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United States District Court, Southern District of New York

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 Johns-Manville Corp. v. Guardian Indus. Corp., 718 F. Supp. 1310, 1315 (E.D. Mich. 1989)). Although Fujitsu and LinkCo disagree on the prevalence of lump-sum licence fees in the industry, the jury should decide whether there is sufficient evidence to warrant the award of a lump-sum or running royalty.


Having determined that the jury should be instructed to calculate a reasonable royalty award, LinkCo and Fujitsu raise a second dispute: Whether the jury can base its calculation on facts that were not known to the parties at the time of the hypothetical negotiation (i.e., events that happened after the alleged misappropriation). Specifically, the parties dispute whether evidence of DisclosureVision's sales projections, actual sales, and profits — all of which happened after the trade secret was allegedly infringed — are relevant to the jury's reasonable royalty calculation.

Courts have not adopted a bright-line rule for determining whether post-negotiation facts are relevant, and some opinions appear to be contradictory. Compare Unisplay, 69 F.3d at 518 n. 9 ("The trial court properly instructed the jury to base its verdict on actual sales, not projected sales.") with Interactive Pictures Corp. v. Infinite Pictures, Inc., 274 F.3d 1371, 1385 (Fed. Cir. 2001) (recognizing "sales expectations at the time when infringement begins as a basis for a royalty base as opposed to an after-the-fact counting of actual sales"). A simple bright-line rule would be to exclude all information that occurred after the meeting, including proof of post-negotiation sales projections, actual sales, or profits or the lack of profits. While this would be easy to apply, it would unfairly limit the proof, as more fully discussed before. This total exclusion rule may be the guiding principle, but decisions of whether to allow evidence of certain events occurring after the hypothetical meeting are peculiarly fact specific.

A. Evidence Relevant to a Reasonable Royalty Award

1. Sales Projections

An infringer's projected sales are often used as a basis for a reasonable royalty when the projections would have been available at the time of the hypothetical negotiation. See Interactive Pictures, 274 F.3d at 1384; Snellman v. Ricoh Co., 862 F.2d 283, 289 (Fed. Cir. 1989); TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 899-900 (Fed. Cir. 1986). Although these projections are not an exact measurement of a trade secret's value, these estimates are relevant to the parties' perceived value of the trade secret at the time of misappropriation. See Interactive Pictures, 274 F.3d at 1384; Snellman, 862 F.2d at 289; TWM Mfg., 789 F.2d at 899-900. For example, in Interactive Pictures, the infringer's sales projections were created two months before the infringement began. As a result, the court held that a reasonable royalty could be based on these projections because "those projections would have been available to [defendant] at the time of the hypothetical negotiation" and were not outdated. Interactive Pictures, 274 F.3d at 1385.

In contrast, post-negotiation sales projections are an after-the-fact assessment that the negotiating parties could not have considered. These estimates do not reflect the parties perceived value of the trade secret during the negotiation. Therefore, sales projections are only relevant in a reasonable royalty calculation when they are available before the time of the misappropriation and would have been considered by the parties.

2. Actual Sales

While an infringer's actual sales are often used to determine damages, there are advantages and disadvantages to allowing this proof to be presented to a jury. On the one hand, when an infringer has not done well on the product developed through use of the trade secret, it argues that the only way to calculate the damages is to apply a reasonable royalty to the actual sales. See, e.g., Unisplay, 69 F.3d at 516; TWM Mfg., 789 F.2d at 899; Nilssen v. Motorola, Inc. et al., No. 93 C 6333, 1998 WL 513090, *12-*13 (N.D. Ill. Aug. 14, 1998). On the other hand, when an infringer has done very well on its sales, it argues that proof of the actual sales is prejudicial because the amount of actual sales could not have been anticipated at the time of the hypothetical negotiations. See, e.g., Donnelly Corp. v. Gentex Corp., 918 F. Supp. 1126, 1139 (W.D. Mich. 1996).

