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E.J. Brooks Company v. Cambridge Security Seals

United States Court of Appeals, Second Circuit

June 5, 2017

E.J. BROOKS COMPANY, d/b/a TYDENBROOKS, Plaintiff-Counter-Defendant-Appellant-Cross-Appellee,
v.
CAMBRIDGE SECURITY SEALS, Defendant-Counter-Claimant-Appellee-Cross-Appellant.

          Argued: November 14, 2016

          DANIEL GOLDMAN (Kerri Ann Law, Claudia Pak, Sam Koch, on the brief), Kramer Levin Naftalis & Frankel LLP, New York, NY, for Plaintiff-Counter-Defendant- Appellant-Cross-Appellee.

          HOWARD SCHUB (Daniel J. Fetterman, on the brief), Kasowitz, Benson, Torres & Friedman LLP, New York, NY, for Defendant-Counter-Claimant-Appellee-Cross- Appellant.

          Before: KEARSE, LOHIER, and DRONEY, Circuit Judges [*]

          LOHIER, Circuit Judge

         E.J. Brooks Company, d/b/a TydenBrooks ("TydenBrooks"), prevailed at trial in its claims against Cambridge Security Seals ("CSS") for misappropriation of trade secrets, unfair competition, and unjust enrichment under New York law. The United States District Court for the Southern District of New York (Preska, then C.J.) instructed the jury that damages for these claims should be measured by the costs CSS avoided rather than the losses TydenBrooks sustained by virtue of the misappropriation and unfair competition. After the jury awarded damages based on CSS's avoided costs, TydenBrooks requested mandatory prejudgment interest pursuant to section 5001(a) of the New York Civil Practice Law and Rules ("CPLR"), which the District Court denied. We affirm the judgment insofar as it relates to CSS's liability. We otherwise defer decision on this appeal and cross-appeal in order to certify the following two questions to the New York Court of Appeals: First, "whether, under New York law, a plaintiff asserting claims of misappropriation of a trade secret, unfair competition, and unjust enrichment can recover damages that are measured by the costs the defendant avoided due to its unlawful activity." Second, "if the answer to the first question is 'yes, ' whether prejudgment interest under CPLR § 5001(a) is mandatory where a plaintiff recovers damages as measured by the defendant's avoided costs."

         Both parties challenge a judgment of the United States District Court for the Southern District of New York (Preska, then C.J.) following a jury trial. At trial, plaintiff E.J. Brooks Company, d/b/a TydenBrooks ("TydenBrooks"), largely prevailed in its claims against defendant Cambridge Security Seals ("CSS") and three former TydenBrooks employees (with whom TydenBrooks thereafter settled) for misappropriation of trade secrets, unfair competition, and unjust enrichment under New York law.[1] This case principally involves questions of New York law relating to whether a plaintiff asserting these claims can recover damages measured by the costs the defendant avoided rather than the losses the plaintiff sustained by virtue of the misappropriation and unfair competition. On appeal, the parties agree that there is no decision of the New York State courts to which we can confidently point to decide whether the defendant's avoided costs are a permissible measure of damages for these claims. Nor, in our view, have the New York courts clearly answered a second question that we are asked to consider, namely, whether prejudgment interest under section 5001(a) of New York's Civil Practice Law and Rules ("CPLR") is mandatory where a plaintiff recovers, if appropriate, damages as measured by the defendant's avoided costs.

         For these reasons, the appeal and cross-appeal present two damages- related questions that have not been resolved by the New York Court of Appeals and implicate significant New York State interests. As we reject CSS's other challenges, [2] the resolution of these two questions may dispose of this appeal. Accordingly, we affirm the judgment as to liability, reserve decision as to damages, and certify the following two questions to the New York Court of Appeals:

1. Whether, under New York law, a plaintiff asserting claims of misappropriation of a trade secret, unfair competition, and unjust enrichment can recover damages that are measured by the costs the defendant avoided due to its unlawful activity.
2. If the answer to the first question is "yes, " whether prejudgment interest under New York Civil Practice Law and Rules § 5001(a) is mandatory where a plaintiff recovers damages as measured by the defendant's avoided costs.

         BACKGROUND

         TydenBrooks is the largest manufacturer of plastic security seals in the United States. CSS was founded in 2010 and began manufacturing plastic security seals at the end of 2011. As relevant here, in 2012 TydenBrooks filed this lawsuit against CSS and former TydenBrooks employees who went to work for CSS, accusing them of misappropriation of trade secrets, civil conspiracy, unfair competition, and unjust enrichment, all in violation of New York law.

         At trial, TydenBrooks claimed that CSS had copied and profited from TydenBrooks's automated process for manufacturing plastic security seals, which are used to detect and prevent tampering with containers and other products. In support of its claim, TydenBrooks introduced evidence that it treated the process as a trade secret. That contention was vigorously disputed by CSS, which sought to introduce evidence that TydenBrooks's manufacturing process was neither secret nor unique. The jury ultimately found that CSS was liable for misappropriation of a trade secret, unfair competition, and unjust enrichment.

         The issue of damages proved to be thornier. TydenBrooks initially sought recovery of its lost profits and sales and disgorgement of CSS's gross profits. It later abandoned those theories, electing instead to pursue an "avoided costs" theory in which damages are calculated as the total costs CSS avoided by not developing its own manufacturing process. To support its avoided costs theory at trial, TydenBrooks relied primarily on the testimony of its damages expert, Dr. Robert Vigil. Dr. Vigil estimated that, as a result of its misappropriation of the manufacturing process, CSS saved between $6.1 million and $12.2 million in costs-or $7.8 million to $16.6 million when he included costs associated with employee benefit payments.[3] In his calculations, Dr. Vigil assumed that CSS's capital cost savings equaled the capital costs that TydenBrooks incurred to develop its own machines in the first instance. For its part, CSS did not introduce any expert trial testimony relating to damages and elected instead to rely on its cross-examination of Dr. Vigil. On cross-examination, Dr. Vigil acknowledged that he tried but failed to calculate CSS's profits because the "profit information from [CSS] was not sufficient."

         At TydenBrooks's request, the District Court instructed the jury that TydenBrooks sought damages on each of its claims "based on the defendants' avoided costs." It explained that the jury would have to compare "actual costs incurred by the defendant . . . with the costs it would have incurred to produce the same products without the use and knowledge of [TydenBrooks's] manufacturing process." The District Court also instructed the jury that it should consider three factors in measuring damages: (1) whether CSS "realized savings in research and development costs, including the time and resources typically devoted to researching and developing a new manufacturing process, " (2)whether CSS "gained a competitive advantage in being able to bring its plastic indicative security seals to market earlier than competitors, " and (3)whether CSS "realized any savings in [its] ...


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