Flexible And Imaginative Approaches To Reasonable Royalty-Related Discovery In Trade Secret Matters

• Published date: 26 May 2022
• Subject Matter: Intellectual Property, Patent, Trade Secrets
• Law Firm: Ankura Consulting Group LLC
• Author: Mr Abel Teshome

How the University Computing framework could serve as a starting point for a proactive and targeted discovery strategy to assess reasonable royalty damages.

Under the Defend Trade Secrets Act and most state statutes adopting the Uniform Trade Secrets Act, the measures of monetary relief available to plaintiffs in trade secret misappropriation matters may include actual losses caused by the misappropriation; unjust enrichment caused by the misappropriation, e.g., disgorgement of at least some portion of the profits earned by the defendant; or a reasonable royalty for the alleged misappropriator's unauthorized use of the trade secret.¹

In cases in which the alleged misappropriation has not resulted in either actual losses by the plaintiff or the realization of accounting profits by the defendant, reasonable royalties may offer a flexible alternative for the recovery of at least some damages by the plaintiff. Reasonable royalty damages are often assessed by constructing a hypothetical negotiation, which generally gauges the amount that a willing licensor and a willing licensee would have agreed upon for a license to the subject intellectual property (IP) at the onset of the alleged wrongful conduct. The hypothetical negotiation envisions a marketplace confrontation of the parties under which the negotiated royalty reflects the relative bargaining strengths of the parties and the economic factors that might be considered by normally prudent market participants under similar circumstances.² In some cases, this framework might require a suspension of disbelief. In the real world, plaintiffs may have little economic incentive to license trade secrets after investing the time, effort, and resources necessary to maintain their secrecy for purposes of deriving competitive business advantages. Such conditions do not necessarily impede the applicability of the hypothetical negotiation framework. While similar economic disincentives to license might exist in patent infringement matters between competitors, practitioners and courts have routinely assessed patent infringement damages through the lens of the hypothetical negotiation framework by considering the impact that the parties' relative competitive and bargaining positions would have on the hypothetically negotiated royalty.

From a practical perspective, assessing reasonable royalty damages in trade secret matters often involves consideration of limiting circumstances or relatively limited record evidence vis-à-vis patent infringement matters. For example, it is not difficult to imagine a hypothetical negotiation involving a patent that has been previously licensed on a stand-alone basis by the patentee under circumstances similar to those envisioned by the hypothetical negotiation. The royalty rate agreed upon regarding this previously executed patent license might serve as a probative indicator or starting point for a hypothetical negotiation concerning that patent. In contrast, stand-alone trade secrets are generally licensed less frequently than patents and, thus, are less likely to be supported by historically agreed upon royalty rates. Moreover, it is not uncommon for patentees to prepare and maintain records establishing the benefits and value of...