Case Information
United States Court of Appeals for the Fifth Circuit United States Court of Appeals Fifth Circuit ____________ FILED January 3, 2025 ____________ Lyle W. Cayce Clerk Silverthorne Seismic, L.L.C.,
Plaintiff—Appellant , versus
Sterling Seismic Services, Limited,
doing business as Sterling Seismic & Reservoir Services,
Defendant—Appellee . ______________________________ Appeal from the United States District Court for the Southern District of Texas USDC No. 4:20-CV-2543 ______________________________ Before Smith, Clement, and Higginson, Circuit Judges .
Jerry E. Smith, Circuit Judge :
In advance of a trial for trade-secret misappropriation, the district court instructed the parties on how the plaintiff could prove reasonable- royalty damages under the Defend Trade Secrets Act of 2016, 18 U.S.C. § 1836. It certified that order for interlocutory appeal under 28 U.S.C. § 1292(b), and an administrative, or motions, panel of this court granted the plaintiff leave to appeal.
That was error. The parties have not yet gone to trial, and the plaintiff hasn’t yet proven liability. Damages may never come up. The parties do not need our input to proceed, and we would not speed up the litigation by weigh- ing in. The time spent on this appeal would only slow the proceedings. There is no reason to buck the hallmark rule that a party may appeal once and only after final judgment.
We vacate the order granting leave to appeal, and we dismiss the appeal for want of jurisdiction and remand for further proceedings.
I. Casillas Petroleum Resource Partners II, L.L.C. (“Casillas”), li- censed seismic data from Silverthorne Seismic, L.L.C. (“Silverthorne”). Under their arrangement, Silverthorne would send the data to Sterling Seis- mic Services, Ltd. (“Sterling”), which would then process the data and pass it on to Casillas.
Sterling’s process required more data than Casillas had paid for. Silverthorne thus required Sterling to agree to forward only the data that Casillas had licensed. But according to Silverthorne, Sterling sent to Casillas some unlicensed data, too, which Casillas then showed to potential investors.
Silverthorne sued Sterling for misappropriating its trade secrets under the Defend Trade Secrets Act. Relevant to this appeal, Silverthorne seeks a remedy of a “reasonable royalty” under § 1836(b)(3)(B)(ii).
In an order issued five days before trial, the district court set out the
standard for calculating a “reasonable royalty,” adopting this court’s defini-
tion of the same term under state law in
University Computing Co. v. Lykes-
“A panel hearing the merits of an appeal may review a motions panel ruling, and
overturn it where necessary.”
X Corp. v. Media Matters for Am.
,
Youngstown Corp.
,
On Silverthorne’s motion, the district court certified the order for interlocutory appeal under § 1292(b), concluding that (1) the reasonable- royalty standard was a controlling question of law, (2) there was substantial ground for difference of opinion regarding the standard, and (3) immediate appeal would materially advance ultimate termination of the litigation. The district court stayed the proceedings pending this court’s resolution of the certified question. An administrative panel of this court granted leave to appeal.
II. We normally have jurisdiction to review only “final decisions of the district courts.” Firestone Tire & Rubber Co. v. Risjord , 449 U.S. 368, 373 (1981) (quoting 28 U.S.C. § 1291). A final decision is generally one “that ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Id. (cleaned up). A party unhappy with an interlocu- tory ruling must wait until that final judgment, when it can appeal all claims of error at once. Id. at 374.
The final-judgment rule “conserves judicial energy and eliminates the
delays, harassment, and costs that would be occasioned by a succession of
separate interlocutory appeals.”
[2]
“Even in [a] favorable state of our
docket,” appeals “require [several] months.”
[3]
Clark-Dietz & Assocs.-Eng’rs,
United States v. Bear Marine Servs.
,
days before trial, then froze the trial proceedings pending this appeal. That was over a year
ago. Trial would long have been finished. At that point, Silverthorne could have appealed,
and, if necessary, this court could have remanded for a short postlude in the district court.
Inc. v. Basic Constr. Co.
,
Section 1292(b) provides one “narrow exception” to the final-
judgment rule.
Garner v. Wolfinbarger
(
Garner II
),
“Interlocutory appeals are generally disfavored,” and § 1292(b)
“must be strictly construed.”
Allen v. Okam Holdings, Inc.
