C.A.G. Insights

Disgorgement of Defendant’s Profits as Damages for Trade Secret Misappropriation, and Reduction of Damages for Accessibility by Proper Means

Analyzing the monetary harm to a business through misappropriation of one or more trade secrets is fraught with difficulty.   How much does each specific trade secret contribute to the trade secret owner’s profit on each product? How important was each trade secret to the defendant’s accused product? What was the development timeline and did the trade secret provide an “early mover” development head-start. What are the relevant market shares?   Are there commercial substitutes? Do consumers have a preference?   Is that preference a basis of demand for the product? Did the defendant sell at a higher margin than the trade secret owner and make more profit per sale that the owner of the trade secret makes?   A relatively rare remedy that addresses some of these concerns is known as “disgorgement” where a judge (not a jury) may award the trade secret owner up to the total profit earned on sales of a product that incorporates the accused trade secret.

Disgorgement was recently analyzed in detail by the United States Court of Appeals for the Federal Circuit in Texas Advanced Optoelectronic Solutions, Inc. v. Renesas Electronics America, Inc., no. 2016-2121, 2208 and 2235 (Fed. Cir. May 1, 2018).   The plaintiff, Texas Advanced Optoelectronic Solutions, Inc., (“TAOS”) and the defendant (“Renesas” f/k/a as its predecessor Intersil Corp. with respect to the conduct at issue) both manufactured ambient light sensors for electronic devices such as mobile phone screens. The sensors detect ambient light and adjust the power to the screen based on the amount of ambient light detected one problem with using a silicon-based photo diode as the sensor is that such a sensor detects both visible and infrared light (such as from an incandescent light bulb).   If the infrared light causes a signal that overestimates the amount of ambient visible light, then an improper screen lighting setting will be generated.

In the early 2000s, TAOS developed and patented a solution based on having two sets of photodiode sensors. One set was shielded from infrared light. The second set was not shielded.   The patent disclosed an embodiment with two separate sensor wells comprising one shielded well, and one unshielded well in a 1:1 ratio. The patent also described a separate embodiment “interleaving” the two types of wells in a repeating pattern in a 3:1 ratio. TAOS continued to improve the design and eventually introduced a sensor that combined the 1:1 ratio with the interleaving feature. In the TAOS system, the signals from the two sensors were compared, and the contribution from infrared could then be excluded. In 2004, Renesas sought to license the technology from TAOS. TAOS declined but suggested the parties seek a merger instead, and a confidentiality agreement was signed.   The merger negotiations ultimately failed, and the parties subsequently competed in selling sensors to Apple for various cell phone and laptop products.

In 2008, TAOS brought suit against Renesas in federal court in the Eastern District of Texas alleging both patent infringement and misappropriation of trade secrets, and other claims.   TAOS alleged improper use of three trade secrets by Rensas: (1) financial information of TAOS related to the manufacture of the sensors that Renesas used to prepare a “build vs. buy” analysis which was a basis in part for the decision by Renesas in not merging with TAOS; (2) a “packaging roadmap” specification regarding glass packaging involving its cost (higher than for plastic), allegedly used by [Renesas] in deciding to use plastic packaging instead of glass; and (3) the 1:1 ratio interleaved photodiode well structure, allegedly used by Renesas in modifying its products. The case was went to trial including both the patent claim and the trade secret claim, although the trade secret claim was based on the Texas common law since the trial predated the more recent enactment of the Texas Uniform Trade Secrets Act as well as the federal Defend Trade Secrets Act (“DTSA”), which could both now be applicable.

At trial the jury awarded: (1) $73,653.51 as a reasonable royalty for patent infringement (over 98% of the infringing sales were found by the court to be outside the United States and thus not subject to U.S. patent law); (2) $48,783,007 in disgorgement of [Renesas’] profits and $10 million in exemplary damages for trade secret misappropriation; (3) $12 million as a reasonable royalty for breach of contract; and (4) $8 million in lost profits and $10 million in exemplary damages for tortious interference. With respect to the first claimed trade secret regarding the TAOS financial information, the Federal Circuit on appeal found that use of such information to prepare a “build vs. buy” analysis, was a permissible use by Renesas. The Federal Circuit also held that because Renesas was already using plastic packaging prior to the exchange of information subject to the confidentiality agreement, that the second category of alleged trade secrets related to the “packaging roadmap” was not protectable as a trade secret. The Federal Circuit reasoned: “[Renesas] did not misappropriate information that it already had. Use of such independently possessed information is no more a misappropriation than is use of one’s ‘independent invention,’ against which ‘trade secret law does not offer protection.’” Thus, the Federal Circuit concluded that damages for misappropriation of a trade secret could not be awarded based on the first two claimed categories of trade secrets.

