"First published in Law360"

A plaintiff considering whether to assert trade secret misappropriation and patent infringement claims in the same lawsuit, must craft its damages theories carefully to avoid running afoul of the prohibition against double recovery. The issue — which can be a complex one — was a focus in the recent Federal Circuit decision, Texas Advanced Optoelectronic Solutions Inc. v. Renesas Electronics America Inc. In that case, the court held that a plaintiff could not recover damages for both trade secret misappropriation and patent infringement, where the award for infringement was based on a subset of the sales that formed the basis of the award for misappropriation. In reaching its conclusion, the Federal Circuit reaffirmed the long-standing prohibition against double recovery and, in doing so, provided useful insights for litigants seeking damages on both patent and trade secret claims.

The Double Recovery Rule at the Federal Circuit

The rule against double recovery finds its roots in the equitable principle disfavoring unjust enrichment. Simply put, the double recovery rule prevents a plaintiff from receiving duplicative recovery for the same injuries or losses arising from the same conduct or wrong. In the patent context, once a court compensates a patentee by awarding damages for lost profits and/or a reasonable royalty, the patentee cannot receive additional damages for conduct arising out of its infringement claims.

The Federal Circuit has applied the double recovery rule to a number of intersecting areas of law. In Aero Products Intern. Inc. v. Intex Recreation Corp., the plaintiff asserted claims for patent and trademark infringement in the same lawsuit. After a jury trial, the district court found the claims to be valid and infringed, and awarded Aero $2.95 million for patent infringement damages and $1 million in trademark infringement damages. On appeal, the Federal Circuit vacated the trademark infringement damage award as an improper double recovery to the patent infringement damages. According to the court, the award was an impermissible double recovery because the trademark damages were based on the “same set of operative facts” as the patent infringement claim, i.e. the sale of infringing goods bearing the infringed trademark. In this case Aero calculated its proposed trademark damages solely on the patent infringement damages calculations, and this choice of damages theory compelled the court’s conclusion on improper double recovery.

In Junker v. Eddings, the court affirmed the district court’s denial of the plaintiff’s motion for judgment as a matter of law to recover damages arising from a claim of breach of a nondisclosure agreement, in a lawsuit where claims for design patent infringement were also asserted. The court affirmed the district court’s holding, in part, because the breach of contract damages the patentee sought were based on an amount “identical to the dollar amount the jury awarded him for infringement.” The court reasoned that because the patentee sought damages based on the same sales on which he obtained damages for the proven design patent infringement, his additional breach of contract claim would constitute a double recovery.

Similarly, in Catalina Lighting Inc. v. Lamps Plus Inc., the Federal Circuit reversed-in-part the district court’s damages award for infringement of utility and design patents. The district court awarded the patentee separate recoveries for infringement of both patents calculated from the same sales of infringing lamps. The district court also found Catalina liable for reasonable royalties under 35 U.S.C. § 284. The Federal Circuit reversed this decision as a double recovery, reasoning that, while the patentee is entitled to damages for each infringement, it is not entitled to a further recovery from the same sale, including a reasonable royalty.

The Texas Advanced Decision and Looking Forward

The rule against double recovery may become more relevant in light of the passage of the Defend Trade Secrets Act in 2015. Since trade secrets and patents often cover interrelated and overlapping areas of technology, it may be appealing and more efficient to present both issues in a combined action. These efficiencies, however, may be undermined by the separate modes of recovery that may be needed to obtain adequate relief.

The Texas Advanced Optoelectronic Solutions opinion illustrates how these issues can arise. In that case, the parties each developed and sold ambient light sensors used in electronic devices to sense incident light and adjust screen brightness in response to it. Although, the parties entered into confidential merger negotiations, the negotiations ultimately failed. Soon after the negotiations ended, Intersil released new sensors that allegedly used a design that TAOS disclosed during their negotiations. TAOS filed suit, and a jury returned a verdict for TAOS awarding over $77 million in damages for patent infringement, breach of contract, tortious interference and — most relevant to the Federal Circuit opinion — exemplary damages for trade secret misappropriation and disgorgement of profits due to the misappropriation claim.

On appeal, the Federal Circuit significantly reduced the amount of damages awarded to TAOS. It did so in part because it found that the district court erred in concluding that the award for patent infringement was not duplicative of the award for trade secret misappropriation. The Federal Circuit found error because the district court-imposed liability for both trade secret misappropriation and patent infringement using the same basis: Intersil’s use of TAOS’s photodiode array structure. The awards for patent infringement and trade secret misappropriation were based on sales of the same four products and more than a dozen others. Citing Aero, the court found that the patent awards constituted an impermissible double recovery because all of the damages awarded to the plaintiff “flowed from the same operative facts: sales of the [same] infringing [products].”

As explained by the Federal Circuit, “double recovery [was] clear” from TAOS’ economic expert’s damages calculations. TAOS’s expert calculated a disgorgement award for the trade secret misappropriation in which all profits made from sales of the infringing products (plus all profits made from sales of additional products) would go to TAOS. The expert the used the same sales for the infringing products to calculate a reasonable royalty for the patent infringement based on a fraction of the total profits for those infringing products. The Federal Circuit concluded that “the royalty award for patent infringement was [] duplicative of some portion of disgorgement award for trade secret misappropriation, to the extent the awards cover the same period.” Because the overlap in the damages analysis was improper, the Federal Circuit vacated the award of damages for patent infringement and remanded the case to the district court.

Conclusion

35 U.S.C. § 284 provides for an award of damages to a patentee “adequate to compensate for the infringement, but in no event less than a reasonable royalty of the use made of the invention by the infringer ... .” A patent owner, however, must still carry its burden of proof and submit evidence of damages at trial. A patent owner’s damages theory must stay true to both the law and the facts of the case. Texas Advanced therefore serves as a reminder for litigants of the pitfalls associated with bringing a case with varied causes of actions. When each cause of action has its own damages measures, it becomes more challenging to avoid duplicative damages. A patentee must be mindful that any damages theory that it presents must not conflict with the law, go beyond sound economic principles or stem from speculation or guesswork. If a patentee’s damages theories do not meet these requirements, a court can significantly reduce or award zero damages. Trial counsel should carefully lay the groundwork for its damages theories to avoid these potential avenues of attack on appeal.