page 13 Key Takeaways Establish causal link to damages Identify most appropriate economic remedies Avoid redundancies Plaintiffs should show incremental profis in UE Consider expectation v. reliance Consider subtleties in the damages analysis Satisfy all quasi-Panduit factors for lost profits Reflect price elasticity in calculating lost profits Identify profit contribution from trade secrets