CAFC Finds District Court Erred in Precluding Unjust Enrichment Damages in Trade Secret Case

On Friday, the U.S. Court of Appeals for the Federal Circuit issued a precedential decision in Versata Software, LLC v. Ford Motor Co. reversing the Eastern District of Michigan’s ruling on judgment as a matter of law (JMOL) reducing Versata’s unjust enrichment damages to $0 after holding that the district court erred in precluding such damages from being awarded by a jury. The Federal Circuit also reinstated the jury verdict’s full award on Versata’s breach of contract claim after finding that the jury properly relied on a damages basis established via the parties’ licensing history, and affirmed the district court’s denial of JMOL to Ford on the knowledge required for trade secret liability.

Availability of Unjust Enrichment Damages Recognized by Several Circuit Courts

Versata’s appeal follows federal and state counterclaims it filed in response to Ford’s declaratory judgment action seeking a ruling that its proprietary vehicle configuration software did not misappropriate trade secrets from Versata, which created configuration software for Ford under the terms of a services agreement that wasn’t renewed in 2014. Versata asserted a protectable interest in its Automotive Configuration Manager (ACM) software comprising three interdependent “combination” trade secrets in the user interface, core computing brain and workspace collaboration functionality.

Before trial, the district court excluded testimony from Versata’s damages expert primarily for applying a speculative damages model inappropriate for the case for measuring Ford’s enrichment “rather than Ford’s unjust enrichment.” Versata responded by submitting reasonable royalty models following Georgia-Pacific factors reflecting a 2011 hypothetical negotiation between the parties to the asserted trade secrets. Although the district court allowed one of those models to proceed to trial, the court granted JMOL to Ford following the jury’s verdict awarding $22.4 million for unjust enrichment from trade secret misappropriation, ruling that the jury had no way to reliably determine how long it would have taken Ford to develop the three trade secrets found misappropriated.

On appeal, the Federal Circuit agreed with Versata that it, as the plaintiff claiming trade secret misappropriation, was entitled to pursue unjust enrichment as a remedy. Such damages are available under the language of both the state and federal statutes providing Versata’s cause of action, and the Federal Circuit noted that unjust enrichment has been found available in trade secret appeals decided in the Sixth, Tenth and Eleventh Circuits. In particular, the CAFC noted the Tenth Circuit’s rejection of the argument that unjust enrichment damages were inappropriate “where the plaintiff was willing to license his or her idea” in Russo v. Ballard Medical Products (2018):

“Indeed, the Russo court explicitly held that under the Utah Trade Secrets Act, which includes the same language as the DTSA and MUTSA, ‘a plaintiff has the express choice of seeking unjust enrichment damages to remedy trade secret misappropriation…’ The court further acknowledged that although unjust enrichment damages “put [the plaintiff] in a much better position than if he had entered a licensing agreement… under Utah law, [defendant], as the party that acted wrongfully, must assume the risk it took by misappropriating rather than licensing [the trade secret].”

The appellate court then pointed out the district court’s misreliance on Sixth Circuit cases in which the parties’ licensing history was used to calculate damages. Although acknowledging that the Sixth Circuit upheld damages awards calculated using royalties-based damages model, the Federal Circuit highlighted that the Sixth Circuit did not altogether preclude unjust enrichment damages in those cases. When Versata pursued its original damages theory the value derived from Ford’s savings through either increased productivity or reduced research costs, the district court erred by dismissing that theory as only appropriate when trade secret damages are not subject to a more exacting measurement like reasonable royalties based upon the parties’ licensing history.

CAFC Reverses Reduction of Contract Damages, Affirms Ford’s Trade Secret Liability

Turning to the district court’s reduction of contract damages to $3, the Federal Circuit agreed with Versata that it presented sufficient evidence supporting the jury’s $82.3 million award. The appellate court noted that the jury ultimately awarded an amount within the range of amounts suggested by the parties’ licensing history for each of the 7.5 years that the services agreement was breached, and the award was not so excessive as to shock the conscience. Disagreeing with the district court, the Federal Circuit found that contract damages were calculated with reasonable certainty based on evidence including agreement addendums affecting Versata’s responsibilities to support ACM for Ford, and the expert’s testimony explaining how the starting figures for hypothetical licensing were more reasonable based on that addendum.

Finally, the appellate court nixed Ford’s argument on cross-appeal that it lacked the knowledge of the specific combination of trade secrets at issue, specifically the bundle of ACM software features that Ford claimed were not present in hundreds of documents provided by Versata. Declining to require such a showing not referenced in either the federal or state statutes, the Federal Circuit found that expert testimony establishing Versata disclosed the secrets as combinations in user guides and presentations to Ford, and evidence that those manuals and presentations were disclosed to Ford employees with technical expertise, provided sufficient evidence to support Ford’s liability for misappropriation.

On remand to Eastern Michigan for a new trial on trade secret damages, the Federal Circuit ordered that the district court must reconsider Versata’s damages models wrongfully excluded, including those not solely based upon the parties’ licensing history.

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Author: may1985
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