,
And if we later conclude that we have improvidently accepted an appeal under § 1292(b), we “must vacate the earlier order granting leave to appeal and must remand the case to the district court.” [5]
Even if we decided the issue presented, Silverthorne’s interlocutory appeal would
be a roadblock, not a shortcut, to final resolution of its action. On remand, this case will go
to trial more than a year late. The loser (maybe also the winner) will bring the case back to
this court on another monthslong journey and then, possibly, back to the district court.
ICTSI Or., Inc. v. Int’l Longshore & Warehouse Union
,
We imprudently granted leave to appeal. The district court’s order involved no controlling question of law, and this appeal would not materially advance the ultimate termination of the litigation.
A.
We have no appellate jurisdiction where the strict requirements of
§ 1292(b) are not met. “This court’s appellate jurisdiction under § 1292(b)
extends only to interlocutory orders that involve a controlling question of
law.”
[6]
“A controlling question of law must be one of law—not fact—and its
resolution must materially affect the outcome of litigation in the district
court.”
ICTSI
,
Our answer to a question can immediately and materially impact an action by “terminat[ing] [it] in the district court” or by restoring it from an incorrect termination. [8] Controlling questions thus “include . . . whether a claim exists as a matter of law, whether a defense that will defeat the claim is available, and questions as to subject-matter jurisdiction, proper venue,
[6]
Malbrough v. Crown Equip. Corp.
,
(3d ed. 2024).
personal jurisdiction, and standing to maintain the action.” [9]
That is why so many of our § 1292(b) appeals have come from dismis-
sal or summary judgment. For example, in
Overdam v. Texas A&M Univer-
sity
, we decided a § 1292(b) appeal from dismissal, identifying controlling
questions in (1) whether a student was constitutionally entitled to cross-
examine his accuser in Title IX proceedings; and (2) what the pleading stan-
dard was for a Title IX claim.
In “rare” circumstances, even discovery orders can contain control-
ling questions of law.
Hyde Constr. Co. v. Koehring Co.
,
Though a controlling question’s resolution “need not . . . terminate an action,” [11] a question is not controlling just because its answer would complicate a litigant’s ability to make its case. Nor is a question controlling
[9]
Id.
(cleaned up).
Note,
Interlocutory Appeals in the Federal Courts under 28 U.S.C. § 1292(b)
,
88 Harv. L. Rev. 607, 623 (1975) [hereinafter Note,
Interlocutory Appeals
] (citing
Gar-
ner I
,
Amminstrazione Straordinaria
,
because our answer could save the parties from a post-judgment appeal. [12] Otherwise, almost any disputed legal question could qualify for interlocutory review, and “the exception [provided by § 1292(b)] might well swallow the rule.” [13]
With those principles in mind, damages issues generally do not control
a case until the plaintiff establishes liability.
[14]
Only then would a plaintiff be
entitled to damages. If this court reversed an incorrect damages order before
then, its impact on the litigation would not be “immediate” but, instead,
would be contingent on the rest of the plaintiff’s case.
Fujitsu
, 539 F. App’x
at 1007. And if the plaintiff fails to show that the defendant is liable, our
reversal will have had no effect on the litigation.
ICTSI
,
One exception, among others, is where the damages issue would be dispositive. For example, in Vaughan v. Anderson Regional Medical Center , this court asserted § 1292(b) jurisdiction to decide whether a plaintiff could seek “pain and suffering and punitive damages” under the Age Discrimina- tion in Employment Act. [15] The district court had dismissed the plaintiff’s claims based on its answer to that question. By reversing, we would have restored the proceedings, immediately and materially impacting the case.
Here, the district court’s pretrial order set out the standard for
[12]
ICTSI
,
[13]
See Baldridge v. SBC Commc’ns, Inc.
,
at 619 (“[A]n order involving computation of damages in complex litigation would not be
controlling until a finding of liability, since it is only at that stage that reversal of trial court
error could result in time savings.”).
reasonable-royalty damages under the Defend Trade Secrets Act. Relying on University Computing ’s definition of the same term under state law, the court required Silverthorne to prove “what Silverthorne and Sterling would have agreed to for Sterling to use the alleged trade secret.” The court then certi- fied that the damages issue was a controlling question of law.
But that issue is not yet controlling. If we reversed now, we would
have no “immediate impact on the course of the litigation” because Silver-
thorne has not yet proven liability.
