Assessing monetary damages in suits for trade secret misappropriation presents a unique set of challenges. Trade secret law provides that a plaintiff can disgorge only those profits from a defendant that were specifically derived from the misappropriation of its trade secret, not those profits that were legitimately earned. But once a plaintiff proves that a defendant has misappropriated its trade secret and derived some profits from the use of that trade secret, which party then has the burden of apportioning the profits the defendant derived from the misappropriated trade secret from those profits derived rightfully? This question can be very important when allocation is complicated and unclear.
Depending upon the product or service at issue, it can be difficult to discern which profits to attribute to the trade secret and which to attribute to legitimate business practices. For instance, a company may have secured a client in part by utilizing the trade secret idea of another. But that company’s prior relationships with the client, its reputation in the industry, and its experience in the field also may have played a part in its success. Where a defendant has been found to have misappropriated a trade secret in developing a product, profits from this misappropriation must be separated from profits derived from legitimate business investments such as production costs, research and development, and labor expenses.
Courts must have a reasonable basis upon which to estimate the profits attributable to the defendant’s wrongful actions. But whose burden is it to apportion those damages? While historically the plaintiff must prove its damages, the latest Restatement (Third) of Unfair Competition § 45 and some jurisdictions, including the Tenth Circuit, shift the burden of proof to the defendant under the theory that the defendant is in a better position to allocate, as it possesses the information necessary to determine apportionment. However, most jurisdictions, including Florida, have yet to address this issue directly.
The Tenth Circuit case, Cartel Asset Mgmt. v. Ocwen Fin., 249 F. App’x 63, 79 (10th Cir. 2007), quoting the Restatement (Third) of Unfair Competition § 45, recognized that “the plaintiff has the burden of establishing the defendant’s sales; the defendant has the burden of establishing any portion of the sales not attributable to the trade secret and any expenses to be deducted in determining net profits.” Other jurisdictions, in Washington and Massachusetts for instance, have likewise adopted the Restatement’s approach to determining the burden of allocation. See Petters v. Williamson & Associates, 151 Wash. App. 154, 164, 210 P.3d 1048, 1054 (Wash. Ct. App. 2009); Jet Spray Cooler v. Crampton, 377 Mass. 159, 179, 385 N.E.2d 1349, 1361 (Mass. 1979).
Florida has not adopted the Restatement and has not directly addressed who has the burden of establishing what portion of the profits should be attributed to the misappropriated trade secret or which expenses should be deducted from the disgorgement amount. However, Florida case law seems to call for the plaintiff to retain the burden of allocation.
Both the Second DCA in Perdue Farms v. Hook, 777 So. 2d 1047, 1051 (Fla. 2d DCA 2001) and the Fourth DCA in Premier Lab Supply v. Chemplex Indus., 94 So. 3d 640, 644 (Fla. 4th DCA 2012), reh’g denied (Sept. 4, 2012) have declared that, in an action for misappropriation of a trade secret, it is the “plaintiff’s burden of proof as to damages caused by the misappropriation.” Moreover, following the Fifth Circuit in Univ. Computing v. Lykes-Youngstown, 504 F.2d 518, 545 (5th Cir. 1974), the Second and Fourth DCAs state in Perdue and Premier Lab, that the plaintiff must introduce “evidence by which the jury can value the rights the defendant has obtained.”
Most persuasively, in Rimmeir v. Dickson, 78 So. 2d 732, 734 (Fla. 1955) (en banc), the Florida Supreme Court reversed as error the lower court’s determination that the burden was on defendant to apportion profits that were not attributable to the infringement of plaintiffs’ trade name and trade-mark. The court found that the lower court’s determination improperly “placed on the defendants the burden of proving the plaintiffs’ damages.”
Despite these strong indications from the Florida courts, this area of trade secret law and the question of burden as to allocation of damages for disgorgement remains unresolved. It can be very impactful for a plaintiff to go to the jury with a damages claim that amounts to the full disgorgement of profits and then put the burden on the defendant to allocate the amount, if any, that should be offset as properly gained. Given the volume of trade secret cases in Florida, this is an area of the law to watch closely.