In a matter involving misappropriation of trade secrets related to software tools used in the healthcare industry, Syntel Sterling Best Shores Mauritius Ltd. v. Trizetto Grp., Inc., 68 F.4th 792, the Court of Appeals for the Second Circuit’s (“Second Circuit”) Order identified factors that may guide the recovery of damages based on avoided costs under the Defend Trade Secrets Act (DTSA). Citing the specific facts of the case, the Second Circuit ruled that the jury’s verdict awarding TriZetto $284,855,192 in compensatory damages based on Syntel’s avoided development costs was not permissible under the DTSA.
As it relates to remedies for trade secret misappropriation under the DTSA, the Second Circuit stated that “the DTSA permits the recovery of compensatory damages, punitive damages, and attorney’s fees.” With respect to compensatory damages, the DTSA allows a court to award: “(1) ‘damages for actual loss caused by the misappropriation;’ and (2) ‘damages for any unjust enrichment caused by the misappropriation . . . that is not addressed in computing damages for the actual loss;’ or (3) ‘in lieu of damages measured by any other methods . . . a reasonable royalty for the misappropriator’s unauthorized disclosure or use of the trade secret.’” While the Second Circuit affirmed that unjust enrichment (or restitution) in the form of avoided costs can be an available remedy for a trade secret misappropriation claim under the DTSA, the availability of avoided costs needs to be analyzed under the particular facts of each case.
Apart from its consideration of the availability of compensation based on avoided costs, the Second Circuit found that Syntel’s unjust benefit from misappropriating TriZetto’s trade secrets of $27 million in revenue and approximately $800,000 in profits represented “the only enrichment Syntel unjustly gained at TriZetto’s expense, and they were ‘addressed in computing damages for [TriZetto’s] actual loss.’” Separate from a calculation of unjust enrichment, TriZetto’s expert testified that the company experienced an actual loss of $8.5 million in profit from Syntel’s misappropriation. The Court explained that “Syntel realized $823,899 in unjust profits ‘at the expense of’ TriZetto’s $8.5 million profit opportunity.”
TriZetto’s primary damages claim was based on Syntel’s approximately $285 million in avoided costs related to the development of the misappropriated trade secrets. Despite TriZetto’s claim and the jury’s award, the Second Circuit concluded that “TriZetto suffered no compensable harm supporting an unjust enrichment award of avoided costs.” As part of its finding that avoided costs were improper in this case, the Second Circuit stated that “[t]he district court’s permanent injunction ended Syntel’s use of TriZetto’s trade secrets,” and Syntel’s misappropriation did not diminish or destroy the trade secrets.
The Second Circuit differentiated its analysis and ruling from rulings of other courts, providing guidance that “future cases may present a range of factual scenarios concerning a defendant who has realized only modest profits from its misappropriation of trade secrets but has, nevertheless, been enriched by avoided costs in a larger amount at the expense of the secret holder.” Such scenarios included “the extent to which the defendant has used the secret in developing its own competing product, the extent to which the defendant’s misappropriation has destroyed the secret’s value for its original owner, or the extent to which the defendant can be stopped from profiting further from its misappropriation into the future.”
While trade secret misappropriation remedies can be flexible and imaginative, it is important to recognize that the specific facts and circumstances of each matter will guide the determination of the appropriate remedy.
To explore this topic and how it could influence your case, please contact Paul Benson at [email protected] or Michael McGinnis at [email protected].