E.J. Brooks Company,, Appellant-Respondent,v.Cambridge Security Seals, Respondent-Appellant.

Brief

N.Y.Jun 20, 2017

To be Argued by: HOWARD W. SCHUB (Time Requested: 30 Minutes) CTQ-2017-00003 United States Court of Appeals for the Second Circuit Docket Nos. 16-207 and 16-259 Court of Appeals of the State of New York E.J. BROOKS COMPANY d/b/a TydenBrooks, Appellant-Respondent, – against – CAMBRIDGE SECURITY SEALS, Respondent-Appellant. REPLY BRIEF FOR RESPONDENT-APPELLANT DANIEL J. FETTERMAN HOWARD W. SCHUB FRIA R. KERMANI KASOWITZ BENSON TORRES LLP Attorneys for Respondent-Appellant 1633 Broadway New York, New York 10019 Tel.: (212) 506-1700 Fax: (212) 506-1800 Date Completed: January 3, 2018 i RULE 500.1(F) DISCLOSURE STATEMENT There are no publicly held corporations that own more than 10% of the stock of Respondent-Appellant Cambridge Security Seals. ii STATEMENT OF RELATED LITIGATION There are no related cases to the knowledge of Respondent-Appellant Cambridge Security Seals. iii TABLE OF CONTENTS PRELIMINARY STATEMENT ............................................................................... 1 ARGUMENT ............................................................................................................. 2 I. New York Law Does Not Permit “Avoided Costs” That Are Untethered From Plaintiff’s Losses ................................................................. 2 A. New York Law Only Permits Compensation for Plaintiff’s Actual Losses ........................................................................................ 3 B. Permitting “Avoided Costs” as Damages Would Negate Fundamental Principles of New York Law and Public Policy ...........14 C. Other Non-New York Cases Do Not Support Permitting “Avoided Costs” as Compensatory Damages .....................................19 II. Prejudgment Interest Is Not Available on Avoided Costs Damages ............21 CONCLUSION ........................................................................................................28 iv TABLE OF AUTHORITIES Page(s) Cases Allan Dampf, P.C. v. Bloom, 127 A.D.2d 719 (2d Dep’t 1987) .......................................................................... 3 American Electronics., Inc. v. Neptune Meter Co., 30 A.D.2d 117 (1st Dep’t 1968) ....................................................................... 3, 9 Bamira v. Greenberg, 295 A.D.2d 206 (1st Dep’t 2002) ....................................................................... 23 Baxter v. McDonnell, 154 N.Y. 432 (1897) ........................................................................................... 13 In re Cross Media Mktg. Corp., 2006 WL 2337177 (S.D.N.Y. Aug. 11, 2006) .............................................. 15, 16 De Long Corp. v. Morrison-Knudsen Co., 20 A.D.2d 104 (1st Dep’t 1963), aff’d, 14 N.Y.2d 346 (1964) .......................... 25 Delulio v. 320-57 Corp., 99 A.D.2d 253 (1st Dep’t 1984) ......................................................................... 25 Dresser-Rand Co. v. Virtual Automation Inc., 361 F.3d 831 (5th Cir. 2004) .............................................................................. 15 Duane Jones Co. v. Burke, 306 N.Y. 172 (1954) ................................................................................. 8, 10, 14 Eighteen Holding Corp. v. Drizin, 268 A.D.2d 371 (1st Dep’t 2000) ....................................................................... 25 Electrolux Corp. v. Val-Worth, Inc., 6 N.Y.2d 556 (1959) ................................................................................... 3, 8, 14 Epstein Eng’g, P.C. v. Cataldo, 41 Misc. 3d 1218(A) (Sup. Ct. N.Y. Cnty. 2013), aff’d, 124 A.D.3d 420 (1st Dep’t 2015) ................................................................................ 8 v Extrin Foods, Inc. v. Leighton, 202 Misc. 592 (Sup. Ct. Kings Cnty. 1952) ......................................................... 7 GlobeRanger Corp. v. Software AG U.S.A., Inc., 836 F.3d 477 (5th Cir. 2016) .............................................................................. 15 Hertz Corp. v. Avis, Inc., 106 A.D.2d 246 (1st Dep’t 1985) ..................................................................... 3, 9 Hyde Park Prods. corp. v. Maximilian Lerner Corp., 65 N.Y.2d 316 (1985) ....................................................................................... 3, 8 In Design v. Lauren Knitwear Corp., 782 F. Supp. 824 (S.D.N.Y. 1991) ..................................................................... 26 Jim Beam Brands Co. v. Tequila Cuervo La Rojena S.a. de C.v., 2011 WL 12711463 (N.Y. Sup. Ct. July 12, 2011) ............................................ 11 Kassis v. Teachers’ Ins. & Annuity Ass’n, 13 A.D.3d 165 (1st Dep’t 2004) ................................................................... 23, 24 Lawrence of London, Ltd. v. Count Romi, Ltd., 30 A.D.2d 518 (1968) ........................................................................................... 7 LinkCo, Inc. v. Fujitsu Ltd., 230 F. Supp. 2d 492 (S.D.N.Y. 2002) ................................................................ 21 Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173 (2011) ......................................................................................... 13 Merck Eprova AG v. Gnosis S.p.A., 760 F.3d 247 (2d Cir. 2014) ............................................................................... 26 Michel Cosmetics, Inc. v. Tsirkis, 282 N.Y. 195 (1940) ..................................................................................... 4, 5, 8 Minnesota Min. & Mfg. Co. v. Tech. Tape Corp., 23 Misc. 2d 671 (Sup. Ct. West. Cnty. 1959), aff’d, 15 A.D.2d 960 (2d Dep’t 1962) ..................................................................................................... 8 Mosesson v. 288/98 W. End Tenants Corp., 294 A.D.2d 283 (1st Dep’t 2002) ....................................................................... 23 vi Pencom Sys., Inc. v. Shapiro, 193 A.D.2d 561 (1st Dep’t 1993) ......................................................................... 7 Ronson Art Metal Works, Inc. v. Gibson Lighter Mfg. Co., 3 A.D.2d 227 (1st Dep’t 1957) ............................................................... 4, 5, 8, 14 Matter of Rothko’s Estate, 43 N.Y.2d 305 (1977) ......................................................................................... 10 Sperry Rand Corp. v. A-T-O, Inc., 447 F.2d 1387, 1393 (4th Cir. 1971) .................................................................. 