Addressing unresolved issues surrounding damages calculations for misappropriation of trade secrets under New York law, the US Court of Appeals for the Second Circuit certified two questions to the New York Court of Appeals: (1) does New York law recognize avoided costs as a permissible measure of damages for misappropriation of trade secrets, unfair competition and unjust enrichment, and (2) if so, is prejudgment interest mandatory where a plaintiff recovers the defendant’s avoided costs? E.J. Brooks Co. v. Cambridge Security Seals, Case Nos. 16-207-cv(L),-259-cv(XAP) (2d Cir., June 5, 2017) (Lohier, J).

E.J. Brooks Co. d/b/a TydenBrooks, a large plastic security seal manufacturer, sued Cambridge Security Seals (CSS) and former TydenBrooks employees for misappropriation of trade secrets, civil conspiracy, unfair competition and unjust enrichment under New York law, alleging that CSS had copied TydenBrooks’s manufacturing process. The district court jury found for TydenBrooks on three of the four claims (misappropriation of trade secrets, unfair competition and unjust enrichment). 

TydenBrooks sought recovery of CSS’s “avoided costs,” which would be calculated based on the cost savings to CSS resulting from not having to develop its own manufacturing process. Under this theory, the district court ultimately awarded TydenBrooks $3.9 million, but the next day TydenBrooks moved to amend the judgment to include prejudgment interest. The district court denied TydenBrooks’s motion, claiming that the current award included the time period during which prejudgment interest would accrue, and therefore the addition of the prejudgment interest would be a windfall to the plaintiff. 

On appeal, the Second Circuit concluded that neither the Second Circuit nor the appellate New York State court had explicitly recognized “avoided costs” as a measure of damages for this type of case. The issue, therefore, presented an “unresolved policy decision that the New York Court of Appeals is better situated [to handle].”

Similarly, with regards to the issue of mandatory prejudgment interest, the Court found that the issue was best left to the New York Court of Appeals. The district court’s jury instructions were that the damages should be calculated from the date of misappropriation or unfair use through the verdict date. As the Second Circuit noted, “[u]nder an avoided costs theory of damages, in which the award to TydenBrooks is measured in terms of costs that CSS did not pay rather than in terms of money TydenBrooks lost, any prejudgment interest award could well constitute a windfall because TydenBrooks was not deprived of the use of those avoided costs.” The issue results from the tension between § 5001(a) of the CPLR, which suggests that prejudgment interest is mandatory in this type of case, and New York case law that suggests mandatory prejudgment interest is not appropriate where it would result in a windfall to the plaintiff.

Ultimately, the Second Circuit affirmed the district court’s decision on liability, reserved its decision on damages, and certified the issues of “avoided costs” recovery and mandatory prejudgment interest to the New York Court of Appeals.

Practice Note: It is expected that the New York Court of Appeals will bring long-awaited clarity regarding recovery of damages for cases involving misappropriation of trade secrets, unfair competition and unjust enrichment.