Trade Secret's Inherent Value, Part 1: Avoided Costs and Trade Secret Damages

In E.J. Brooks Co. v. Cambridge Security Seals, 105 N.E.3d 301 (N.Y. 2018), the New York Court of Appeals addressed two questions certified by the Second Circuit. In the underlying suit, E.J. Brooks claimed that several of its employees defected to Cambridge Security Seals—misappropriating E.J. Brooks's trade secrets, engaging in unfair competition, and unjustly enriching Cambridge Security Seals. To measure damages, E.J. Brooks relied on the costs Cambridge avoided as a result of its unlawful activity.  Specifically, for the trade secret cause of action, E.J. Brooks claimed that Cambridge avoided certain development costs.

One question before the court of appeals—among related questions—was whether New York common law allowed E.J. Brooks to rely exclusively on Cambridge's avoided costs to measure trade secret misappropriation damages. The Uniform Trade Secret Act, which has been adopted by almost each and every state, expressly permits this method of calculating damages. But New York has not adopted that act, and New York courts had not addressed this question. Over a strong dissent, the court held that the plaintiffs cannot solely rely on a defendant's avoided costs to measure trade secret misappropriation damages.

Essentially, the majority and dissent in E.J. Brooks disagree over what a plaintiff loses when a defendant misappropriates a trade secret. The majority takes a narrow view, holding that the plaintiff loses either profits or its own development costs. The dissent takes a broader view, arguing that the plaintiff loses the value of the trade secret, and that this value can be measured in many ways.  That is, the dissent believes that trade secret damages should measure the trade secret's value, and that the value can be measured using a defendant's avoided costs. The majority disagrees.