20 Steitz v. Gifford, 280 N.Y. 15 (1939) ....................................................................................... 13, 14 Straus v. Notaseme Hosiery Co., 240 U.S. 179 (1916) .............................................................................................. 5 Suburban Graphics Supply Corp. v. Nagle, 5 A.D.3d 663 (2d Dep’t 2004) ........................................................................ 9, 10 Underhill v. Schenck, 238 N.Y. 7 (1924) ................................................................................................. 3 University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518 (5th Circ. 1974)............................................................................. 20 Vermont Microsystems, Inc. v. Autodesk, Inc, 138 F.3d 449 (2d Cir. 1998) ............................................................................... 20 Wathne Imports, Ltd. v. PRL USA, Inc., 101 A.D.3d 83 (1st Dep’t 2012) ......................................................................... 10 Zylon Corp. v Medtronic,Inc., 2015 WL 1779010 (Sup. Ct. N.Y. Cnty. April 17, 2005) .......................... 6, 7, 11 Statutes Copyright Act ........................................................................................................... 26 Lanham Act .............................................................................................................. 26 Uniform Trade Secrets Act ...................................................................................... 20 vii Other Authorities CPLR § 5001 .....................................................................................................passim 1 PRELIMINARY STATEMENT1 As TydenBrooks admits, currently New York law requires damages in trade secret cases to be connected to a plaintiff’s losses. (TydenBrooks Rep. at 14.) Because avoided costs do not measure, and are not linked to, a plaintiff’s losses, that admission is fatal to TydenBrooks’s position that avoided costs are consistent with New York law. Moreover, TydenBrooks fails to meaningfully distinguish the many New York cases that measure compensatory damages by the actual losses sustained by a plaintiff. TydenBrooks argues instead that New York law should “evolve” to recognize avoided costs as a new measure of damages where financial losses cannot be calculated. (Id. at 4, 17.) However, there is no need for such an evolution nor is it advisable. For over a century, New York courts have recognized that damages are difficult, if not impossible, to prove in trade secret and unfair competition cases. To address that issue, New York law has allowed plaintiffs to establish losses in different ways and relaxed the rule of certainty as to the amount of damages. But where, as here, a plaintiff cannot or elects not to prove any losses, New York law is clear that no damages are recoverable. TydenBrooks asserts that New York law allows for damages to be measured by a reasonable royalty where a 1 Capitalized terms not defined herein have the meaning set forth in CSS’s Opening Brief, filed on November 2, 2017 (“CSS Br.”). References herein to “TydenBrooks Rep.” refer to TydenBrooks’s Reply Brief, filed on December 1, 2017. 2 plaintiff’s losses cannot be calculated. While CSS does not agree that New York authorizes any measure of damages absent proof of loss, even if it did allow a reasonable royalty as an alternative measure of damages where financial losses cannot be calculated, it is neither advisable nor necessary for this Court to create a new, second, alternative measure of damages. TydenBrooks’s argument as to prejudgment interest also is unsound as it fails to acknowledge, as the Second Circuit did, that an avoided cost measure of damages is not compensatory. Moreover, awarding interest on top of an award of damages “through the date on which the verdict is given” would result in an impermissible double recovery. ARGUMENT I. New York Law Does Not Permit “Avoided Costs” That Are Untethered From Plaintiff’s Losses TydenBrooks does not dispute that: (i) the guiding principle for damages in misappropriation and unfair competition cases is to allow a plaintiff to recover compensatory damages for the injury sustained; (ii) a plaintiff is not entitled to recover more than the extent of its own injury; (iii) New York courts require trade secret damages to have a connection to a plaintiff’s actual losses; and (iv) the Second Circuit concluded that an avoided costs measure of damages, which does not measure the injury to the plaintiff, but rather purports to measure the gain enjoyed by the defendant in the form of time and labor that the defendant might 3 have saved as a result of its conduct, is not compensatory. Despite these concessions, TydenBrooks inexplicably argues its made up “avoided costs” theory of damages is consistent with New York law. For the reasons that follow, TydenBrooks is wrong. A. New York Law Only Permits Compensation for Plaintiff’s Actual Losses It is beyond cavil that New York courts require damages in trade secret and unfair competition cases to be commensurate with a plaintiff’s actual pecuniary losses that are a proximate result of defendant’s wrongdoing.2 Even where compensatory damages have been articulated in terms of “profits unjustly received by a defendant” or a “defendant’s gain,” New York courts have steadfastly required (i) a causal link between the defendant’s unjust profits and the loss sustained by plaintiff, and (ii) that the measure of damages correspond to the plaintiff’s losses as a means of compensation. (CSS Br. at 12-25.) TydenBrooks intentionally glosses over this entire body of New York jurisprudence relying exclusively on general precepts, and it takes issue with 2 See, e.g., Hyde Park Prods. Corp. v. Maximilian Lerner Corp., 65 N.Y.2d 316, 322 (1985); Electrolux Corp. v. Val-Worth, Inc., 6 N.Y.2d 556, 572 (1959); Underhill v. Schenck, 238 N.Y. 7, 20 (1924); Hertz Corp. v. Avis, Inc., 106 A.D.2d 246, 251 (1st Dep’t 1985); American Electronics, Inc., v. Neptune Meter Co., 30 A.D.2d 117, 119 (1st Dep’t 1968); Allan Dampf, P.C. v. Bloom, 127 A.D.2d 719, 719 (2d Dep’t 1987). 