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

Brief

N.Y.June 20, 2017

To Be Argued By: DANIEL B. GOLDMAN 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 STATE OF NEW YORK E.J. BROOKS COMPANY d/b/a TYDENBROOKS, Appellant-Respondent, -against- CAMBRIDGE SECURITY SEALS, Respondent-Appellant. BRIEF FOR APPELLANT-RESPONDENT E.J. BROOKS COMPANY D/B/A TYDENBROOKS d DANIEL B. GOLDMAN KERRI ANN LAW CLAUDIA PAK SAM KOCH KRAMER LEVIN NAFTALIS & FRANKEL LLP 1177 Avenue of the Americas New York, New York 10036 Telephone: (212) 715-9100 Facsimile: (212) 715-8000 Attorneys for Appellant-Respondent September 21, 2017 i Disclosure Statement Pursuant to Rule 500.1(f) Appellant-Respondent E.J. Brooks Company d/b/a TydenBrooks (“Tyden”), by and through its undersigned counsel, files this Corporate Disclosure Statement and states that: Tyden is a non-governmental corporation. Tyden Group Holdings Corp. is the parent corporation of E.J. Brooks Company. No publicly-held corporation owns 10% or more of Tyden’s stock. ii Statement of Related Litigation There are no related cases, to the knowledge of Appellant-Respondent E.J. Brooks Company d/b/a TydenBrooks. iii Table of Contents Page Disclosure Statement Pursuant to Rule 500.1(f) ......................................................... i Statement of Related Litigation ................................................................................ ii Table of Authorities .................................................................................................. iv Certified Questions Accepted for Review ................................................................. 1 Jurisdictional Statement ............................................................................................. 2 Preliminary Statement ................................................................................................ 2 Relevant Factual Background .................................................................................... 4 A. Relevant Pre-Trial Matters .................................................................... 4 B. The Evidence at Trial Supported the Jury’s Verdict ............................. 4 C. The Court’s Jury Charge and the Jury’s Verdict ................................. 12 D. Relevant Post-Trial Proceedings ......................................................... 14 Argument.................................................................................................................. 16 I. A Defendant’s Avoided Costs is a Proper Measure of Damages in a Case for Theft of Trade Secrets ..................................................................... 16 A. Trade Secret Damages are Difficult to Calculate and Require a Flexible Approach ............................................................................... 17 B. Courts Around the United States Award Research and Development Costs in Cases Involving the Theft of a Trade Secret .................................................................................................. 21 II. New York Law Mandates an Award of Prejudgment Interest Where Damages Are Calculated Based on a Defendant’s Avoided Costs ............... 33 Conclusion ............................................................................................................... 41 iv Table of Authorities Page CASES: Ajaxo Inc. v. E*Trade Grp., Inc., 37 Cal. Rptr. 3d 221 (Cal. Ct. App. 2005) .......................................................... 30 Altavion, Inc. v. Konica Minolta Sys. Labs. Inc., 171 Cal. Rptr. 3d 714 (Cal. Ct. App. 2014) ........................................................ 40 Avery Dennison Corp. v. Four Pillars Enter. Corp., 45 F. App’x 479 (6th Cir. 2002) ......................................................................... 17 Bamira v. Greenberg, 744 N.Y.S.2d 367 (1st Dep’t 2002) .................................................................... 37 Benton v. Avedon Eng’g, Inc., 10-cv-01899-RBJ-KLM, 2012 WL 3399367 (D. Colo. Aug. 15, 2012) .................................................................................... 26 Biocore v. Khosrowshahi, 183 F.R.D. 695 (D. Kan. 1998) .......................................................................... 30 Bohnsack v. Varco, L.P., 668 F.3d 262 (5th Cir. 2012) .............................................................................. 26 Boule v. Hutton, 320 F. Supp. 2d 132 (S.D.N.Y. 2004) ................................................................ 36 Bourns, Inc. v. Raychem Corp., 331 F.3d 704 (9th Cir. 2003) .............................................................................. 24 Callaway Golf Co. v. Dunlop Slazenger Grp. Americas, Inc., No. Civ.A. 01-669-KAJ, 2004 WL 1534786 (D. Del. May 21, 2004) ....................................................................................... 27 Carbo Ceramics, Inc. v. Keefe, 166 F. App’x 717 (5th Cir. 2006) ................................................................. 22, 23 Cargill, Inc. v. Sears Petroleum & Transp. Corp., 388 F. Supp. 2d 37 (N.D.N.Y. 2005) .................................................................. 23 Page v Cargill, Inc. v. Sears Petroleum & Transp. Corp., No. 5:03 CV 0530(DEP), 2004 WL 3507329 (N.D.N.Y. Aug. 27, 2004) ............................................................................ 35, 36 Cartel Asset Mgmt. v. Ocwen Fin. Corp., No. 01-cv-01644-REB-CBS, 2010 WL 3522416 (D. Colo. Sept. 1, 2010) ................................................................................ 24, 25 Comput. Print Sys., Inc. v. Lewis, 422 A.D. 148 (Pa. Super. Ct. 1980) .................................................................... 28 In re Cross Media Mktg. Corp., No. 06 Civ. 4228 (MBM), 2006 WL 2337177 (S.D.N.Y. Aug. 11, 2006) ............................................................................. 22, 30 De Long Corp. v. Morrison-Knudsen Co., 14 N.Y.2d 346 (1964) ................................................................................... 35, 38 De Long Corp. v. Morrison-Knudsen Co., 244 N.Y.S.2d 859 (1st Dep’t 1963), aff’d, 14 N.Y.2d 346 (1964) ............... 34, 35 Delulio v. 320-57 Corp., 472 N.Y.S.2d 379 (1st Dep’t 1984) .................................................................... 33 Direct Line Corp. v. Carrington, No. 3:10-0423, 2012 WL 6568569 (M.D. Tenn. Dec. 17, 2012) ................. 29, 31 Dresser-Rand Co. v. Virtual Automation Inc., 361 F.3d 831 (5th Cir. 2004) .............................................................................. 30 Duane Jones Co. v. Burke, 306 N.Y. 172 (1954) ........................................................................................... 18 E.I. Dupont De Nemours & Co. v. Kolon Industries, Inc., No. 3:09cv58, 2011 WL 13079484 (E.D. Va. June 15, 2011) ........................... 29 Eighteen Holding Corp. v. Drizin, 701 N.Y.S.2d 427 (1st Dep’t 2000) .................................................................... 35 Empire Fin. Servs., Inc. v. Bellantoni, 861 N.Y.S.2d 898 (4th Dep’t 2008) ................................................................... 20 Page vi In re Estate of Rothko, 43 N.Y.2d 305 (1977) ......................................................................................... 19 Flores v. Citizens Int’l. Bank, 640 N.Y.S.2d 746 (1st Dep’t 1996) .................................................................... 37 G.S. Rasmussen & Assocs., Inc. v. Kalitta Flying Serv., Inc., No. 95-56496, 96-56588, 1997 WL 774869 (9th Cir. Dec. 11, 1997) ...................................................................................... 28 Gen. Rubber Co. v. Benedict, 215 N.Y. 18 (1915) ............................................................................................. 16 Glob. Prot. Corp. v. Halbersberg, 503 S.E.2d 483 (S.C. Ct. App. 1998) ................................................................. 31 GlobeRanger Corp. v. Software AG U.S., Inc., 836 F.3d 477 (5th Cir. 2016) .............................................................................. 26 Hauck Mfg. Co. v. Astec Indus., Inc., No. 1:03-CV-166, 2004 WL 5523286 (E.D. Tenn. Nov. 3, 2004)..................... 30 Hillsley v. State Bank of Albany, 263 N.Y.S.2d 578 (1st Dep’t 1965) .................................................................... 33 Int’l Indus., Inc. v. Warren Petroleum Corp., 248 F.2d 696 (3d Cir. 1957), cert. denied, 355 U.S. 943 (1958) ....................... 28 Int’l Mezzo Tech., Inc. v. Frontline Aerospace, Inc., No. 10-397-SCR, 2011 WL 4481687 (M.D. La. Sept. 27, 2011) ...................... 27 J&K Comput. Sys., Inc. v. Parrish, 642 P.2d 732 (Utah 1982) ................................................................................... 31 Jacobus v. Colgate, 217 N.Y. 235 (1916) ........................................................................................... 16 Johns-Manville Corp. v. Guardian Indus. Corp., 718 F. Supp. 1310 (E.D. Mich. 1989), aff’d, 925 F.2d 1480 (Fed. Cir. 1991) ............................................................................................. 39, 40 Kaiser v. Fishman, 590 N.Y.S.2d 230 (2d Dep’t 1992) ..................................................................... 36 Page vii Kassis v. Teachers’ Ins. & Annuity Ass’n, 786 N.Y.S.2d 473 (1st Dep’t 2004) .............................................................. 36, 37 Leatt Corp. v. Innovative Safety Tech., LLC, No. 09-CV-1301-IEG (POR), 2010 WL 11442713 (S.D. Cal. Aug. 24, 2010) ................................................................................... 30 Lightlab Imaging, Inc. v. Axsun Techs., Inc., 13 N.E.3d 604 (Mass. 2014) ............................................................................... 18 LinkCo, Inc. v. Fujitsu Ltd., 230 F. Supp. 2d 492 (S.D.N.Y. 2002) .......................................................... 