The victims, or plaintiffs, are equally mercurial. When the infringer's product has not done well in the market, the victims argue that the sales should not be presented to the jury because they occurred after the date of the hypothetical meeting and therefore do not reflect the value the infringer placed on the product at the time of the meeting. See, e.g., Interactive Pictures, 274 F.3d at 1384; Snellman, 862 F.2d at 289. The victims also argue that the actual sales are highly prejudicial because the infringer may have done a poor job of marketing the product. See, e.g., Unisplay, 69 F.3d at 515. When the product does well on the market, however, the victims argue that actual sales represent the best measure of damages. See, e.g., TransWorld Mfg. Corp. v. Al Nyman & Sons, Inc., 750 F.2d 1552, 1566 (Fed. Cir. 1984).

Each of these arguments has some merit and the case law on this issue reflects a high level of confusion and inconsistency. Occasionally, courts allow proof of actual sales and in other instances they do not. Apparently, no governing principle informs the court's decision. The key, of course, is what the parties would have believed to be the reasonable value of the alleged trade secret at the time it was stolen.

If, for example, the parties had produced sales projections prior to the theft, then those projections probably would have governed the hypothetical negotiations because they would have informed the parties' discussion of the value of the alleged trade secrets. See Interactive Pictures, 274 F.3d at 1385. On the contrary, if there were no projections at or before the date of the hypothetical negotiations, then a court is more likely to conclude that the parties would have set the royalty rate at the meeting but agreed that this rate would be applied to actual sales. See, e.g., Nilssen, 1998 WL 513090, *12-*13. In between these two extremes, might be cases in which the parties had sufficient information, aside from projections, to have agreed on a lump-sum purchase price for the alleged trade secret, which does not apply a royalty rate to either sales projections of actual sales. Accordingly, the decision as to whether actual sales should be admitted turns on the facts of the particular case.

3. Lack of Profits

A reasonable royalty may also be based on the infringer's profits. See Trans-World, 750 F.2d at 1568 ("Evidence of the infringer's profits generally is admissible as probative of his anticipated profits."); see also Donnelly, 918 F. Supp. at 1139; Fromson v. Citiplate, Inc., 699 F. Supp. 398, 407 (E.D.N.Y. 1988), aff'd, 886 F.2d 1300 (Fed. Cir. 1989). It is not surprising that when the infringer has profited from its wrongful use of a competitor's intellectual property, and sometimes quite handsomely, the injured party urges that those profits reflect the damages it has suffered. Many cases recognize this self-evident proposition. See, e.g., Trans-World, 750 F.2d 1552; Donnelly, 918 F. Supp. 1126; Fromson, 699 F. Supp. 398.

The situation is entirely different when the infringer has not profited from its wrongful conduct. The absence of profits does not preclude the victim from obtaining damages based on the loss of its intellectual property. See In re Cawood Patent, 94 U.S. at 710; University Computing, 504 F.2d at 536; Computer Assocs. Int'l v. American Fundware, Inc., 831 F. Supp. 1516, 1527 (D. Colo. 1993); Structural Dynamics Research Corp. v. Engineering Mechs. Research Corp., 401 F. Supp. 1102, 1119 (E.D. Mich. 1975). Indeed, that is the genesis of the damage calculation based on the hypothetical negotiation at the time of misappropriation. See Vermont Microsystems II, 138 F.3d at 450 (affirming trial court's application of reasonable royalty doctrine because evidence of infringer's profits was too imprecise); University Computing, 504 F.2d at 536-38 (applying a reasonable royalty where infringer did not make a profit). These cases demonstrate that when there are no profits, an event that the parties could not have anticipated at the time of the hypothetical negotiations, admission of this evidence would be highly prejudicial to the victim of the alleged infringement. The intellectual property had a theoretical value at the time it was stolen. There are many reasons why the infringer may not have profited once it commercialized the idea and sold the product. These intangible factors, such as the infringer's efficiency in bringing the product to market, the quality of its product and its marketing efforts, all contribute to the conclusion that proof of no profits by the infringer is unreliable, highly prejudicial, and inadmissible.

