No Unjust Enrichment Won’t Let You Off the Hook for Reasonable Royalties under California Trade Secrets Act

What happens when you can’t – or don’t – prove actual damages or unjust enrichment in your trade secrets case?

E*Trade (annoying baby mascot pictured) just found out the answer in a recent case from the California Court of Appeal, Ajaxo Inc. v. E*Trade Financial Corp., H033631 (Aug. 30, 2010 6th Dist.).

The factual background is a bit complicated, so I’ll try to boil it down. Ajaxo and E*Trade entered into an NDA so that E*Trade could consider Ajaxo’s technology for wireless stock trading. E*Trade determined not to enter into an agreement, but instead went with another company, loosely affiliated with E*Trade. Ajaxo later found out that E*Trade and the other company developed their wireless offering with trade secrets from Ajaxo and Ajaxo brought suit under the California Uniform Trade Secret Act (CUTSA). Liability was established in the first trial.

In the second trial, Ajaxo could prove under CUTSA either its actual losses or the unjust enrichment of E*Trade. For various reasons, Ajaxo put all its eggs in the latter basket.

Wireless stock trading, though, turned out not to be lucrative for E*Trade. In fact, the jury determined, E*Trade lost over $2 million implementing it. (It made up only ½ of one percent of all trading.)

Ajaxo, having struck out on damages, argued that the court had to award a reasonable royalty to it under CUTSA. The California Act, unlike the uniform act as adopted in most states, provides for the reasonable royalty remedy solely in cases where the other two types of damages – plaintiff’s losses or defendant’s unjust enrichment – are not “provable.”

The question became, what does “provable” mean in this context. E*Trade successfully argued to the trial court that Ajaxo was not entitled to a royalty because the other types of damages were legally “provable,” they just had not been proved as a matter of fact.

The court of appeals reversed, holding that the failure to establish any damages still leaves a plaintiff with a royalty remedy to be awarded by the court. The court held that the legislature intended to track the common law remedy of allowing for reasonable royalties when a plaintiff could not prove any loss and defendant made no actual profits.

The appeals court also offered some guidance to the trial court on remand. The royalty should represent the hypothetically agreed value of what the defendant wrongfully obtained, i.e. “by means of a suppositious meeting between the parties, the court calculates what the parties would have agreed to as a fair licensing price at the time the misappropriation occurred.”

Quick lesson learned: not profiting from stealing trade secrets won’t let you off the hook.