Proving damages can be difficult in a wide range of cases, often especially so in a trade-secrets case. In a recent Federal appellate decision, the 5th Circuit (painfully for the plaintiffs) identified some of the risks involved. A link to the decision, In re Mandel, 2014 WL 3973479 (5th Cir. Aug. 15, 2014), is below.
Here, two individuals, an IP lawyer and a database expert, came together through a joint-venture entity to develop what they conceived to be a new type of search-engine. This JV hired personnel, retained a development team, and searched for investors. The relationship then went sour, with misrepresentations made, one partner forming a competing company without disclosing it to the other partner, and that new company raising investor funds. Suits, counter-suits, and a bankruptcy petition followed.
Later, the bankruptcy court presided over a trial as to whether the chapter 11 debtor (before filing for bankruptcy) misappropriated trade secrets under Texas law. While finding that the debtor-defendant was liable, the court rejected each of the plaintiffs’ damages theories (they proposed a number of them). But then, the bankruptcy court awarded damages—$1 Million to one plaintiff and $400k to another—“without explaining the damages theory on which it relied or identifying the evidence that supported these awards.”
Although the Fifth Circuit stated that in trade-secret misappropriation cases: (1) damages need not be proved with great specificity; (2) a flexible damages approach is appropriate; (3) uncertainty as to damages does not preclude recovery; and (4) only an approximation is needed, as long as there is a just and reasonable inference in support; it held that since the trial / bankruptcy court neither identified the theory of damages nor explained the evidentiary support for the amounts awarded, even this relaxed standard was not satisfied. The Fifth Circuit remanded back to the bankruptcy court to clarify the damages issue.
Accordingly, as a practice pointer, a plaintiff harmed by trade-secret misappropriation should ensure that the court identifies how it arrived to the amount of damage suffered, and not just identify the amount of monetary damage.
Note: this decision applied Texas common law, which has since been superseded by Texas’ adoption of the Uniform Trade Secrets Act.
Solomon Genet is a partner at Meland Russin & Budwick, P.A. in Miami, FL. He specializes in complex commercial litigation, business insolvency, and financial-fraud-related matters in the State and Federal courts.