B. Fujitsu's Projections, Sales and Profits

1. Sales Projections

Fujitsu's DisclosureVision sales projections were created in December 1998 and October 1999. See Amendment to Aron Levko's [Plaintiff's Expert] Initial Expert Report at 4. Levko relied on these projections to calculate a proposed reasonable royalty. See id. LinkCo argues that these projections are probative of Fujitsu's valuation of LinkCo's technology at the time of the alleged misappropriation in 1997. See Pl. Mem. at 14.

Fujitsu's projections would be admissible if they were created near the time of the hypothetical negotiation and if it were probable that the parties would have considered the figures during their negotiations. See Interactive Pictures, 274 F.3d at 1385; Snellman, 862 F.2d at 289. However, the projections were not available until several months after the hypothetical negotiation. Therefore, it is impossible for the parties to have considered these projections at the time of the hypothetical negotiation. Although the parties could have agreed on a lump-sum royalty based on expected sales, Fujitsu's projections are not evidence of expected sales at the time of the negotiation. LinkCo must establish expected sales with evidence available to the parties before the alleged theft. As a result, Fujitsu's sales projections are inadmissible to prove damages because they are irrelevant, highly prejudicial to Fujitsu, and would tend to mislead the jury. See Riles v. Shell Exploration and Prod. Co., 298 F.3d 1302, 1313 (Fed. Cir. 2002).*fn9

2. Actual Sales

According to Fujitsu, the parties would have negotiated a running royalty to be applied against actual sales. Although actual sales were not known until after the negotiation, the form of the reasonable royalty is an issue of fact and Fujitsu may present its running royalty theory to the jury. See supra Part II.C. In order to permit Fujitsu to present its proposed damages calculation, the running royalty must be applied to actual sales because there is no proof of reliable sales projections. See supra Part III.A.2. LinkCo, however, will then be permitted to prove that these sales figures are misleading because of the way in which Fujitsu commercialized and/or marketed the product and may further present evidence as to what it believes the sales would have been had it brought its own product to market.

3. Lack of Profits

Fujitsu claims that because it had expenses of $10 million, it made no profits on its sales of DisclosureVision. See 10/7/02 Trial Tr. at 265. Fujitsu argues that its lack of profits is relevant to both the measure of damages and to the value of the trade secret. Applying the balancing test of Rule 403 of the Federal Rules of Evidence, this evidence must be precluded. Profits can be considered in a reasonable royalty calculation. However, lack of profits is not admissible because it is unfairly prejudicial to LinkCo and would defeat the purpose of a reasonable royalty measure of damages.


The final issue raised by the parties is whether pre-judgment interest is mandatory or discretionary. Pursuant to the New York Civil Practice Law and Rules, pre-judgment interest is mandatory for a damage award, except when the action is equitable in nature. See N.Y. C.P.L.R. § 5001(a) (McKinney 2002). When the action is equitable, pre-judgment interest is left to the court's discretion. Id.

Whether a trade secret misappropriation claim is legal or equitable has not been clearly decided. Decisions addressing this issue suggest that trade secret misappropriation claims can be either equitable or legal in nature.*fn10 However, a close reading of these cases reveals that trade secret misappropriation claims are equitable in nature only when plaintiffs are seeking injunctive relief. See, e.g., Speedry, 306 F.2d at 330; Protexol Corp., 12 F.R.D. at 8.

Where a plaintiff seeks damages for trade secret misappropriation, rather than equitable relief, the claim is essentially legal in nature. See Softel, 891 F. Supp. at 943; Spiselman, 61 N.Y.S.2d at 141.*fn11 Because LinkCo is seeking damages, its misappropriation claim is an action at law and pre-judgment interest is mandatory.


For the reasons discussed above, the appropriate measure of damages for plaintiff's misappropriation of trade secrets claim, where defendant did not profit from the alleged infringement, is a reasonable royalty. Depending on the evidence presented at trial, the royalty may result in a lump-sum payment based on a reasonable royalty as applied to expected sales or a running royalty based on actual sales. If damages are awarded, pre-judgment interest is mandatory under New York law because a claim for damages is legal in nature.

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