The Developing "Avoided Costs" Remedy In Trade Secret Litigation

• Published date: 26 October 2022
• Subject Matter: Intellectual Property, Trade Secrets
• Law Firm: Sheppard Mullin Richter & Hampton
• Author: Ms Andrea Feathers

Should a defendant found liable for stealing trade secrets have to fork over all of the research and development costs it theoretically avoided by misappropriating the secrets? Yes, according to the "avoided costs" theory of unjust enrichment that is gaining traction and resulting in large verdicts in DTSA and UTSA cases around the country.¹

The theory is gaining such traction that in a recent decision out of the Southern District of California, the parties did not contest the availability of "avoided costs," and the court accepted it as a viable remedy without dispute. Medimpact Healthcare Sys. v. IQVIA Inc., No. 19cv1865-GPC(DEB), 2022 U.S. Dist. LEXIS 186470, at *1 (S.D. Cal. Oct. 7, 2022). Instead, the parties fought over the appropriate method for calculating those costs and the scope of the costs, given the particular trade secrets alleged'issues that the Court left for further briefing.

The "avoided costs" theory is rooted in statutory language in the DTSA allowing "damages for any unjust enrichment caused by the misappropriation of the trade secret that is not addressed in computing damages for actual loss" (see 18 U.S.C. ' 1836(b)(2)) and a similar provision under the UTSA. The purpose of "avoided cost" damages is "preventing wrongdoers from keeping ill-gotten gains," not making the plaintiff whole. Syntel Sterling Best Shores Mauritius Ltd. v. TriZetto Grp., No. 15 Civ. 211 (LGS), 2021 U.S. Dist. LEXIS 75875, at *24 (S.D.N.Y. Apr. 20, 2021). Accordingly, they "do not require a corresponding loss to the plaintiff." Id.

How then should we calculate costs that defendant avoided but would have hypothetically incurred if it had developed the trade secret on its own? Courts take a "flexible and imaginative approach." GlobeRanger Corp. v. Software AG U.S., Inc., 836 F.3d 477, 499 (5th Cir. 2016). This might include using plaintiff's development costs as a proxy for what defendant would have incurred. Id.

As the court noted in Medimpact, the Ninth Circuit has yet to weigh in on "avoided costs" as a trade secret remedy, but a number of other courts have recognized it. These decisions are expanding the potential recovery for plaintiffs who can show that it would have taken millions of dollars and years of work to piece together the secrets defendant misappropriated. This remedy can significantly change the award calculation where the defendant has gained a large advantage by taking the trade secrets, but it is difficult or even impossible to calculate the...