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November 14, 2002


The opinion of the court was delivered by: Shira A. Scheindlin, United States District Judge.



LinkCo, Inc. ("LinkCo") was formed in 1995 as an Internet content company with a mission to become the preeminent world-wide provider of comprehensive information about Japan's public companies delivered in an electronic format. See Complaint ("Compl.") at ¶ 11. The company was created in response to the Japanese Ministry of Finance's announcement that the government was adopting an electronic corporate disclosure reporting system. See LinkCo, Inc. v. Fujitsu Ltd., No. 00 Civ. 7242, 2002 WL 237838, at *4 (S.D.N.Y. Feb. 19, 2002) ("LinkCo I"). Although LinkCo designed various computer systems for two years, it never commercialized a product. See id. at *1.

After LinkCo ceased operations in December 1997, one of its former directors, Kyoto Kanda, began working for Fujitsu Ltd. ("Fujitsu"), a large Japanese company that in addition to its many other products, became interested in developing programs related to corporate disclosure. See id. at *1-*2. On March 31, 1999, Fujitsu publicly announced the development of DisclosureVision — a software package that performs some of the same functions as the computer system designed by LinkCo. See id. As a result, on September 25, 2000, LinkCo sued Fujitsu on the ground "that certain elements of DisclosureVision are copies of its technology, `virtually identical in design and substance.'" Id. (quoting Compl. ¶ 46). Indeed, LinkCo claimed that "`virtually every significant element of Fujitsu's DisclosureVision was stolen from LinkCo's technology.'" Id. (quoting Compl. ¶ 48). LinkCo brought this action, alleging that Fujitsu engaged in misappropriation of trade secrets, unfair competition, and tortious interference with contract.*fn1 See id.

Both parties proposed competing jury instructions concerning the appropriate measure of damages for each claim.*fn2 During the trial, I made an oral ruling as to the appropriate measure of damages in a trade secret case.*fn3 I write now to fully set forth the reasoning supporting that decision.

The parties differ as to whether damages for the alleged misappropriation of a trade secret should be measured by (1) LinkCo's losses, (2) Fujitsu's unjust enrichment, or (3) a reasonable royalty.*fn4 See LinkCo's Memorandum of Law on the Appropriate Measure of Damages ("Pl. Mem.") at 3-7; Fujitsu's Memorandum of Law on the Appropriate Measure of Damages ("Def. Mem.") at 2-4. For the reasons below, I conclude that a reasonable royalty is the proper measure of damages.*fn5 Because the reasonable royalty measure applies, I also conclude that the parties may not introduce evidence of sales projections that were prepared after the alleged date of theft or evidence of Fujitsu's actual profits arising from its sales of DisclosureVision.


A. Plaintiff's Losses, Defendant's Unjust Enrichment, or a Reasonable Royalty

Once it is established that a trade secret has been misappropriated, there are two obvious ways to calculate plaintiff's damages. See A.F.A Tours, Inc. v. Whitchurch, 937 F.2d 82, 87 (2d Cir. 1991) ("The amount of damages recoverable in an action for misappropriation of trade secrets may be measured either by the plaintiff's losses or by the profits unjustly received by the defendant.") (citations omitted). First, damages may be measured according to any losses plaintiff suffered from the alleged misappropriation. Plaintiff's losses may include the cost of developing the trade secret and the revenue plaintiff would have made but for the defendant's wrongful conduct. Second, damages may be measured by the defendant's unjust enrichment as a result of the misappropriation. Unjust enrichment is measured by the profits the defendant obtained from using the trade secret. See Electro-Miniatures Corp. v. Wendon Co., 771 F.2d 23, 27 (2d Cir. 1985).

In certain circumstances, these damage calculations provide inadequate compensation to the plaintiff. Courts have therefore developed a third measure of damages: a reasonable royalty.*fn6 "A reasonable royalty award attempts to measure a hypothetically agreed value of what the defendant wrongfully obtained from the plaintiff." Vermont Microsystems I, 88 F.3d at 151. To measure this value, "the Court calculates what the parties would have agreed to as a fair licensing price at the time that the misappropriation occurred." Id. (citing Georgia-Pacific Corp. v. U.S. Plywood-Champion Papers, Inc., 446 F.2d 295, 296-97 (2d Cir. 1971)). Because the plaintiff's loss or the defendant's gain may be very difficult to calculate in intellectual property cases, a reasonable royalty is "a common form of award in both trade secret and patent cases." Vermont Microsystems, Inc. v. Autodesk, Inc., 138 F.3d 449, 450 (2d Cir. 1998) ("Vermont Microsystems II"); Taco Cabana Int'l, Inc. v. Two Pesos, Inc., 932 F.2d 1113, 1128 (5th Cir. 1991), aff'd, 505 U.S. 763 (1992). Moreover, a reasonable royalty is ideal when the commercial context in which the misappropriation occurred requires consideration of multiple factors in order to compensate the plaintiff adequately. See University Computing, 504 F.2d at 538.

B. Reasonable Royalty Applies to this Case

Neither LinkCo's losses nor Fujitsu's unjust enrichment can serve as an adequate method of calculating damages. First, LinkCo's losses are an inadequate measure of damages because the company ceased operations very close to the time of the alleged misappropriation, making losses difficult to establish. Measuring LinkCo's damages after it was already out of business would require a fact-finder to speculate as to the revenue LinkCo may have made if it had remained in business. In addition, losses measured solely by LinkCo's development costs would not adequately compensate the company for its loss of the potentially valuable trade secret. Second, Fujitsu's unjust enrichment: is impossible to measure because the company did not make any profits from DisclosureVision. Nevertheless, "the lack of actual profits does not insulate the defendants from being obliged to pay for what they have wrongfully obtained." University Computing, 504 F.2d at 536 (citing In re Cawood Patent, 94 U.S. 695 (1877)). Under these circumstances, a reasonable royalty avoids the danger of an inadequate measure of damages by enabling the jury to consider various relevant factors to reach the most practical and sensible award.*fn7 Therefore, a reasonable royalty is the best measure of damages in a case where the alleged thief made no profits.*fn8

C. Form of Royalty

A reasonable royalty may be computed in various ways, including a lump-sum royalty based on expected sales or a running royalty based on a percentage of actual sales. The choice of the proper form of the royalty is dependent upon what would have been the most likely agreement during the hypothetical negotiation. A jury may award damages based on a lump-sum if there is sufficient evidence that lump-sum license structures are common in the industry. See Celeritas Techs., Ltd. v. Rockwell Int'l Corp., 150 F.3d 1354, 1359-60 (Fed. Cir. 1998) (permitting a lump-sum license structure where plaintiff produced sufficient evidence that lump-sum license structure was common in the industry); Unisplay, S.A. v. American Elec. Sign Co., 69 F.3d 512, 519 (Fed. Cir. 1995) (reversing a reasonable royalty damage award based on upfront royalty where industry practice did not include upfront licensing fees); Endress & Rauser, Inc. v. Hawk Measurement Sys. Pty. Ltd., 892 F. Supp. 1123, 1131 (S.D. Ind. 1995) ("[I]n calculating a reasonable royalty rate, the court `must design a methodology for the hypothetical negotiation that comports with industry practice.'") (quoting ...

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