4 concepts that do not speak to the fundamental issue here -- that avoided costs bear no connection to a plaintiff’s losses and thus are not compensatory in nature. To that end, TydenBrooks incorrectly contends that all of the cases cited in CSS’s opening brief are distinguishable. TydenBrooks asserts that this Court’s decision in Michel Cosmetics, Inc. v. Tsirkis, 282 N.Y. 195 (1940) -- which reversed an award of compensatory damages based on all of defendant’s profits -- is irrelevant because the Court reversed the damages for a failure of proof. (TydenBrooks Rep. at 11-12.) But the proof that was lacking in Michel Cosmetics was any evidence linking the claimed damages to losses sustained by the plaintiff as a result of the unfair competition: “plaintiff’s sales were not reduced after that competition began nor were its profits, and … at least in part, the sales by the defendants were not made in territory where the plaintiff did business. Id. at 204. This Court held that absent a demonstrable link between the defendant’s gains and the plaintiff’s losses, no damages can be awarded. Id. TydenBrooks incorrectly claims that the First Department’s decision in Ronson Art Metal Works, Inc. v. Gibson Lighter Mfg. Co., 3 A.D.2d 227 (1st Dep’t 1957) -- which reversed a damages award of “defendant’s entire profits” -- is inapplicable because the plaintiff failed to prove that all the profits were the result of unfair competition. (TydenBrooks Rep. at 11.) But that is precisely the point. The burden is on the plaintiff to prove actual losses, and there is no presumption 5 that a defendant’s gains are a valid proxy for a plaintiff’s losses. Id. 232-33. Ronson, like Michel Cosmetics, required that damages be linked to the plaintiff’s actual loss to the exclusion of other legitimate causes and in those cases damages were reversed because the plaintiff, like TydenBrooks here, submitted no proof that defendant’s gains had any connection whatsoever to what plaintiff lost. TydenBrooks further argues that CSS overstated the United States Supreme Court’s holding in Straus v. Notaseme Hosiery Co., 240 U.S. 179 (1916) -- which reversed an award of defendant’s profits -- because “the Court there did not hold that damages in trade secret cases are limited solely to plaintiff’s losses.” (TydenBrooks Rep. at 12.) This argument is disingenuous. The Supreme Court in Straus reversed the award of damages because there was no direct connection between the defendant’s sales gains and any injury to the plaintiff. Id. at 181-82. Thus, Straus stands for the proposition that compensatory damages in unfair competition cases must be linked to a plaintiff’s actual losses. Id. at 181-83. TydenBrooks also attempts to discredit the numerous other New York cases CSS cited in support of its position by claiming that they involved a theft of customer lists where it “makes sense” to measure damages based on the customers diverted. (TydenBrooks Rep. at 13.) That is a distinction without a difference. It makes equal sense to measure damages by lost sales where a case involves a theft of manufacturing processes. See Michel Cosmetics, 282 N.Y. at 200 (“The wrong 6 inflicted upon the plaintiff is analogous to the wrong suffered by an owner through infringement of his patent or trade-mark, and the rule of damages is similar.”). Moreover, any factual distinctions ignore the fundamental legal issue that this Court must decide as to TydenBrooks’s novel “avoided costs” measure of damages. The cases cited by CSS all stand for the legal principle that the measure of damages in unfair competition and trade secret cases must comport with black- letter New York law -- namely that damages must be commensurate with and causally connected to plaintiff’s loss. (CSS Br. at 12-18.)3 Despite the wealth of authority from this Court and the Appellate Division that damages in unfair competition cases must be linked to a plaintiff’s losses, TydenBrooks now argues that three cases, not cited in its opening brief, hold to the contrary. (TydenBrooks Rep. at 7-9.) TydenBrooks is wrong. The first case, Zylon Corp. v Medtronic,Inc., 2015 WL 1779010 (Sup. Ct. N.Y. Cnty. April 17, 2005), did not hold that damages could be measured by defendant’s profits. It simply denied a pre-trial motion to preclude, and reserved decision until trial on whether it would allow damages to be measured by defendant’s profits. Zylon, at 3 TydenBrooks wrongly accuses CSS of reversing course and claiming “for the first time that ‘the measure of damages in trade secret cases must correspond to a plaintiff’s losses as a means of compensation.’” (TydenBrooks Rep. at 6-7.) CSS has argued consistently that damages must be measured by a plaintiff’s losses or a defendant’s profits (in palming off cases), not a defendant’s avoided costs. But even if it had not, it wouldn’t matter. New York law requires that compensatory damages must be measured and limited by a plaintiff’s actual losses. 7 *17 n.10. In so ruling, the court reaffirmed that damages are measured by a plaintiff’s lost profits and refused to bar plaintiff’s expert from opining as to defendant’s profits, but only after finding the expert could say that the defendant’s profits were “traceable to Plaintiff’s zero fold balloon technology.” Zylon, at *16 (emphasis added). Accordingly, the Court recognized the need for evidence linking defendant’s gain and the plaintiff’s lost sales.4 The second case, Extrin Foods, Inc. v. Leighton, 202 Misc. 592, 603 (Sup. Ct. Kings Cnty. 1952), provides for an accounting of “the profits earned” from sales of product that copied plaintiff’s trade secret formula, but the accounting was for profits earned “and for the damages sustained by plaintiff.” (emphasis added). Thus, the court also required a connection between defendant’s profits and plaintiff’s losses. Id. The third case, Lawrence of London, Ltd. v. Count Romi, Ltd., 30 A.D.2d 518, 518 (1968), measured damages by defendant’s sales of raincoats in 13 different styles that had been stolen from plaintiff. This case is clearly one of palming off where there was a direct link between defendant’s profits and 4 The Zylon court noted that damages may be measured by “profits unjustly gained,” but the court cited a federal, not New York, case. Zylon, at *16. The court also mistakenly relied on only part of a quote from Pencom Sys., Inc. v. Shapiro, 193 A.D.2d 561 (1st Dep’t 1993), in stating that disgorgement of profits is a proper measure of damages. Zylon, at *16. The rest of the quote clarifies that disgorgement is only awarded when the defendant uses trade secrets for his own benefit while still in the plaintiff’s employ. Pencom, 193 A.D.2d at 561. 