22, 31 Little Genie Prods. LLC v. PHSI Inc., No. 2:12-cv-00357-RSM, 2014 WL 3050326 (W.D. Wash. July 2, 2014) ................................................................................. 40 Litton Sys., Inc. v. Ssangyong Cement Indus. Co., 107 F.3d 30, 1997 WL 59360 (Fed. Cir. Feb. 13, 1997) .................................... 28 Lucini Italia Co. v. Grappolini, No. 01 C 6405, 2003 WL 1989605 (N.D. Ill. Apr. 28, 2003) ...................... 30, 31 M.D. Mark, Inc. v. Kerr-McGee Corp., 565 F.3d 753 (10th Cir. 2009) ............................................................................ 39 Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173 (2011) ......................................................................................... 20 Mar Oil Co. v. Korpan, 973 F. Supp. 2d 775 (N.D. Ohio 2013) .............................................................. 17 Men’s World Outlet, Inc. v. Estate of Steinberg, 476 N.Y.S.2d 171 (2d Dep’t 1984) ..................................................................... 37 Ming Tung v. China Buddhist Ass’n, 996 N.Y.S. 2d 236 (1st Dep’t 2014) ................................................................... 16 Novell, Inc. v. Microsoft Corp., 731 F.3d 1064 (10th Cir. 2013) .......................................................................... 23 Paramount Film Distrib. Corp. v. State, 30 N.Y.2d 415 (1972) ......................................................................................... 20 Page viii PQ Labs, Inc. v. Yang Qi, No. 12-0450 CW, 2014 WL 4954161 (N.D. Cal. Sept. 30, 2014) ..................... 26 Quantlab Tech., Ltd. (BVI) v. Kuharsky, --- F. App’x ---, No. 16-20242, 2017 WL 2713034 (5th Cir. June 22, 2017) ...................................................................................... 26 Rose Assocs. v. Lenox Hill Hosp., 695 N.Y.S.2d 1 (1st Dep’t 1999) ........................................................................ 34 Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984) ............................................................................................ 17 Salsbury Labs. v. Merieux Labs., 735 F. Supp. 1555 (M.D. Ga. 1989) ............................................................. 28, 31 Sonoco Prods. Co. v. Johnson, 23 P.3d 1287 (Colo. App. 2001) ............................................................. 18, 27, 39 Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555 (1931) ...................................................................................... 17, 19 Telex Corp. v. IBM Corp., 510 F.2d 894 (10th Cir. 1975) ............................................................................ 23 Thyroff v. Nationwide Mut. Ins. Co., 8 N.Y.3d 283 (2007) ..................................................................................... 19, 21 TKC Aerospace, Inc. v. Muhs, No. 3:11-cv-0189-HRH, 2015 WL 6394481 (D. Alaska Oct. 22, 2015) ................................................................................... 26 Toledo Mack Sales & Serv., Inc. v. Mack Trucks, Inc., No. 02-4373, 2007 WL 5256959 (E.D. Pa. Feb. 16, 2007), aff’d in part, vacated in part, 530 F.3d 204 (3d Cir. 2008) ................................ 27 Universal Engraving, Inc. v. Metal Magic, Inc., CV-08-1944-PHX-GMS, 2010 WL 4922703 (D. Ariz. Nov. 29, 2010) ..................................................................................... 27 Vermont MicroSystems, Inc. v. Autodesk, Inc. 138 F.3d 449 (2d Cir. 1998) .............................................................................. 31 Page ix W.L. Gore & Assocs., Inc. v. GI Dynamics, Inc., 872 F. Supp. 2d 883 (D. Ariz. 2012) .................................................................. 29 Wathne Imports Ltd. v. PRL USA, Inc., 953 N.Y.S.2d 7 (1st Dep’t 2012) ........................................................................ 19 Wellogix, Inc. v. Accenture, L.L.P., 716 F.3d 867 (5th Cir. 2013) .............................................................................. 26 Williams v. Vill. of Port Chester, 76 N.Y.S. 631 (2d Dep’t 1902) ........................................................................... 16 Other Authorities 22 N.Y.C.R.R. § 500.27 ............................................................................................. 2 N.Y. C.P.L.R. § 5001 ........................................................................................passim David D. Siegel, New York Practice § 719 (5th ed. 2011) ................................ 33, 34 Restatement (Third) of Unfair Competition § 45 .............................................. 28, 29 KL3 2928501.1 Certified Questions Accepted for Review 1. Under New York law, can a plaintiff asserting claims of misappropriation of a trade secret, unfair competition, and unjust enrichment recover damages that are measured by the costs the defendant avoided due to its unlawful activity? Yes, the trial court correctly held that a jury may consider an avoided cost measure of damages, which holding is consistent with the overwhelming majority of state and federal courts that have held that losses and profits include the development and other costs that were either invested by the plaintiff in developing the trade secret or avoided by the defendant as a result of defendant’s theft of plaintiff’s trade secret. 2. If the answer to the first question is “yes” and a plaintiff recovers damages as measured by the defendant’s avoided costs, is prejudgment interest mandatory pursuant to New York Civil Practice Law and Rules § 5001(a)? Yes, prejudgment interest is mandatory under C.P.L.R. § 5001(a) where, as here, the defendant’s tortious conduct caused damage to the plaintiff’s property rights and such an award does not constitute a windfall. The trial court erred when it held otherwise. 2 Jurisdictional Statement This Court has jurisdiction pursuant to 22 N.Y.C.R.R. § 500.27. Preliminary Statement Respondent-Appellant Cambridge Security Seals (“CSS”) profited and was unjustly enriched from its theft of the trade secrets of Appellant- Respondent E.J. Brooks Company d/b/a TydenBrooks (“Tyden”) by avoiding the significant research and development, labor, and capital costs it would have incurred had it developed its own processes for manufacturing plastic indicative seals from scratch. Where there is a claim, there must a remedy, and Tyden was legally permitted to recover the benefits CSS incurred from entering the indicative seals market on an expedited basis by stealing its labor, skills, and expenditures and copying Tyden’s processes, which are trade secrets. While no New York court has ruled on the issue of whether development and other costs saved by the defendant through the misappropriation of trade secrets are recoverable, virtually every other state and federal court around the country that has considered this issue has held that such costs are recoverable as part of plaintiff’s losses or defendant’s gains. See infra at 21-32. Such a holding here would be consistent with existing New York law. New York courts have held that there must be a remedy for wrongdoing. See infra at 16-17. They also have held consistently that where damages are difficult to calculate, juries 3 must be allowed to make the best approximation possible under the facts and circumstances of the case. See infra at 17-19. In addition, this Court has instructed that the common law needs to respond to our ever-evolving society, and over the years has broadened the remedies available for misappropriation of personal property. See infra at 19. Allowing recovery of the cost savings to defendant that resulted from the misappropriation of plaintiff’s trade secrets is particularly appropriate here. Because CSS was a startup, Tyden’s damages could not adequately be calculated using traditional methods. See infra at 18. The cost savings best represents the unjust gains CSS acquired as a result of its theft and is a fair, non-speculative measure of damages. Prejudgment interest also should be awarded. Under New York C.P.L.R. § 5001, an award of prejudgment interest is mandatory where, as here, defendant’s tortious conduct caused damage to the plaintiff’s property rights. See infra at 33-36. There is no precedent for any other result; the fact that the damages are calculated by the cost savings to CSS does not alter the analysis. See infra at 39-40. For these reasons, this Court should answer both certified questions in the affirmative. 4 Relevant Factual Background A. Relevant Pre-Trial Matters On April 12, 2012, Tyden brought an action against CSS and its employees Brian Lyle, Gurmeet Singh Grover, and Michael Gizzarelli. Tyden’s complaint alleged, among other things, that CSS had competed unfairly and was unjustly enriched because it had misappropriated Tyden’s trade secrets. The trade secrets consisted of the manufacturing processes Tyden had developed and used to produce certain plastic indicative security seals. Plastic indicative security seals are used by a variety of industries, including trucks, airlines and medical supplies, to show evidence of tampering. A-119 at 53:1-23.1 The case was tried before a jury from April 20, 2015 to May 4, 2015, who found that CSS had stolen Tyden’s trade secrets, competed unfairly, and was unjustly enriched as a result. B. The Evidence at Trial Supported the Jury’s Verdict The evidence presented at trial overwhelmingly supported the jury’s finding that CSS was liable to Tyden on three claims: trade secret misappropriation, unjust enrichment, and unfair competition. Tyden proved that over the past 20 years, Tyden and its predecessor, Stoffel Seals (“Stoffel”), developed unique and state of the art processes to manufacture plastic indicative seals. Starting with a rudimentary horizontal turntable that required operation by 1 “A-” refers to the Joint Appendix, filed herein with this brief on September 21, 2017. 