Recovering Damages In Iowa Trade Secret Act Cases

I've previously written about claims under Iowa's Uniform Trade Secrets Act. Now I want to talk about the potential damages that can be recovered in a trade secret case. They include damages that aren't available in many other types of cases.

Iowa Code 550.4(1) allows for various types of damages in a trade secret case: "Damages may include the actual loss caused by the misappropriation, and the unjust enrichment caused by the misappropriation which is not taken into account in computing the actual loss. In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a person's unauthorized disclosure or use of a trade secret."

Trade secret valuation is particularly difficult. This is an area in which courts frequently cite the rule that precision in proving damages is not necessary. As long as there's proof that some type of damages has occurred, the fact that the amount of damages is not precisely known is not fatal to a trade secret claim.

Lost profits are a common measure of damages in trade secret cases. Or the damages may be looked at from the opposite perspective, which is the amount of profit that the defendant has derived from the unauthorized use of the plaintiff's trade secret. A market analysis may be undertaken to determine a trade secret's value. That usually will be done through the testimony of an expert witness. Market analysis is considered a reasonable basis from which the amount of damages can be inferred or approximated.

As noted above, courts have the authority to award a "reasonable royalty" as an alternative measure of damages. Usually a reasonable royalty is a damages measure suitable only to cases in which the defendant has made no profit and the plaintiff is unable to establish a monetary loss. Reasonable royalties need not be limited to rate of any royalty. In some cases the defendant may not have realized a profit; in such event, defendant's revenues and plaintiff's probable profits on such revenues might be the measure. 

A reasonable royalty is simply that amount which estimates what a person desiring to use a trade secret would be willing to pay for its use and a trade secret owner desiring to license the trade secret would be willing to accept. The primary inquiry is what the parties would have agreed upon, if both were reasonably trying to reach an agreement for the use of the trade secret. Factors in the reasonable royalty analysis include the nature of the trade secret, its utility and advantages, and the extent of the use involved. There is no mathematical formula for the determination of a reasonable royalty. It'll usually amount to no more than a reasonable approximation of the trade secret's value.

Such flexibility in determining a reasonable royalty is imperative in cases involving misappropriation of trade secrets. That is because public policy requires that unfair competitors must not be allowed to profit by their wrongful methods and that those who have been injured by them should receive adequate compensation for the loss or injury they have incurred. This is especially important where (1) a defendant has destroyed the value of plaintiff's secret through publication and the plaintiff has not enjoyed any profits and (2) the plaintiff is hard-pressed to show any loss.

Harley Erbe