What Damages Can Trade Secrets Result in?
As a former MIT finance professor and PhD in financial economics from the University of Chicago with extensive testifying experience, Dr Don May is a world-class expert in the valuation of damages.
With his invaluable experience in testifying in arbitrations as well as state and federal court, Dr May represents what sets DMA Economics apart from others—our solid knowledge base and experience. Below he explains what damages trade secrets can result in and how these are calculated, while addressing the common misconceptions people may have around valuation.
Each of the intellectual property infringements – patent, copyright, trademark and trade secret – permit recovery of “actual damages” where those can be ascertained. What are your first steps when instructed to calculate damages from these infringements?
First, it is important to ascertain the type of infringement and thus the legal theory and acceptable approaches to calculating damages. Next, apply the models and calculations associated with the legal theory of damages and accepted methodology for the particular infringement. For example, the lost profits, profit disgorgement, market, cost, or relief from royalties’ approaches may be more applicable for a particular type of IP infringement.
What considerations are made when valuing damages from the theft of trade secrets?
- Type of trade secret (e.g., client list, technology, etc.)
- Accepted methodology under legal and economic theories
- Data availability
- Economic conditions subsequent to the theft and type of infringer (direct or indirect competitor)
When it comes to calculating damages resulting from IP infringements, some damages may be “unobservable” or indirect and therefore difficult to identify and quantify. What are some examples of indirect damages and how do you work around the difficulties that valuing them may pose?
This really depends on the approaches used to calculate damages. Under the cost approach, all costs associated with the development of the IP are observable to a great extent, but this might not yield the most accurate measure of damages.
However, when calculating damages using the lost profits approach or profit disgorgement approach, the expert would need to estimate sales lost (or gained by the infringer) as a result of the infringement. These lost future sales are not observable but could be accurately estimated.
The workaround for this issue would be to use observable historical sales and economic conditions post infringement to extrapolate via regression analysis, or other techniques to calculate what unobservable future lost sales would have been but-for the infringement.
In other words, the workaround would be to use observable data and trends to derive or estimate the unobservable data needed to calculate damages.
What are common misconceptions do clients sometimes have when trying to value damages in instances like these?
Some clients can be biased in terms of their desire to use an approach that will lead to the highest (for plaintiff clients) or lowest (for defendant clients) damages. However, it is important for both defendants and plaintiffs to understand that only the most acceptable, accurate, and economically reasonable approach and calculation of damages will ultimately be successful.
What types of economic damages do theft of trade secrets result in?
The following may overlap to some degree, but are the general categories of damages are:
- Costs associated with developing the trade secret that may now be worthless for plaintiffs.
- Lost profits incurred from competitors using the trade secret to develop a competing product that diminishes sales for plaintiffs.
- Lost enterprise value incurred from competitors using the trade secret to develop a competing product that diminishes sales for plaintiffs over many years (essentially the value of the trade secret).
- Lost royalties from potential licensing of trade secret technology (if not included in lost profits above).
- Profits earned from the trade secrets by the infringer.
Don May PhD
DMA Economics, LLC
212.390.0595 I Cell 914.473.3601
DMA Economics works on behalf of plaintiffs and defendants to calculate damages in high-stakes commercial litigation. Some examples of damage calculations relate to securities fraud, product defects, theft of trade secrets, and portfolio mismanagement to name just a few.
DMA Economics is a leader in providing damage calculations using rigorous analyses that are clearly communicated to triers-of-fact.