E.J. Brooks Co. v Cambridge Sec. Seals (
| E.J. Brooks Co. v Cambridge Sec. Seals |
| May 3, 2018 |
| Feinman, J. |
| Court of Appeals |
| Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. |
| As corrected through Wednesday, August 29, 2018 |
[*1]
| E.J. Brooks Company, Doing Business as TydenBrooks, Appellant-Respondent, v Cambridge Security Seals, Respondent-Appellant. |
Argued February 8, 2018; decided May 3, 2018
The United States Court of Appeals for the Second Circuit has asked us to decide "[w]hether, under New York law, a plaintiff asserting claims of misappropriation of a trade secret, unfair competition, and unjust enrichment can recover damages that are measured by the costs the defendant avoided due to its unlawful activity" (E.J. Brooks Co. v Cambridge Sec. Seals,
E.J. Brooks Company d/b/a TydenBrooks is the largest manufacturer of plastic indicative security seals in the United States. TydenBrooks acquired Stoffel Seals Corporation, and thereafter came into possession of Stoffel's fully-automated process for manufacturing plastic indicative security seals. According to TydenBrooks, several Stoffel/TydenBrooks employees defected to a rival manufacturer, Cambridge Security Seals (CSS), bringing the confidential Stoffel process with them. In 2012, TydenBrooks brought an action in the United States District Court for the Southern District of New York against CSS and those former employees, asserting causes of action based on, inter alia, common-law misappropriation of trade{**
On the issue of damages, TydenBrooks sought to measure its injury by the costs CSS avoided as a result of its unlawful activity. Under this "avoided costs" theory, TydenBrooks sought monetary relief in an amount equal to the difference between the costs CSS actually incurred in developing and using the TydenBrooks' manufacturing process and the costs that CSS would have incurred had it not misappropriated TydenBrooks' process. At trial, TydenBrooks' damages expert testified that CSS would have had to incur an additional $6.1 million to $12.2 million, at a minimum, to develop the manufacturing process for its first-generation machines without making use of its knowledge of TydenBrooks' information.[FN3]
TydenBrooks did not present any evidence, or otherwise argue, that CSS's avoided costs could be a proxy for its own losses (such as its investment losses). Instead, CSS's avoided costs were presented exclusively as a measure of the benefit CSS derived from the misappropriation, which TydenBrooks asserted was its per se measure of damages. Specifically, TydenBrooks' expert testified that, among the three theories of damages he was familiar with—"lost profits," "disgorgement of unjust gains" and "reasonable royalty damages"—his avoided cost calculation was a "type of disgorgement," which he explained was a measure of how much a company "gain[ed] by taking and using information that didn't belong to them." TydenBrooks consistently took the position, both before and during trial, that its own financial losses were irrelevant to its "avoided costs" theory of damages. For instance, TydenBrooks brought motions in limine to, among other things, exclude evidence that any customers it lost to CSS were due to factors other than CSS's misappropriation. The court granted the motions, holding that such evidence was irrelevant because "TydenBrooks is not claiming damages from the loss of customers," but rather, "based on the idea that, by stealing Tyden{**
At the close of trial, the court charged the jury on damages based solely on an avoided costs theory:
"In evaluating cost savings, you are to use the standard of comparison method. Under this method, you are to compare actual costs incurred by the defendant you are considering with the costs it would have incurred to produce the same products without the use and knowledge of TydenBrooks' manufacturing process. . . . The difference between the costs actually incurred by the defendant you are considering and the amount he would have incurred in the absence of the misappropriation and/or unfair use is the amount of damages that you should award to TydenBrooks."
The court reminded the jury that it "may award compensatory damages only for injuries that TydenBrooks prove[d] were proximately caused by a defendant's allegedly wrongful conduct" and "only for those injuries that TydenBrooks has [*3]actually suffered or which it is reasonably likely to suffer in the near future." However, the court did not explain how the jury could make the inference that CSS's avoided costs approximated the losses that TydenBrooks "actually suffered" or was reasonably likely to suffer in the near future. Separately, the court instructed the jury that if it found CSS liable for compensatory damages, it may award punitive damages, "[t]he purpose of [which] is not to compensate a plaintiff but to punish a defendant for wanton and reckless or malicious acts and thereby to discourage the defendant and other people or companies from acting in a similar way in the future."
The jury returned a verdict finding CSS liable for trade secret misappropriation, unfair competition and unjust enrichment. It assessed $1.3 million against CSS in "compensatory damages" on each claim, for a total of $3.9 million against CSS in compensatory damages. The jury did not award punitive damages.
