Under New York Law, Trade Secret Damages Must Reflect Plaintiff’s Actual Loss, Not Just Defendant’s Wrongful Gain

At a Glance

• Following a remand from the Second Circuit, a New York federal judge recently vacated the roughly $200 million damages award in favor of TriZetto. Specifically, the court vacated a $142 million New York trade secret misappropriation award and a $59 million copyright infringement award.
• New York law is different from other states’ laws regarding trade secret damages. Specifically, in New York, damages in trade secrets cases must be measured by the plaintiff’s actual losses, which must correspond to what the defendant has wrongfully gained.
• By awarding punitive damages in the form of attorney’s fees against Syntel, the jury necessarily found that Syntel’s misappropriation was malicious and wanton.

A recent trade secret case from New York highlights the importance of how damages are calculated and emphasizes the need to conform those damages calculations to the applicable standards in your jurisdiction.

In Syntel Sterling Best Shores Mauritius Ltd. v. TriZetto Group Inc., 1:15-cv-00211, after a six-day jury trial in the Southern District of New York in October 2020, a jury found that Syntel misappropriated TriZetto’s trade secrets related to health care insurance software and infringed TriZetto’s copyrights. Following a remand from the Second Circuit, a New York federal judge recently vacated the roughly $200 million damages award in favor of TriZetto. Specifically, the court vacated a $142 million New York trade secret misappropriation award and a $59 million copyright infringement award.

With respect to the New York trade secret misappropriation claim, the court explained that the damages amount “bears no reasonable relation to the actual harm TriZetto suffered, as required by New York law.” Of note, New York law is different from other states’ laws regarding trade secret damages. Specifically, in New York, damages in trade secrets cases must be measured by the plaintiff’s actual losses, which must correspond to what the defendant has wrongfully gained. Here, TriZetto premised its theory of damages on a reasonable royalty that was calculated based on Syntel’s avoided development costs. TriZetto’s damages expert testified that a hypothetical negotiation between the parties would result in a royalty that apportioned half of TriZetto’s development costs to Syntel. The court, however, found a reasonable royalty was not an appropriate method of computation. The court highlighted that TriZetto’s actual loss was only $8.5 million in lost profits and noted the expert’s royalty amount bore no relation to the injury TriZetto actually suffered from Syntel’s infringement. Because a $142 million award would represent a “windfall far in excess of any injuries demonstrated at trial,” the court vacated the award.

The court then vacated the copyright infringement award, finding that it was subsumed within the New York trade secret misappropriation claim and based on the same improper reasonable royalty theory. For a copyright infringement claim, the focus of a damages inquiry is not what the owner would have charged, but rather the fair market value of the infringing product. The fair market value is the reasonable license fee on which a willing buyer and seller would have agreed for the use taken by the infringer. The court found TriZetto’s damages expert did not present sufficient evidence to establish this fair market value and did not provide any evidence or explanation as to why the royalty rate approximated TriZetto’s actual losses. The court also emphasized that Syntel earned only $27 million in revenue for the infringing product, of which only $800,000 or so was profit. Thus, no reasonable fact finder would conclude a $59 million award is a reasonable licensing fee for this use.

The court vacated the compensatory damages judgements but ultimately granted TriZetto’s accompanying motion for almost $15 million in attorney’s fees. By awarding punitive damages in the form of attorney’s fees against Syntel, the jury necessarily found that Syntel’s misappropriation was malicious and wanton. The court similarly determined that “Syntel’s conduct was reprehensible” and recognized TriZetto’s evidence showed that Syntel acted willfully. For example, TriZetto produced evidence that Syntel misappropriated over 100 trade secrets, including downloading more than 700 test cases and automation scripts, as part of a sustained course of illegal conduct against TriZetto over a period of years. Because fees were proper on the trade secret misappropriation claim, the court deemed it unnecessary to decide whether the copyright claim provides an independent channel for recovery of the attorney’s fees. The court also declined to “pick apart TriZetto’s fee calculation to omit any work related to TriZetto’s damages” because that work was “inherently bound up in its liability arguments,” on which TriZetto was successful.