8 plaintiff’s lost sales, id., and offers no legal support for applying TydenBrooks’s new theory of “avoided costs” in this case.5 Only after devoting more than half of its brief arguing that avoided costs are not inconsistent with New York law, does TydenBrooks even acknowledge that currently New York law requires trade secret damages to be connected to a plaintiff’s losses. (TydenBrooks Rep. at 14-15.) It then attempts to belittle this well-settled authority by claiming that only “some New York cases … [exist] in which the court has stated that the damages awarded must have some connection to the plaintiff’s losses” and that those cases are factually distinct and should not apply where plaintiff’s lost profits and defendant’s unjust gains cannot be calculated. (Id. at 14 (emphasis added).) TydenBrooks’s argument is meritless. First, it is not just “some New York cases” that require compensatory damages to have a connection to a plaintiff’s losses. There are legions of New York cases from this Court and the appellate division over the past century, including Michel Cosmetics, Hyde Park, Duane Jones, Electrolux, Ronson, 5 TydenBrooks’s reliance on Epstein and Minnesota also is misplaced. Both cases required a link between defendant’s wrongful diversions of plaintiff’s business and plaintiff’s actual loss. Epstein Eng’g, P.C. v. Cataldo, 41 Misc. 3d 1218(A) (Sup. Ct. N.Y. Cnty. 2013), aff’d, 124 A.D.3d 420 (1st Dep’t 2015) (plaintiff “must prove by competent and sufficient evidence its loss of sales and consequential lost profits from defendants’ wrongdoing”) (emphasis added); Minnesota Min. & Mfg. Co. v. Tech. Tape Corp., 23 Misc. 2d 671, 689-90 (Sup. Ct. West. Cnty. 1959), aff’d, 15 A.D.2d 960 (2d Dep’t 1962) (defendant “liable for damages sustained by the plaintiff” for the profits earned from the wrongful conduct) (emphasis added). 9 Suburban Graphics, Hertz and American Electronics, among many others, that require this connection to a plaintiff’s losses. (See CSS Br. at 12-19.) Second, on the critical legal issue -- whether damages must be commensurate with and causally connected to plaintiff’s loss -- the cases are not distinguishable. Hertz Corp. v. Avis, 106 A.D.2d at 246, is an unfair competition case where Hertz alleged that Avis stole trade secrets to gain inside information concerning Hertz’s operations. Hertz alleged that Avis was able to use the information to reverse substantial business losses and correct operational deficiencies. Id. at 247. Hertz claimed $25 million in damages based on Avis’s gains despite its admission that it suffered no losses. Id. at 247-48. The trial court granted Hertz’s motion to compel Avis to produce financial information concerning Avis’s profits. On appeal, the First Department reversed, holding that a defendant’s gains are irrelevant if a plaintiff has not sustained any losses. Id. at 251. In Suburban Graphics Supply Corp. v. Nagle, 5 A.D.3d 663, 666 (2d Dep’t 2004), another unfair competition and misappropriation of trade secrets case, the Second Department stated that the measure of damages is the amount which the plaintiff would have made but for the defendant’s wrong, not the profits received by the defendant. There, the defendants defaulted on the claim and an inquest was directed. The plaintiff, who was deprived of an opportunity for discovery, claimed 10 as damages all of its lost profits, but defendants submitted evidence that lost profits were caused by the poor performance of workers who replaced them and customers who were dissatisfied with the plaintiff and would have gone elsewhere anyway. Id. at 666-67. The court limited damages to those suffered by plaintiff as a result of the unfair competition. Id. It did not relieve plaintiff of its burden to prove its losses nor did it presume that all of defendant’s gains constituted plaintiff’s losses. Id. These cases and the others discussed in CSS’s Opening Brief are on point and reject measuring damages by a defendants’ gain absent proof of a plaintiff’s loss. Third, there is no authority supporting TydenBrooks’s suggestion that a new measure of damages should be created where profits and gains cannot be calculated. There have been dozens of unfair competition cases over the years where it has been difficult for a plaintiff to prove the losses caused directly by the defendant’s wrongdoing. (See CSS Br. at 12-25.). To deal with that issue, New York courts did not create new measures of damages. They instead afforded plaintiffs with different methods of establishing their losses and considerable leeway in proving the amount of those losses. See, e.g., Duane Jones Co. v. Burke, 306 N.Y. 172, 190-92 (1954); Matter of Rothko’s Estate, 43 N.Y.2d 305, 322-23 (1977); Wathne Imports, Ltd. v. PRL USA, Inc., 101 A.D.3d 83, 88-90 (1st Dep’t 2012). 11 TydenBrooks’s ipse dixit that avoided costs are an appropriate “proxy” for a plaintiff’s losses is not compelling. New York has never authorized a substitute for actual losses. Where a plaintiff cannot prove damages, courts have awarded no damages. (CSS Br. at 21-22.) Moreover, avoided costs are not a proxy for plaintiff’s actual losses -- that is, they do not serve as a reliable substitute for the value of plaintiff’s actual losses. They are instead a proxy for a defendant’s intangible gains. Additionally, even under TydenBrooks’s view of the current New York law, a new avoided costs measure of damages is not necessary as a proxy when a plaintiff’s loss or defendant’s gain is difficult to determine because, according to TydenBrooks, if neither of those measures of damages are available, then damages are to be measured by a “reasonable royalty.” (TydenBrooks Rep. at 1.)6 Assuming arguendo TydenBrooks were correct that its losses were difficult to calculate, and assuming further arguendo that New York law allows for an award of a “reasonable royalty” when losses are difficult to calculate, TydenBrooks’s 6 In its opening brief, TydenBrooks cites federal cases in support of its position that a reasonable royalty is an acceptable measure of damages. (TydenBrooks Br. at 22.) In its reply brief, TydenBrooks cites one New York case, Zylon, that mentions a reasonable royalty. (TydenBrooks Rep. at 7.) But Zylon also relied on federal cases and the defendant accepted use of that measure of damages. Zylon, at *16. In Jim Beam Brands Co. v. Tequila Cuervo La Rojena S.a. de C.v., 2011 WL 12711463 (N.Y. Sup. Ct. July 12, 2011), the court found there was no precedent in New York for royalty damages in a breach of contract case where plaintiff suffered no losses. Given the wealth of New York caselaw measuring damages by a plaintiff’s losses, and the dearth of cases recognizing a reasonable royalty, CSS does not concede that New York recognizes a reasonable royalty as an alternative measure of damages. 