Importance of Evaluating Defendant’s R&D Acceleration and Related Cost Savings
More than six years have passed since President Obama signed into law the Defend Trade Secrets Act (“DTSA”) in May 2016. Since then, Federal trade secret actions have been on the rise, with an average of nearly 160 new DTSA cases filed each quarter since Q4 2020.
Ocean Tomo’s Expert Testimony practice has also experienced an uptick in trade secret-related assignments. Earlier this year, I shared our experience with the extraterritorial application of the DTSA in the matter of Motorola Solutions, Inc. v. Hytera Communications Corp., 17-cv-01973 (N.D. IL). https://www.oceantomo.com/insights/extraterritorial-application-defend-trade-secrets-act/. Other notable DTSA cases in which we were retained include: Waymo LLC v. Uber Technologies, Inc., 17-cv-00939 (N.D. CA); Comet Technologies USA Inc. v. XP Power LLC, 20-cv-06408 (N.D. CA); and Appian Corporation v. Pegasystems Inc., 20-cv-07216 (Fairfax County, VA).
As part of our work in these cases, we typically undertake two related evaluations: 1) the defendant’s accelerated R&D schedule, and 2) the defendant’s R&D cost savings resulting from the alleged misappropriation. These evaluations are important not only to our work concerning monetary recovery, but also to the case overall, as they often help to establish other elements of the trade secret claim and/or other relevant issues. Below are examples of claim elements or other relevant issues to which R&D cost analyses may relate depending on the specific facts of a case.
- The purported ascertainable nature of the asserted trade secrets – Trade secret defendants may contend that the asserted trade secrets are readily ascertainable through proper means and are therefore invalid. This contention may be rebutted however with evidence that demonstrates that the alleged misappropriation resulted in significant R&D cost savings to the defendant. Such R&D cost savings may be estimated, for example, based in part on the plaintiff’s actual R&D costs and development time periods.
- The defendant’s commercial use of the asserted trade secrets – “Use” of a trade secret, as an element of a trade secret claim, means commercial use by which a defendant seeks to profit. Regardless of whether or not a trade secret defendant has successfully commercialized an accused product or service as of the date of trial, evidence of the defendant’s use of asserted trade secrets to accelerate its R&D schedule may demonstrate a defendant’s commercial use.
- The defendant’s unjust enrichment – The R&D costs savings a defendant realizes from the misappropriation of asserted trade secrets is an independent measure of a defendant’s unjust enrichment.
- The time period for monetary recovery – A plaintiff’s period of recovery for damages or unjust enrichment may be limited to the time it would have taken the defendant to reverse engineer or independently develop the asserted trade secrets. Thus, the acceleration of a defendant’s R&D schedule may serve as the time period for calculating, for example, plaintiff’s lost profits or defendant’s unjust enrichment from the commercialization of accused products or services.
- The apportionment of value among asserted trade secrets – Depending on the record evidence, the R&D cost savings of each asserted trade secret may serve as a metric for apportioning among the asserted trade secrets the value of plaintiff’s claim for unjust enrichment.
- A reasonable royalty – According to the DTSA, “in lieu of damages measured by any other methods, the damages caused by the misappropriation [may be] measured by imposition of liability for a reasonable royalty for the misappropriator’s unauthorized disclosure or use of the trade secret.” Depending on the record evidence, a defendant’s R&D cost savings may inform a reasonable royalty for the defendant’s unauthorized use of the asserted trade secrets.
- The lost value of an improperly disclosed trade secret – A measure of recovery for the improper public disclosure of an asserted trade secret is the lost value of the trade secret. The value of an asserted trade secret may be measured based on the plaintiff’s actual R&D costs it incurred to develop the trade secret.
As illustrated above, an evaluation of a defendant’s accelerated R&D schedule and related cost savings is important in trade secret misappropriation cases as these analyses may address not only issues of monetary recovery, but also other elements of the claim and other relevant issues.
To explore this topic and how it could influence your case, please contact: Robert McSorley, JD, CPA at Robert.McSorley@jsheld.com or +1 312.327.4412.
Robert McSorley is a Managing Director in the Intellectual Property Disputes Financial Expert Testimony practice. He has 30 years of experience addressing the economic, financial, and accounting issues concerning commercial litigation. Mr. McSorley has focused on intellectual property disputes since 1998, and regularly evaluates the measures and amounts of monetary recovery for infringement/misappropriation. He has offered expert testimony in federal courts and in depositions on dozens of occasions, and courts and juries have adopted his opinions and conclusions.
 18 U.S.C. § 1839(3)(B); ChromaDex, Inc. v. Elysium Health, Inc., 301 F. Supp. 3d 963 (C.D. Cal 2017).
 RSM Production Corp. v. Global Petroleum Group, Ltd., 507 S.W.3d 383 (Tex. App. Houston 1st Dist. 2016).
 18 U.S.C.A. § 1836(b); Motorola Solutions, Inc. v. Hytera Communications Corp. Ltd., 495 F. Supp. 3d 687 (N.D. Ill. 2020).
 The period of recovery may be extended in order to eliminate commercial advantage that otherwise may be derived from the misappropriation.
 18 U.S.C.A. § 1836(b)(3)(B)(ii); Comet Technologies USA Inc. v. XP Power LLC, 20-cv-06408 (N.D. CA) DI 290, March 2, 2022.