Sixth District Holds That Reasonable Royalties Available When a Defendant Has Not Realized a Profit or Other Calculable Benefit

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Today, in Ajaxo Inc. v. E*Trade Financial Corporation, — Cal.Rptr.3d —-, H033631, 2010 WL 3386479 (Cal. Ct. App. 6th Dist. Aug. 30, 2010), the Sixth District held that where a defendant has not realized a profit or other calculable benefit as a result of his or her misappropriation of a trade secret, unjust enrichment is not provable within the meaning of section 3426.3(b). Thus, the trial court had discretion pursuant to section 3426.3(b) to order payment of a reasonable royalty.

Plaintiff Ajaxo Inc. (Ajaxo), sued defendant E*Trade Financial Corporation (E*Trade) for misappropriation of trade secrets under the California Uniform Trade Secret Act.  E*Trade was found liable in a prior jury trial, where a jury determined that E*Trade had willfully and maliciously misappropriated Ajaxo’s trade secrets.  Id. *1.  A second trial determined the extent to which E*Trade had been unjustly enriched by its misappropriation.  Id.

Ajaxo elected to pursue damages measured only by E*Trade’s unjust enrichment, and it submitted evidence intending to show that E*Trade had been enriched by more than $300 million. Id. The jury rejected the evidence, accepting instead E*Trade’s data, which showed that E*Trade had lost over $2 million.  Id. Ajaxo asked the trial court to award reasonable royalties, the court rejected the request, concluding that unjust enrichment was “provable,” there was just “no net amount in terms of actual damages.”  Id. Ajaxo appealed, and the Sixth District reversed.

The court noted that damages may sometimes “not be proved, as happened here, where the jury concludes that the defendant did not profit from its wrongdoing. Either way, it is not provable for purposes of section 3426.3, subdivision (b).”  Id.

Contentions

Ajaxo contended on appeal, among other things that “the trial court erred in excluding evidence of investments in Everypath, which, Ajaxo claims, would have supported its unjust enrichment claim against E*Trade” and “the trial court had discretion to award reasonable royalties under section 3426.3, subdivision (b) because the verdict demonstrated that unjust enrichment is not provable.”

Everypath Investment Evidence

The court held that Ajaxo’s expert’s two alternative theories of unjust enrichment were irrelevant.  “In addition to his primary theory based upon the percentage of new clients acquired during the pertinent time period, Bratic posited that E*Trade had been benefitted by Everypath’s receipt of $63.5 million in venture funding just a few months after E*Trade first disclosed the trade secrets to Everypath. Bratic’s second alternative theory was that E*Trade had been unjustly enriched by $60 million, the market value Bratic assigned to Ajaxo’s trade secret based upon the increased valuation of Everypath.”

The court held that unjust enrichment, “as the phrase is used here, is, in effect, synonymous with restitution.”  And it concluded that the “increase in Everypath’s capitalization is not a reasonable basis upon which to compute E*Trade’s unjust enrichment because it does not represent property or benefits received by E*Trade.”  E*Trade’s benefit was measured by profit.

The only other way E*Trade could have benefitted from the investment in Everypath was through E*Trade’s stake in the Arrowpath venture capital fund. E*Trade undoubtedly hoped to realize some return on that investment. If it had, E*Trade might be liable in restitution to Ajaxo. But Ajaxo could not show that E*Trade ever realized any return on that investment at all.

Reasonable Royalties

Under the CUTSA, reasonable royalties are allowed where, when calculating a monetary remedy for the past use of a misappropriated trade secret, a court “may order” reasonable royalties “[i]f neither damages [for actual loss] nor unjust enrichment caused by misappropriation are provable.” (§ 3426.3, subd. (b).)  “In that situation, a reasonable royalty is an attempt ‘to measure a hypothetically agreed value of what the defendant wrongfully obtained from the plaintiff. By means of a ‘suppositious meeting’ between the parties, the court calculates what the parties would have agreed to as a fair licensing price at the time that the misappropriation occurred.’” Id. (citing Vermont Microsystems, Inc. v. Autodesk, Inc., 138 F.3d 449, 451 (2d Cir. 1998) and University Computing, 504 F.2d at 538.)