Fujitsu
,
Even assuming arguendo that Silverthorne could establish liability, the reasonable-royalty standard may still not be controlling. Silverthorne claims that the district court’s order prevents it from proving damages. If that were true, the question could have controlled the case. As the district court noted, though, its order did “not automatically bar [Silverthorne] from prov- ing damages,” as long as it does so according to the standard defined in Uni- versity Computing .
Any effect of this court’s reversal would be speculative and dependent
For example, the district court might have granted summary judgment against
Silverthorne after concluding that it could not prove damages under
University Computing
.
See, e.g.
,
Vaughan
,
on Silverthorne’s evidence. If we adopted Silverthorne’s standard, Silver- thorne may nonetheless fail to establish a reasonable royalty, and if we af- firmed the district court’s interpretation, Silverthorne could nonetheless find a way to prove damages.
The dissent makes hay out of
Garner I
, where we asserted § 1292(b)
jurisdiction over a discovery order denying the attorney-client privilege.
Resolution of that privilege in that “complex case” could have abated years
of pretrial litigation and a long trial.
See
Also misplaced is the dissent’s reliance on
Yamaha Motor Corp.,
U.S.A. v. Calhoun
,
Because our answer to the certified question would not “immedi-
ate[ly]” or “materially affect the outcome of litigation in the district court,”
the question is not yet controlling.
Fujitsu
, 539 F. App’x at 1007;
ICTSI
,
Yamaha
decided two issues: (1) whether a court of appeals could “exercise jur-
isdiction over any question that is included within the order that contains the controlling
question . . . identified by the district court,” and (2) whether federal law “suppl[ied] the
exclusive remedy” in certain maritime cases.
B.
Section 1292(b) also requires that an “immediate appeal [may] mate-
rially advance the end of the litigation,” which means that this court’s
decision on the interlocutory appeal could “abbreviate [the district court pro-
ceedings] significantly.”
Bear Marine
,
This interlocutory appeal would not do that. See id. at 1120. The par- ties will continue to trial whether this court weighs in. The trial, including any trial on damages, will probably “be short, and nothing we might do is likely to abbreviate it significantly.” Id. Indeed, the parties may not even reach the damages issue because Silverthorne has not yet proven liability.
Silverthorne and the dissent aver that we could save judicial resources
by shortening post-judgment appeals and proceedings. But § 1292(b)
requires that an interlocutory appeal shorten the proceedings in the district
court, not on post-judgment appeal. Otherwise, almost any disputed legal
question could qualify under § 1292(b), and the “narrow exception” allow-
ing interlocutory review would “swallow the rule.”
See Garner II
, 433 F.2d
at 120;
Baldridge
,
This interlocutory appeal would not materially advance the ultimate termination of the litigation.
C.
The dissent bemoans that “the parties and this court have already
Bear Marine
,
expended time and resources on briefing and argument, all while the case is
abated in the district court.”
Post
, at 9–10. But “[t]hat is no reason for th[is]
court to dissipate further energies on the appeal or to decide questions that
may prove to be hypothetical.”
Bear Marine
,
By declining to decide this appeal, the dissent complains, we leave the
law of reasonable royalties “a mess.”
Post
, at 10. Maybe so. But itching,
though we may be, to reach the merits of an interesting issue, “[w]e do not
sit to decide moot questions[] or to issue advisory opinions.”
Bear Marine
,
We unwisely accepted this interlocutory appeal under § 1292(b).
Because the certified question is not controlling, and the appeal would not
materially advance the ultimate termination of the litigation, Silverthorne has
not shown “that exceptional circumstances justify a departure from the basic
policy of postponing appellate review until after the entry of a final judg-
ment.”
Coopers & Lybrand v. Livesay
,
* * * * * The order granting leave to appeal is VACATED , the appeal is DISMISSED for want of jurisdiction, and the case is REMANDED for further proceedings as appropriate. We express no opinion on the ultimate merits of any question that the district court may address.
