Does apportionment rule extend to trade secrets cases?

Case analysis: Versata Software, Inc. v. Internet Brands, Inc., 2012 U.S. Dist. LEXIS 145020 (October 9, 2012)

Background: Both the plaintiff and defendant sold software to large automobile manufacturers that permitted customers to comparison-shop for cars on line. After the plaintiff lost its contract with Chrysler to the defendant, it sued for patent infringement related to the software technology. In response, the defendant countersued for theft of trade secrets and breach of contract, claiming it owned the critical comparison-enabling components of the software and calculating damages based on the plaintiff’s continuing contracts with Toyota.

Expert testimony: In assessing damages for a jury trial, the defendant’s expert reviewed various documents related to the plaintiff’s work for Toyota, including contracts and financial and business records related to income from the contracts and licenses for the software. He also looked at industry research that both parties had conducted, including market and consumer studies and drew on his prior experience working with automobile manufacturers and service providers, including Toyota. (He noted one document “highlighted” the plaintiff’s need for the comparison component of the software.) An additional technical expert for the defendant testified how the plaintiff used the component in preparing its software products for Toyota

Based on this review, the damages expert testified that the comparison functionality was the basis for Toyota’s purchase of the plaintiff’s software, and that the defendant was entitled to all of the profits from related contracts, which amounted to $2 million. If the jury was not prepared to accept the proposition, he still believed that “not less than of 50%” of those profits was attributable to the plaintiff’s theft. Notably, the plaintiff cross-examined the expert but did not present its own expert to calculate damages for the alleged trade secret theft.

Trial court verdict: After the defendant vigorously contested the patent infringement claims on the basis of invalidity and anticipation, the jury returned entirely in the defendant’s favor of $2 million, and the plaintiff appealed.

Appeal: As a preliminary matter, the plaintiff argued that the defendant’s expert incorrectly applied all of its revenues from the Toyota contracts, in violation of the entire market value rule (EMVR). Borrowing the rule from federal patent law, which permits recovery of damages based on the entire value of the accused product if the patented feature drives consumer demand, the plaintiff claimed the expert’s evidence “was not up to the task.” That is, he never showed that the basis for Toyota’s interest in the plaintiff’s software was the trade secret component and he failed to prove that all of profits from the Toyota contract were attributable to the same. At a minimum, the plaintiff maintained the expert should have apportioned the amount of profits that were due directly from the stolen technology.

Importantly, the plaintiff did not cite any legal authority or case precedent for its argument to apply the EMVR to trade secret cases. “In any event,” the court said, “all that is at issue here is whether the evidence supports the jury’s finding that [the defendant’s] trade secret[s] were of sufficient importance to [the plaintiff’s] work on the Toyota project,” such that their award of all of the profits is appropriate.

To determine this narrower issue, the court acknowledged generally the financial documents and market/industry surveys that the defendant’s expert relied on, noting in particular that the plaintiff was free to explore any of their shortcomings on cross-examination. Similarly, the plaintiff had “ample” opportunity to point out any flaws in the expert’s calculations as well as any alleged inconsistencies in his offering a lesser amount. Finally, the plaintiff could have but chose not to offer an expert to offer an alternative measure of misappropriation damages. “At the end of the day, the jury apparently chose to believe” the testimony of the defendant’s expert, “which it was entitled to do,” the court said, and affirmed the $2 million award.

Read the text of the decision in BVR Law.