12 purported inability to calculate its losses would not require this Court to craft a new, alternative measure of damages in the form of “avoided costs.” Damages in such a hypothetical case could and should simply be measured by the existing alternative measure of damages -- a reasonable royalty. There is nothing special about this case that warrants the creation of a brand new measure of alternative damages. While TydenBrooks argues that the trial court found that losses could not be calculated at trial, it concedes sub silentio that it made a tactical decision before trial to waive any claim for financial losses and never mentioned, let alone attempted to prove, actual damages at trial. Indeed, the trial court’s order on the motions in limine makes clear that there was no evidence at trial of TydenBrooks’ losses because TydenBrooks elected not to seek lost profits. (A.458-59, A.464.) Lost profits were not impossible to calculate but after TydenBrooks elected exclusively to seek avoided costs, the trial court precluded TydenBrooks’s expert from amending his expert report to assert a claim for lost profits. (A.458-59.) TydenBrooks also does not -- because it cannot -- dispute that CSS’s revenues were known and could have been used to calculate a “reasonable royalty” measure of damages. (A.912, A.941-43.) Rather, TydenBrooks strategically elected to seek the only form of damages that would allow it to argue for substantial, seven-figure damages. This Court would be ill advised to modify 13 more than a century of black-letter New York law simply to satisfy the strategic and economic desires of a single plaintiff.7 TydenBrooks argues that because “there are a wide variety of commercial business practices denominated as unfair competition … the relief granted must be tailored to the facts and circumstances of the case” especially where “damages cannot be estimated with certainty.” (TydenBrooks Rep. at 9-10.)8 But TydenBrooks ignores that the very cases it cites have tailored relief within the legal strictures of damages awards and without compromising the integrity of black- letter compensatory damage principles. As this Court observed in Steitz v. Gifford: “In actions in tort, there are certain well-settled and universally recognized rules relating to damages recoverable …. The damages cannot be remote, contingent or speculative …. The damages must be compensatory only. Reasonable certainty as to the amount is all that is required … and [that the damages] can be traced directly and with 7 TydenBrooks’s argument that “avoided costs” is a proper measure of damages for its unjust enrichment claim is wrong. (TydenBrooks Rep. at 24.) TydenBrooks does not, because it cannot, respond to CSS’s obvious point that New York courts limit damages awards based on unjust enrichment causes of action to compensation for the plaintiff’s loss. (CSS Br. at 26-27); see also Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 182 (2011) (plaintiff must show defendant was enriched at plaintiff’s expense). 8 Although it argues that the Court must take into account the facts and circumstances of this case, TydenBrooks dedicates an entire section of its reply brief asking the court to ignore many of the facts of this case that CSS set forth in its opening brief to provide the court with the full context of the dispute as to whether avoided costs are compensatory in nature. (TydenBrooks Rep. at 2-3.) It is appropriate for the Court to review all the facts. See Baxter v. McDonnell, 154 N.Y. 432, 436 (1897) (“While we are confined to the question certified, it is our duty to examine the record, not only to see that it actually arose, but also to see how it arose, so that we can decide it as it was presented to the courts below. In other words, we should ascertain all the facts that raise the question, so that it can be decided as an existing issue between the parties, and the danger of passing upon merely abstract propositions may thus be avoided.”) (emphasis added). 14 reasonable certainty to the [wrongdoing], to the exclusion of other causes …. It cannot be said that a fixed, categorically stated and arbitrary rule from which no variation is permissible is applicable to every case where facts in different cases so greatly differ, and necessity requires the formulation of a rule that will fit the particular case without affecting the integrity of the above-stated general principles. 280 N.Y. 15, 20-21 (1939) (emphasis added); see also Duane Jones, 306 N.Y. at 190-91 (noting that damages need not be determined with certainty but still limiting damages to “plaintiff’s losses [that] were a proximate result of defendants’ conduct”) (citation omitted); Electrolux, 6 N.Y.2d at 572 (acknowledging that “disposition of each case peculiarly depends upon the precise state of facts disclosed” and still requiring plaintiff to prove “loss in business which can be traced directly to respondents’” wrongdoing) (citation omitted); Ronson, 3 A.D.2d at 231 (recognizing the “unlimited ingenuity that overreaching entrepreneurs and trade pirates put to use” but still requiring a “sufficient causal relationships between the prohibited conduct and the profits earned by the defendant”). Consequently, New York law does not allow trade secret damages to be measured by a defendant’s avoided costs rather than the losses the plaintiff sustained by virtue of the misappropriation or unfair competition. B. Permitting “Avoided Costs” as Damages Would Negate Fundamental Principles of New York Law and Public Policy To permit plaintiffs to recover a defendant’s “avoided costs” as damages for misappropriation and unfair competition would undermine several important 15 principles of New York law. It would eliminate the requirement to prove proximate causation, eliminate the requirement for a plaintiff to prove injury with certainty, permit recovery of speculative damages, and eliminate the distinction between compensatory and punitive damages. (CSS Br. at 27-28). TydenBrooks argues that avoided costs are compensatory because they compensate for the time, labor and expenditures “the plaintiff invested” in developing