Defendants do not always profit from misappropriations of trade secrets. Where a plaintiff offers evidence that a defendant guilty of misappropriation was unjustly enriched, but the trier of fact rejects the evidence, what recovery, if any, is available to the plaintiff?
This question was answered recently by the Sixth Appellate District in Ajaxo Inc. v. E*Trade Financial Corp., 187 Cal.App.4th1295 (2010). Ajaxo, Inc. sued E-Trade Financial Corporation under the California Uniform Trade Secrets Act (“CUTSA”) for misappropriating Ajaxo’s wireless stock-trading software. Liability had been established in a prior trial, Ajaxo I. At issue in Ajaxo II was the extent of Ajaxo’s damages and remedies.
Under CUTSA, a plaintiff may recover (1) damages for its actual loss and (2) any amounts of unjust enrichment that are not taken in account in computing damages for actual loss. Civ. Code § 3426.3(a). However, “[i]f neither damages nor unjust enrichment caused by the misappropriation are provable, the court may order payment of a reasonable royalty for no longer than the period of time the use could have been prohibited.” Id. § 3426.3(b) (emphasis added). A “reasonable royalty” is a court-determined fee imposed upon a defendant for its use of a misappropriated trade secret.
At trial, Ajaxo offered evidence that E*Trade had been unjustly enriched by more than $300 million. E*Trade countered with evidence that its wireless-trading expenses far exceeded its wireless-trading commissions. The jury was persuaded by the latter, finding that E*Trade had actually lost more than $2 million through the misappropriation. Ajaxo then asked the trial court to award a reasonable royalty pursuant to subsection (b) of section 3426.3, on the grounds that neither actual loss nor unjust enrichment was “provable.” Reading section 3426.3(b) literally, the trial court concluded that it lacked discretion to award a reasonable royalty because unjust enrichment was theoretically “provable” – i.e., Ajaxo had sufficient evidence of unjust enrichment to support a monetary award if the jury chose to believe the evidence – but the proof at trial had resulted in a negative net amount.
In analyzing the issue, the Court of Appeal reviewed the common law in place before the Legislature’s enactment of CUTSA in 1984, where recovery of reasonable royalties was allowed when the plaintiff could not prove loss, and the defendant made no actual profit. The Court of Appeal could not find any indication in CUTSA’s legislative history that the Legislature had intended to depart from the common-law rule. The court also noted that the public policy behind trade-secret laws was to promote the sharing of knowledge and to reward innovation; the trial court’s interpretation would not promote either purpose.
Accordingly, the Court of Appeal reversed, holding that where a defendant has not realized a profit or other calculable benefit as a result of its misappropriation, unjust enrichment is not “provable,” and a court then has discretion to award a reasonable royalty. Evidence of negotiations between the parties pertaining to licensing Ajaxo’s software, as well as evidence of the price E*Trade paid for a license from a co-defendant, could serve as a basis for determining the amount of a reasonable royalty.
Ajaxo represents a victory for trade-secret plaintiffs, as it bolsters the ability to recover meaningful damages under CUTSA. However, the decision may result in an anamoly: what happens when a defendant profits only marginally from the misappropriation – say by $100? Under section 3426.3(b), the plaintiff would only be entitled to the amount of the unjust enrichment, $100 – though the amount of a reasonable royalty might be far greater – whereas he or she may be entitled to the full reasonable royalty amount in a net-loss situation. Is it time to amend CUTSA to allow an election between recovery of a reasonable royalty and amounts of unjust enrichment/actual loss?