Both parties filed postjudgment motions. First, TydenBrooks moved to amend the judgment to include prejudgment interest under CPLR 5001 (a), which the court denied (see E.J. Brooks Co. v Cambridge Sec. Seals,
The parties cross-appealed the District Court's denial of their respective motions to the Second Circuit. With respect to the avoided costs issue raised in CSS's motion, the Second Circuit noted that "neither [the Second Circuit] nor the New York courts appear to have approved the specific type of award in this case" (E.J. Brooks,
Accordingly, the Second Circuit certified the following questions:
"1. Whether, under New York law, a plaintiff asserting claims of misappropriation of a trade secret, unfair competition, and unjust enrichment can recover damages that are measured by the costs the defendant avoided due to its unlawful activity.[*4]
"2. If the answer to the first question is 'yes,' whether prejudgment interest under [CPLR] 5001(a) is mandatory where a plaintiff recovers damages as measured by the defendant's avoided costs." (Id. at 752.)
The Court accepted these questions on June 27, 2017 (see
We turn first to the question of whether avoided costs are awardable as compensatory damages in an action based on a theory of unfair competition.
The "fundamental purpose" of compensatory damages is to have the wrongdoer "make the victim whole" (Sharapata v Town of Islip,
Such is the rule in unfair competition cases. Damages must correspond to "the amount which the plaintiff would have made except for the defendant's wrong . . . , not the profits or revenues actually received or earned" by the defendant (McRoberts Protective Agency v Lansdell Protective Agency,
Here, CSS was found liable to TydenBrooks under a "misappropriation theory" of unfair competition. Under the "misappropriation theory" of unfair competition, a party is liable if they unfairly exploit "the skill, expenditures and labors" of a competitor (ITC Ltd. v Punchgini, Inc.,
To be sure, courts may award a defendant's unjust gains as a proxy for compensatory damages in an unfair competition case (see Underhill v Schenck,
In Michel Cosmetics (
"[t]he wrong inflicted upon the plaintiff is analogous to the wrong suffered by an owner through infringement of his patent or trade-mark, and the rule of damages is similar. An infringer must compensate the owner of a trade-mark, a patent, a process or a formula for the profits which the owner would have acquired in [the owner's] business except for such infringement" (id. at 200).
The Court acknowledged that, "if the plaintiff would otherwise have made the sales of lipsticks which in fact the defendants made by the use of plaintiff's formulas," then the plaintiff would be "entitled to recover from the defendants [such] amount of the profits" (id.). However, the Court observed that there was insufficient evidence that the defendant's customers actually overlapped with the plaintiff's, noting in particular that the defendants distributed the products in countries where the plaintiff was not even marketing them (see id. at 200-201). When a plaintiff "seeks to recover damages," the Court held that "the burden is on him to prove by competent and sufficient evidence his lost sales, or that he was compelled to reduce prices as the result of his competitor's wrongful conduct" (id. at 202). Because the evidence in Michel Cosmetics was "insufficient to justify an inference that the plaintiff would have made all the sales actually made by the defendants," the Court remitted for a new trial on damages (id. at 204).{**
In Hyde Park (
Michel Cosmetics and Hyde Park establish that, while a defendant's gains may be evidence of a plaintiff's losses, they will not be presumed to be the actual measure of a plaintiff's losses. Otherwise, damages would "cease[ ] to serve the compensatory goals of tort recovery" (McDougald,
We next turn to whether avoided costs are awardable as damages in trade secret actions. "A plaintiff claiming misappropriation of a trade secret must prove: (1) it possessed a trade secret, and (2) defendant is using that trade secret in breach of an agreement, confidence, or duty, or as a result of discovery by improper means" (Shaw Creations Inc. v Galleria Enters., Inc.,
In Hertz Corp. v Avis, Inc. (
Trade secret cases following Hertz have generally adhered to this holding (see Equity Now, Inc. v Wall St. Mtge. Bankers, Ltd.,
[*7]We agree that damages in trade secret actions must be measured by the losses incurred by the plaintiff, and that damages may not be based on the infringer's avoided development costs. Authorities embracing the avoided cost method of damages almost universally consider them a measure of the defendant's unjust gains, rather than the plaintiff's losses (see e.g. GlobeRanger Corp. v Software AG United States of Am., Inc.,
It is true that, in trade secret cases, "loss" is broadly defined and must account for the fact that trade secrets inherently derive their value from their confidentiality. The plaintiff's injury in trade secret misappropriation cases includes the loss of "competitive advantage over others . . . by virtue of its exclusive access" to the secret (Ruckelshaus v Monsanto Co.,
Finally, the certified question asks us whether avoided costs may be awarded as compensatory damages in an unjust enrichment action. We have stated that, in order to sustain an unjust enrichment claim, "[a] plaintiff must show that (1) the other party was enriched, (2) at [the plaintiff's] expense, and (3) that it is against equity and good conscience to permit [the other party] to retain what is sought to be recovered" (Mandarin Trading Ltd. v Wildenstein,
"is available only in unusual situations when, though the defendant has not breached a contract nor committed a recognized tort, circumstances create an equitable obligation running from the defendant to the plaintiff. Typical cases are those in which the defendant, though guilty of no wrongdoing, has received money to which he or she is not entitled" (id.).
