Monday, September 27, 2010

Lost Profits Always Difficult to Prove In Trade Secrets Case (SKF USA v. Bjerkness)

You have established that your ex-employees copied thousands of files on storage devices before quitting.

You have proven they serviced your key customers after quitting.

You have even convinced a judge that those employees used the very purloined documents to service those same diverted accounts.

Slam dunk case on damages, right?

Not so. Damages often times are the tail wagging the dog in trade secrets cases. Even on those occasions when they are not, parties get bogged down in issues of proof.

In SKF USA v. Bjerkness, a federal district court again held that a plaintiff in a strong liability case could not prove lost profits relating to the defendants' use of trade secrets. The rationale has to do with proximate cause: the customers did not leave the plaintiff because the defendants used stolen documents. Rather, they left because of a change in the plaintiff's ownership and their relationship with the defendants. Absent a non-compete, there is "nothing illegal about that", the court said. Proof of lost profits therefore failed.

Of course, this does not mean that a defendant can simply walk without financial liability. It still must account for its unjust enrichment in a trade secrets case - the profits related to those customers taken and for whom secret information was used. Frequently, in start-up businesses, though, this is an exercise in futility. New businesses frequently are unprofitable, and a plaintiff simply cannot apply its gross margin to the defendant's start-up.

This was the defendant's problem in Bjerkness. Rather than counter evidence of an applicable margin rate, the defendant simply contended it was not liable at all. Accordingly, the court used the plaintiff's margin as a substitute and based unjust enrichment by applying that percentage the defendant's gross sales. The court did not have to accept this as an evidentiary basis for damages.

All this makes injunctive relief more critical in trade secrets cases. Damages are notoriously difficult to prove, at least in "soft secrets" cases. What I mean by that is the sort of operational business information that may contain or reference admittedly confidential information but is not the crown jewel of the company. How do you prove damages from someone's disclosure of an outdated financial statement.

Damages cases are much different when a "hard secret" is at issue. On that score, think of a key engineering drawing, proprietary source code or a product formula as a revenue-enhancing secret for which damages may be eminently more provable. If, for instance, a proprietary drawing is taken and used to engineer a competing product, all profits from sales of that unfairly developed product provide a sound evidentiary basis for damages.


Court: United States District Court for the Northern District of Illinois
Opinion Date: 8/9/10
Cite: SKF USA Inc. v. Bjerkness, 2010 U.S. Dist. LEXIS 80776 (N.D. Ill. Aug. 9, 2010)
Favors: Employee
Law: Illinois

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