A Intersil Corporation – Part 2 (CAFC Opinion May 1, 2018)

A few months ago, we provided background on this matter and discussed the available oral argument. A summary of Intersil’s appeal is provided by the Federal Circuit:

The Federal Circuit issued an opinion reversing the District Court regarding disgorgement of profits. The Federal Circuit found that the monetary award for trade secret damages should be vacated, in part, because only one of three asserted trade secrets was found to have been misappropriated; whereas the plaintiff expert had advanced a single damages value concerning all three of those trade secrets… and the resulting monetary award had not been allocated on a trade-secret-by-trade-secret basis.

There were other issues relevant from this opinion. The Federal Circuit directs damages experts to embrace a finite period of time when assessing disgorgement of profits in trade secrets matters, especially as it concerns analysis involving a supposed “head start.”

The court also decided that TAOS was not entitled to a jury decision on disgorgement, and that the District Court should make that determination.

The Federal Circuit rejected “double recovery” of damages/monetary remedy awards on sales of the same accused product. In this instance, it was unacceptable that a reasonable royalty should be paid on the same accused sales for which disgorgement was afforded.

Finally, we were hoping for guidance on the issue of gross versus net profits, but alas… the Federal Circuit only briefly notes in passing:

Scentsational Technologies v. Pepsi, Inc. et al. (Order on Motion to Strike, Issued February 14, 2018)

In a biting opinion regarding a motion to strike a damages analysis, Judge Forrest of the Southern District of New York struck the entire report of Wayne Hoeberlein, CPA.

The case involved accusations of trade secret misappropriation associated with scented packaging, as well as breach of contract. Mr. Hoeberlein was retained by plaintiff attorneys to derive damages. Mr. Hoeberlein appears to have relied (almost entirely) on a packaging expert, Dr. Sand, whose own opinions on the likelihood for commercialization were also struck by Judge Forrest.

Courts rightfully and reasonably afford damages experts the capacity to rely on the testimony of other experts (e.g., technical experts or licensing experts); however, when doing so, Courts do not simultaneously afford those damages experts a capacity to suspend their critical faculties Where damages experts do not ask critical questions, push back against unreasonable and unsubstantiated damages theories, or ignore countervailing documents and data, they run high likelihood of having opinions excluded.

Waymo LLC v. Uber Technology, Inc. et al. (Order on Acquisition Damages January 18, 2018)

As we all watch the Waymo v. Uber trial unfold this week, we thought it interesting to discuss Judge Alsup’s order issued on the eve of trial. The order strikes Waymo’s new theory regarding damages associated with the acquisition of the trade secrets at issue, as distinguished from damages associated with acquisition and use of those trade secrets.

Judge Alsup concludes that Waymo had not preserved its right to proffer a damages theory based upon Uber’s “acquisition” alone, but instead had only offered damages theories, previously struck, regarding the use of the trade secrets.

Fascinating to us is the notion that trade secret damages may be derived solely from “acquisition,” as opposed to acquisition and use/benefit. Looking back at the motions written by both parties attempting to answer Judge Alsup’s question about whether “acquisition alone” is enough to support “an unjust enrichment theory,” it appears both sides conflate monetary remedies (such as unjust enrichment) with actual damage. Our understanding is that damages experts are not retained simply to sum up values found in financial schedules, but rather to follow acceptable methodologies to quantify harm. They are to apply their special understanding and expertise to provide analysis that laypersons could not do themselves.

Equating an “acquisition” to a damages analysis seems incorrect. We note that Judge Alsup was careful not to use the term “damages” in his questions to the attorneys on the subject of this acquisition issue. Yet briefs provided by both attorneys do relate the acquisition of the trade secrets alone with “damages”; whereas we believe such quantification should be considered “a monetary remedy.”

Texas Advanced Optoelectronic Solutions v. Intersil Corp. (CAFC Oral Argument Jan 2018)

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):

Waymo LLC v. Uber Technologies, et al. (November 6, 2017)

Anchoring is the concept of tying one’s ship to a mooring to keep it from drifting into the open seas. In the late 1970’s Kahneman and Tversky determined that people can unconsciously tie opinions to unrelated moorings which keep them within a constrained area.

Anchoring may be found in all aspects of decision making. And many academics have determined that juries anchor their opinions to potentially unrelated aspects of a matter. For example, in Uniloc USA v. Microsoft, the court notes that “the ‘$19 billion cat was never put back into the bag,'” suggesting that once a jury hears a large number, its opinion regarding damages can be anchored to that number. This appears to be the number one reason why the entire market value rule (EMV) and the smallest saleable practicing unit (SSPU) have become so important in damages.

In his recent opinion, Judge Alsup appears to conclude that the trade secret’s damages expert in the Waymo matter was in danger of anchoring the jury with a large value:

In short, anchoring issues appear to have reached the trade secret realm.