In such circumstances, equity merely intervenes to deem the parties privy to each other (see Miller v Schloss,
IDT Corp. v Morgan Stanley Dean Witter & Co. (
Similarly, where a defendant saves, through its unlawful activities, costs and expenses that otherwise would have been{**
Accordingly, the first certified question should be answered in the negative and the second certified question not answered as unnecessary.
Wilson, J. (dissenting). This case was brought and tried in federal court, on three distinct theories of trade secret theft, unfair competition and unjust enrichment. The jury returned judgment for TydenBrooks, specifically finding that TydenBrooks "possessed a trade secret, identifiable with reasonable particularity, which was unlawfully misappropriated by [Cambridge Security Seals]"; that Cambridge Security Seals stole those secrets and used them for its own benefit, injuring TydenBrooks by that theft; that Cambridge Security Seals "engaged in unfair competition" with TydenBrooks; and that Cambridge Security Seals was "unjustly enriched, that is, that [Cambridge Security Seals] received a benefit at [TydenBrooks'] expense that, in equity and good conscience, [Cambridge Security Seals] should not retain." The United States Court of Appeals for the Second Circuit has asked us, and we have agreed to resolve, three questions of New York's law relating to damages: "Whether, under New York law, a plaintiff asserting claims of [1] misappropriation of a trade secret, [2] unfair competition, and [3] unjust enrichment can recover damages that are measured by the costs the defendant avoided due to its unlawful activity" (E.J. Brooks Co. v Cambridge Sec. Seals,
As to the Second Circuit's first question—whether avoided costs may form the basis of a damage award for trade secret misappropriation—the majority admits a vacuum in our decisional law. Instead of engaging with the unique nature of trade secret theft and the policy concerns at issue, the majority relies on several inapposite Appellate Division cases that discuss whether a plaintiff can be awarded defendant's profits as a measurement of damages; in none of the cited cases did plaintiffs seek avoided costs as damages. As to the second question, the majority misinterprets our prior case law to adopt an unnecessarily narrow interpretation of damages. In particular, the majority ignores our case law expressly allowing flexible recovery in equity. As to the third question, the majority tacitly concedes the absence of authority, again pointing to inapposite decisions.
The Second Circuit recognized not just the paucity of New York law on the questions it certified, but also the historically established common-law role of our Court, when framing the issue as an "unresolved policy decision," that our Court is "better situated" to make (
Avoided costs are widely recognized as an available measure of damages in trade secret cases. They comport with each of the principles above. In both unfair competition actions and unjust enrichment actions, avoided-cost damages deprive the wrongdoer of its gain. As a policy matter, avoided-cost damages would often undercompensate plaintiffs, because no rational economic actor would spend $X to recover profits of merely $X (see LinkCo, Inc. v Fujitsu Ltd.,
By focusing on and misconstruing the underlying proceeding and by relying on inapposite case law, the majority also fails to discern the greater point of the Second Circuit's questions. The{**
Answering the first certified question requires an examination of trade secret law. A trade secret, by definition, must have economic value and provide a competitive advantage to its owner due to the exclusive use of a product or technique (see Ashland Mgt. v Janien,
When a trade secret is stolen, the injury encompasses many things, including the lost profits plaintiff might have made without the theft, the loss in potential exclusive licensing opportunities, the loss in the value of the secret once exposed and, perhaps most importantly, the lost incentive for others to expend their time and efforts on innovation. In simple terms, "there is no secret any longer"; but "the standard rules of damages are, however, not tailored to take this extra loss into account" (Prandl, 22 Tort & Ins LJ at 448). Thus, when the theft can be nipped in the bud, courts routinely grant injunctions, because money damages are deemed insufficient to capture the true loss suffered by a plaintiff (see e.g. Basicomputer Corp. v Scott, 973 F2d 507, 511 [6th Cir 1992] [affirming injunction because "an injury is not fully compensable by money damages if the nature of the plaintiff's loss would make damages difficult to calculate"]; Norbrook Labs. Ltd. v G.C. Hanford Mfg. Co.,
The majority claims that "damages in trade secret actions must be measured by the losses incurred by the plaintiff" (majority op at
454). By "losses incurred by the plaintiff," the majority means "plaintiff's lost profits," or perhaps "plaintiff's development costs." That narrow interpretation flouts the above basic principles and fails to engage meaningfully with the unique nature of trade secrets, as well as the differences between profits and development costs. In a trade secret case, the plaintiff's loss is the loss in value of the trade secret; that loss can be measured in several ways, but all correspond to the plaintiff's loss, even though they may differ in amount, just as a damage award based on royalties predicated on a hypothetical license may not yield the same—or even a similar—amount as damages based on the plaintiff's lost profits. Of course, plaintiffs will often want to prove lost profits as a measurement of damages, but that may be difficult or impossible to do, because factors exogenous to the theft (e.g., changes in demand, changes in costs, other competition, leak of the trade secret by{**
