Unjust Enrichment in Trade Secret Damages Cases

BY SCOTT COBB AND CONNOR BRENNAN

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The following article was prepared by its author(s). The opinions expressed in the article represent the author(s)’s and may not reflect the view and/or opinion of Vallit Advisors and its staff. Views/opinions are based on the specific facts and circumstances of each Matter.

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Scott Cobb, CFA, is a Director at Vallit Advisors, LLC. Cobb has more than 20 years of financial advisory expertise and provides valuation, commercial litigation and dispute consulting services across multiple industries.

Mr. Cobb can be reached at 202-652-4500 Ext 119 or scobb@vallitadvisors.com

Connor Brennan is an analyst at Vallit Advisors, LLC providing business valuation, economic damage calculation, dispute advisory, and forensic accounting services for our clients.

Mr. Brennan can be reached at 443-699-6412 Ext 115 or cbrennan@vallitadvisors.com

Vallit Viewpoints

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In trade secret misappropriation matters, one measure of damages is based on the economic benefit obtained by the defendant through the improper acquisition, use, or disclosure of a trade secret. This damages measure is commonly referred to as unjust enrichment. Unlike a lost profits analysis, which focuses on the economic harm suffered by the plaintiff, an unjust enrichment analysis seeks to quantify the economic value realized by the defendant as a result of the misappropriation. This article: (1) defines trade secrets and the theory underlying unjust enrichment damages; (2) examines the principal methodologies used to quantify unjust enrichment; (3) evaluates the advantages and limitations of these methodologies; and (4) discusses the role and responsibilities of the damages expert in assessing allegations of trade secret misappropriation.

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Introduction

To understand the role of unjust enrichment in a trade secret litigation, it is first necessary to understand how a “trade secret” is defined and the characteristics that distinguish a trade secret from other forms of business information.

 

According to 18 U.S.C. §1839(3), a trade secret includes financial, business, scientific, technical, economic, or engineering information that derives independent economic value, actual or potential, from not being generally known or readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.

 

Common examples of trade secrets include customer lists, pricing information, personnel, manufacturing processes, software source code, or business knowledge or plans. These examples can typically be characterized by the following: (1) the trade secrets are not known outside of the company, (2) are valuable to the owner and possible competitors, (3) have expenditures in time, effort, and money to develop, (4) are known only to a very select few employees or others involved with the company on a need to know basis with proper protections, (5) difficult for others to properly acquire or independently duplicate, and (6) subject to reasonable measures to guard the confidentiality of the information.

 

For most of the modern era, trade secret protection in the United States was governed primarily by state law. Prior to 2016, there was no federal civil cause of action for trade secret misappropriation. Instead, the principal source of statutory protection was the Uniform Trade Secrets Act (“UTSA”), a model law promulgated by the Uniform Law Commission in 1979 and substantially revised in 1985. The UTSA was intended to promote uniformity among the states and replace the patchwork of common-law trade secret doctrines that had developed independently throughout the country. Although adopted in varying forms, the UTSA has been enacted by nearly every state and the District of Columbia, with individual jurisdictions modifying certain provisions to reflect local policy preferences. As a result, trade secret litigation remained fundamentally a matter of state law for several decades.

 

The federal landscape changed with the enactment of the Defend Trade Secrets Act of 2016 (“DTSA”), which amended the Economic Espionage Act to create a federal civil cause of action for trade secret misappropriation. Rather than displacing state law, Congress modeled the DTSA largely on the substantive framework developed under the UTSA and expressly preserved state-law remedies. Consequently, the DTSA and the various state enactments of the UTSA now operate in parallel, allowing plaintiffs in many cases to pursue both federal and state claims arising from the same alleged misappropriation.