5 hand, Tyden developed fully-automated manufacturing processes, which dramatically increased Tyden’s manufacturing productivity, as well as the quality of its seals. Tyden established that the combination of characteristics and components of its manufacturing processes was unique, not publicly known, and competitively valuable. Specifically, Tyden’s plant manager, Boyd Coggins, testified in detail about the evolution of the trade secret processes and the many different features of these processes that were custom designed by Tyden through an iterative process over many years, including, but not limited to, what was referred to as the “heartbeat” of the processes: the axle-to-axle distances of the assembly tables, the index speed and pause time of the processes, the total run time of the assembly process, and the number of seals that advance per movement. A-123 at 71:23 to A- 124 at 73:6; A-129 at 93:15 to A-135 at 119:12; A-136 at 123:1 to A-137 at 127:23; A-151 at 182:16-21. While certain components of the processes are publicly available, Mr. Coggins testified that one cannot purchase Tyden’s processes from any source, further evincing its uniqueness and the fact that it was not publicly known. A-132 at 108:10-23; A-139 at 133:24-134:12. Mr. Coggins also established that Tyden’s competitive advantage was derived from the quality and efficiency of its manufacturing processes, which keep costs low and require less inventory. See A-203 at 389:20-25. Tyden’s former Global Vice President for 6 Sales and Marketing, Ralph Mallozzi, testified that he was “very familiar” with the manufacturing processes of other plastic seal manufacturers, A-201 at 379:19- 380:6, and none of the processes used by thirteen competitors around the world, which Mr. Mallozzi personally observed, were similar to the fully-automated process that Tyden developed. A-201 at 379:15 to A-203 at 388:21. The evidence established that in December of 2010 (almost immediately after Tyden acquired Stoffel) CSS was formed and lifted out almost the entirety of Stoffel’s engineering staff with the express purpose of competing with Tyden in a short period of time. The evidence showed that CSS had jumped into the security seals market on an expedited basis by copying Tyden’s manufacturing processes, which CSS knew were highly efficient and had been developed and tested over many years. From the start, CSS did not have a factory, a shop, or a tool room. A- 180 at 300:14-23. Notwithstanding the fact that the former Stoffel/Tyden engineers were housed in a temporary office the size of a small conference room without any machinery, they immediately began generating design drawings of manufacturing components that were virtually identical to those utilized by Tyden. A-181 at 301:8-302:22. Defendants Gizzarelli and Singh - who were part of the Tyden team that joined CSS - contacted Stelron, Inc., one of Tyden’s former vendors, and requested that Stelron build the exact same conveyor system for CSS 7 as used by Tyden for its manufacturing processes. A-181 at 304:12-22; A-183 at 309:11-312:11. By February 11, 2011, defendant Singh, with defendant Gizzarelli’s knowledge, had provided Stelron with Tyden’s confidential information containing key manufacturing specifications - i.e., the heartbeat of the processes - to build the Stelron conveyor system for CSS. A-185 at 317:8 to A- 186 at 322:20; A-385 to A-393. A mere nine months later and only a couple of months after CSS actually procured a plant, CSS put into operation its first fully- automated production line, which was an exact duplicate of Tyden’s manufacturing line. A-180 at 300:24 to A-181 at 301:3; A-327 at 884:6-9. Tyden offered the testimony of Dr. James Kirk, a mechanical engineer, who opined that CSS’s manufacturing lines were direct copies of Tyden’s. A-163 at 232:5-21; A-165 at 240:11 to A-166 at 241:14; A-170 at 258:1- 23; A-238 at 529:18 to A-239 at 530:1; A-239 at 531:7-15. Dr. Kirk explained to the jury that he spent hundreds of hours analyzing and comparing Tyden’s manufacturing processes to CSS’s, and he walked the jury through the key features of the manufacturing processes. A-170 at 259:25-260:4; A-161 at 221:12-22. Dr. Kirk explained to the jury, with the help of a demonstrative checklist, that thirty of thirty-one key features of CSS’s process were exact duplicates of features of Tyden’s process. A-161 at 221:1 to A-163 at 232:21. Tyden also introduced the testimony of a second expert, Dr. William Howard, an automated manufacturing 8 expert, who opined that absent CSS’s knowledge and use of Tyden’s trade secrets, CSS would have required a larger design team and taken considerably longer to develop its manufacturing lines. A-239 at 530:2-20. Dr. Howard testified that without the use of Tyden’s manufacturing processes, it would take a design team of ten to sixteen people between twenty-three and forty-one months to produce a first generation manufacturing line. A-239 at 530:7-20. Dr. Howard testified that a second generation line would take fourteen to twenty-three months to develop. Id. The jury also heard evidence of the elaborate measures CSS undertook to hide the fact that it was stealing Tyden’s fully-automated process. CSS instructed the former Stoffel/Tyden engineers to lie to Tyden about where they were employed. A-121 at 61:5-62:4; A-219 at 451:8-452:14; A-223 at 469:9- 12; A-289 at 730:2-731:11; A-291 at 740:5-8. CSS put an ad in Craig’s List and instructed the engineers to respond to it so that it would appear that CSS had not targeted them for hire. A-180 at 299:17-300:13; A-261 at 620:12 to A-262 at 621:20; A-289 at 732:1-25; A-291 at 737:5-11. CSS gave the engineers anonymous emails, such as engineering@CSS. A-260 at 616:4 to A-261 at 619:13. It instructed the receptionist at CSS to lie to any outside callers about whether the engineers were actually employed by CSS. A-261 at 618:10-25. If someone were to ask for them, the receptionist was told to respond that the former 9 Stoffel engineers did not work for CSS. Id. CSS also instructed the engineers to conduct all of their CSS business by cell phone. A-188 at 331:23-332:3. When CSS targeted one of the Stoffel engineers for employment, a former Stoffel engineer and CSS employee met her at a restaurant, told her to follow him in her car to an undisclosed location, and refused to disclose the identity of the company or its industry until they arrived at CSS. A-289 at 732:1 to A-290 at 734:21. The evidence also established that the former Stoffel/Tyden engineers, now CSS employees, knew Tyden’s processes were proprietary and confidential and were under a continuing obligation to maintain the confidentiality of Tyden’s proprietary information. A-222 at 463:23-464:7. For example, after impeachment on the stand, defendant Singh admitted that he understood Tyden’s design drawings “were not to be shared” with competitors and “were marked with the word confidential.” A-179 at 295:1-296:6. Defendant Singh also conceded that only a “select number of employees” at Tyden had access to engineering drawings. Id. at 296:14-25. Defendant Gizzarelli admitted that when he was employed by Tyden, he did not share key features of Tyden’s processes with competitors, including the “heartbeat” of the processes: the index time, pause time and run time of the assembly process, the axle-to-axle distance, and length of the Stelron-brand assembly tables, which dictated the size and nature of the machines on the assembly line. A-223 at 467:2-468:7. Defendant Gizzarelli also admitted that he 10 signed the Stoffel Seals Statement of Principles of Conduct, which expressly informed him of his continuing obligation to “maintain the confidentiality of confidential or proprietary information, including trade secrets.” A-221 at 461:24 to A-222 at 462:5; A-222 at 463:10-464:10. The testimony at trial also showed that CSS itself required its own vendors to sign non-disclosure agreements, further proof of the confidential nature of the manufacturing processes. A-182 at 305:23- 306:2. Regarding damages, Tyden offered the testimony of Dr. Robert Vigil, a PhD in economics, who explained to the jury that in this case an avoided cost methodology was the most appropriate of three common damage calculation methodologies - lost profits, disgorgement of unjust gains (which Dr. Vigil said avoided costs constitutes), and reasonable royalty. A-280 at 696:15 to A-281 at 697:1. Dr. Vigil explained that this calculation determined “how much [CSS] gain[ed] by taking and using information that didn’t belong to them,” A-280 at 696:20 to A-281 at 697:1, and he testified that his analysis applied to all three claims upon which the jury found in Tyden’s favor - misappropriation of trade secrets, unfair competition, and unjust enrichment. A-284 at 709:3-7, 709:17-19. Dr. Vigil further testified that the profit information provided by CSS was not enough to render a calculation of CSS’s lost profits. A-280 at 695:12-21. 