The majority recognizes that "[w]here disclosure of a trade secret has 'destroy[ed] that competitive edge,' the plaintiff's costs of developing the product may be the best evidence of the (now-depleted) value that the plaintiff placed on the secret" (majority op at
454 [citations omitted and emphasis added]). The majority suggests, though, that it is "neither automatically nor presumptively the case that the [defendant's cost-savings] will be an adequate approximation of the plaintiff's investment losses" (id. [emphasis omitted]).[FN2] That conclusion misses the point; the issue is not whether [*11]defendant's avoided costs {**
In other words, if the defendant could have independently developed the trade secrets at a cost of $X in a period of Y years, and the plaintiff recovers $X plus the profits lost during the Y years due to the defendant's early entry made possible by the theft, the plaintiff will be put exactly into the position it would have been in had the defendant not stolen the secrets—which satisfies the majority's "fundamental purpose" to "make the victim whole" (majority op at
448, quoting Sharapata v Town of Islip,
The majority insists that damages for trade secret misappropriation cannot include defendant's avoided costs, relying on Appellate Division cases where the measure of damages was lost profits. However, those cases do not stand for the proposition that plaintiff's losses must be measured exclusively by plaintiff's lost profits. In Hertz Corp. v Avis, Inc. (
Nor is an examination of cases involving lost profits particularly helpful in determining the rule for avoided costs, because lost profits differ from avoided costs in important ways. Lost profits cases generally involve products or services sold to third parties, where the profits from those sales would have been realized by the plaintiff, had it not been for the defendant's misconduct. The analysis must involve a consideration of whether plaintiff would have made those sales, because the nature of the claim means that either the plaintiff or defendant would have made those sales, but not both (see infra at 467-468).
Anything else would award plaintiff a windfall. Avoided costs, however, are an entirely different measure of damages. Plaintiff's own investment costs, which the majority concedes would be an appropriate measure of loss, do not depend at all on third-party sales, nor do they have any relation to a particular defendant. Rather, plaintiff's investment costs serve as "evidence of the (now-depleted) value" of the trade secret (majority op at
454). So, too, would defendant's avoided costs. Unlike lost profits, there is no concern that plaintiff will receive more than it would have had it not been for the theft, and plaintiff's investment costs and defendant's avoided costs need not be the same. Those considerations are simply irrelevant because investment costs (direct or avoided) measure the inherent value of the trade secret, rather than actual profits gained or lost.{**
The majority's answer to the Second Circuit's second question—whether avoided costs are available as a measure of damages for unfair competition—is similarly flawed. The majority claims that damages in unfair competition cases "must correspond to 'the amount which the plaintiff would have made except for the defendant's wrong . . . , not the profits or revenues actually . . . earned,' " relying on cases in which no claim for avoided-cost damages was made (majority op at
449).[FN5] At the same time, the majority admits that "proof of damages for unfair competition [may be] 'especially complicated' where the injury only affects intangible
values" and approvingly quotes Electrolux Corp. v Val-Worth, Inc. (
The majority reaches its conclusion by misinterpreting the holdings of Michel Cosmetics, Inc. v Tsirkas (
Michel Cosmetics and Hyde Park have nothing to do with a defendant's avoided costs, or even a plaintiff's cost of development in trade secret cases. Those cases disallowed wholesale recovery of the defendant's profits as a measure of plaintiff's{**
If Michel Cosmetics and Hyde Park tell us anything about avoided costs as trade-secret damages, it is that defendants should be allowed to challenge the amount of damages claimed; for example, by showing that the defendant could have developed the same or an equivalent method through cheaper, legitimate means (thus challenging the claimed value of the secret) or that plaintiff retained some value in the secret that should be deducted from the claimed damage amount (e.g., when a court issues an injunction after defendant has made substantial sales). Those cases provide no basis whatsoever to announce that, as a matter of New York law, a plaintiff may never "recover damages that are measured by the costs the defendant avoided due to its unlawful activity." Rather, the answer to the second question asked by the Second Circuit must be yes—as one acceptable measure of damages for unfair competition, a plaintiff may sometimes recover defendant's avoided costs as damages for its lost trade secret, because such avoided costs can be a reasonable approximation of the injury to the plaintiff, subject, of course, to evidentiary challenge by the defendant and acceptance by the trier of fact.