Stephen A. Higginson , Circuit Judge , dissenting:
The question in this appeal was certified for our review by a veteran district judge who felt compelled to adhere to case law that is out of step with more recent statutory text, as confirmed by two other circuit courts. A unanimous panel of our colleagues agreed to revisit our law, granting permission to appeal. Today, nearly a year later, we vacate and dismiss that grant as “imprudent[],” ante at 5, and “unwise[],” ante at 11, and we return the case to the inquiring district court with no answer. This is a mistake. Because the certified issue is a question of law; because it is decisive for this litigation; because decisions from the other courts of appeals convincingly explain that our half-century-old decision in University Computing Co. v. Lykes-Youngstown Corp. , 504 F.2d 518 (5th Cir. 1974), is inconsistent with statutorily expanded liability in the Defend Trade Secrets Act of 2016, Pub. L. No. 114-153, § 2(a), 130 Stat. 376, 376–80 (codified at 18 U.S.C. § 1836) (DTSA)—we can, and should, answer the district court’s question.
I.
The history of the proceedings shows why the case pivots on the
certified question. Silverthorne Seismic, L.L.C. (Silverthorne) alleged
misappropriation of its trade secrets under the DTSA and sought a
reasonable royalty from Sterling Seismic Services, Ltd. (Sterling). This was
the sole claim in issue at all points relevant. During motions practice, the
district court found multiple triable issues of fact regarding liability under the
DTSA. But the district court excluded the opinion of Silverthorne’s
damages expert. Silverthorne, applying the reasonable royalty benchmark of
a hypothetical negotiation between a willing licensor and licensee, then
proposed to “present evidence at trial of the fair market value of a license to
the . . . data in a fictitious transaction between willing seller and willing
buyer,” with lay witness Barton Wilson, Silverthorne’s owner, “testify[ing]
based on his knowledge of actual transactions . . . in the time period in
question.” Relying on
University Computing
, Sterling moved to exclude the
testimony, contending that it was expert testimony and irrelevant because
Wilson was “opining on . . . what an oil and gas operating company . . . would
be willing to pay,” rather than what Sterling, a data processing company,
would have paid in a hypothetical negotiation to license the trade secret for
its own use.
See Univ. Computing
,
At a pretrial conference, the parties and the district court extensively discussed settling the statutory measure for a reasonable royalty by interlocutory appeal. Counsel for Silverthorne stated that “if the Court is ruling that the measure of damages would be what Silverthorne would sell and what Sterling would pay, . . . there’s not going to be any evidence of that adduced with plaintiff’s case. . . . I think the Court’s going to be left with no alternative but to grant a directed verdict on the DTSA.” The court responded, “I’m afraid you’re right. I’m afraid there is no means of showing damages . . . .”
On October 25, 2023, having already excluded testimony from
Silverthorne’s damages expert, the district court denied the motion to
exclude Wilson’s lay testimony. But with respect to the reasonable royalty
standard, the court decided to adhere to
University Computing
, stating that
“the proper measure of a reasonable royalty analysis is ‘what the parties
would have agreed to as a fair price for licensing the defendant to put the
trade secret to the use the defendant intended at the time the
misappropriation took place.’”
See Univ. Computing
,
On November 15, 2023, the court certified its order for interlocutory appeal and framed the following question: “whether a plaintiff is entitled to prove reasonable royalty damages under the DTSA using willing buyer(s) detached from the parties to the litigation when willing buyers (here, oil and gas exploration companies) exist for plaintiff’s alleged trade secret (here, seismic data), but the defendant and comparable entities (here, seismic processors) do not buy or license that trade secret.”
We unanimously granted leave to appeal on January 4, 2024. II.
Certification of interlocutory orders under 28 U.S.C. § 1292(b)
requires the district court to find that the “order involves a controlling
question of law,” that “there is substantial ground for difference of opinion”
upon that question, “and that an immediate appeal from the order may
materially advance the ultimate termination of the litigation.” The appeal
proceeds only if the court of appeals receives a timely application for and
allows review. The statute otherwise affords “unfettered discretion” to the
court of appeals.
See Microsoft Corp. v. Baker
,
The majority opinion’s constricted application of § 1292(b) is out of step with that discretion and with our previous decisions. “The statute was Like the majority, I focus on the first and third factors, but there is substantial ground for difference of opinion as well. Cf. David O. Taylor, Using Reasonable Royalties to Value Patented Technology , 49 Ga. L. Rev. 79, 134 (2014) (referring to a similar “unresolved question” concerning reasonable royalties for patent infringement).
framed in broad language” and we interpret it with the recognition that its
“considerable flexibility” avoids the “waste of precious judicial time while
the case grinds through to a final judgment as the sole medium through which
to test the correctness of some isolated identifiable point of fact, of law, of
substance or procedure, upon which in a realistic way the whole case or
defense will turn”—rather than according to a set of “handy modifiers” such
as “‘strictly construed.’”