11 Dr. Vigil testified that he calculated “how much would it have cost Cambridge to develop the manufacturing processes for its first generation version of the three machines at issue” if CSS had “not used TydenBrooks’s trade secrets.” A-275 at 676:18-24. Dr. Vigil explained that he considered two components of research and development costs in his calculation: labor costs and capital costs. A-276 at 677:2-4. Capital costs referred to the “materials or parts costs that you have to pay to actually build the machines at issue.” A-276 at 677:6-7. Labor costs were defined as “the amount that Cambridge in this case would have had to pay the employees to do the work of designing and developing the manufacturing processes that we’re talking about.” A-276 at 677:9-12. Using fully burdened labor costs, Dr. Vigil testified that the damages to Tyden resulting from the costs that CSS avoided by stealing Tyden’s manufacturing processes ranged from $7.8 to $16.6 million, and this range was applicable to all of the claims. A-278 at 686:10-17. CSS did not offer the testimony of any damages expert at trial, despite representing to the lower court on two prior occasions that it would do so. See A- 256 at 597:11-14; A-333 at 908:14-15. Interest, or prejudgment interest, was never mentioned by Dr. Vigil as a component of his damage calculation. In fact, the phrase “prejudgment interest” was not uttered once during the entire trial, and there was no reference to prejudgment interest in either the jury instructions or on the verdict sheet. A-368 12 1041:1 to A-377 at 1076:25 (Jury Instructions); A-395 to A-398 (Jury Verdict Form). C. The Court’s Jury Charge and the Jury’s Verdict On May 4, 2015, Judge Preska charged the jury with detailed instructions. Among other things, she explained that the jury may calculate damages based on the “benefits derived by the defendant” and the “costs avoided by the defendant . . . by misappropriating TydenBrooks’ manufacturing process.” A-374 at 1067:4-8. The trial court further explained that the jury should “compare actual costs incurred by the defendant . . . with the costs it would have incurred to produce the same products without the use and knowledge of TydenBrooks’ manufacturing process” and that the difference between these costs should be awarded as damages. A-375 at 1068:10-21. In addition, Judge Preska instructed the jury that it “may award compensatory damages only for injuries that TydenBrooks proves were proximately caused by a defendant’s allegedly wrongful conduct,” A-374 at 1065:20-22, and that it “should not award compensatory damages for speculative injuries, but only for those injuries that TydenBrooks has actually suffered or which it is reasonably likely to suffer in the near future.” A- 374 at 1065:24-1066:2. There was no instruction on prejudgment interest. That same day, on May 4, 2015, the jury rendered a unanimous verdict in favor of Tyden. It awarded Tyden compensatory damages against CSS 13 in the amount of $1.3MM on its claim of misappropriation of trade secret, $1.3MM on its claim for unfair competition, and $1.3MM on its claim for unjust enrichment, for a total of $3.9MM. A-382 at 1098:1 to A-384 at 1104:4. That award was half of the lower end of Dr. Vigil’s damage calculation. After rendering its verdict, upon CSS’s request to ensure that the award was not duplicative, Judge Preska asked the jury to clarify the exact amount of the award, and the foreperson confirmed that the jury’s intent was to award the sum total of $3.9MM against CSS. A-383 at 1102:24-1103:25. The jury also awarded compensatory damages against each of the defendants Singh and Gizzarelli in the amount of $2,000 on Tyden’s claim of misappropriation of trade secret, $2,000 on the claim for unfair competition, and $2,000 on the claim for unjust enrichment, for a total of $6,000 against each of them. Id. The jury awarded compensatory damages against defendant Lyle in the amount of $2,000 on Tyden’s claim for unfair competition and $2,000 on the claim for unjust enrichment, for a total of $4,000; it did not award any amount on the claim of misappropriation of trade secret against defendant Lyle. Id.2 Consistent with the jury’s award, the District Court for the Southern District of New York (“District Court” or “trial court”) entered a Judgment on May 2 The claims against the individual defendants have been settled and thus are not at issue on this appeal. 14 14, 2015 in the amount of $3.9MM against CSS, $4,000 against Mr. Lyle; $6,000 against Mr. Singh; and $6,000 against Mr. Gizzarelli. A-399 to A-400. D. Relevant Post-Trial Proceedings After the jury rendered its verdict, CSS moved to vacate or modify the judgment. Among other things, CSS argued that the District Court erred by allowing Tyden to pursue a measure of damages based on the costs that CSS avoided by its theft of Tyden’s trade secret. The District Court denied CSS’s motion. In so doing, the District Court noted that damages could be measured either by “plaintiff’s losses” or “the profits unjustly received by the defendant.” A- 417. If these two methods of calculating damages provided inadequate compensation to the plaintiff, the District Court explained that the “reasonable royalty” measure of damages could be used. A-418. In rejecting CSS’s argument that “profits” and “losses” do not include avoided development costs, the District Court held that “avoided development costs could just as aptly be categorized as Tyden’s ‘losses’ or CSS’ ‘gains’” and that “CSS’ suggested interpretations of these terms is too narrow.” Id. The District Court then cited ample authority within the Second Circuit and in other jurisdictions that recognized this measure of damages. A-419 to A-421. The District Court further noted that the theory of damages was supported by Dr. Vigil, Tyden’s damage expert: Dr. Vigil noted in his expert report that, although he found ‘evidence that TydenBrooks lost sales and profits 15 as a result of Cambridge’s misappropriation of trade secrets . . . [he was] unable to precisely quantify the exact amount of sales TydenBrooks lost due to Cambridge’s theft of trade secrets.’ Dr. Vigil testified at trial, therefore, that a more appropriate method of calculating damages in the instant case would be based on the Defendant’s ‘disgorgement of unjust gains’ and that ‘[a]voided costs would be a type of disgorgement.’ . . . Dr. Vigil further noted that this analysis would not apply only to the misappropriation of trade secrets claim but also to Tyden’s unfair competition and unjust enrichment claims. A-421 to A-422. After trial, Tyden moved to amend the judgment to include prejudgment interest based on N.Y. C.P.L.R. § 5001, which CSS opposed. Despite the fact that prejudgment interest was not mentioned once during the trial - and was not a component of Dr. Vigil’s damage calculation - the District Court denied Tyden’s motion. Relying on a single line in the jury charge in which the District Court instructed the jury that “damages are assessed from the date of the misappropriation and/or unfair use through the date on which the verdict is given,” the District Court found it “possible” that the jury had incorporated the “prejudgment time in its award.” A-406. CSS appealed the denial of its motion to vacate the judgment to the Court of Appeals for the Second Circuit (“Second Circuit”), and Tyden appealed the denial of its motion for prejudgment interest. The Second Circuit certified the two questions set forth above to this Court. 16 Argument I. A Defendant’s Avoided Costs is a Proper Measure of Damages in a Case for Theft of Trade Secrets It is undisputed that the jury found that CSS willfully stole Tyden’s trade secrets, used them to manufacture competing products, and was thus liable to Tyden for claims of trade secret misappropriation, unfair competition, and unjust enrichment. The jury’s verdict on liability was affirmed by both the District Court and the Second Circuit, and the issue of liability is not a subject of any of the certified questions pending before this Court. A-408 to A-445 (District Court); A- 4 to A-5 (Second Circuit). Under well-established New York law, “there is no wrong without a remedy.” See Jacobus v. Colgate, 217 N.Y. 235, 254 (1916); Gen. Rubber Co. v. Benedict, 215 N.Y. 18, 23 (1915); Williams v. Vill. of Port Chester, 76 N.Y.S. 631, 633-35 (2d Dep’t 1902); Ming Tung v. China Buddhist Ass’n, 996 N.Y.S. 2d 236, 252 (1st Dep’t 2014) (quoting maxim in dissent). That legal maxim should apply with full force here. With the vast number of technological, financial and other companies that call New York home, New York has a vested interest in deterring the theft of intellectual property, including another’s trade secrets. See Robert Hackett, States With the Most Fortune 500 Companies, FORTUNE 500 (June 15, 2015), available at http://fortune.com/2015/06/15/states-most-fortune-500- companies (a 2015 Fortune report finding that New York had more fortune 500 17 companies than any other state in the county); New York State Comptroller, New York City’s Growing High-Tech Industry (Apr. 2014), available at https://www.osc.state.ny.us/osdc/rpt2-2015.pdf (a 2014 report from the New York State comptroller finding that the high-tech industry was one of the fastest growing industries in New York City with a rate of growth that was four times faster than the rate of job growth in the rest of the City’s economy). Indeed, as the Supreme Court of the United States has stated, “the right to exclude others is generally one of the most essential sticks in the bundle of [property] rights that are commonly characterized as property. . . . [and] [w]ith respect to a trade secret . . . central to the very definition of the property interest.” Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1011 (1984) (internal quotations and citations omitted). A. Trade Secret Damages are Difficult to Calculate and Require a Flexible Approach The Supreme Court of the United States noted long ago that damages in trade secret cases are often difficult to calculate with certainty. Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555 (1931). More recent courts have echoed this sentiment. See Mar Oil Co. v. Korpan, 973 F. Supp. 2d 775, 782 (N.D. Ohio 2013) (noting the difficulty of calculating trade secret damages); Avery Dennison Corp. v. Four Pillars Enter. Corp., 45 F. App’x 479, 485 (6th Cir. 2002) (“Damages in trade secret cases are difficult to calculate, because the offending company has mixed the profits and savings from increased quality and quantity of 18 products, as well as savings from reduced [] costs of research and production, with its own natural profits.”); Sonoco Prods. Co. v. Johnson, 23 P.3d 1287, 1289 (Colo. App. 2001) (“Damages in trade secret appropriation cases are often difficult to ascertain with certainty.”). This is particularly true here, where the defendant is a start-up company, making losses and profits even more difficult to ascertain. Lightlab Imaging, Inc. v. Axsun Techs., Inc., 13 N.E.3d 604, 614 (Mass. 2014) (“traditional lost profits analysis as a measure of damages may not be an adequate model for analyzing harm caused by misappropriation of the trade secrets of a ‘start-up’ business. Such businesses often operate for years without profit. This fact should not render them ‘damage proof.’”). Where damages are difficult to calculate, this Court and other lower courts within New York have permitted a practical approach to measuring damages, allowing juries to make “the most intelligible and accurate estimate which the nature of the case will permit.” Duane Jones Co. v. Burke, 306 N.Y. 172, 192 (1954) (finding that where defendants had wrongfully deprived plaintiff of its customers and key employees and “the amount of the damages cannot be estimated with certainty . . . no objection is perceived to placing before the jury all the facts and circumstances of the case having any tendency to show damages or their probable amount, so as to enable them to make the most intelligible and accurate estimate which the nature of the case will permit” (internal quotations and 19 citation omitted)). See generally Wathne Imports Ltd. v. PRL USA, Inc., 953 N.Y.S.2d 7, 11 (1st Dep’t 2012) (finding that breaching party shall shoulder the burden of uncertainty regarding the amount of damages). In In re Estate of Rothko, this Court - citing the Supreme Court’s decision in Story Parchment - upheld a damages award in a case involving unreturned works of art. 43 N.Y.2d 305, 323 (1977). This Court found that where damages could not be calculated with absolute certainty, the lower court had “the right to resort to reasonable conjectures and probable estimates and to make the best approximation possible through the exercise of good judgment and common sense” and that the damages figure had a “reasonable basis of computation” and “was not merely speculative, possible or imaginary.” Id. (citing Story Parchment Co., 282 U.S. at 562-63). In matters involving the misappropriation of personal property, “the common law has evolved to broaden the remedies available.” Thyroff v. Nationwide Mut. Ins. Co., 8 N.Y.3d 283, 288 (2007) (recognizing a claim for conversion of electronic data). As this Court has explained, “it is the strength of the common law to respond, albeit cautiously and intelligently, to the demands of commonsense justice in an evolving society.” Id. at 290. Awarding avoided costs resulting from the misappropriation of the trade secret involves a straightforward application of New York law governing 20 unjust enrichment, which has been described as a broad and flexible legal category. See, e.g., Paramount Film Distrib. Corp. v. State, 30 N.Y.2d 415 (1972). As this Court has held, to recover damages under an unjust enrichment theory, a plaintiff must establish that “(1) the other party was enriched, (2) at that party’s expense, and (3) that it is against equity and good conscience to permit the [defendant] to retain what is sought to be recovered.” Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 182 (2011) (internal quotations omitted). “[I]n determining the extent of recovery in an unjust enrichment cause of action, courts will generally consider factors surrounding the benefit received by the defendant, such as whether the defendant still retains that benefit, whether the defendant’s conduct was tortious, or whether there was a change in position by the defendant.” Empire Fin. Servs., Inc. v. Bellantoni, 861 N.Y.S.2d 898, 900 (4th Dep’t 2008). Allowing avoided costs in this case as a form of unjust enrichment is wholly consistent with this precedent. By avoiding millions of dollars in development costs through its trade secret misappropriation, CSS was unjustly enriched at the expense of Tyden. And CSS’s misappropriation was egregious and tortious. Among other things, the evidence at trial established that CSS not only stole Tyden’s trade secrets, but engaged in an elaborate cover-up to hide its tracks. Among other things, CSS instructed Tyden’s former employees to lie about joining CSS and these employees then did in fact lie to Tyden; CSS instructed its 21 receptionist to lie to callers as to the true identities of its employees; and even used anonymous emails and job listings, and resorted to using individual cellular phones, in order to conceal its tortious acts from Tyden. See supra 8-9. There is no doubt as to CSS’s liability in this case, and Tyden should not be unjustly denied its award solely on account of the fact that the misappropriator was a start-up company, which made the task of conducting a traditional profit and loss analysis difficult and inadequate in this particular case. B. Courts Around the United States Award Research and Development Costs in Cases Involving the Theft of a Trade Secret That a defendant’s avoided development costs in a trade secret case should be awarded a plaintiff as a form of unjust enrichment is widely recognized by federal and state courts across the country, including by at least one federal court in New York (in addition to the trial court below). Where New York law has not been settled on a particular issue, this Court has looked to the holdings of New York federal courts and to state and federal courts outside of New York as part of its decision-making process. See Thyroff, 8 N.Y.3d at 290 (considering how other federal and state courts, including courts outside New York, dealt with the issue presented by the certified questions). In actions involving the misappropriation of trade secrets or confidential information, a plaintiff typically recovers damages based either on the value of what has been lost by the plaintiff or the value of what has been gained by 22 the defendant. If damages cannot be calculated under either of those methods, a plaintiff can recover damages measured by a “reasonable royalty.” See, e.g., Carbo Ceramics, Inc. v. Keefe, 166 F. App’x 717, 722 (5th Cir. 2006) (laying out methodologies to calculate damages for trade secret misappropriation); In re Cross Media Mktg. Corp., No. 06 Civ. 4228 (MBM), 2006 WL 2337177, at *6 (S.D.N.Y. Aug. 11, 2006) (same). New York federal courts have adopted liberal interpretations of the terms “profits” and “gains” and, in particular, “have diverged from a straight lost profits analysis in cases where plaintiff’s losses and defendant’s actual gain cannot easily be computed.” LinkCo, Inc. v. Fujitsu Ltd., 230 F. Supp. 2d 492, 503 (S.D.N.Y. 2002); In re Cross Media Mktg. Corp., 2006 WL 2337177, at *6 (quoting Univ. Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 536 (5th Cir. 1974)) (“‘[T]he lack of actual profits does not insulate the defendants from being obliged to pay for what they have wrongfully obtained.’”). See also A-418 (same). Courts have measured the value of what has been gained by the defendant through the misappropriation of the trade secret in a variety of ways. Plaintiffs have received damages measured by the defendant’s actual profits, by the value that a reasonably prudent investor would have paid for the trade secret, 23 and/or - as relevant here - by the costs saved by the defendant as a result of the misappropriation. See Carbo Ceramics, Inc., 166 F. App’x at 723. In Cargill, Inc. v. Sears Petroleum & Transp. Corp., for example, in considering post-trial motions, the court noted that it instructed the jury on a claim of trade secret misappropriation that it “may consider the cost [that counterclaim defendant] Cargill would have incurred in acquiring the same trade secret information through its own experimentation or through other lawful means or . . . [could] consider the actual value of what has been appropriated or the reasonable royalty as of the time of the misappropriation.” 388 F. Supp. 2d 37, 70 (N.D.N.Y. 2005). In Telex Corp. v. IBM Corp., the Tenth Circuit upheld the trial court’s $10MM damage award. 510 F.2d 894, 930-32 (10th Cir. 1975) (per curiam), cert. denied, 423 U.S. 802 (1975), abrogation on other grounds recognized by, Novell, Inc. v. Microsoft Corp., 731 F.3d 1064 (10th Cir. 2013). In that case, the court found that IBM spent $30MM to develop its product and spent six years doing so. Telex, 510 F.2d at 932. By using IBM’s trade secret, the trial court found that Telex had been able to develop its equivalent product in approximately eighteen months and “if [the defendant] had not misappropriated and used [the plaintiff’s] trade secrets, it would have itself spent $10,000,000 more than it did in connection with [that] work.” Id. 24 Likewise, in Bourns, Inc. v. Raychem Corp., the Ninth Circuit affirmed the award of avoided development costs in a misappropriation case, in which the defendant, like CSS, had obtained confidential and trade secret information belonging to the plaintiff by hiring its former employees. 