The Secret to Success: Use of Trade Secrets Warrants Damages Equal to License Price

On April 22, the California Court of Appeal, Sixth Appellate District, held that the use of trade secrets warrants damages equal to the license price, not the purchase price.

Grail Semiconductor, Inc. invented a new, faster microchip.  The chip used induction to collect electric charges and accelerate computer processes.  Grail discussed the induction technology in 2001 with Mitsubishi Electric, Inc.  Mitsubishi signed a nondisclosure agreement and attended a presentation, but refused to invest.  Mitsubishi’s subsidiary then began to manufacture products with the same inductive design only three years later.

Damages for the breach of a nondisclosure agreement typically reflect the stolen property’s value.  “Value,” however, is a vague term.  It might mean 1) purchase price; 2) projected royalties; or 3) actual profits.  The jury defined “value” as the purchase price.  It awarded around $123 million, the amount for which Grail could sell the technology.  Its calculations reflected projected profits in Grail’s business plan.

However, the jury’s calculation method was not valid.  The appellate court held in Grail Semiconductor Inc. v. Mitsubishi Electric & Electronics USA, Inc., case number 1-07-CV098590, that damages should reflect the price to license the product, not purchase it.  Mainly, Grail could lease the technology to other companies, despite the misappropriation.  The technology, therefore, retained most of its value; Grail and Mitsubishi were the only two companies that knew it.

Furthermore, the court refused to grant a JNOV as Mitsubishi was still liable – it just owed less money.  It also said that damages were a sufficient remedy, though the nondisclosure agreement required an injunction.  Ultimately, it ordered a new trial so a different jury could correctly compute damages.

Consequently, the improper use of trade secrets may warrant fewer damages than disclosure. Plaintiffs who sue for the illicit use of trade secrets may need to consider accepting lower settlement offers.  They might also want to describe a marketing strategy for which mere use of a trade secret completely impairs its value.