With respect to the third category of alleged trade secrets regarding the improved sensor using the 1:1 ratio of “interleaved” shielded and unshielded wells, the Federal Circuit found that such a structure was not disclosed by the TAOS patent, and was subject to protection as a trade secret.   The Federal Circuit affirmed that this photodiode array structure had been misappropriated by Renesas.

The Federal Circuit then moved on to the issue of damages. This appeals court held that because the jury based monetary damages on misappropriation of all three trade secrets without apportionment, the monetary damages award would be vacated in its entirety and the issue remanded for further factual findings by the district court. As part of that determination, the Federal Circuit instructed the district court to consider both disgorgement of the defendant’s profits, as well as the date no later than January, 2006 when the 1:1 “interleaved” photodiode array structure was “accessible by proper means” once TAOS released its improved product and Renesas “reverse-engineered” it.

The Federal Circuit cited the “Texas rule” articulated by the Fifth Circuit that:

[o]ne may use his competitor’s secret process if he discovers the process by reverse engineering applied to the finished product.”  Secrecy protection terminated at the end of the period of time it would have taken [Renesas], after [Renesas’] permissible discovery of the photodiode structure, to recreate that structure in its own products.

The appeals court then limited the duration of monetary damages for disgorgement of defendant’s profits to those profits that predate the time of the proper accessibility plus the duration of a head-start period to be determined on remand to the district court.  The Federal Circuit reasoned that a defendant liable for trade secret misappropriation was not entitled to dissolution of an injunction immediately upon publication of the trade secret in a patent application, because such dissolution would give the defendant a “head start” on the competition, and that the conclusion of this “head-start” period ends a trade secret owner’s right to monetary relief for misappropriation.

The Federal Circuit then considered whether the amount of disgorgement of profits was to be determined by a judge or a jury.  TAOS argued to the appeals court that TAOS had a right under the 7th Amendment to the U.S. Constitution to a jury trial on the issue of the amount of disgorgement of Renesas’ profits for trade secret misappropriation based upon the prior availability of such remedy under English common law when the Amendment was adopted.  The court of appeals conducted an exhaustive analysis of the availability of “restitution” (as “disgorgement” is sometimes called) under English law in 1791 and held that such restitution for trade secret misappropriation was not available at common law in England and therefore can today only be awarded by a judge in equity, and not by a jury:

Once claims of trade secret misappropriation came to be accepted in the Nineteenth Century, several decisions quickly recognized that a plaintiff properly asserting jurisdiction in equity could also request incidental monetary relief in the form of disgorgement (restitution) of the defendant’s profits based on the defendant’s past use of the trade secret. E.g., Green v. Folgham, 57 Eng. Rep. 159, 162–63 (Ch. 1823) (defendant undisputedly considered as holding trade secret in trust under the settlement was decreed to account for profits, which would be awarded to plaintiffs; the case was then referred to the courts of law, where a jury would decide the value of the trade secret to award further monetary relief to plaintiffs); see Vickery v. Welch, 36 Mass. 523, 527 (1837) (in a debt action on a bond brought in court of law, recognizing a trade secret as property, deciding that the bond had been forfeited, and stating that the plaintiff “may be heard in chancery [equity] touching the damages”); see also Restatement (First) of Restitution § 136 cmt. a (1937) (“The usual method of seeking restitution is by a bill in equity, with a request for an accounting for any profits which have been received.”). In contrast, we have been pointed to no sound basis for concluding that, for this wrong, the law courts would have awarded disgorgement of the defendant’s profits, notwithstanding that the law courts, through a writ of assumpsit, sometimes awarded such relief for certain other wrongs.

In conclusion, this opinion by the Federal Circuit illustrates three important considerations for parties involved in trade secret litigation:  (1) disgorgement of the defendant’s profits is an available remedy for trade secret misappropriation, but such remedy must be determined by the judge, and not the jury; (2) permissible reverse engineering does not constitute misappropriation of trade secrets; and (3) once a product becomes available to the market and can be permissibly reverse engineered, then monetary damages for misappropriation of the former trade secret(s) is cut off after the expiration of a “head-start” period.