[*14]The majority's answer is wrong for a second reason: common-law unfair competition "is an action in equity and not one at law" (Warren, Inc. v Turner's Gowns, Ltd.,
"[a] wrongdoer who has imitated the containers of the plaintiff and has used the secret formulas and processes belonging to the plaintiff might be compelled to 'yield up his gains to the true owner, upon a principle analogous to that which charges a trustee with the profits acquired by wrongful use of the property of the cestui que trust' " (282 NY at 199 [emphasis added], quoting Hamilton-Brown Shoe Co. v Wolf Brothers & Co.,240 US 251 , 259 [1916]).
Thus, inasmuch as the majority relies on Michel Cosmetics and Hyde Park for the proposition that, because the entirety of a defendant's profits cannot be recovered in an action at law for unfair competition based on a theft of trade secrets, and therefore (although this remains quite a leap) avoided costs also cannot be recovered, the same is not true in equity. We should, therefore, answer the Second Circuit's second question affirmatively: as a matter of law, avoided-cost damages are available in a common-law claim of unfair competition.
The majority fares no better in attempting to answer the Second Circuit's third question: whether avoided-cost damages are an available remedy for unjust enrichment. Instead, the majority answers an entirely different question—whether TydenBrooks can state a claim for unjust enrichment at all. We lack the power to decide that question, which the federal district court has already decided.
The cases cited by the majority, supposedly related to whether a plaintiff bringing an unjust enrichment action may recover costs that the defendant avoided, stand for no such proposition (majority op at
455-456). Corsello v Verizon N.Y., Inc. (
Relying on IDT Corp. v Morgan Stanley Dean Witter & Co. (
Even were it within our power to decide whether a cause of action for unjust enrichment lies here, and were one to read the majority opinion to say that it does not, that would be{**
"[E]quity will intervene to declare the wrongdoers trustees. Some remedy at law there is. It is not so complete or effective as the remedy in equity. Suing at law, the plaintiff would be restricted to the value of his shares, if he rescinded, or to the difference between the value and par . . . , if he affirmed. Suing in equity, he may reach the proceeds of the resale, securities and cash, though the price upon resale is found to be greater than the value. . . . Equity will not be overnice in balancing the efficacy of one remedy against the efficacy of another when action will baffle, and inaction may confirm, the purpose of the wrongdoer" (citations omitted).
We have consistently upheld the principle that a common-law cause of action for unjust enrichment prevents a defendant from retaining any benefit wrongly received. Unjust enrichment is "undoubtedly equitable and depends upon broad considerations of equity and justice" (Paramount Film Distrib. Corp. at 421; see also Saunders v Kline,
The answer to the question certified by the Second Circuit is obvious merely from stating the question: recovery of the benefit obtained by the defendant is the definition of an action for unjust enrichment: "The essential inquiry in any action for unjust enrichment . . . is whether it is against equity and good conscience to permit the defendant to retain what is sought to be recovered" (Mandarin Trading at 182 [emphasis added], quoting Paramount Film Distrib. Corp. [*16]at 421). Especially when defendant's enrichment has come about by wrongdoing, plaintiff's recovery may even include defendant's gains (see Restatement [Third] of Restitution and Unjust Enrichment § 51).
The most curious feature of the majority's opinion is that, by completely neglecting the availability of avoided costs as a measure of equitable damages, it answers the question in a way that renders the proffered answer irrelevant to the Second Circuit. We have recognized—and the majority does not dispute—that disgorgement of defendant's ill-gotten gains is available as an equitable remedy, including in cases involving intellectual property (see Warren, Inc. v Turner's Gowns, Ltd.,
To avoid our ancient, settled law that equity permits disgorgement of a defendant's ill-gotten gains, the majority tacitly interprets the word "damages" to mean damages historically recoverable at law, not in equity. The majority offers no reason for doing so, and does not even attempt to account for our decisions in Warren, New York Bank Note, or Hoffman. Interpreting the Second Circuit's questions as restricted to damages at law is in fundamental conflict with the manner in which federal courts have operated for the past 80 years, since their merger of law and equity in 1938. Federal Rules of Civil Procedure rule 54 (c) provides that, other than for default judgments, "[e]very . . . final judgment should grant the relief to which each party is entitled, even if the party has not demanded that relief in its pleadings." The Advisory Committee note explains that this portion of rule 54 (c) "makes clear that a judgment should give the relief to which a party is entitled, regardless of whether it is legal or equitable or both."[FN10]
Federal courts, governed by rule 54 (c), award damages without regard to whether they arise from a legal or an equitable cause of action (see e.g.In re Fasano/Harriss Pie Co., 848{**
Thus, the Second Circuit did not ask us whether avoided costs may be an appropriate measure at law but not in equity. Upon the jury's finding of liability, the federal courts are indifferent to under which of those branches the relief is available. The majority's opinion does not dispute the availability of a defendant's avoided costs as damages in equity. Indeed, the majority goes so far as to say that a defendant's gain may be used as "the method of computing damages" (majority op at 450 [emphasis omitted]). Thus, the majority's ostensible "no" is a practical "yes," unless we turn the clock back to 1937.
