December 2006

In the legislative session that just ended, Civil Code 3426.4 was amended to permit recovery of costs by a prevailing party in litigation of claims for trade secret misappropriation when a party acts maliciously or in bad faith. Costs include expert witness fees that are “actually incurred and reasonably necessary”. Costs incurred by a regular employee of a party are not recoverable. The new law also extends to arbitrations.

According to the bill’s summary by the Judiciary Committee, “The complex nature of trade secret law makes the input of an expert witness a virtual necessity in the litigation of any claim.”  Examples of where experts are useful in these cases include:

  • To identify that trade secrets have in fact originated from the plaintiff. The challenge plaintiffs sometimes face is that it is lawful for one to reverse engineer information from publicly available sources. Defendants sometimes claim that, although the data appears similar, the data was not actually taken from the plaintiff but assembled from memory, or from other sources. These assertions can be tested by:

a. inspection of metadata to ascertain the source of the questioned information,

b. statistical analysis to determine the likelihood of the alternate explanation being plausible, and

c. comparison of relevant data sets to determine whether it is possible (or likely) that the alternate explanation is correct.

  • Through inspection of computers, identification of the means that the stolen data was removed, recovered, and used. This can be done with computer forensics to discover devices and programs used, and data recovered, even if the devices, software, or data were subsequently removed or “deleted.”
  • To provide information about what data is actually available from public sources in that industry, and how the stolen information would be useful to a competitor.
  • To calculate monetary remedies, which often involve complicated customer and sales analysis. Allowable damages consist of:

a.  unjust enrichment from the misappropriation

b.  the plaintiff’s lost profits

c. a reasonable royalty for the misappropriated property, or

d.  reasonable attorney’s fees to a prevailing party if (i) a claim is made in bad faith, (ii) a motion to terminate an injunction is made or resisted in bad faith, or (iii) willful misappropriation exists.

The California Uniform Trade Secrets Act also permits injunctive relief for actual or threatened trade secret misappropriation.  The Intellectual Property Law Section of the California State Bar sponsored the bill.

Fulcrum Inquiry regularly performs and damages analysis in trade secret cases.