Monday, January 30, 2006, 1/30/2006 02:49:00 PM

Speculative Damages Are Not Recoverable for Misappropriation

By Todd
Imagine that a managerial-level employee decided that he would like to compete with his employer and, to do so, this required him copying a bunch of information that his employer maintains concerning the costs of starting up and running the business, procuring supplies, servicing customers, and other financial estimates. Imagine, too, that the managerial-level employee's plan is to build a plant to make these competitive products. Imagine further that the managerial-level employee even typed his business plan up to get financing for that idea in furtherance of this misappropriation scheme. Last, imagine he got caught before he could get the plan in motion - before he could build the plant or manufacture the competitive product. Accepting that the aforementioned conduct constitutes a misappropriation of trade secrets, was the former employer damaged such that they could recover money in their suit against the former employee?

That's the issue the United States Court of Appeal for the Fifth Circuit addressed in a case called Carbo Ceramics, Inc. v. Keefe, 2006 WL 197340 (5th Cir., January 26, 2006). Carbo Ceramics proved everything above in the underlying trial. Carbo even had an expert economist come in to court and testify that from Mr. Keefe's own documented prospectus and estimates, Mr. Keefe was going to have revenues in the new business of $238,500,000.00 over ten years - or the estimated life of the manufacturing process trade secret. The expert then estimated that a good portion of that revenue would be attributable to use of the trade secret and that this percentage, reduced to present value, resulted in a present value damage claim of $3.9 million.

What's the problem? Problem is that Mr. Keefe never built the plant or produced a single competitive product by the time of trial. On appeal, Carbo Ceramics argued this didn't matter. The Fifth Circuit, though, disagreed. The Court noted that "any damage model based on speculative revenues and operating profit from an unbuilt plant, is in and of itself, inherently speculative." Thus, Mr. Keefe wins that matter on appeal.

THE LESSON? There are some legal wrongs (theft of a trade secret) that do not result in any remedy from the legal system except for injunctive remedies. You must be able to prove actual damages to obtain actual damages. In other words, betting the farm on an expensive piece of litigation designed to recover money from the other side is not always a wise bet. Perhaps the better course is to keep the farm and bet on the value of an injunction from the court stopping the competition prospectively. It is never unwise to consider alternatives to money damages in these matters.

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