The court noted California’s departure in this regard from the Uniform Trade Secrets Act:

California law differs on this point from both the [Uniform Act] and Federal patent law, neither of which require[s] actual damages and unjust enrichment to be unprovable before a reasonable royalty may be imposed.” (Cacique, Inc. v. Robert Reiser & Co., Inc. (9th Cir.1999) 169 F.3d 619, 623; see 14 West’s U. Laws Ann. (2005) U. Trade Secrets Act, § 3(a), pp. 633-634 [reasonable royalties available “[i]n lieu of damages measured by any other methods”]; 35 U.S.C. § 284 [claimant is entitled to compensation for patent infringement, “in no event less than a reasonable royalty.”].)

The Court of Appeal concluded that the trial court erred because although Ajaxo did not prove either its actual loss or E*Trade’s unjust enrichment, the trial court held that unjust enrichment was “provable” and rejected Ajaxo’s request for reasonable royalties on that basis.

Unjust Enrichment

Ajaxo argues that unjust enrichment was not “provable” because, after all, the jury’s verdict shows that E*Trade was not enriched. E*Trade maintains that, since Ajaxo had sufficient evidence of unjust enrichment to support a monetary award had the jury chosen to believe it, unjust enrichment was “provable,” it was just not proved. In effect, E*Trade’s position is that to be unprovable within the meaning of section 3426.3, subdivision (b), a measure of damages must fail as a matter of law, as opposed to the situation here, where the measure was not proved as a matter of fact.

Whether E*Trade’s unjust enrichment was “provable” within the meaning of section 3426.3, subdivision (b) depends upon how we interpret that statutory provision.

The court stated the public policy underlying trade secret laws as follows:

Trade secret laws in general are designed to promote the sharing of knowledge and to reward innovation. (Kewanee Oil Co. v. Bicron Corp. (1974) 416 U.S. 470, 493.) While all persons have the right to engage in businesses and occupations of their choosing, “also fundamental to the preservation of our free market economic system is the concomitant right to have the ingenuity and industry one invests in the success of the business or occupation protected from the gratuitous use of that ‘sweat-of-the-brow’ by others.” (Morlife, Inc. v. Perry, supra, 56 Cal.App.4th at p. 1520.) Stated most broadly, the goal of trade secrets law is to maintain important standards of commercial ethics. (Kewanee Oil Co. v. Bicron Corp., supra, at p. 481; DVD Copy Control Assn., Inc. v. Bunner (2003) 31 Cal.4th 864, 878.)

The court concluded that:

where a defendant has not realized a profit or other calculable benefit as a result of his or her misappropriation of a trade secret, unjust enrichment is not provable within the meaning of section 3426.3, subdivision (b), whether the lack of benefit is determined as a matter of law or as a matter of fact. To hold otherwise would place the risk of loss on the wronged plaintiff, thereby discouraging innovation and potentially encouraging corporate thievery where anticipated profits might be minimal but other valuable but nonmeasureable benefits could accrue. . . .

We conclude that given the jury’s finding that E*Trade did not profit from its misappropriation of trade secrets unjust enrichment is not “provable” within the meaning of section 3426.3. We further conclude that, since E*Trade had consistently and successfully taken the position that Ajaxo’s actual losses are not provable, E*Trade is estopped from arguing otherwise now. Thus, since neither actual loss nor unjust enrichment is provable, the trial court had discretion pursuant to section 3426.3, subdivision (b) to order payment of a reasonable royalty. The matter must be remanded to allow the trial court to exercise its discretion in that regard.

Judges and Attorneys

Justice Eugene M. Premo wrote the opinion for the court.  Presiding Justice Conrad L. Rushing, and Justice Wendy Clark Duffy concurred.

The Trial Judge is Hon. Joseph H. Huber.

Attorneys for Plaintiff/Appellant Ajaxo Inc.: Diemer, Whitman & Cardosi, Kathryn S. Diemer, John P. Cardosi.

Attorneys for Defendant/Respondent E*Trade Financial Corporation: Morgan, Lewis & Bockius, Joseph E. Floren, Brett M. Schuman, Michael P. Monagle.

By CHARLES H. JUNG

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