Hadjipateras v. Pacifica, S.A.
,
Instead, we take a pragmatic approach in assessing whether a district
court order involves a controlling question of law the review of which would
materially advance the litigation. As Judge Posner put it, a “‘question of law’
means an abstract legal issue” that “the court of appeals c[an] decide quickly
and cleanly” without “hunting through the record.”
Ahrenholz v. Bd. of Trs.
of Univ. of Illinois
,
Ahrenholz
,
The design of § 1292(b) supports this usual approach. Appeals under
the provision, although they are taken from certified orders, involve
propositions of law
, which are prospective in nature, in an
interlocutory
posture.
The whole point is that legal principles are generally applicable, so the court
of appeals does not need to “hunt[] through the record”—particularly not in
order to second-guess the district court judge by scrutinizing the record to
determine whether a question is really dispositive.
See Coopers
, 437 U.S. at
475 n.25 (quoting H.R. Rep. No. 85-1667, at 5–6 (1958), as stating that the
district court’s certification provides “the best informed opinion that
immediate review is of value”);
United States v. Garner
,
Because § 1292(b) appeals are not taken from final judgments, courts
including ours have emphasized that imposing a simulacrum of the final-
judgment rule on the provision makes little sense. “[I]t is never one hundred
percent certain in advance that the resolution of a particular question will
determine the outcome or even the future course of the litigation.”
Johnson
v. Burken
,
The contingency that worries the majority can be spotted in even our
most garden-variety § 1292(b) decisions. We have repeatedly entertained
appeals from summary judgment orders involving certified questions such as
“whether a plaintiff must prove an adverse effect on competition in order to
prevail under 7 U.S.C. §§ 192(a)–(b),”
Wheeler v. Pilgrim’s Pride Corp.
, 591
F.3d 355, 357 (5th Cir. 2009) (en banc), or whether workers were “entitled
to be paid the minimum wage,”
Castellanos-Contreras v. Decatur Hotels, LLC
,
I am accordingly doubtful that the principles the majority extracts
from a law review note and an unpublished decision from another circuit can
be reconciled with the full sweep of our case law. We have on multiple
occasions resolved discovery privilege disputes under § 1292(b).
See Hyde
Constr. Co. v. Koehring Co.
,
The question here not only “affect[s] the scope of the evidence” but
has a much more direct and immediate effect on the litigation than potential
limits on the exchange of documents among the litigants’ lawyers years
before trial if it ever occurs. It is undisputed that the district court’s standard
A decision, moreover, which is not even clearly the law of that circuit. The
Federal Circuit considered this issue at length in the context of a Rule 54(b) appeal from
the grant of a motion in limine to exclude damages evidence and concluded that § 1292(b)
would have been the proper avenue for an appeal.
See Ultra-Precision Mfg. Ltd. v. Ford
Motor Co.
,
for reasonable royalty damages forecloses the principal theory upon which Silverthorne’s witness has foundation to opine.
And even if our discovery privilege cases approach the outer bounds of § 1292(b), we are nowhere near those jurisdictional hinterlands. The certified question here is on all fours with the keystone Supreme Court precedent on § 1292(b) review. Yamaha Motor Corp., U.S.A. v. Calhoun , 516 U.S. 199 (1996), involved a summary judgment order deciding that federal maritime law provided the cause of action in the case, so that federal law preempted certain avenues of recovery under state law, id. at 203. The certified questions asked whether the plaintiffs might recover damages for loss of society, damages for future earnings, or punitive damages. Id. at 204. The Supreme Court held that damages were “properly governed by state law,” id. at 216—and did not address which state’s law this might be, or “the standards governing liability,” leaving such questions for the district court on remand, id. at n.14. So liability was far less established than in this case, and the Supreme Court’s decision, which left open the choice of law governing both liability and remedies, was far less dispositive.
Yamaha
is not an exception either. As the majority notes,
ante
at 7,
this court reviewed the dismissal of pain and suffering and punitive damages
for claims under an antidiscrimination statute.
Vaughan v. Anderson Reg’l
Med. Ctr.