331 F.3d 704, 709-10 (9th Cir. 2003). The defendant there, like CSS, had argued that the plaintiff had failed to prove that it suffered an injury of $9 million in damages, the compensatory amount awarded by the jury. Id. at 709. The court found it sufficient that “[the defendant] saved at least three years of development by its torts” and that “this unjust enrichment [was] fairly recoverable by [the plaintiff].” Id. at 710. In Cartel Asset Mgmt. v. Ocwen Fin. Corp., the trial court denied several Daubert motions to exclude expert testimony in advance of a re-trial on the issue of damages. No. 01-cv-01644-REB-CBS, 2010 WL 3522416 (D. Colo. Sept. 1, 2010). The jury in the first case had found that the defendant had misappropriated trade secrets, including a database of real estate brokers and agents who could provide broker price opinions (“BPOs”) concerning parcels of real estate. As in this case, one of plaintiff’s damage theories was that “the bank benefited from its misappropriation of Cartel’s database because the bank got a head start in developing its own service that provided BPOs to buyers in need of that service.” Id. at *1. There, the defendant sought to introduce the testimony of 25 Dr. Bardwell, an expert who (like Tyden’s expert, Dr. Howard) would opine on “the question of how long it would have taken the bank to develop a database of BRO providers in 2000.” Id. at *3. The court denied plaintiff’s motion to exclude that testimony, which questioned, among other things, whether the testimony was reliable under the Daubert requirements. The plaintiff also moved to exclude defendant’s damage expert, who (like Tyden’s expert, Dr. Vigil) relied on Dr. Bardwell’s opinion and determined “the economic benefit” that defendant obtained for its use of the database based on the “cost savings associated with developing a list of BPO providers plus the incremental profits that Ocwen derived from its access to the Cartel list during the period of time Ocwen would have required to develop such a list.” Id. at *6. In denying defendant’s motion, the Court found the “method of calculating the unjust enrichment garnered by Ocwen” to be consistent with Colorado law. Id. at *7. Numerous other courts, in a variety of contexts, have similarly found that the remedy for misappropriating another’s trade secrets or proprietary information may be measured by the costs saved or avoided by defendants. For example: 26 • Quantlab Tech., Ltd. (BVI) v. Kuharsky, --- F. App’x ---, No. 16-20242, 2017 WL 2713034, at *6 (5th Cir. June 22, 2017) (upholding jury’s award of $1MM and $1.8MM in damages against two different defendants and noting that it was appropriate for the jury to consider evidence of both avoided development costs and profits earned by defendants in making its determination); • GlobeRanger Corp. v. Software AG U.S., Inc., 836 F.3d 477, 499-500 (5th Cir. 2016) (upholding $15MM jury award in action for trade secret misappropriation that was based on an unjust enrichment theory rooted in research and development costs that defendant avoided); • TKC Aerospace, Inc. v. Muhs, No. 3:11-cv-0189-HRH, 2015 WL 6394481, at *7 (D. Alaska Oct. 22, 2015) (expressing willingness to award damages for research and development costs in action for, inter alia, unjust enrichment and misappropriation of trade secrets and expressing its “tentative view” of damages for Alaska Trade Secret Act violations in this case, which included approximately $3.8MM in research and development costs); • PQ Labs, Inc. v. Yang Qi, No. 12-0450 CW, 2014 WL 4954161, at *11 (N.D. Cal. Sept. 30, 2014) (finding that plaintiffs were entitled to unjust enrichment damages of $214,800, representing the avoided “expense of [Defendants] conducting their own research and development”); • Wellogix, Inc. v. Accenture, L.L.P., 716 F.3d 867, 879 (5th Cir. 2013) (citation omitted) (“Damages in misappropriation cases can [include] . . . the development costs the defendant avoided incurring through misappropriation.”); • Bohnsack v. Varco, L.P., 668 F.3d 262, 280 (5th Cir. 2012) (acknowledging that damages in misappropriation cases can take several forms, including plaintiff’s lost profits, defendant’s actual profits, the value a reasonable investor would pay, a reasonable royalty, and development costs avoided by the defendant); • Benton v. Avedon Eng’g, Inc., 10-cv-01899-RBJ-KLM, 2012 WL 3399367, at *6 (D. Colo. Aug. 15, 2012) (upholding magistrate judge’s decision to allow expert testimony where report “reflect[ed] an informed comparison of ‘Avedon’s cost of developing the product and market to the Opposing Parties’ product and market development costs’”); 27 • Int’l Mezzo Tech., Inc. v. Frontline Aerospace, Inc., No. 10-397-SCR, 2011 WL 4481687, at *3 (M.D. La. Sept. 27, 2011) (denying summary judgment in action for misappropriation of trade secrets and unjust enrichment and rejecting argument that plaintiff lacked evidence to support a claim for monetary damages because “[p]laintiff has shown at least the possibility of recovery of monetary damages in the form of development costs”); • Universal Engraving, Inc. v. Metal Magic, Inc., CV-08-1944-PHX-GMS, 2010 WL 4922703, at *8 (D. Ariz. Nov. 29, 2010) (denying motion for summary judgment in action for misappropriation of trade secrets, unfair competition and other claims, finding that plaintiff had presented sufficient evidence of damages, via documentation of a communication from defendant’s employee discussing the cost savings resulting from a change in one of defendant’s processes); • Toledo Mack Sales & Serv., Inc. v. Mack Trucks, Inc., No. 02-4373, 2007 WL 5256959, at *4 (E.D. Pa. Feb. 16, 2007), aff’d in part, vacated in part, 530 F.3d 204 (3d Cir. 2008) (on claim for misappropriation of trade secrets, court noted its instruction to the jury that it could award development costs in the amount of money that defendant saved by not having to develop a database and software, but reduced the amount awarded under that method as excessive); • Callaway Golf Co. v. Dunlop Slazenger Grp. Americas, Inc., No. Civ.A. 01- 669-KAJ, 2004 WL 1534786, at *2 (D. Del. May 21, 2004) (denying motion to exclude expert who estimated that Callaway was unjustly enriched in the amount of $10.4MM because of avoided research and development costs and who opined that “Dunlop is entitled to approximately $11.3MM in royalty damages for the research and development costs that Callaway avoided by having the trade secret information rather than creating it independently, and for the head start, or accelerated market entry, that Callaway received by using that information”); • Sonoco Prods. Co. v. Johnson, 23 P.3d 1287, 1290 (Colo. App. 2001) (upholding $4.6MM damages award in trade secret case involving manufacturer of paper spiral tubes and finding that award reasonable in light of expert testimony that defendant saved $19MM to $25MM in cost of capital by using plaintiff’s trade secret); 28 • G.S. Rasmussen & Assocs., Inc. v. Kalitta Flying Serv., Inc., No. 95-56496, 96-56588, 1997 WL 774869, at *2, 3 (9th Cir. Dec. 11, 1997) (affirming district court’s measure of damages for unjust enrichment claim where defendant used plaintiff’s STC to modify one of its airplanes, without buying a license from plaintiff or developing its own STC, and noting that the “[t]he amount of [damages] represents the cost that CKS should have absorbed to use Rasmussen’s or its own STC, and thus represents the amount of CKS’s unjust enrichment under its implied contract with Rasmussen”); • Litton Sys., Inc. v. Ssangyong Cement Indus. Co., 107 F.3d 30, 1997 WL 59360, at *8 (Fed. Cir. Feb. 13, 1997) (vacating district court’s damages award for trade secret misappropriation and unjust enrichment based on an “expected gain” theory, and holding that the correct measure of damages was either plaintiff’s actual loss, defendant’s unjust enrichment, or a reasonable royalty and that when unjust enrichment is the measure of damages, it is measured by defendant’s actual profits or “by the cost saving that the defendant has realized from using the trade secret”); • Salsbury Labs. v. Merieux Labs., 735 F. Supp. 1555, 1578-80 (M.D. Ga. 1989) (awarding $1MM for the “advantages gained by [defendant] in using the research, development, marketing and advertising techniques of Salsbury); • Comput. Print Sys., Inc. v. Lewis, 422 A.D. 148, 157 (Pa. Super. Ct. 1980) (upholding damages award for conversion of computer program where “chancellor concluded that the $18,000 cost of developing the programs was the proper amount applicable under [two measures of damages]” and noting that the improperly obtained information allowed defendant to design programs within ten days as opposed to the three to four weeks without the information); and • Int’l Indus., Inc. v. Warren Petroleum Corp., 248 F.2d 696, 702 (3d Cir. 1957) (permitting plaintiff to recover the advantage gained by the defendant, which the court calculated as the defendant’s avoided costs), cert. denied, 355 U.S. 943 (1958). Recognizing that a defendant’s avoided costs is a standard measure of trade secret damages across the country, the Restatement (Third) of Unfair 29 Competition § 45 (“Monetary Relief; Appropriation of Trade Secrets”), comment f (2000) provides: If the benefit derived by the defendant consists primarily of cost savings, such as when the trade secret is a more efficient method of production, the ‘standard of comparison’ measure that determines relief based on the savings achieved through the use of the trade secret may be the most appropriate measure of relief. The standard of comparison measure determines the defendant’s gain by comparing the defendant’s actual costs with the costs that the defendant would have incurred to achieve the same result without the use of the appropriated trade secret. Similarly, many courts have found that the costs that plaintiff spent to develop the trade secret is an appropriate measurement of defendant’s unjust enrichment in a trade secret case. For example: • Direct Line Corp. v. Carrington, No. 3:10-0423, 2012 WL 6568569, at *5 (M.D. Tenn. Dec. 17, 2012) (allowing recovery of $287,928 that plaintiff expended to develop the online catalog); • W.L. Gore & Assocs., Inc. v. GI Dynamics, Inc., 872 F. Supp. 2d 883, 892 (D. Ariz. 2012) (allowing expert to testify concerning the value lost in research and development costs that GID invested and noting that “[t]he cost to create property has long been considered an appropriate factor in computing damages, so long as the ‘property . . . is injured or destroyed by the wrongful or negligent act of another,’” which happens when the trade secrets are used to develop a competing product); • E.I. Dupont De Nemours & Co. v. Kolon Indus., Inc., No. 3:09 cv 58, 2011 WL 13079484, at *1 (E.D. Va. June 15, 2011) (denying Daubert motion to exclude damages expert in trade secret misappropriation and unjust enrichment case and holding that “it was appropriate for [expert] to have considered, in his evaluation of the unjust enrichment damages, the value of knowing what ‘blind alleys’ and ‘wrong turns’ to avoid as a consequence of 30 misappropriating trade secrets of the plaintiff” and for the expert “to have included all of Dupont’s research costs in calculating unjust enrichment damages”); • Leatt Corp. v. Innovative Safety Tech., LLC, No. 09-CV-1301-IEG (POR), 2010 WL 11442713, at *5 (S.D. Cal. Aug. 24, 2010) (finding recovery of money spent in research and development costs to be an appropriate substitute of Leatt’s actual losses due to the misappropriation); • In re Cross Media Mktg. Corp., No. 06 Civ. 4228 (MBM), 2006 WL 2337177, at *5 (S.D.N.Y. Aug. 11, 2006) (noting that “the plaintiff’s losses . . . may include the cost of developing the trade secret” and affirming lower court’s award of damages that were calculated by determining the development cost of stolen lists); • Ajaxo Inc. v. E*Trade Grp., Inc., 37 Cal. Rptr. 3d 221, 249 (Cal. Ct. App. 2005) (finding substantial evidence to uphold $1.29MM jury award in unjust enrichment to E*Trade based on theft of trade secrets, which likely was based in part on testimony that plaintiff’s development costs were approximately $900K); • Hauck Mfg. Co. v. Astec Indus., Inc., No. 1:03-CV-166, 2004 WL 5523286, at *5 (E.D. Tenn. Nov. 3, 2004) (denying Daubert motion to exclude expert who calculated defendants’ unjust enrichment based on an estimate of the research and development costs incurred by plaintiff in developing its trade secrets and noting that expert’s findings would allow the jury “to compare the costs incurred by Astec with the benefit of Plaintiff’s trade secrets versus the costs of accomplishing the same result through other means”); • Dresser-Rand Co. v. Virtual Automation Inc., 361 F.3d 831, 842 (5th Cir. 2004) (allowing $2.2 million jury award based on plaintiff’s development costs); • Lucini Italia Co. v. Grappolini, No. 01 C 6405, 2003 WL 1989605, at *19 (N.D. Ill. 2003 Apr. 28, 2003) (awarding plaintiff lost profits of $4.17MM plus $800K in development costs); • Biocore v. Khosrowshahi, 183 F.R.D. 695, 700-01 (D. Kan. 1998) (allowing expert to testify that plaintiff incurred over $11MM in product development costs in connection with unjust enrichment theory of damages); 31 • Glob. Prot. Corp. v. Halbersberg, 503 S.E.2d 483, 488 (S.C. Ct. App. 1998) (upholding award of damages that included plaintiff’s research and development costs); and • J&K Comput. Sys., Inc. v. Parrish, 642 P.2d 732, 736 (Utah 1982) (finding jury’s $7,500 damages award for theft of trade secret to be reasonable “considering plaintiff’s loss in customers and the cost of developing its accounts receivable program”). Citing Vermont MicroSystems, Inc. v. Autodesk, Inc.,138 F.3d 449 (2d Cir. 1998) and LinkCo, CSS has claimed that “[c]ourts only diverge from straight lost profits analysis in misappropriation and unfair competition cases where there is insufficient evidence of a plaintiff’s losses or a defendant’s profits.” CSS Br. at 15 (emphasis added). While LinkCo, which cites Vermont Microsystems, notes that “courts have diverged from a straight lost profits analysis in cases where plaintiff’s losses and defendant’s actual gain cannot be easily computed,” it by no means suggests that those are the only circumstances under which a court can diverge, as CSS contends. See LinkCo, 230 F. Supp. 2d at 503. Indeed, in Salsbury Labs., Inc. v. Merieux Labs., Inc., the Eleventh Circuit upheld a damages award based on defendant’s avoided development and research costs notwithstanding the fact that defendant admitted it gained $52,000 in profits from its misappropriation. 908 F.2d 706, 714-15 (11th Cir. 1990); see also Direct Line Corp. v. Carrington, No. 3:10-0423, 2012 WL 6568569, at *4-6 (M.D. Tenn. Dec. 17, 2012) (recommending judgment that included defendant’s earnings and the amount plaintiff expended to develop the online category); Lucini Italia Co., 2003 32 WL 1989605, at *19 (awarding plaintiff lost profits of $4.170MM plus $800K in development costs). In any event, as the trial court held here, CSS’s increased sales and Tyden’s lost business were not readily calculable. As the trial court highlighted, Tyden’s damages expert stated in his expert report that “although he had found ‘evidence that TydenBrooks lost sales and profits as a result of Cambridge’s misappropriation of trade secrets . . . [he was] unable to precisely quantify the exact amount of sales TydenBrooks lost due to Cambridge’s theft of TydenBrooks’ trade secrets.” A-421 to A-422.3 And although Dr. Vigil noted in his expert report that “there is evidence that CSS gained from use of the trade secrets,” in part because “CSS received revenues and profits from selling products manufactured using TydenBrooks’ propriety manufacturing process,” CSS does not, nor can it, point to anything that says such “revenues and profits” were calculable. See A- 911; A-941. In fact, on cross examination, Dr. Vigil testified that “[t]he profit information from Cambridge was not sufficient.” A-280 at 695:17-18. And, as noted earlier, CSS did not offer the testimony of its damages expert at trial, despite 3 Citing to A-573 to A-574, CSS implied in its brief before the Second Circuit that TydenBrooks’s corporate representative testified that TydenBrooks had lost profits of less than $600,000. But review of that testimony shows that the witness actually testified that he was unable to estimate the total damages to Tyden. A-574 at 339:10-22. Similarly, CSS claims that Tyden’s expert noted at trial that CSS had approximately $4MM in revenue. But revenue is not the same as profits as it does not account for expenses. In addition, there was no evidence at trial that CSS had made any profits. 33 representing to the trial court that it would do so. See A-256 at 597:11-14; A-333 at 908:14-15. * * * Because avoided costs are a component of defendant’s unfair gains, such costs should be awarded as a measure of damages in a trade secret action under New York law. II. New York Law Mandates an Award of Prejudgment Interest Where Damages Are Calculated Based on a Defendant’s Avoided Costs An award of prejudgment interest is mandatory under New York law. Specifically, N.Y. C.P.L.R. § 5001 et seq provides that “[i]nterest shall be recovered upon a sum awarded because of . . . an act or omission depriving or otherwise interfering with title to, or possession or enjoyment of, property.” N.Y. C.P.L.R. § 5001(a) (emphasis added). See Delulio v. 320-57 Corp., 472 N.Y.S.2d 379, 381 (1st Dep’t 1984) (explaining that CPLR 5001(a)’s instruction that “interest ‘shall’ be recovered on monetary damages awarded for . . . any act or omission affecting possession or enjoyment of property” is “now a statutory mandate,” and “absent reasons to the contrary, a prevailing plaintiff is entitled to such interest as of right.”); Hillsley v. State Bank of Albany, 263 N.Y.S.2d 578, 581-82 (1st Dep’t 1965) (“In an action for injury to property rights, the rule is that interest is generally awarded as a matter of right.”); David D. Siegel, New York Practice § 719 (5th ed. 2011) (“All actions for money, seeking in essence to 34 recover for property loss, whether sounding in contract or tort, get interest as a matter of right [under 5001]. This is so if the action is one at law . . . .”); see also Rose Assocs. v. Lenox Hill Hosp., 695 N.Y.S.2d 1, 2 (1st Dep’t 1999) (“Because this action sought the legal remedy of ejectment, which the Supreme Court granted . . . , plaintiff was entitled to prejudgment interest as a matter of right (CPLR 5001[a])”). Under C.P.L.R. § 5001(a), “interest is available for the tortious interference with intangible, as well as tangible, property whether or not the property has been physically damaged.” De Long Corp. v. Morrison-Knudsen Co., 244 N.Y.S.2d 859, 864 (1st Dep’t 1963), aff’d, 14 N.Y.2d 346 (1964). Accordingly, prejudgment interest is mandatory where a party has asserted successful claims of trade secret misappropriation, unfair competition, and/or unjust enrichment. In De Long Corp. v. Morrison-Knudsen Co., for example, the First Department affirmed an award of prejudgment interest in an “action for unfair competition and inducement to breach contract” where “[d]efendant tortiously obtained and utilized confidential information [regarding the cost and manner of constructing and installing jacks] of the plaintiff from a former employee of plaintiff in violation of a restrictive covenant made by the faithless employee.” 