Suppose, for a moment, that the majority is entirely right: although the answer is not dictated by our precedents, they suggest that plaintiffs cannot recover defendant's avoided costs as a measure of compensatory damages. The approach provided by nearly all other jurisdictions and the Restatement (Third) of Unfair Competition explicitly allows plaintiffs in trade secret cases to recover the plaintiff's cost of development or the defendant's avoided costs. That is of no moment to the majority. The suggestion that our Court—the Court that, in Judge Cardozo's time and thereafter, led the nation in advancing the laws that govern civil wrongs in contract, tort and equity—should turn a blind eye and disregard our duty "to bring the law into accordance with present day standards of wisdom and{**
Underlying the majority's hidebound view that a plaintiff's lost profits must always be the remedy for theft of commercially valuable information of any type is a failure to comprehend the difference between private goods and public goods,[FN11] and therefore the reasons that some types of public goods, if they are to exist, require a damage remedy that, though not punitive, is not cabined to the plaintiff's lost profits. That is, the appropriate calculus for thefts of private goods should not constrain the calculus for thefts of public goods (see e.g. Roger D. Blair & Thomas F. Cotter, An Economic Analysis of Damages Rules in Intellectual Property Law, 39 Wm & Mary L Rev 1585, 1590 [1998] ["the optimal set of damages rules should preserve both the incentive structure of intellectual property law and the property-like character of intellectual property rights . . . in the absence of enforcement, information, and other transaction costs, these goals require at a minimum an award that renders the infringer no better off as a result of the infringement"]; Mark A. Lemley, The Surprising Virtues of Treating Trade Secrets as IP Rights, 61 Stan L Rev 311, 329-330 [2008] ["Trade secrets are best understood not as applications or extensions of existing common law principles (warranted or unwarranted), but as IP rights. . . . A right to exclude does not have to be absolute to be effective in rewarding and therefore encouraging innovation. It need merely provide sufficient advantage in terms of lead time or relative costs to minimize or eliminate the public goods problem"]).
The majority also abandons our role in crafting the common law to fulfill the policy goals of this State. The Supreme Court of the United States has identified the general policies behind trade secret law as the "maintenance of standards of commercial ethics and the encouragement of invention" (Kewanee,
New York, as the nation's commercial center and a hub of innovation, embodies those goals by fostering inventors and innovation; those are unmistakable goals of our legislative and executive branches (see e.g. Press Release, Governor Cuomo Announces Highlights of the FY 2019 Budget [Mar. 30, 2018] [announcing budget includes "$600 million to support construction of a world-class, state-of-the-art life sciences public health laboratory in the Capital District that will promote collaborative public/private research and development partnerships"]; Governor Andrew Cuomo, State of the State Address to 2015 New York Legislature [announcing "new innovation hotspots . . . (to) provide one-stop funding and services—legal services, accounting services, all the services (inventors) need to grow their business"]).
What commercial ethics or invention is encouraged by the majority's decision? What does that decision bode for our role in molding the common law to changing times? By rejecting the predominant rule accepted by most states and the Restatement, the majority undermines the policy goals of this State and casts off our mantle. Under the majority's rule, I am encouraged to steal your trade secrets. If I can make better use of them than you, because I am a better salesperson, better funded or a cheaper purchaser of inputs, even if I lose when you sue me, I can make a net profit, repaying you only what you can prove you lost in sales. If I am not better suited to exploit your trade secrets, I [*18]may nevertheless profit if you are unable to prove your lost sales, which, because of the messiness of the real world, is often difficult or impossible to do. At worst, I may be subjected to an injunction, but at that point, the secret has begun to leak out, and you will be hard-pressed to prove that some third, fourth or fifth party derived its identical{**
Cases such as this, "where a decision one way or the other, will count for the future, will advance or retard, sometimes much, sometimes little, the development of the law . . . are the cases where the creative element in the judicial process finds its opportunity and power" (Benjamin Cardozo, The Nature of the Judicial Process 165 [Yale University Press 1921]). Judge Cardozo set that course for us a century ago; I am saddened we shirk from it; doubly so when the Second Circuit has steered us to it.