,
As for our discretion, it weighs in favor of finishing what we started. The Castellanos-Contreras court noted that although “whether we should address these questions at this stage . . . is a question about which reasonable jurists can—and, in the case of this court, do—debate,” id. :
A motions panel of this court permitted Decatur to pursue this appeal, and the original panel exercised its discretion to hear the appeal. Others on our court might have had a different take had they been on either panel. But we are no longer at the beginning of this case; instead, we are very far along. Considerable time has passed, two panel opinions have issued, and the parties have briefed the merits three times: to the original panel, in connection with the rehearing petitions, and in merits briefing to the en banc court. Additionally, this case has been the subject of two oral arguments. After so much time and effort has been expended by both the parties and the court as a whole, the discretionary decision now becomes much different, and the majority of the court agrees it should be resolved in favor of hearing the merits.
Id. at 399–400.
As in
Castellanos-Contreras
, our discretion has already been exercised
to hear this appeal. I think those points of the majority opinion’s which are
well taken sound at most in the further exercise of our discretion to finish
what we started and render a decision. But when a motions panel has already
granted the appeal, when the parties and this court have already expended
time and resources on briefing and argument, all while the case is abated in
the district court, “the discretionary decision
now
becomes much different.”
Id.
at 399. Declining to decide this appeal now amounts only to “acquiescing
in a useless trial and later appeal” of the same issue with the same arguments.
Cf. Ex parte Tokio Marine
,
III. The question certified by the district court, and previously accepted by us, involves a provision in the DTSA which permits royalty awards in compensation for mere disclosure of trade secrets, regardless of the traditional rule in University Computing that the basis for a royalty award must be the defendant’s commercial use. The district court, however, followed University Computing and formulated the standard for a reasonable royalty award as “what the parties would have agreed to as a fair price for licensing the defendant to put the trade secret to the use the defendant intended at the time the misappropriation took place.” See Univ. Computing , 504 F.2d at 539. The district court thus certified the question of whether the legal test for a hypothetical negotiation as between a “willing buyer” and a “willing seller” was “case-specific,” or “whether a plaintiff is entitled to prove The DTSA does not preempt state-law remedies, which are not at issue. See 18 U.S.C. § 1838.
reasonable royalty damages under the DTSA using” third party “willing buyer(s).”
We would greatly assist the district court and speed the resolution of
this litigation if we were to answer the legal question as other circuit courts
have, and must, by “start[ing] with the statutory text.”
Rest. L. Ctr. v. U.S.
Dep’t of Labor
,
In conducting this analysis, the court may “address any issue fairly included within the certified order.” Yamaha , 516 U.S. at 205. I would answer the district court’s question in two parts. First, I would explain why the district court’s failure to allow for misappropriation by disclosure in its reasonable royalty standard was out of step with the plain text of the DTSA. Second, with the benefit of this analysis, I would explain why third parties may provide useful points of reference to arrive at a royalty remedy for such disclosure. The district court noted that “[t]he parties . . . disagree over who the appropriate
‘ willing buyer’ is in this inquiry: Defendant argues for a case-specific buyer (here, a seismic processing company such as Defendant), while Plaintiff argues for a willing buyer desiring to use the trade secret (here, an oil and gas exploration company).”
A. The district court assumed based on University Computing that only a defendant’s use was compensable by a reasonable royalty. However, by its plain text, the DTSA authorizes reasonable royalty damages not just for commercial use of misappropriated trade secrets but also for disclosure of them, as is alleged here by Silverthorne against Sterling. The statute allows courts to award “the damages caused by the misappropriation measured by imposition of liability for a reasonable royalty for the misappropriator’s unauthorized disclosure or use of the trade secret.” 18 U.S.C. § 1836(b)(3)(B)(ii).
The district court felt compelled to start not with the DTSA but with the test in University Computing , which applied Georgia’s common law of misappropriation at the time:
In calculating what a fair licensing price would have been had the parties agreed, the trier of fact should consider such factors as the resulting and foreseeable changes in the parties’ competitive posture; the prices past purchasers or licensees may have paid; the total value of the secret to the plaintiff, including the plaintiff’s development costs and the importance of the secret to the plaintiff’s business; the nature and extent of the use the defendant intended for the secret; and finally whatever other unique factors in the particular case which might have affected the parties’ agreement, such as the ready availability of alternative processes.