244 N.Y.S.2d at 860-62. In so holding, the court explained that “a plaintiff 35 victimized by a business tort of the nature pleaded and proved in this action is entitled to have interest included as a matter of right on the damages assessed, measured from the date on which the action was begun.” Id. at 860. That court also instructed that “in the case of [an] intentional tort resulting in pecuniary injury measurable by economic standards and not involving personal injuries, interest must be added if the victim of the tort is to be made whole.” Id. at 861; see also id. at 862 (“It has been the settled rule that interest must be allowed as a matter of right on recoveries for intentional tort with respect to property and property rights.”). In affirming that decision, this Court explained that “[w]hile this court has recently declined to discard the decisional rule - which it has frequently criticized - that interest in actions involving negligent injury to property must be left to the discretion of the trier of facts, it is generally recognized that interest is awardable as a matter of right in all other tort actions in which damages are recovered for the destruction of, or injury to, property rights.” De Long Corp. v. Morrison-Knudsen Co., 14 N.Y.2d 346, 348 (1964) (emphasis in original; citations omitted); see also Eighteen Holding Corp. v. Drizin, 701 N.Y.S.2d 427, 428-29 (1st Dep’t 2000) (affirming award of prejudgment interest under CPLR § 5001 on plaintiff’s causes of action for money had and received, unjust enrichment, and conversion). See generally Cargill, Inc. v. Sears Petroleum & Transp. Corp., No. 36 5:03 CV 0530 (DEP), 2004 WL 3507329, at *16 (N.D.N.Y. Aug. 27, 2004) (awarding mandatory prejudgment interest on plaintiff’s claims of trade secret misappropriation, unfair competition, and unjust enrichment); Boule v. Hutton, 320 F. Supp. 2d 132, 140 (S.D.N.Y. 2004) (awarding mandatory prejudgment interest on unfair competition claim). Notwithstanding the mandatory language of the statute, some New York courts have forged an exception to mandatory prejudgment interest to prevent windfalls in favor of plaintiffs. As the Second Department has explained, “[t]he award of interest is founded on the theory that there has been a deprivation of use of money or its equivalent and that the sole function of interest is to make whole the party aggrieved. It is not to provide a windfall for either party.” Kaiser v. Fishman, 590 N.Y.S.2d 230, 234 (2d Dep’t 1992). Courts have found a windfall where the trial court charged the jury on interest, creating the possibility that the award included interest or where the damages evidence presented at trial took into consideration the present value of money/costs. In Kassis, the First Department held that plaintiffs were not entitled to prejudgment interest because “plaintiffs’ proof at trial was not based on estimates at the time the damages were incurred at their buildings but rather 11 years later.” Kassis v. Teachers’ Ins. & Annuity Ass’n, 786 N.Y.S.2d 473, 474 (1st Dep’t 2004) (emphasis added). In that situation, the court found that the jury’s award “amply compensated plaintiffs and placed them 37 in the same position as if there had been no breach.” Id. at 474. The court noted that to award prejudgment interest would have resulted in an “unwarranted windfall.” Id. Likewise in Bamira, the First Department held that plaintiffs were not entitled to prejudgment interest where the “jury’s award of damages [was] based on the present value of stock that had significantly appreciated during the period between the defendant’s misappropriation of the partnership opportunity and the verdict” and where “the charge made clear that the verdict should make plaintiff whole by putting him ‘in the same position he would have been had [defendant] complied with his contractual obligations.’” Bamira v. Greenberg, 744 N.Y.S.2d 367, 369 (1st Dep’t 2002). In Men’s World Outlet, Inc. v. Estate of Steinberg, the appellate court reversed a prejudgment interest award where the trial court had charged the jury as to interest, finding “there [was] a possibility that the jury had already allowed interest in the amount of recovery fixed in the verdict.” 476 N.Y.S.2d 171, 172 (2d Dep’t 1984); see also Flores v. Citizens Int’l. Bank, 640 N.Y.S.2d 746, 746 (1st Dep’t 1996) (plaintiff was not entitled to interest since the jury was instructed to consider interest in its deliberations as to damages). Here, there was not a single mention of prejudgment interest during the entire trial, let alone mention of the applicable prejudgment interest rate. Similarly, there was no reference to prejudgment interest in either the jury instruction or on the verdict sheet. The jury’s verdict of $3.9MM against CSS 38 amounted to exactly one-half of the lower range of the damage calculations offered by Dr. Vigil. But the figures offered by Dr. Vigil did not include interest calculations nor reflect present values. Dr. Vigil’s calculation was not based on labor or capital costs at the time of the trial in 2015; instead, Dr. Vigil’s labor costs were from 2011 and the capital costs were from 2013. A-276 at 678:2-3; A-282 at 702:23-703:4. Thus, the evidence at trial did not take into account the present value of money. Under these circumstances, there is no basis whatsoever to believe that the jury awarded interest. The District Court erred in finding that because it was “possible that the jury [] incorporated the prejudgment time period in its award,” no prejudgment interest was warranted. A-406. That finding was based on the following one line of the admittedly “routine” jury instructions that were given to the jury: “Damages are assessed from the date of the misappropriation and/or unfair use through the date on which the verdict is given.” A-375 at 1068:22-24; A-406. Nothing about that charge could have suggested to the jury that they undergo the complicated task of calculating interest in awarding damages. Moreover, this Court held that section 5001(a) “is designed to obliterate all distinctions that may turn on the form of the action . . . , the type of property involved, or the nature of the encroachment upon the plaintiff’s property interests.” De Long Corp., 14 N.Y.2d at 349. The jury charge that formed the basis of the trial court’s ruling concerned solely the nature 39 of the damages suffered in this case and cannot, as a matter of law, displace Tyden’s statutory entitlement to prejudgment interest. In other words, the nature of the damages suffered and/or the jury charge concerning the nature of the damages in this case, cannot form the basis of the District Court’s denial of prejudgment interest under § 5001, as a matter of law. The fact that the damages award was calculated by the costs the defendant avoided by its theft of trade secrets does not change the analysis. In Sonoco Prods. Co., for example, the court awarded mandatory prejudgment interest even though plaintiff was awarded the research and development costs that the defendant saved by stealing the information. 23 P.3d at 1288, 1290. The Colorado Court of Appeals affirmed the judgment of the trial court. In M.D. Mark, Inc. v. Kerr-McGee Corp., the Tenth Circuit affirmed the district court of Colorado’s decision to deny a JMOL following a jury trial. 565 F.3d 753 (10th Cir. 2009). In that case, the district court awarded mandatory prejudgment interest even though the jury awarded $25MM in trade secret damages and considered evidence of research and development costs of the trade secret in measuring the damages. Id. at 760, 766. Likewise, in Johns-Manville Corp. v. Guardian Indus. Corp., the court awarded discretionary prejudgment interest where the court found that “the proper measure of unjust enrichment in th[e] case is the entire sum that [the plaintiff] expended in developing the HERM technology that [the defendant] 40 misappropriated.” 718 F. Supp. 1310, 1316-17 (E.D. Mich. 1989), aff’d, 925 F.2d 1480 (Fed. Cir. 1991); see generally Altavion, Inc. v. Konica Minolta Sys. Labs. Inc., 171 Cal. Rptr. 3d 714 (Cal. Ct. App. 2014) (awarding prejudgment interest in an action for trade secret misappropriation where damages were calculated under reasonable royalty theory and court considered the amount the plaintiff had spent in hiring and researching and developing the stolen technology); Little Genie Prods. LLC v. PHSI Inc., No. 2:12-cv-00357-RSM, 2014 WL 3050326 (W.D. Wash. July 2, 2014) (granting plaintiff’s motion for default judgment on claims of copyright infringement and unfair competition brought under the Lanham Act and awarding plaintiff’s past lost profits, development cost, and prejudgment interest on all damages). It would be unprecedented for this Court to exempt avoided costs from CPLR § 5001 where the claim arises from a property loss and is compensatory in nature, and where the damages award did not include interest. Accordingly, an award of damages that was calculated using an avoided cost methodology should be entitled to mandatory prejudgment interest. 41 Conclusion For the foregoing reasons, Tyden respectfully requests that this Court hold that (i) a plaintiff asserting claims of misappropriation of a trade secret, unfair competition, and unjust enrichment may recover damages that are measured by the costs the defendant avoided due to its misappropriation and (ii) under New York C.P.L.R. § 5001(a), prejudgment interest is mandatory where a plaintiff recovers damages that are measured in such a manner. Dated: New York, New York September 21, 2017 Kramer Levin Naftalis & Frankel LLP By: ____________________________ Daniel B. Goldman Kerri Ann Law Claudia Pak Sam Koch 1177 Avenue of the Americas New York, New York 10036 (212) 715-9100 Attorneys for Appellant-Respondent KL3 3139452.1 /s/ Daniel B. Goldman CERTIFICATE OF COMPLIANCE Pursuant to 22 NYCRR Part 500 1. The Brief for Appellant-Respondent Tyden complies with the type- volume limitation of Rule 500.13(c) because this brief contains 10,070 words, excluding the parts of the brief exempted by Rule 500.13(c)(3). 2. The Brief for Appellant-Respondent Tyden complies with the typeface and typestyle requirements of Rule 500.1 because this brief has been prepared in a proportionately spaced typeface using word processing program Microsoft Word 2010, in 14-point font, Time New Roman.