The California Court of Appeal for the Sixth District recently provided guidance on whether a defendant should have to pay reasonable royalties for trade secret misappropriation even if the defendant did not profit from the trade secrets. The dispute in Ajaxo, Inc. v. E*Trade Financial Corporation, 187 Cal. App. 4th 1295 (2010) began when Ajaxo and E*Trade entered into a confidentiality agreement to protect Ajaxo’s trade secrets while E*Trade evaluated Ajaxo’s wireless stock trading software. E*Trade ultimately selected Everypath, Inc. as its wireless vendor, but Ajaxo allegedly later discovered that E*Trade and Everypath had used Ajaxo’s trade secrets in the software developed by Everypath. Ajaxo sued E*Trade for trade secret misappropriation under the California Uniform Trade Secrets Act, Cal. Civ. Code §§ 3426, et seq. (CUTSA).
At the trial court level, E*Trade was found liable for willful and malicious misappropriation of Ajaxo’s trade secrets. Ajaxo elected to pursue damages only based on E*Trade’s unjust enrichment from the misappropriation, but the jury found no unjust enrichment had occurred since E*Trade showed it had actually lost over $2 million on the Everypath collaboration. Ajaxo then requested reasonable royalties from the court, since § 3426 of CUTSA allows this remedy when both (1) the plaintiff’s actual losses and (2) the defendant’s unjust enrichment are not “provable.” The court rejected Ajaxo’s request, finding that unjust enrichment was “provable” under CUTSA, but was simply not proven by Ajaxo as a matter of fact. Ajaxo appealed this decision.
The California appeals court explored the CUTSA term “provable” in deciding whether the trial court erred in refusing to award reasonable royalties to Ajaxo. Ajaxo argued that unjust enrichment was not “provable” because the jury ultimately decided that E*Trade was not enriched by the misappropriation. E*Trade argued that Ajaxo presented evidence that could have been sufficient to prove enrichment, but the jury had refused to believe Ajaxo’s evidence, so unjust enrichment was “provable” in theory but not proven in practice by Ajaxo.
The appellate court agreed with Ajaxo. Looking to CUTSA’s legislative history, the court determined that CUTSA was intended to track the common law practice of permitting reasonable royalties when the plaintiff could not prove actual loss and the defendant made no actual profits. The court further found that, from a public policy standpoint, trade secrets law is intended to maintain commercial ethics standards, which would be better maintained under Ajaxo’s interpretation of “provable.”
The appellate court also found that E*Trade was estopped from arguing that Ajaxo could have proven an actual loss because Ajaxo opted not to try to prove it. Under CUTSA, if either E*Trade’s enrichment or Ajaxo’s actual loss were “provable,” then the reasonable royalties remedy would not apply. However, the court found that since E*Trade had already taken the position that Ajaxo had suffered no actual loss, E*Trade was now estopped from arguing Ajaxo should have proven an actual loss did occur.
Thus, the appellate court held that neither actual loss nor unjust enrichment was provable, and so remanded the matter to the trial court for determination of reasonable royalties. This decision clarifies that even if a defendant did not profit from its trade secret misappropriation, it may still have to pay reasonable royalties to the plaintiff.