But this common law has since been succeeded by codification,
specifically first in the Uniform Trade Secrets Act (UTSA), as confirmed by
decisions interpreting states’ versions of that statute. A notable decision
recognizing this change was the Tenth Circuit’s in
StorageCraft Tech. Corp.
v. Kirby
, 744 F.3d 1183 (10th Cir. 2014). StorageCraft’s former director
shared its source code with a competitor, but claimed that he never used it
for profit and that there was no evidence the competitor did either.
Id.
at
1185. That, said then-Judge Gorsuch, was of little help under Utah’s UTSA,
which made reasonable royalties available “for a misappropriator’s
unauthorized
disclosure or use
of a trade secret.”
Id.
at 1186 (quoting Utah
Code Ann. § 13-24-4(1)) (emphasis added in original). This clear statutory
language led the Tenth Circuit to reject the common-law rule from
University
Computing
that “a misappropriation defendant generally had to ‘ put the
trade secret to some commercial use’ before a reasonable royalty award was
allowed,”
id.
at 1187 (quoting
Univ. Computing
,
Similarly, the Fourth Circuit instructively interpreted parallel
language in Maryland’s UTSA in
AirFacts, Inc. v. Amezaga
,
In 2016, after StorageCraft and before AirFacts , and over forty years after University Computing , the DTSA was enacted. As noted, the plain language of the statute permits courts in civil actions for misappropriation of trade secrets to award “the damages caused by the misappropriation measured by imposition of liability for a reasonable royalty for the misappropriator’s unauthorized disclosure or use of the trade secret.” 18 U.S.C. § 1836(b)(3)(B)(ii) (emphasis added). The House report noted that “Subparagraph (B)” is “drawn directly from § 3 of the UTSA.” H.R. Rep. No. 114-529, at 13 (2016), reprinted in 2016 U.S.C.C.A.N. 195, 207. The report referred to decisions of “courts interpreting the UTSA’s analogous provision.” Id. at n.13.
Accordingly, as explicated by our two sister courts in nearly identical
contexts, the DTSA by its plain text authorizes reasonable royalty damages
not just for use of misappropriated trade secrets but also for disclosure of
them, as alleged here. Indeed, other provisions of the statute confirm this
expansion of liability. Section 1836(b)(3) applies to “civil action[s] brought
under this subsection with respect to the misappropriation of a trade secret,”
thereby
incorporating 18 U.S.C. § 1839(5)(B), which defines
“misappropriation” to include some disclosures. Moreover, as a matter of
statutory scheme § 1836(b)(3)(B)(ii) applies “in lieu of” other remedies—
which are relatively likely to be inadequate in instances of disclosure, since
lost profits and unjust enrichment may reflect the defendant’s commercial
use.
See StorageCraft
,
The DTSA provides this remedy at the district court’s discretion. See 18 U.S.C. § 1836(b)(3). In recognizing it as a potential option, then-Judge Gorsuch cautioned that he “d[id]n’t mean to suggest that the reasonable See, e.g. , Utah Code Ann. § 13-24-4(1) (“In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator’s unauthorized disclosure or use of a trade secret.”); Md. Code Ann., Com. Law § 11-1203(c) (same).
royalty measure of damages is always the most sensible remedy.” StorageCraft , 744 F.3d at 1187. And the legislative history of the DTSA disavows “intent to encourage the use of reasonable royalties.” H.R. Rep. No. 114-529, at 13.
Congress would have expected courts to award a reasonable royalty
for disclosure in cases where, as with any type of damages award, the court
has determined that the remedy would provide fair compensation for the
wrong. The logic of the reasonable royalty is that when someone puts the
intellectual property of another to work, a royalty can be assessed as if on the
fruits of the endeavor.
See Tex. Advanced Optoelectronic Sols., Inc. v. Renesas
Elecs. Am., Inc.
,
The district court’s application of University Computing foreclosed this option from the outset. Rather than inquiring into the value of a license for “the use the defendant intended,” the district court should have framed the hypothetical negotiation as directed to a license that would have covered the alleged disclosures. At the threshold, the court should have focused not only on whether Sterling intended to use the trade secret in commerce, but on the more general question of whether the purpose could be attributed to Sterling of attempting to convert either the content or the confidentiality of Silverthorne’s trade secrets into its own profit upon which a prospective royalty could be reasonable to assess.
