Ajaxo v. E*Trade: How (Not) to Prove a Reasonable Royalty for Trade Secret Misappropriation

3 minute read | April.30.2020

The latest appellate decision in the nearly 20-year legal battle between Ajaxo and E*Trade highlights the importance of expert discovery and a well-developed trial court record for a plaintiff attempting to claim reasonable royalties for trade secret misappropriation.

The saga between Ajaxo and E*Trade began back in the late 1990s, with Ajaxo, a six-person company, approaching E*Trade, seeking to support its wireless access and trading business.  In response, E*Trade asked Ajaxo for a technical paper and live demonstrations, during which E*Trade’s engineers peppered Ajaxo with questions.  One E*Trade senior engineer, Dan Baca, made a copy of Ajaxo’s technical binder.  After E*Trade sent Ajaxo a draft letter of intent—with everything but the dollar amount filled in—E*Trade had a change of heart and told Ajaxo it was simply too small to be an E*Trade partner.  Instead, E*Trade acquired these services a short time later from Everypath, a company that it had been meeting with simultaneously, and where Dan Baca started to work shortly after attending the Ajaxo meetings.

Ajaxo sued E*Trade, alleging, inter alia, breach of the parties’ NDA and trade secret misappropriation.  After a seven-week trial on Ajaxo’s claims for breach of the NDA and misappropriation of trade secrets, a jury found in favor of Ajaxo and awarded $1.3 million on the NDA breach and nothing for misappropriation.  After a round of appeals, the court of appeals remanded for a second trial on the issue of unjust enrichment damages.  Ajaxo lost and appealed again.  The court of appeals remanded the case for consideration of reasonable royalties.  After a third trial, the trial court declined to award Ajaxo any reasonable royalty.  (The trial court order is covered extensively here.)  Ajaxo appealed again, asking the court of appeals to overrule the trial court’s denial of a reasonable royalty.

Finding that the trial court did not abuse its discretion in denying Ajaxo’s request for a royalty, the court of appeals’ opinion provides important guidance for those pursuing a reasonable royalty for trade secret misappropriation:

  • Disclose your royalty theory during expert discovery. If a theory is not timely disclosed, then the trial court may properly exclude it at trial as prejudicial to the opposing party.

  • Match your royalty theory to your misappropriation case. If your misappropriation case is premised on disclosure of a trade secret (i.e., E*Trade’s disclosure of Ajaxo’s technology to Everypath), then do not premise your royalty theory on use of a trade secret (i.e., Everypath’s use of Ajaxo’s technology in its services to E*Trade and other Everypath customers).

  • Introduce evidence to show exactly what your trade secret is and explain how that compares to the overall product or service. If the misappropriated trade secret accounts for only a portion of a commercial process or product, then apportionment is appropriate to determine the value of royalty owed (akin to the process used in patent cases).  Because the burden of proof falls on the plaintiff, a failure to provide evidence of what your trade secret is can be relied on by the trial court to deny any royalty award.

  • If you are seeking to establish a standard rate in the market, provide more than one licensing agreement to show the correct price. This is akin to patent law, where a single licensing agreement is insufficient proof of an established royalty.  Through the introduction of multiple licenses, you can establish general agreement on price.
Satisfying your evidentiary burden before the trial court is crucial because the standard on appeal is an “onerous” one.  To reverse a trial court’s denial of a reasonable royalty due to insufficient evidence, the appellant must demonstrate that the evidence that it presented is “uncontradicted and unimpeached” and “of such a character and weight as to leave no room for a judicial determination that it was insufficient to support a [reasonable royalty].”  You must be able to show that the evidence “compels” a royalty award in your favor.

As Ajaxo’s experience shows, without a well-supported damages case, a trade secret misappropriation finding can be a hollow victory.