On September 7, 2016, the Fifth Circuit in GlobeRanger Corp. v. Software AG affirmed a $15 million judgment in a trade secret case. Although much of the opinion focused on jurisdictional issues, the portion of the opinion on damages is noteworthy because—in this ever-changing climate on damages law in intellectual property cases—it is helpful to have an opinion that provides a guidepost for an adequate damages model instead of a critique of a flawed damages model.
In the GlobeRanger case, GlobeRanger accused Software AG of misappropriating its trade secrets relating to radio frequency identification (RFID) technology. GlobeRanger was subcontracting for the Navy RFID systems on a smaller basis (i.e., Navy base-by-base), but when the Navy ultimately wanted an enterprise-wide RFID system, it ceased its business with GlobeRanger and contracted with Software AG. Thereafter, when Software AG was creating the Navy’s enterprise-wide system, it accessed GlobeRanger’s trade secrets and then GlobeRanger sued for misappropriation of trade secrets.
At the district court level, the jury determined that Software AG misappropriated GlobeRanger’s trade secrets and found that the damages were $15 million. On appeal, among other issues, Software AG asserted that (a) GlobeRanger’s expert’s damages model was flawed and (b) that the $15 million award was excessive. As explained below, the Fifth Circuit rejected both arguments.
GlobeRanger’s expert gave an opinion that the appropriate damages were $19.7 million based on an unjust enrichment theory rooted in research and development costs that Software AG avoided. The expert calculated the $19.7 million in research and development costs based on the amount GlobeRanger had spent on the trade secrets it had used for its Navy solution. Even though the Fifth Circuit recognized that the expert failed to consider factors like Software AG’s preexisting RFID capabilities and that a more precise damages model might have been possible, the Fifth Circuit did not find that the district court should have struck the expert’s testimony. Rather, the Fifth Circuit recognized that Texas takes a flexible and imaginative approach to damages and that for an unjust enrichment theory, the costs a plaintiff spent on development—which is the method used by GlobeRanger’s expert—can be a proxy for the costs the defendant saved.
With respect to the $15 million award being excessive, Software AG argued that because it only earned $860,000 in profits on the Navy project, it was excessive to pay $15 million in damages. But the Fifth Circuit disagreed and reiterated that plaintiffs are not limited to damages based on the misappropriator’s profits. This is because the wrongdoer should not benefit from the hindsight perspective that its gamble of misappropriating trade secrets was not so profitable. As such, Software AG was liable for damages that was more than fifteen times its profits on the project at issue.
The GlobeRanger case, therefore, teaches an important lesson for plaintiffs and defendants in trade secret theft cases. For plaintiffs, be sure not to limit your damages theories to those based on the defendant’s revenues and profits, such as lost profits or reasonable royalty models. And for defendants, be aware that if found liable for trade secret theft your exposure can be much greater than your profits.