Trade Secrets: Measuring Damages For Misappropriation
May 22, 2015
When your trade secrets are stolen, you might sue the ex-employee who stole them, or the competing business that’s now in possession of them, or both. What’s an appropriate measure of damages when your trade secrets are stolen? It can be your lost profits caused by the misappropriation, if you can prove them. Or, it can be your competitor’s unfair gain caused by his/her/its knowledge of your trade secrets, again, if you can prove them. What if the misappropriation is clear, but you can’t prove that you suffered any lost profits or that there was any specific unfair gain by a competitor? What if, for whatever reason, you determine that the only appropriate legal target is the disloyal ex-employee, and you cannot prove any specific market harm caused by the misappropriation? Just because you cannot prove lost profits or any unfair gain by a competitor doesn’t mean you haven’t suffered damage by the misappropriation. One federal appeals court has determined that the appropriate measure of damages in such a case is a full refund by the ex-employee of her severance pay: $735,000.
In Hallmark Cards, Inc. v. Murley, 703 F.3d 456 (8th Cir. 2013), Murley was a top marketing executive at Hallmark with knowledge of and access to its confidential business information. In 2002 her position was eliminated and she was given a severance package including a $735,000 payment. As part of her severance agreement, Murley agreed not to use, and not to retain, any information or documents of Hallmark, and not to work for a Hallmark competitor for eighteen (18) months. In 2006, after her non-competition period was over, she began consulting for Recycled Paper Greetings (RPG). It was later discovered, and Murley admitted, that she disclosed confidential Hallmark information to RPG, but this was unknown to Hallmark at the time. In 2009, RPG was bought out by American Greetings. Before American Greetings closed on its purchase of RPG, it invited Hallmark to have a neutral third-party review RPG’s records to ensure that there was no Hallmark confidential information in them. (The court opinion does not say why American Greetings made this gesture to Hallmark, but it may have been because American Greetings knew that a former top executive at Hallmark (Murley) had worked for RPG, and didn’t want any trouble from Hallmark after it purchased RPG.) The third-party reviewer found Hallmark documents in RPG’s records and alerted Hallmark. Hallmark filed suit against Murley for misappropriation of trade secrets, etc. In the course of the lawsuit, Hallmark learned that in 2007, while Murley was consulting for RPG, an RPG executive had arranged to have Murley’s hard drive examined, and that, just before that examination took place, Murley had deleted a number of Hallmark files from the drive.
At trial, Hallmark asked the jury to award it $735,000, which represented the severance payment it had made to Murley, plus another $125,000, which represented the consulting fee that Murley had gotten from RPG, for a total of $860,000. The jury did just that.
On appeal, Murley argued that the jury should not have awarded Hallmark the $125,000 that represented her consulting fee from RPG. The appeals court agreed, saying that this amount did not reflect any harm caused to Hallmark. Thus, it reduced the jury award by $125,000.
Reimbursement To Hallmark Of Its Severance Payment To Murley
Murley also argued that the jury should not have awarded Hallmark the full return of its $735,000 severance payment to her, because she had complied with some of her obligations in the severance agreement, such as not working for a Hallmark competitor for 18 months. Here, the appeals court disagreed. It said that because Murley had flagrantly violated her confidentiality obligations to Hallmark, the jury’s reimbursement to Hallmark of the full $735,000 severance payment was not excessive, and it affirmed this part of the award.
Penalty For Murley’s Destruction Of Evidence
As an aside, it should be noted that Murley also objected on appeal to the trial court’s “adverse inference” jury instruction against her. That is, the trial court had instructed the jury that it could “infer” that the files that Murley had deleted from her hard drive in 2007 would have been helpful to Hallmark’s legal case against her. The appeals court ruled that this was a perfectly proper instruction, given her flagrant conduct in deleting those files just before her drive was about to be inspected – even though the deletion occurred before there was any lawsuit pending against her.
When an ex-employee misappropriates your trade secrets, and you can’t prove financial harm specifically caused by the misappropriation, consider demanding the return of any severance payments made to the ex-employee.
American Greetings appears to have done the right thing when purchasing RPG: checked to make sure it wasn’t inadvertently acquiring any confidential data of its competitor (Hallmark). Businesses could consider taking this strategy to heart.
Developments Since The Murley Decision
In the two years since its issuance, I haven’t found any decisions outside the Eighth Circuit citing Murley (except for one Federal Claims Court decision). Interestingly, however, later in 2013 the Supreme Court of my home state of Vermont came to a similar conclusion on recoverable damages in the context of a breach of a non-compete agreement in Foti Fuels, Inc. v. Kurrle Corporation, 2013 VT 111 (Dec. 13, 2013). In Foti, the Vermont Supreme Court reversed the trial court’s dismissal of defendant’s counterclaim against plaintiff for violating a non-competition agreement. The trial court had dismissed that claim because defendant had failed to show lost profits from plaintiff’s breach. In reversing, the Supreme Court stated held that in seeking damages for plaintiff’s breach of the non-compete (i.e., a contract), defendant was not limited to trying to prove consequential damages. Instead, the defendant could seek to recover the value of the non-competition agreement itself, as evidenced by the separate consideration assigned to that agreement in the parties’ purchase and sale documents. The defendant’s inability to establish consequential damages from the breach does not foreclose it from seeking restitution, i.e., a refund of the consideration it had paid to secure the non-competition agreement from the plaintiff, the Court held. Restitution is an appropriate remedy at law for the unjust enrichment that would occur if a breaching party to the contract were permitted to retain the benefit of the its non-performance. Indeed, concluded the Court, such a measure of the loss suffered by the non-breaching party may be the most appropriate where consequential damages, such as lost profits, are speculative and thus difficult to establish.
Where proving consequential damages (i.e., lost profits) from misappropriation of your trade secrets or breach of a non-competition agreement would be difficult or impossible, consider instead seeking to recover the severance payment you paid to ex-employee (i.e., misappropriator) or the value assigned to the non-competition agreement, if separate value was assigned.
I’d be interested to hear from other practitioners as to whether they are aware of similar damages holdings in their jurisdictions.