Virginia: Trade Secret Plaintiffs Must Prove Unjust Enrichment Damages

At a Glance

• The appellate court found error in the jury instruction for unjust enrichment damages that required the plaintiff to only prove misappropriation and total sales, and then shifted the burden to the defendant to show the sales were attributed to something other than misappropriation.
• For trade secret disputes under Virginia law, the trade secret plaintiff can expect to have to prove unjust enrichment damages proximately caused by the defendant’s misappropriation.

The Virginia Court of Appeals reversed a $2 billion jury award for trade secret misappropriation under the Virginia Uniform Trade Secrets Act (VUTSA). The appellate court found error in the jury instruction for unjust enrichment damages that required the plaintiff to only prove misappropriation and total sales, and then shifted the burden to the defendant to show the sales were attributed to something other than misappropriation. The plaintiff thus simply offered the defendant’s billions in sales (even for unrelated products), and then the trial court required the defendant to prove the sales were not attributable to the misappropriation.

The court of appeals found this instruction violated Virginia law. By permitting the plaintiff to use all of the defendant’s sales, the jury instruction relieved the plaintiff of its burden to prove proximate cause for the misappropriation. Notably, the court found that the VUTSA contains express language that a plaintiff must prove unjust enrichment damages. Thus, the court explained that the plaintiff bears the burden of proving the share of sales caused by the misappropriation.

Case Summary

Pegasystems Inc. v. Appian Corp., No. 1399-22-4, 2024 WL 3571808 (Va. Ct. App. July 30, 2024) was a dispute between two competitors who both offer software platforms that allow business customers to build complex software applications that are used to automate processes, such as fulfilling orders or opening new customer accounts. The gist of the dispute was that the plaintiff contended that the defendant misappropriated the plaintiff’s trade secrets to copy features into the defendant’s own platform. The plaintiff also contended that the defendant obtained and used trade secrets regarding weaknesses in the plaintiff’s platform. After a trial, the jury awarded the plaintiff more than $2 billion in unjust enrichment damages for the defendant’s trade secret misappropriation. The defendant appealed.

One of the issues on appeal was the jury instruction for the unjust enrichment damages. The trial court gave the following instruction which used a burden-shifting approach:

For unjust enrichment, [the plaintiff] is entitled to recover [the defendant’s] net profits. [The plaintiff] has the burden of establishing by greater weight of the evidence [the defendant’s] sales; [the defendant] has the burden of establishing by greater weight of the evidence any portion of the sales not attributable to the trade secret or trade secrets and any expenses to be deducted in determining net profits.

2024 WL 3571808, at *16. This instruction allowed the plaintiff to prove the defendant’s total sales for all of its products (which were billions at the time) and then shift the burden to the defendant to prove which portion of the sales were not attributable to the trade secrets.

The Virginia Court of Appeals found the trial court erred with this instruction in several respects:

First, the trial court shifted the burden to the defendant to disprove causation between the harm and the misappropriation, which the appellate court found to be inconsistent with the VUTSA, which specifically provides:

Damages can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. If a complainant is unable to prove a greater amount of damages by other methods of measurement, the damages caused by misappropriation can be measured exclusively by imposition of liability for a reasonable royalty for a misappropriator’s unauthorized disclosure or use of a trade secret.

Id. at *16 (quoting Va. Code § 59.1-338(A) (emphases in the opinion)). Based on the second sentence — which deviates from the Defend Trade Secrets Act and the Uniform Act — the court of appeals concluded that Virginia law required the complainant to prove causation between the unjust enrichment and the harm.

Second, even outside the VUTSA, the appellate court found Virginia law generally requires the plaintiff to prove the causal connection between harm and damages. The instruction in Appian deviated from Virginia law by erroneously requiring the plaintiff to prove only misappropriation plus the defendant’s total sales to meet its burden in proving damages.

Third, the Virginia Supreme Court had already rejected burden shifting under the VUTSA in the context of proving misappropriation. The court of appeals concluded that this prior supreme court precedent precluded burden shifting under the VUTSA for damages.

Finally, the appellate court concluded that even if burden shifting were allowed, the instruction — which drew from the Restatement (Third) of Unfair Competition — still went too far by absolving the plaintiff from proving the unjust enrichment was caused by the misappropriation. Even in cases that allow burden shifting, the plaintiff must first identify the sales attributable to the improper use of the trade secret. After such a showing, the burden shifts to the defendant to show the expenses that should be deducted from the revenue to yield profits and whether any portion of the profits is attributable to something other than the misappropriation.

Given the error with the instruction (among a few other errors), the court of appeals reversed the judgment for the VUTSA claim and ordered a new trial.

Takeaway

For trade secret disputes under Virginia law, the trade secret plaintiff can expect to have to prove unjust enrichment damages proximately caused by the defendant’s misappropriation.