New York State Of Mind: The Second Circuit Restricts Trade Secret Damages

• Published date: 25 July 2023
• Subject Matter: Intellectual Property, Litigation, Mediation & Arbitration, Trade Secrets, Trials & Appeals & Compensation
• Law Firm: Kramer Levin Naftalis & Frankel LLP
• Author: Mr Daniel B. Goldman and Claudia Pak

On May 25, 2023, the U.S. Court of Appeals for the Second Circuit in Syntel Sterling Best Shores Mauritius Ltd. v. TriZetto Grp., Inc. issued a ruling severely limiting the availability of avoided costs as a measure of damages in trade secret cases brought under the Defend Trade Secrets Act (DTSA). ' F. 4th ', 2023 WL 3636674 (2d Cir. May 25, 2023).

Avoided costs refers to "the costs a trade secret holder had to spend in research and development that a trade secret misappropriator saves by avoiding development of its own trade secret." Id. at *13. Despite acknowledging that "avoided costs are recoverable as damages for unjust enrichment under the DTSA" and while affirming a jury's finding of liability over Syntel's misappropriation of TriZetto's trade secrets, the Second Circuit vacated the jury's award of $285 million in compensatory damages on the ground that avoided development costs was not an available measure of damages "under the particular facts of th[at] case." Id. at *13, *17-18.

The Second Circuit very narrowly interpreted the DTSA as permitting an award based on avoided costs only in instances where a plaintiff's injury "is not adequately addressed by lost profits," such as "where the value of the secret is damaged, or . . . destroyed." Id. at *13. The court opined that Syntel's misappropriation did not injure TriZetto beyond any loss of profits because "TriZetto retain[ed] the use and value of its trade secrets and the district court permanently enjoin[ed] Syntel from using TriZetto's secrets." Id. at *14. The court so held despite acknowledging that Syntel had "unjustly benefitted from misappropriating TriZetto's trade secrets" and earned $27 million in revenue. Id. at *15

Syntel is the latest chapter in the hostility of New York appellate courts to avoided development costs as a measure of damages in trade secrets cases. On May 3, 2018, in a 4-3 split decision, the New York Court of Appeals held that New York law does not permit avoided development costs damages in a trade secret misappropriation, unfair competition, or unjust enrichment claim. E.J. Brooks Co. v. Cambridge Sec. Seals, 31 N.Y.3d 441, 444 (N.Y. 2018). The Court of Appeals reasoned that, under New York law, compensatory damages "must be measured by the loss of the plaintiff's commercial advantage," id. at 449, and avoided costs were a measure of a defendant's "unjust gains, rather than the plaintiff's losses." Id. at 454.

In a dissenting opinion, Judge Rowan Wilson'now the...