the trade secret, and that courts in other jurisdictions describe lost “development costs” as compensatory. (TydenBrooks Rep. at 21 (emphasis added).) This argument is misleading. The (non-New York) cases cited by TydenBrooks base their calculations of the defendant’s “gains” not on a defendant’s avoided costs, but on the actual, documented amount of the plaintiff’s development costs, essentially compensating the plaintiff for its lost investment in the research and development. See GlobeRanger Corp. v. Software AG U.S.A., Inc., 836 F.3d 477, 499-500 (5th Cir. 2016) (“The costs a plaintiff spent in development … can be a proxy for the costs that the defendant saved”); Dresser- Rand Co. v. Virtual Automation Inc., 361 F.3d 831, 838 (5th Cir. 2004) (“The jury awarded Dresser-Rand … the value of its lost development costs.”); In re Cross Media Mktg. Corp., 2006 WL 2337177, at *5 (S.D.N.Y. Aug. 11, 2006) (damages based upon plaintiff’s development cost). In contrast, TydenBrooks’s new, proposed “avoided costs” damages are not based on its own development costs or 16 the actual development costs of any of the dozens of competing security seals manufacturers. (A.280, A.332-33, A.454-65, A.640-50.) TydenBrooks made no effort to prove the amount of its own development costs, and prevented CSS from presenting evidence to show TydenBrooks’s actual development costs were de minimis. (Id.) Accordingly, as the Second Circuit properly held, (A.18), TydenBrook’s “avoided costs” damages are not compensatory. TydenBrooks further asserts that avoided costs do not vitiate the requirement of proximate causation, citing the trial court’s instruction to the jury on the requirement of proximate cause. (TydenBrooks Rep. at 22.) This misses the point. A measure of damages that presumes a plaintiff lost what a defendant gained removes the requirement to prove what plaintiff lost as a result of defendant’s wrongdoing. A boilerplate instruction about proximate cause does not cure that defect. Indeed, TydenBrooks does not dispute that after receiving that jury instruction, the jury needed a definition concerning what “injury to TydenBrooks” meant. (CSS Br. at 20; A.377.) TydenBrooks argues that avoided costs are not an inherently speculative measure of damages -- even though they are based on hypothetical, not actual, costs -- because they were based on limited information from the parties’ records 17 and the testimony of its three expert witnesses.9 (TydenBrooks Rep. at 22-23.) But that does not make avoided costs any less speculative. It simply replaces concrete and objective evidence of damages with speculative and subjective testimony from expert witnesses as to the hypothetical amount CSS might have spent to replicate TydenBrooks’s manufacturing process. (A.114, A.943-46.) Without requiring a standard of comparison to real-world development costs -- i.e., the costs incurred by the plaintiff or third-party competitor -- avoided costs are not only speculative but grounded in alchemy. TydenBrooks next contends that avoided costs would not encourage a plaintiff to hide relevant financial information. (TydenBrooks Rep. at 23-24.) But TydenBrooks does not -- and cannot -- dispute that after it elected to pursue an “avoided costs” measure of damages, it actively sought preclusion of any evidence concerning its actual injury, including its own financial statements. (CSS Br. at 30.) TydenBrooks seeks to avoid the force of its tactical waiver of lost profits as part of its strategic move to avoid evidence as to any actual losses by asserting that the trial court properly found that TydenBrooks’s losses and CSS’s increased sales were not readily calculable. (TydenBrooks Rep. at 23.) As demonstrated in CSS’s opening brief, this finding was erroneous and premised on TydenBrooks’s decision 9 Two of the witnesses were found to be unqualified as experts on manufacturing trade secrets. (A.466-68.) 18 not to introduce any such evidence. (CSS Br. at 10.) It is also irrelevant under TydenBrooks’s view of New York law. (A.464.) If TydenBrooks’s losses and CSS’s profits were not readily calculable, CSS’s total revenue of $4.1 million was disclosed (A.912, A.941-43), and Dr. Vigil, TydenBrooks’s damages expert who specializes in calculating royalties, could have used CSS’s total sales revenue to calculate a “reasonable royalty.” Instead, TydenBrooks opted for avoided costs, and moved to preclude any evidence concerning actual damages. (CSS Br. at 30.) Finally, TydenBrooks asserts that no injustice results from using a new “measure of damages that is untethered from plaintiff’s actual losses” because even though it sought $8 to $16 million in damages, the jury only awarded $3.9 million. (TydenBrooks Br. at 24.) This is a non-sequitur. The question is not how much this particular jury awarded. The question for this Court is whether TydenBrooks’s new, proposed “avoided costs” measure of damages is speculative, subject to inflation and manipulation, and could lead to unjust outcomes. CSS’s total sales revenue during the relevant period, including products unrelated to the trade secrets at issue in this case, was only $4.1 million. (A.912, A.941-43.) Profits (or even a reasonable royalty) on those sales would naturally be a small fraction of that number. Yet, TydenBrooks’s strategically defined its “avoided costs” measure of damages -- untethered to its actual losses -- to allow it to assert a damages claim of between $8 million and $16 million, which is two to four times higher than CSS’s 19 sales revenue and many more multiples of any actual lost profits. It is nonsensical to posit that CSS would have spent from $8 to $16 million to make minor profits on sales of $4.1 million, and it would be manifestly unjust for a measure of compensatory damages to permit such a result. Consequently, it is dangerous, unprecedented, and unnecessary for this Court to create a new measure of damages in trade secret and unjust enrichment cases that is untethered from a plaintiff’s actual losses and could result in runaway verdicts and manifest injustice. C. Other Non-New York Cases Do Not Support Permitting “Avoided Costs” as Compensatory Damages New York courts do not fashion new law simply because a different court applying a different law reaches a different conclusion. But even if New York were to consider out of state cases, most rely on express statutory authority for damages beyond actual losses, and there is no consensus to