Plaintiffs in New York state trade secret actions face a new limitation on their damages claims, according to a May 3, 2018 decision from the state’s Court of Appeals.  The 4-3 opinion settles a split in New York state case law.  Going forward, compensatory damages for trade secrets misappropriation are limited to the amount actually lost by the plaintiff, and cannot extend to the “hypothetical” amount saved by the alleged infringer on research or development.

The issue at the heart of the court’s decision stemmed from trade secret litigation between two competitors in the plastic security-seal business in the Southern District of New York.  There, Plaintiff TydenBrooks sued Cambridge Security Seals alleging common law trade secret misappropriation, unfair competition, and unjust enrichment, claiming that former TydenBrooks employees stole confidential trade secret information and used it to found Cambridge Security.  At trial, TydenBrooks’ damages expert testified that without the allegedly misappropriated information, Cambridge Security would have had to spend between $6.1 million and $12.2 million in order to develop its manufacturing machinery.  The trial court judge charged the jury on the avoided costs theory alone, and the jury awarded TydenBrooks a $3.9 million judgment.

This decision sets a bright line for plaintiffs in New York state court, couching damages claims firmly in the context of plaintiff’s actual loss, and insulating defendants from damages awards based on their in-house development and research costs.  Plaintiffs and defendants alike can now look forward to litigation narrowly focused on only the economic injuries incurred by the plaintiff.  However, as noted by the minority, the decision sets New York apart from other jurisdictions which allow damages based on either the plaintiff’s losses, the defendant’s gain, or even—as in the Fifth Circuit—a “reasonable royalty.”