Misappropriation of Trade Secrets: The “Reasonable Royalty” Measure of Damages

Trade secrets are the lifeblood of successful businesses. Under South Carolina law, a trade secret can be information including, but not limited to, a formula, method, or product, that  

(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by the public or any other person who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

S.C. Code Ann. § 39-8-20(5)(a).

While the phrase “reasonable efforts” is worthy of its own analysis, it is sufficient for the purposes of this article to note that courts recognize that determining the proper balance between protecting and utilizing a trade secret is a fact-intensive inquiry.  There are, however, some statutory mechanisms in place to assist employers in putting their trade secrets to work; S.C. Code Ann. § 39-8-30(b), for example, imposes a duty on all employees who are “informed of or should reasonably” know of the existence of a trade secret to neither use nor disclose an employer’s trade secrets.  

The Question of Damages

When an employee or third party misappropriates a trade secret, South Carolina law provides the owner of the trade secret with both short-term and long-term remedies. In the immediate aftermath of a known misappropriation, for example, a business owner may seek an injunction under S.C. Code Ann. § 39-8-50.

At trial, a business owner who can prove that his trade secret has been misappropriated is entitled to recover actual damages for the misappropriation. Calculating actual damages for the misappropriation of a trade secret, however, is not always as straightforward as calculating actual damages for another action in contract or tort.

Suppose, for example, we have a misappropriation of a trade secret from a business with a seasonal business model, like a manufacturer of chocolate Easter bunnies. For most of the year, there’s no market for the manufacturer’s product. Suppose that despite the manufacturer’s reasonable efforts to protect its recipes, a trusted employee manages to misappropriate them in August. If the manufacturer discovers the misappropriation in August and immediately files suit against the (now former) employee, the manufacturer will be unable to claim that it has yet lost business from the misappropriation. What, then, are the manufacturer’s actual damages?

The Reasonable Royalty

The legislature, foreseeing the likelihood of these types of scenarios, provided an ingenious method for calculating damages in S.C. Code Ann. § 39-8-40(b):

In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator’s unauthorized disclosure or use of a trade secret.”

[emphasis added].

While case law addressing royalty damages is spares, courts throughout the United States have held that this measure of damages is a way “to measure the value to the defendant of what he actually obtained from the plaintiff” and is determined by calculating “what the parties would have agreed to as a fair price for licensing the defendant to put the trade secret to the use the defendant intended at the time the misappropriation took place.” University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518 (5th Cir. 1974); see also AirFacts, Inc. v. Amezaga, 30 F.4th 359 (20220); StorageCraft Technology Corp. v. Kirby, 744 F.3d 1183 (10th Cir. 2014).

The reasonable royalty measure of damages provides a way to capture the ongoing effects of misappropriation on a business. Misappropriation rarely inflicts a confined and easily-measured harm; rather, the misappropriation erodes a business’s competitive advantages over time as the misappropriator continues to benefit from its use. As with determining “reasonable efforts,” determining a reasonable royalty is a fact-intensive exercise, involving, amongst other things, the market position of the owner of the trade secret prior to misappropriation.

While its application may become complex in certain scenarios, the general advantages offered by the reasonable royalty measure of damages are obvious. In the hypothetical above, the manufacturer’s inability to demonstrate a loss of business in the immediate aftermath of the misappropriation has no bearing on its ability to calculate a reasonable royalty. All the manufacturer would need to determine is a price at which it would have agreed to license its recipes to the employee at the time the employee misappropriated them.

If you are dealing with a suspected misappropriation of trade secrets, or are interested in taking steps to secure the trade secrets you have developed, contact us.

This website is for information purposes only. The information should not be construed to constitute formal legal advice or the formation of an attorney/client relationship. A result achieved on behalf of one client does not necessarily indicate similar results can be obtained for other clients. For information, contact Greg Studemeyer at (803) 393-4399.