measure compensatory damages in trade secret and unfair competition claims by avoided costs. (CSS Br. at 33-39.) TydenBrooks argues that New York can look to the law of other states for guidance because New York law is silent on avoided costs. (TydenBrooks Rep. at 15-16.) But TydenBrooks wrongfully treats the absence of a specific case rejecting its strategically-engineered, proposed “avoided costs” measure of damages as an absence of legal precedent on the issue. Nothing could be further from the truth. As demonstrated above, for over a century it has been a well-settled rule that New 20 York courts measure damages in trade secret and unfair competition cases exclusively by a plaintiff’s losses and repudiate efforts by plaintiffs to recover a defendant’s unjust gains where, as here, they have no relation to a plaintiff’s losses. TydenBrooks’s suggested “avoided costs” measure of damages -- which would allow such a result -- therefore is asking this Court to turn more than a century of New York jurisprudence on its head. TydenBrooks argues that it is irrelevant that some states rely on the Uniform Trade Secrets Act (“UTSA”) because the statute codified the “basic principles of common law trade secret protection.” (Id. at 16.) However, TydenBrooks cites no support for the notion that use of an avoided cost measure of damages is a “basic principle” of common law trade secret protection. It is not. Indeed, as shown in CSS’s opening brief, even cases from other jurisdictions applying the UTSA make clear that courts are wary of avoided costs and use other measures of damages like reasonable royalty, day-to-day operational savings, or plaintiff’s own documented research and development costs. (CSS Br. at 35-38 citing, e.g., Sperry Rand Corp. v. A-T-O, Inc., 447 F.2d 1387, 1393 (4th Cir. 1971) (“damages to [plaintiff] is the more appropriate measure of recovery than [defendant’s] profits.”); University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 547 (5th Circ. 1974) (no damages are permitted where the plaintiff fails to prove an actual loss); Vermont Microsystems, Inc. v. Autodesk, Inc, 138 F.3d 449, 451 (2d Cir. 1998) (calculating 21 reasonable royalty); LinkCo, Inc. v. Fujitsu Ltd., 230 F. Supp. 2d 492, 504 (S.D.N.Y. 2002) (approving damages measured by plaintiff’s development cost). TydenBrooks does not even mention these cases in its reply, let alone dispute CSS’s showing that none of the many cases cited by TydenBrooks in its opening brief support its position. Instead, TydenBrooks feebly asserts that it does not matter that most courts outside New York don’t “award avoided development cost …. What matters is that avoided costs were considered and found to be a viable and proper measure of damages for trade secret claims.” (TydenBrooks Rep. at 17.) This makes no sense. Most cases have not found avoided costs to be a viable and proper measure of damages. There is no reason to overturn and negate long-standing, black-letter New York law to create a speculative measure of alternative damages that is unconnected to reality and awards windfalls to plaintiffs where no actual losses were suffered based on a smattering of scattered caselaw interpreting non-New York statutes. Accordingly, this Court should answer the first certified question in the negative. II. Prejudgment Interest Is Not Available on Avoided Costs Damages As demonstrated in CSS’s opening brief, if this Court decides that an award of avoided research and development costs is within the scope of permissible compensatory damages under New York law, prejudgment interest should not be 22 added pursuant to CPLR § 5001(a) for two primary reasons. First, avoided costs -- constituting the entirety of the defendant’s cost savings through the date of trial -- is sufficient to make the plaintiff whole, and it is well-settled under New York law that prejudgment interest is not permitted where a party has already been fully compensated by a jury verdict. As the Second Circuit correctly observed, to award prejudgment interest on top of such a verdict would result in a massive windfall to TydenBrooks. (CSS Br. at 43-47.) Second, CPLR § 5001(a) only requires that prejudgment interest be awarded “upon a sum awarded because of a breach of performance of a contract, or because of an act or omission depriving or otherwise interfering with title to, or possession or enjoyment of, property[.]” Avoided costs, however, are unrelated to a contract or the deprivation of property. Avoided costs do not compensate a plaintiff for a pecuniary loss, or for property damage. Rather, avoided costs represent the reasonable value of the savings earned by the defendant by utilizing the plaintiff’s information. Such damages are not encompassed within the language of CPLR § 5001(a). (CSS Br. at 47-53.) In response to CSS’s showing that TydenBrooks would be made whole by an award of avoided costs and anything more would constitute a windfall, TydenBrooks argues that New York courts have only found a windfall in two situations: where the trial court charged the jury on interest or where damages evidence presented to the jury considered the present value of money/costs. 23 (TydenBrooks Rep. at 27.) But that is only half the story. The reason courts do not award interest in those situations is because it is clear in those cases that the jury has fully compensated the plaintiff for its losses through the damages award. This is in accord with New York law that interest is not awarded where the plaintiff has already been made whole. (CSS Br. at 43-45); see, e.g., Kassis v. Teachers’ Ins. & Annuity Ass’n, 13 A.D.3d 165, 165-66 (1st Dep’t 2004); Bamira v. Greenberg, 295 A.D.2d 206, 207 (1st Dep’t 2002); Mosesson v. 288/98 W. End Tenants Corp., 294 A.D.2d 283, 284 (1st Dep’t 2002). TydenBrooks does not dispute this is the law. Nor does it dispute that the trial court instructed the jury, at TydenBrooks’s request, that avoided cost “[d]amages are assessed from the date of the misappropriation and/or unfair use through the date on which the verdict is given.” (A.375, A.406.) Yet, TydenBrooks fails to explain why the principle of declining prejudgment interest to a plaintiff who has already been fully compensated does not apply, as the trial court held it did, to an avoided cost award that fully compensates a plaintiff for all damages through the date of the verdict. It is academic that no New York case has yet found interest to constitute a windfall in an