The protection of intellectual property has undergone a shift. For years, patents and patent litigation were the preferred way for companies to protect and enforce their valuable intellectual property rights. Recently, however, patent litigation has declined and trade secret litigation is on the rise. This is due to many factors including the client view that patents are readily invalidated in inter partes reviews at the U.S. Patent and Trademark Office Patent Trial and Appeal Board and the reduction of patent damages awards by the court after jury verdicts, especially for patents comprising a less-than-whole part of a salable product.

Historically, trade secret litigation does not have either of these problems. Not surprisingly, some defendants have pushed the theory that trade secret damages should be limited using the same theories applied to patent litigation.¹ This attempt by companies potentially liable for large trade secret misappropriation damage awards unmoors trade secret damages from the justification for trade protection in the first place.

Trade secrets protect different intellectual property interests than patents and should be viewed differently when it comes to damages for remedying the harm from misappropriation. A trade secret is information, including a formula, pattern, compilation, program, device, method, technique, or process, that derives independent economic value from not being generally known and not being readily ascertainable by proper means and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.² Misappropriation occurs when:

• a trade secret is acquired directly or indirectly through improper means,
• the acquirer should know it was obtained by improper means, or
• it is disclosed without authorization by one who knows or should know of the existence of the trade secret that was obtained by improper means or under a duty of confidentiality.³

Under Michigan law, a trade secret owner has a wide array of available damages against a misappropriator. These include a reasonable royalty, the trade secret owner’s lost profits, and the unjust enrichment of the defendant.⁴ Michigan’s regime is consistent with the federal Defend Trade Secrets Act and the vast majority of states, almost all of which have adopted the Uniform Trade Secrets Act.⁵

One form of unjust enrichment remedy available to a trade secret misappropriation plaintiff is disgorgement of the profits obtained by the defendant through the misappropriation.⁶ It is the “best measure of damages” (along with any plaintiff lost profits) in a misappropriation of trade secrets case in Michigan.⁷ Disgorgement of the defendant’s profits is a remedy for trade secret misappropriation not available to patent infringement plaintiffs.⁸ Patent infringement damages are awarded as plaintiff’s lost profits or a reasonable royalty.⁹

Disgorgement of the defendant’s profits reflects the fact that misappropriation generally destroys the trade secret through public disclosure — secrecy being a prerequisite for trade secret protection.¹⁰ Disgorgement of wrongfully gained profits accounts for the uncertainty of plaintiff’s lost profits when its improperly disclosed secret is no longer secret.¹¹ When seeking disgorgement, the trade secret owner only has the burden of showing the defendant’s revenue generated from misuse of the trade secret, and the defendant has the burden of establishing any portion of sales not attributable to the trade secret and any permissible deductible allowances.¹² This burden shifting exists because the defendant has the necessary knowledge to rebut the presumption that the defendants’ profits were derived from the misappropriation.

In the context of trade secrets, it is proper to calculate damages for the entire product that includes a trade secret as a component when the trade secret makes such profits possible.¹³ This is consistent with apportionment in trademark infringement cases where the plaintiff’s burden is only to prove revenue driven by the infringing mark; it is the defendant’s burden to prove deductions, costs, and offsets.¹⁴ Trademark infringement damages are analogous because in both trade secret misappropriation and trademark infringement, damages are awarded only if the defendant took wrongful action.¹⁵ Misappropriation of trade secrets (or trademark infringement) is an intentional tort that requires improper conduct by the defendant to obtain monetary damages.¹⁶

In contrast, patent infringement is strict liability and no intent on the part of the defendant is necessary for the plaintiff to recover monetary damages.¹⁷ Patent damages protect the right to exclude others from using the disclosed invention¹⁸ and the reasonable value of this exclusion is measured in any damages awarded because the infringer uses the disclosed invention without authorization.¹⁹ The damages awarded reflect the loss to the owner of this unauthorized use through a reasonable royalty payment.

The doctrine of apportionment arose to protect strict liability patent infringement defendants from overcompensating a patent holder when the patented invention did not derive all of the benefits to the infringer; for example, if the patented invention is part of a larger product that had selling points in its favor unrelated to the patented invention or if the invention was only a small improvement on a publicly available device.²⁰

Apportionment is relevant in calculating a reasonable royalty the patent infringer would theoretically pay to the owner because the larger the patented component to the product as a whole, the higher the royalty to be paid for its use.²¹ The burden of apportionment in patent cases is on the plaintiff to show its right to exclude use of the patented invention is significant.²² Therefore, as one can see, apportionment in the context of patent infringement damages effectively balances a reasonable royalty to compensate for the right to exclude with the scope of the patent exclusion itself.²³ A patent holder’s damages under a reasonable royalty compensates the patent holder for what it would have made if not for the infringement.²⁴ This is different than the compensation for trade secret misappropriation, which compensates the plaintiff for the loss of the intellectual property itself.

Apportionment in the context of trade secret misappropriation is different from patent damages apportionment. As we have seen for patent infringement, damages are only awarded for the plaintiff’s lost profits or set as a reasonable royalty because the plaintiff lost its right to exclude others from using the patent during the patent term.²⁵ Patent holders have no risk of losing patent rights through public disclosure — public disclosure is required to obtain the exclusionary patent right in the first place. A patent infringer is liable even if it is not aware of the patent holder’s rights.²⁶ For trade secret misappropriation, damages should be awarded to compensate the plaintiff for the loss of its intellectual property in its entirety. There is no strict liability for trade secret infringement. To be liable, a trade secret misappropriator must know or have reason to know that the trade secret contains secret information.²⁷ When a trade secret is misappropriated, the wrongdoer takes intentional action to destroy the existence of the intellectual property right.²⁸ This is because unauthorized disclosure exposes the trade secret to the public, thereby destroying its secrecy and value.

Any apportionment of trade secret damages is the wrongdoer’s burden to show what percentage of its sales is not the result of trade secret misappropriation, similar to trademark and copyright law, because the wrongdoer is the source of the relevant information and the bad actor.²⁹ There are no unjust enrichment disgorgement remedies or similar assignments of burdens for patent infringement because patent rights protect different interests.

Patent remedies are quite different because patent holders are limited by law to a reasonable royalty or the patent owner’s lost profits. Patent rights are also different — a limited right to exclude in exchange for public disclosure. In contrast, trade secrets last indefinitely as long as the information remains secret. When a trade secret is misappropriated, the defendant necessarily took wrongful action to disclose and/or steal the secret information. As a result, damage awards are to compensate for the loss of the intellectual property itself. Trade secret misappropriation damages should not follow patent damages apportionment theory placing the burden on the plaintiff to justify the benefit of the stolen information. This is contrary to law and basic principles of equity underling trade secret protection in the first place. Trade secret misappropriation defendants must have the burden of demonstrating the extent, if any, its profits are not derived by the misappropriation. One that misappropriates trade secrets must not be permitted to steal technology and avoid disgorging the profit it made therefrom. Not only would this be unfair, it would also embolden wrongdoers to act unfairly.