The CAFC listened to oral argument in the TAOS v. Intersil matter in January 2018. At the forefront of the discussion was the question of whether disgorgement should be considered an equitable remedy or a legal remedy, and whether net or gross profits should have been used.
In 2015, the Texas jury awarded TAOS for the misappropriation of its trade secrets over $48 million as disgorgement of the Defendant’s gross profits. Judge Snell issued final judgment stating, “The Plaintiff shall recover from the Defendant prejudgment interest in the amount of $18,377,159.00 on the jury’s award of $48,783,007.00 for the misappropriation of the Plaintiff’s trade secrets.”
In the oral argument, Intersil argued that the disgorgement award should not have been determined by the jury. Citing to two Fifth Circuit cases, ERI Consulting Engineers, Inc. v. Swinnea and MGE UPS Sys., Inc. v. GE Consumer & Industrial, Intersil said this was an equitable issue. It was not appropriately categorized as a “damage” because TAOS never asked for lost profits, nor ever suggested that TAOS lost sales as a result of the misappropriation.
TAOS argued that the Supreme Court ruling in Dairy Queen should be followed and that the jury’s award should be preserved.
Intersil also argued that the award should not have relied on gross profits, but instead on net profits. A recent 5th Circuit case, Motion Medical Technologies v. Thermotek Inc., affirmed a judgment which vacated a lost profits jury award (for fraud) calculated using defendant’s gross profits instead of net profits.
The appropriate measure of any party’s economic benefit is a cornerstone for sensible damages. Reliance in this case on “gross profit” (which is formally defined as Net Sales – Cost of Goods Sold) inexplicably may ignore the other expenses (e.g., selling, general & administrative… a.k.a., “SG&A”… a.k.a., “operating expenses”) that the party required to place its product successfully in the marketplace.
The oral argument may be found here (start at 7:30 and when you get tired of listening, move to 30:00):