Federal Circuit Illuminates Right to Disgorgement as Remedy for Trade Secret Misappropriation

3 minute read | June.06.2018

The Federal Circuit recently issued an opinion, Texas Advanced Optoelectronic Solutions, Inc. v. Renesas Electronics America, Inc., that addressed several interesting issues impacting the calculation of damages in trade secret actions.  Perhaps the Court of Appeals’ ruling of greatest consequence involved its determination that there is no Seventh Amendment right to a jury decision on disgorgement of profits – a remedy also often commonly described as “unjust enrichment.”  The Federal Circuit instead ruled that the calculation of disgorgement damages is for the trial court to decide after making findings of fact and conclusions of law.  If the decision is extended by other federal courts, it could have wide-reaching implications for claims under the Defend Trade Secrets Act, which allows for unjust enrichment damages as a remedy for misappropriation of trade secrets.

The dispute between plaintiff Texas Advanced Optoelectronic Solutions, Inc. (TAOS) and defendant Intersil Corporation (“Intersil”, now known as Renesas Electronics America) arose in the wake of confidential discussions related to a possible merger in 2004.  Ultimately the merger discussions failed, and the companies went their separate ways.  However, after Intersil released a product allegedly incorporating TAOS’s confidential design information disclosed during the merger discussions, TAOS filed suit against Intersil in 2008 in the Eastern District of Texas alleging trade secret misappropriation, patent infringement, and other state law theories.  Following trial in April 2015, the jury returned a verdict in favor of TAOS on all claims and awarded TAOS over $48 million in disgorgement of Intersil’s profits for trade secret misappropriation (among other damages).

Intersil then appealed, and the Court of Appeals affirmed the jury’s verdicts.  However, the Federal Circuit vacated the jury’s damages awards for recalculation of the more than $70,000,000 awarded to TAOS on both claims.  Intersil asserted – and the Federal Circuit agreed – that the district court erred in permitting the jury to determine the award of disgorgement since the issue is one of equity to be decided by the court.  In deciding whether TAOS had a constitutional right to a jury on disgorgement, the appeals court conducted a historical analysis of whether juries awarded disgorged profits as a remedy in trade secrets cases at the time the Constitution was enacted in 1791.  Noting that trade secret claims were not first recognized in American or English equity courts until the 19th century, the Federal Circuit looked to analogous torts and remedies available for patent, copyright, and trademark infringement, and concluded that disgorgement, like other restitutional remedies, was not available at law.

In vacating the damages verdict, the Court of Appeals also independently concluded the Court needed to limit the award to a head start period dictated by when Intersil lawfully could reverse engineer the misappropriated technology.  Because the head start damages were part of the disgorgement remedy, the Federal Circuit ordered the damages to be recalculated by the trial court.  The court simultaneously vacated approximately $74,000 in reasonable royalty damages that had been awarded for patent infringement, since under TAOS’ theory of liability, they were duplicative of the misappropriation damages.

The Federal Circuit’s decision raises the serious question of whether unjust enrichment damages under the DTSA (or state law) must be decided by the court, rather than a jury.  As we reported back in 2013, various theories of damages falling under the umbrella of unjust enrichment have been the source of significant trade secrets verdicts.  It remains to be seen what sort of impact the Federal Circuit’s analysis might have on how unjust enrichment is assessed in future cases. Notably, though,  more than 98% of the potential damages TAOS sought to recover were excluded due to its inability at the summary judgment stage to introduce evidence that sales occurred domestically, as opposed to extraterritorially, even though TAOS apparently identified stronger evidence of US sales within the United States at trial.  Presumably, if those damages had not been excluded and instead had been substantiated through evidence presented at a bench trial, they still could have produced a very significant verdict.