Chief Judge DiFiore and Judges Stein and Garcia concur; Judge Wilson dissents in an opinion in which Judges Rivera and Fahey concur.
Following certification of questions by the United States Court of Appeals for the Second Circuit and acceptance of the questions by this Court pursuant to section 500.27 of the Rules of Practice of the Court of Appeals (22 NYCRR 500.27), and after hearing argument by counsel for the parties and consideration of the briefs and record submitted, first certified question answered in the negative and second certified question not answered as unnecessary.
Footnote 1:We also accepted the following certified question from the Second Circuit: "If the answer to the first question is 'yes,' whether prejudgment interest under New York Civil Practice Law and Rules § 5001(a) is mandatory where a plaintiff recovers damages as measured by the defendant's avoided costs" (id. at 752). We do not reach the second question because we answer the first question in the negative.
Footnote 2:TydenBrooks also asserted claims under the federal "Lanham Act," 15 USC § 1125 (a), and the District Court exercised supplemental jurisdiction over the New York common-law claims pursuant to 28 USC § 1367. TydenBrooks' Lanham Act claims are not at issue here.
Footnote 3:TydenBrooks' damages expert further testified that this figure would be $7.8 to $16.6 million if "fully burdened costs," i.e., retirement and health benefits, are taken into account.
Footnote 4:Section 5001 (a) provides that "[i]nterest shall be recovered upon a sum awarded . . . because of an act or omission depriving or otherwise interfering with title to, or possession or enjoyment of, property, except that in an action of an equitable nature, interest and the rate and date from which it shall be computed shall be in the court's discretion."
Footnote 5:Indeed, the law could not categorically prevent businesses from "reaping where they have not sown" in the absence of inherently perfidious conduct and actual injury to a competitor. Virtually every form of technological and creative progress stands on ideas and information taken from others (see Harper & Row, Publishers, Inc. v Nation Enterprises,
Footnote 6:The Court noted that
"[a] wrongdoer who has imitated the containers of the plaintiff and has used the secret formulas and processes belonging to the plaintiff might be compelled to 'yield up his gains to the true owner, upon a principle analogous to that which charges a trustee with the profits acquired by wrongful use of the property of the cestui que trust' " (id. at 199, quoting Hamilton-Brown Shoe Co. v Wolf Brothers & Co.,240 US 251 , 259 [1916]).
However, as the defendant did not actually make any profits, no such constructive trust was imposed (id. at 198).
Footnote 7:The term "unjust enrichment" (or "restitution") can refer to a number of distinct concepts, and courts employing these terms have meant different things in different contexts (see generally Doug Rendleman, Measurement of Restitution: Coordinating Restitution with Compensatory Damages and Punitive Damages, 68 Wash & Lee L Rev 973, 976 [2011] [describing multiple concepts that have historically been referred to as "restitution" and noting that "(o)ur court-made common law jurisprudence has not developed fences around the doctrines to define exact boundaries"]). As a remedy, unjust enrichment, in contrast to damages, is designed to avoid wrongful gains rather than compensate the plaintiff for its losses (see Dobbs Law of Remedies: Damages, Equity, Restitution § 4.1 [1] [2d ed 1993]). As a cause of action, however, unjust enrichment simply refers to liability imposed on a defendant who has been enriched apart from a breach of an independent legal duty (see Corsello,Footnote 1:The first certified question is really three separate questions, one each for trade secret theft, unfair competition and unjust enrichment. The Second Circuit certified an additional question concerning prejudgment interest, to be answered if any of the other questions was answered in the affirmative. Because the majority has not answered that question, I also do not.
Footnote 2:The majority's objection that we cannot measure "plaintiff's actual expenditures, a known quantity, by the defendant's projected expenditures, an unknown one," is a challenge suitably made by defense counsel in attacking a plaintiff's damage model, but not a basis to deny recovery as a matter of law (majority op at 455 [emphasis omitted]). Avoided-cost damages do not attempt to measure plaintiff's actual expenditures; they measure plaintiff's loss—the loss of the exclusive use of the trade secret—by providing an approximation of its value: what would it cost the defendant to have developed the secret on its own? Here, TydenBrooks' damage model consisted of two components: capital costs for construction of the machines incorporating the trade secrets, and labor costs associated with the development of the trade secrets and incorporation into the first-generation machines. The $1,886,395 of capital costs included in the damage estimate was—without any adjustment—the capital cost TydenBrooks itself incurred. So, when the majority says, "TydenBrooks did not present any evidence, or otherwise argue, that CSS's avoided costs could be a proxy for its own losses (such as its investment losses)," that is flatly incorrect, at least as to the $1,886,395 of capital costs (majority op at 445.