B. With this statutory framework in hand, I would turn to the specifics of the hypothetical negotiation. The district court has asked for our advice on how to apply the construct of a hypothetical negotiation between willing buyer and seller in order to arrive at a reasonable royalty. The district court was correct that the reasonable royalty is “case-specific” insofar as any damages remedy is specific to the case at hand—the scope of the misappropriation helps define the license over which the parties are hypothesized to be negotiating. But the district court applied this principle too rigidly. A hypothetical negotiation is only one way to measure a reasonable royalty. And when it is used, it is hypothetical . The question is how the parties would have acted, had they negotiated reasonably toward a license—not how they did act. The district court thus erred in concluding that a comparison to third-party benchmarks could never inform that assessment.
A reasonable royalty award is compensatory. The DTSA states that
reasonable royalty awards should “measure[]” “the damages caused by the
misappropriation.” 18 U.S.C. § 1836(b)(3)(B)(ii). Thus “[t]he ‘value of
what was taken’ . . . measures the royalty.”
Aqua Shield v. Inter Pool Cover
Team
,
But because the reasonable royalty reflects “the actual value of what
has been appropriated,”
Univ. Computing
, 504 F.2d at 537 (quoting
Vitro
Corp. of Am. v. Hall Chem. Co.
,
As an initial matter, this means that the district court erred in
positioning the hypothetical negotiation as the sole measure of a reasonable
royalty that it was permitted to consider. A court’s discretion to select a
“methodology for arriving at a reasonable royalty” in a particular case is not
so confined.
See SmithKline Diagnostics, Inc. v. Helena Lab’ys Corp.
, 926 F.2d
1161, 1164 (Fed. Cir. 1991). Besides analytical methods,
see, e.g.
,
Univ.
Computing
,
And when the district court does select a hypothetical negotiation to value the royalty, the method still cannot be too specific to the parties, because it requires assuming that the parties behaved precisely as they did not. Instead of keeping its trade secret close, the plaintiff licenses the secret out; instead of misappropriating, the defendant obtains a license. Of necessity, therefore, the exercise abstracts from the actual parties in order to posit a sequence of events that did not occur. As Chief Judge Markey (then of the Court of Customs and Patent Appeals) explained in the patent context:
Determination of a “reasonable royalty” after infringement, like many devices in the law, rests on a legal fiction. Created in an effort to “compensate” when profits are not provable, the “reasonable royalty” device conjures a “willing” licensor and licensee, who like Ghosts of Christmas Past, are dimly seen as “negotiating” a “license.” There is, of course, no actual willingness on either side, and no license to do anything . . . .
Panduit Corp. v. Stahlin Bros. Fibre Works
,
Because the reasonable royalty relates to the parties in this
counterfactual sense, the district court should not have framed the
hypothetical negotiation in the “case-specific” way that it did. The willing
negotiators are counterfactual constructions of the parties negotiating
reasonably “in the marketplace” toward a reasonable price.
See
LaserDynamics, Inc. v. Quanta Comput., Inc.
,
Of course, comparable licenses must be actually comparable. District
courts must take care when assessing evidence and methodology on the
reasonable royalty question, lest confusion amid “the individual and
collective flexibility of the factors . . . impede[] the hypothetical negotiation
from leading to an objectively fair and reasonable outcome.”
See
John C.
Jarosz & Michael J. Chapman,
The Hypothetical Negotiation and Reasonable
To be sure, these fictitious negotiators are “
the parties
in the marketplace” at the
relevant time.
LaserDynamics
,
Royalty Damages: The Tail Wagging the Dog
, 16 Stan. Tech. L. Rev. 769,
807 (2013). “[T]here must be a basis in fact to associate the royalty rates
used in prior licenses to the particular hypothetical negotiation at issue in the
case.”
Uniloc USA, Inc. v. Microsoft Corp.
, 632 F.3d 1292, 1317 (Fed. Cir.
2011);
see also ResQNet.com, Inc. v. Lansa, Inc.
,
Because a reasonable royalty may compensate for mere disclosure under the DTSA, as similarly explicated by the Tenth and Fourth Circuits, and the standard for such a royalty does not categorically rule out proof by means of comparable licenses, I respectfully dissent and would vacate the district court’s order and remand for reconsideration.