 

The DTSA adopted many of the UTSA’s core concepts. Both statutes define a trade secret as information that derives independent economic value from not being generally known or readily ascertainable and that is subject to reasonable measures to maintain its secrecy. Both statutes recognize claims based on the improper acquisition, disclosure, or use of trade secrets and authorize similar remedies, including injunctive relief, compensatory damages, unjust enrichment damages, reasonable royalty awards, exemplary damages for willful and malicious conduct, and attorneys’ fees in exceptional cases. Consequently, courts frequently rely on decades of UTSA jurisprudence when interpreting corresponding provisions of the DTSA.

 

Despite their common foundation, several distinctions between the UTSA and DTSA remain significant. First, the UTSA consists of state statutes, meaning that important variations exist among jurisdictions. While most states adopted the core provisions of the model act, many modified definitions, statutes of limitations, available remedies, or preemption provisions. Accordingly, trade secret protection under the UTSA is not entirely uniform, and outcomes may differ from state to state. By contrast, the DTSA establishes a single federal statutory framework applicable nationwide.

 

Second, the DTSA provides direct access to federal court for claims involving trade secrets related to products or services used in interstate or foreign commerce. The UTSA, by comparison, creates only state-law causes of action.

 

Third, the DTSA contains several unique provisions that have no counterpart in the UTSA, including the extraordinary remedy of ex parte civil seizure and statutory whistleblower immunity protections for employees who disclose trade secrets in connection with reporting suspected legal violations.

 

With respect to damages, the DTSA largely follows the remedial approach established under the UTSA. Both statutes permit recovery for unjust enrichment resulting from the misappropriation of a trade secret to the extent such enrichment is not otherwise accounted for in calculating the plaintiff’s actual losses. Thus, the modern law governing unjust enrichment in trade secret cases reflects substantial continuity between the state-law framework established under the UTSA and the federal framework later adopted through the DTSA.

 

Damages in a trade secret misappropriation matter may arise when competitors, former employees, business partners, or other individuals improperly acquire, use, or disclose confidential information that derives an economic benefit from its secrecy. When this information is misappropriated, the owner of the trade secret (i.e., the plaintiff) may suffer economic harm in the form of lost profits, diminished business value, or the erosion of its competitive position.

 

The defendant in the matter may also realize economic benefit through the trade secret misappropriation in the form of increased revenue, an accelerated market entry, and the avoidance of associated costs such as research and development. These economic benefits to the defendant form the basis for the theory of unjust enrichment.

 

According to the Legal Information Institute at Cornell Law School, unjust enrichment occurs when a party receives a benefit or gains an advantage at another party’s expense without providing the restitution required by law. Under this theory, the focus shifts from the economic harm to the plaintiff to the benefit realized by the defendant. In trade secret litigation, unjust enrichment seeks to measure these benefits obtained by the defendant through the alleged misappropriation of the trade secret.

 

Measurements of Unjust Enrichment

Unjust enrichment may be quantified through several distinct methodologies, each designed to capture a different aspect of the economic benefit realized by the defendant. The appropriate measure is highly dependent on the facts and circumstances of the case, and no uniform standard exists for calculating unjust enrichment damages. Common approaches include analyses of avoided costs, profits attributable to the misappropriation, and increases in enterprise value (“EV”) resulting from the unauthorized acquisition, use, or disclosure of the trade secret.

 

Cost Savings and Operational Efficiencies

Trade secret misappropriation may generate benefits in the form of saved costs relating to said trade secret. Trade secrets are typically the result of substantial investments by the plaintiff, requiring research and development, engineering, testing, product design, and other costs associated with the development, acquisition, or implementation of the trade secret.

 

Through the misappropriation of the trade secret, the defendant can avoid the costs that would have been necessary to develop the same or similar information. Notably, the benefits associated with the cost savings are independent of the revenue generated and may meet or exceed the economic advantage derived from the revenue generated or the increase in profits because of the alleged misappropriation. Under this approach the damages are measured by estimating the costs that a reasonable company would have incurred to develop a comparable trade secret.