The labor cost component was based on a high and a low estimate of the number of hours TydenBrooks spent developing the trade secrets, allocated by the type of work involved to specific persons (or types of persons) actually employed by Cambridge Security Seals, and multiplied by the monthly cost of each of those employees. That is, instead of claiming that Cambridge Security Seals could have hired the relevant employees at the wages paid by TydenBrooks, TydenBrooks used Cambridge Security Seals' actual rate of pay, multiplied by an estimate of the actual hours it needed to develop the trade secrets. There is nothing "unsubstantial [or] imaginary" about that method (majority op at 455). If the hourly rates or estimated hours are overstated, it is up to a defendant to challenge them by contrary evidence, including expert opinion.
Footnote 3:Indeed, defendant here attempted that proof; from what we can tell based on the verdict, the jury here credited Cambridge Security Seals' attack on the avoided-cost damages proffered by TydenBrooks, awarding $3.9 million in damages instead of the $7.8-16.6 million claimed by TydenBrooks' expert.Footnote 4:For example, if an injunction issued before a defendant had made any use or disclosure of the trade secrets, avoided costs would most likely not be an appropriate measure of damage.
Footnote 5:The claim in Santa's Workshop v Sterling (
Footnote 6:It is noteworthy that the "unjust gains" in Underhill referred to the defendant's profits, not the tamer, more directly-related amount of avoided costs.
Footnote 7:If the only form of damages available were the entirety of a defendant's profits, the results would sometimes be unjustified; for example, a valve manufacturer stealing my trade secret relating to valve manufacture would pay all its profits to me, as would an automobile manufacturer who stole my valve trade secret and used it in the tires of cars it sold—including all the profits on the cars. A trade secret thief who broadly published but made no commercial use of my trade secrets would owe me nothing; one who, through great skill and effort, successfully commercialized them beyond anything I ever could have accomplished would owe me everything.
Footnote 8:If cited to show that trade secret plaintiffs may not ever bring a claim for unjust enrichment, Corsello and Clark-Fitzpatrick hold nothing of the kind (because trade secret thieves do not usually steal by contract), and, as mentioned above, any such holding is far beyond the scope of the certified question.
Footnote 9:The availability of unjust enrichment in trade secret actions is particularly equitable (see Risch, 11 Marq Intell Prop L Rev at 59 ["Because the economic justification of trade secrets differs from the justification for patents and copyrights, disgorging unjust enrichment is important. If the competitor values the secret in an amount more than the owner will lose or if the court undervalues the amount of the owner's loss, then the competitor will have an incentive to spend more on appropriation. In turn, this will cause the owner to spend more on protection than it otherwise might need to if it had the remedy, leading to the same 'arms race' without a commensurate gain in expected social value. Thus, the law disgorges the additional benefit in order to reduce the competitor's incentive to focus more resources on appropriation"]).
Footnote 10:Wright and Miller's Federal Practice and Procedure § 2662 provides a full explanation:
"Perhaps most significantly subdivision (c) is designed to implement the merger of law and equity mandated by Rule 2 by allowing relief to be given that is consistent with what is shown to be necessary to compensate the parties or remedy the situation without regard to the constraints of the antiquated and rigid forms of action. At common law it was held that plaintiff could not recover anything other than the relief specifically requested in the ad damnum clause of the complaint. In equity, however, the general practice was for plaintiff to demand whatever special relief desired and then to add a prayer for general relief. If the court decided that the evidence did not justify the specific remedy requested, it could rely on the general prayer for relief for the purpose of granting the relief to which plaintiff actually was entitled. Rule 54(c) adopts the more liberal approach used by the equity courts for all civil actions, whether they formerly would be brought at law or in equity, as long as defendant has not defaulted. In this way the rule effectuates one of the objectives of the federal rules—the development of a uniform procedure for all civil actions" (see also 10 Moore's Federal Practice—Civil § 54.70).
In any event, TydenBrooks expressly sought equitable relief in its complaint: "That the Defendants be adjudged to have been unjustly enriched . . . and that Defendants be required to disgorge the profits gained as a result of their conduct and actions and any other appropriate equitable remedy including that the Defendants be enjoined from such unlawful act or practice."
Footnote 11:Private goods are, in the economics parlance, rivalrous and excludable. That is, if I consume my $5 sandwich, you cannot ("rivalrous"), and I can readily prevent you from consuming it ("excludable"). If I create a secret recipe for the sauce used on my sandwiches, your using the recipe does not stop me from using it too ("nonrivalrous"), and—absent legal protection—I cannot easily prevent you from using the recipe once you learn it ("nonexcludable").