avoided costs case; this is the first case to award damages based on avoided costs. Inasmuch as an avoided cost measure of damages fully compensates a plaintiff for all damages from the date of 24 misappropriation through trial, awarding interest would constitute an impermissible windfall. TydenBrooks argues that interest is mandatory because it was deprived of intangible property. (TydenBrooks Rep. at 25-26.) In the process, TydenBrooks ignores that it is not the nature of the property right but the nature of the avoided costs damages that precludes the mandatory application of CPLR § 5001-- avoided costs are unrelated to compensating a plaintiff for actual pecuniary loss and do not purport to compensate TydenBrooks “for the loss of the use of money [it was] entitled to receive.” See e.g., Kassis, 7 N.Y.S.2d at 474; (see also CSS. Br. at 47- 50.) Avoided costs are a form of unjust enrichment and represent the value of the savings earned by the defendant by utilizing the plaintiff’s information. Thus, TydenBrooks was simply not deprived of the use of its property or CSS’s avoided costs. (CSS. Br. at 47-50.) As the Second Circuit correctly recognized, the avoided costs measure forecloses the ability of a plaintiff to recover in a way that “tak[es] into account the time value of money.” (A.18-19). Contrary to TydenBrooks’s assertion, accepting CSS’s argument would not mean that “prejudgment interest would never be available in a trade secret case due to its intangible nature.” (TydenBrooks Rep. at 26.) It would mean that prejudgment interest is not available on avoided costs. Prejudgment interest would properly be available in all cases where damages represent compensation for actual 25 pecuniary loss resulting from deprivation of or interference with plaintiff’s property -- tangible or intangible. In its opening brief, CSS showed that the New York authority TydenBrooks relies upon to argue that prejudgment interest is “mandatory” under CPLR § 5001(a) is inapposite, as every decision relates to damages awarded to compensate for the plaintiff’s own financial losses. (CSS Br. at 49-50.) TydenBrooks claims it is irrelevant that it relies on cases where damages were awarded based on plaintiff’s financial losses because “none of them linked the interest award to that fact.” (TydenBrooks Rep. at 28.) This claim is meritless. Absent an actual loss, there is nothing to compensate. TydenBrooks’s own cases make abundantly clear the required link between prejudgment interest and compensating actual loss. See, e.g., De Long Corp. v. Morrison-Knudsen Co., 20 A.D.2d 104, 105 (1st Dep’t 1963), aff’d, 14 N.Y.2d 346 (1964) (interest must be added if the victim of the tort is to be made whole for “an intentional tort resulting in pecuniary injury”); Delulio v. 320-57 Corp., 99 A.D.2d 253, 256 (1st Dep’t 1984) (modifying judgment to include prejudgment interest by “granting plaintiff interest on the total amount of the court’s award of compensatory damages only”) (emphasis added); Eighteen Holding Corp. v. Drizin, 268 A.D.2d 371, 372 (1st Dep’t 2000) (prejudgment interest proper where defendants wrongly withheld plaintiff’s money). 26 In defense of its reliance on case law applying statutes that explicitly permit recovery of non-compensatory damages, TydenBrooks claims “this too is irrelevant because neither the Copyright Act or the Lanham Act addresses prejudgment interest, leaving such an award to the discretion of the court.” (TydenBrooks Rep. at 28.) But the cases TydenBrooks cites make clear that prejudgment interest was awarded to satisfy the non-compensatory but deterrent aspects of these statues, discretion aside. See Merck Eprova AG v. Gnosis S.p.A., 760 F.3d 247, 263-64 (2d Cir. 2014) (affirming prejudgment interest award noting that pursuant to the Lanham Act, prejudgment interest is “within the discretion of the trial court and is normally reserved for ‘exceptional’ cases” “where infringement is ‘malicious’ ….”); In Design v. Lauren Knitwear Corp., 782 F. Supp. 824, 837 (S.D.N.Y. 1991) (purpose of the Copyright Act is not just to “compensate the plaintiff” but also “sufficiently … deter the defendant from future infringement”) (emphasis added). The fundamental purpose of CPLR § 5001 is to make a plaintiff whole -- not deter or punish misconduct. That is the purpose of punitive damages, which the jury did not award here. Moreover, to the extent that avoided costs are, as TydenBrooks acknowledges (TydenBrooks Br. at 19-21), a form of “unjust enrichment,” such damages would be equitable. Accordingly, interest is discretionary, not mandatory, under the statute. TydenBrooks does not dispute this in its reply. 27 In sum, CPLR § 5001 is inapplicable because avoided costs do not compensate a plaintiff for pecuniary loss or deprivation of property, and an award of avoided cost damages through the date of trial fully compensates a plaintiff for any loss. Awarding prejudgment interest on top of avoided costs would bestow an undeserved windfall in violation of settled New York law. CONCLUSION For the foregoing reasons, CSS respectfully requests that this Court answer the certified questions in the negative, and hold that (i) a plaintiff asserting claims of misappropriation of a trade secret, unfair competition, and unjust enrichment may not recover damages that are measured by the costs the defendant avoided rather than the losses the plaintiff sustained by virtue of the misappropriation or unfair competition, and (ii) prejudgment interest under CPLR § 5001(a) is not mandatory when a plaintiff recovers damages as measured by a defendant’s avoided costs. Dated: New York, New York January 3, 2018 Respectfully submitted, By: Daniel J. Fetterman Howard W. Schub Fria R. Kermani KASOWITZ BENSON TORRES LLP 1633 Broadway New York, New York 10019 Tel.: (212) 506-1700 Fax: (212) 506-1800 Attorneys for Respondent-Appellant Cambridge Security Seals 28 CERTIFICATE OF COMPLIANCE This brief for Respondent-Appellant Cambridge Security Seals1. complies with the type-volume limitation of rule 500.13(c) because this brief contains 6807 words, excluding the parts of the brief exempted by Rule 500.13(c)(3). This brief for Respondent-Appellant Cambridge Security Seals2. complies with the typeface and typestyle requirements of Rule 500.1 because this brief has been prepared in a proportionately spaced typeface using Microsoft Word 2013 in Times New Roman 14-point font. Dated: January 3, 2018 Howard W. Schub 29