 

Example Calculation #1

Scenario:

XYZ Manufacturing, LLC (Plaintiff) developed a proprietary manufacturing process, for which they incurred $5.0 million of development, engineering, testing, and implementation costs. ABC Enterprises, Inc. (Defendant) misappropriated the process and implemented it into their operations. ABC Enterprises, Inc. spent $500.0 thousand dollars purchasing the equipment necessary to implement the process.

 

Cost Savings Damage Calculation:

($5.0 Million in total costs – $500.0 thousand in Costs not Eliminated) = $4.5 million in cost savings.

 

Profit Apportionment

Another notable approach for calculating unjust enrichment is profit apportionment, or the process of allocating a company’s total earnings and expenses amongst or profit across their different products or services, departments, branches, etc. While the defendant may experience increased profits after obtaining a trade secret, this increase can be attributable to a variety of factors. Therefore, the damages must be calculated through isolating the profits directly impacted by the misappropriation.

 

A key component in measuring profit apportionment is the analysis of the profit generated by the defendant that is attributable to the misappropriation of the trade secret. The objective of this measure is not to solely determine the total profit generated by the defendant, but rather identify the profit that is directly attributable to the alleged misappropriation. Such profit may arise through the use of confidential information, customers diverted from the plaintiff, or products and services that were developed utilizing the misappropriated trade secret.

 

Example Calculation #2

Scenario:

ABC Enterprises, Inc. (Defendant) generated $10.0 million in total profits from the product line incorporating the misappropriated manufacturing process. However, not all of these profits, are attributable to the misappropriation of the trade secret. ABC Enterprises, Inc. also benefited from its established brand reputation, pre‑existing customer relationships, independent sales and marketing efforts, and unrelated product features, which contributed to the profits earned. Based on an analysis of the relevant factors, it is determined that 40.0 percent of the total profits are directly attributable to the misappropriated manufacturing process.

 

Profit Apportionment Damage Calculation:

($10.0 Million in total profit x 40.0 percent apportionment factor) = $4.0 million in attributable profit.

 

Increased Enterprise Value

A further method for calculating unjust enrichment is the measurement of the increase in the defendant’s EV, that is, the appreciation in the overall worth of the business, attributable to the misappropriated trade secret. Rather than viewing the unjust enrichment as solely the increased profits or avoided costs, this approach recognizes that the misappropriated trade secret may create a durable competitive advantage that becomes embedded in the value of the enterprise itself.

 

While the defendant’s business may experience an increase in EV following the misappropriation, this can be caused by a variety of factors, including favorable market conditions, management execution, or capital investment. Therefore, the damages must be calculated by isolating the portion of the value increase that is directly attributable to the misappropriation, rather than the EV growth as a whole.

 

Example Calculation #3

Scenario:

ABC Enterprises, Inc. (Defendant) experienced an increase in its enterprise value from $40.0 million to $60.0 million during the damage period, an increase of $20.0 million. This appreciation, however, is not attributable to the misappropriated manufacturing process alone. ABC Enterprises, Inc.’s EV also grew as a result of favorable market conditions and capital investment in new production facilities, which contributed independently to the overall increase in value. Based on an analysis of the relevant contributing factors, it is determined that 30.0 percent of the total EV increase is directly attributable to the durable competitive advantage created by the misappropriated manufacturing process.

 

Increased Enterprise Value Damage Calculation:

($20.0 million increase in EV × 30% attribution factor) = $6.0 million in EV.

 

Advantages and Benefits

The unjust enrichment framework offers several distinct advantages as a measure of damages in a trade secret litigation, particularly in circumstances where a traditional lost-profits analysis is difficult to apply. The following illustrate the strengths of unjust enrichment for quantifying damages.

 

Captures Gains Beyond the Plaintiff’s Losses

Unjust enrichment ensures that a defendant does not retain the profits and advantages derived from the misappropriation. In many matters, the economic benefit realized by the defendant exceeds the measurable harm suffered by the plaintiff. Focusing on the defendant’s gain rather than the plaintiff’s loss captures the full economic value conferred by the trade secret.

 

Useful for New Products or Markets

The framework is especially valuable when the misappropriated trade secret relates to a new product, emerging market, or a business line with no established sales history or revenue. These scenarios make performing a lost profits analysis incredibly difficult and often unreliable as there is no established financial baseline. Unjust enrichment provides an alternative measure by quantifying the advantages gained by the defendant.

 

Flexible Approach

Unjust enrichment accommodates a range of economic benefits and can be tailored to the specific facts of the matter. As previously mentioned in the preceding sections, the analysis can account for avoided research and development costs, profits directly attributable to the misappropriation, or the increase in the EV. This flexibility allows the analyst to apply the measure or combination of measures best fit for the circumstances of the case.

 

Limitations & Challenges

While unjust enrichment offers a flexible and equitable measure of damages, it also presents notable challenges that can complicate its application. The following limitations illustrate why unjust enrichment claims often require careful development and rigorous support to withstand scrutiny.

 

Proving Causation

Establishing a causal link between the misappropriated trade secret and the defendant’s economic benefit is often one of the most challenging aspects of an unjust enrichment analysis. Regardless of whether damages are measured using avoided costs, profit apportionment, or EV enhancement, the analyst must identify and quantify the portion of the defendant’s benefit that is directly attributable to the trade secret. This determination can be particularly difficult when multiple factors contribute to the defendant’s success. As a result, isolating the economic impact of a specific trade secret frequently requires significant analysis and supporting evidence.

 

Double Recovery

Another challenge associated with unjust enrichment is the risk of double recovery. This occurs when the same economic harm is compensated multiple times under different damage theories. When unjust enrichment is measured using multiple methodologies, such as avoided costs, incremental profits, and EV enhancement, the Analyst must ensure that overlapping benefits are not counted more than once. For example, a defendant’s increased profits may already reflect the benefit derived from avoided research and development costs or other expenditures that would otherwise have been incurred absent the misappropriation.

 

Example:

Cost Savings: $4.5 million

Profit Apportionment: + $4.0 million

Potential Double Recovery = $8.5 million

 

Role of the Damages Expert in Assessing Trade Secret Misappropriation

The damages expert is responsible for evaluating the economic impact of the alleged trade secret misappropriation and determining an appropriate measure of damages. While technical experts may address whether the trade secret existed and was appropriated, the damages expert focuses on quantifying the economic benefit obtained by the defendant or economic harm suffered by the plaintiff.

 

In addition to calculating damages, the damages expert is responsible for evaluating the reliability of the information and assumptions underlying the analysis. This often requires reviewing financial records, business operations, market data, and other relevant evidence, as well as considering information provided by technical experts and fact witnesses. The expert must assess whether the available evidence supports a measurable economic benefit arising from the alleged misappropriation and develop an analysis that is consistent with the facts and circumstances of the case. Through this process, the damages expert provides an independent economic assessment intended to assist the trier of fact in understanding the financial implications of the alleged conduct.

 

Ultimately, the damages expert’s role is to provide an objective and well-supported assessment that links the facts of the case to the claimed economic damages. To withstand scrutiny, the expert must clearly explain the underlying assumptions, methodologies, and supporting evidence, ensuring that the resulting damages reflect only the economic benefit reasonably attributable to the alleged misappropriation.

 

Conclusion

Unjust enrichment is an important measure of damages in trade secret misappropriation matters as it focuses on the economic benefit realized by the defendant rather than solely the harm suffered by the plaintiff. Depending on the case, unjust enrichment may be measured through avoided costs, profits gained, or increases in EV attributable to the trade secret misappropriation. While these approaches provide flexibility and may capture benefits that are not reflected in a traditional lost profits analysis, they also require careful consideration of causation, apportionment, and the potential for double recovery. As a result, the damages expert plays a critical role in applying reliable methodologies and ensuring that any damages conclusion is supported by the facts, evidence, and economic realities of the alleged trade secret misappropriation.