E.J. Brooks Company,, Appellant-Respondent,v.Cambridge Security Seals, Respondent-Appellant.BriefN.Y.June 20, 2017To 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. REPLY 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 December 1, 2017 i Table of Contents Page Table of Authorities ............................................................................................ ii Preliminary Statement ......................................................................................... 1 Argument ........................................................................................................... 2 I. This Court’s Jurisdiction is Limited to the Certified Questions .................... 2 II. Defendant’s Avoided Costs is a Proper Measure of Damages in a Case for Theft of Trade Secrets .................................................................. 3 A. An Award of Avoided Costs Is Consistent with Existing New York Precedent ................................................................................ 4 B. Numerous Other Courts have Recognized An Avoided Cost Measure of Damages ..................................................................... 15 C. An Avoided Cost Measure of Damages is Consistent with Public Policy and the Holding of Numerous Other Courts ............... 20 III. New York Law Mandates an Award of Prejudgment Interest Where Damages Are Calculated Based on a Defendant’s Avoided Costs .............. 25 Conclusion ....................................................................................................... 29 ii Table of Authorities Page(s) CASES 23/23 Commc’ns Corp. v. Gen. Motors Corp., 683 N.Y.S.2d 43 (1st Dep’t 1999) ................................................................. 27 Allan Dampf v. Bloom, 512 N.Y.S.2d 116 (2d Dep’t 1987)................................................................ 13 Am. Elecs., Inc. v. Neptune Meter Co., 290 N.Y.S.2d 333 (1st Dep’t 1968) ......................................................... 13, 14 Bourns, Inc. v. Raychem Corp., 331 F.3d 704 (9th Cir. 2003)......................................................................... 21 In re Cross Media Mktg., Corp. v. Nixon, 06 Civ. 4228 (MBM), 2006 WL 2337177 (S.D.N.Y. Aug. 11, 2006) ............................................................................. 21 Downes v. Culbertson, 275 N.Y.S. 233 ............................................................................................ 14 Dresser-Rand Co. v. Virtual Automation Inc., 361 F.3d 831 (5th Cir. 2004)......................................................................... 21 Duane Jones Co. v. Burke, 306 N.Y. 172 (1954) ...........................................................................4, 10, 11 Electrolux Corp. v. Val-Worth, Inc., 6 N.Y.2d 556 571 (1959) .............................................................................. 10 Empire Fin. Servs., Inc. v. Bellantoni, 861 N.Y.S.2d 898 (4th Dep’t 2008) ................................................................ 4 Epstein Eng’g, P.C. v. Cataldo, 1 N.Y.S.3d 38 (1st Dep’t 2015) ...................................................................... 7 In re Estate of Rothko, 43 N.Y.2d 305 (1977)..................................................................................... 4 Page iii Extrin Foods, Inc. v. Leighton, 115 N.Y.S.2d 429 (Sup. Ct. Kings Cnty. 1952)................................................ 8 GlobeRanger Corp. v. Software AG U.S., Inc., 836 F.3d 477 (5th Cir. 2016)......................................................................... 21 Hertz Corp. v. Avis, Inc., 485 N.Y.S.2d 51 (1st Dep’t 1985) ................................................................. 14 Hyde Park Prods. Corp. v. Maximilian Lerner Corp., 65 N.Y.2d 316 (1985)..................................................................................... 9 In Design v. Lauren Knitwear Corp., 782 F. Supp. 824 (S.D.N.Y. 1991) ................................................................ 28 Int’l Indus., Inc. v. Warren Petroleum Corp., 248 F.2d 696 (3d Cir. 1957), cert. denied, 355 U.S. 943 (1958)...................... 16 Jacobus v. Colgate, 217 N.Y. 235 (1916) ...................................................................................... 4 Lawrence of London, Ltd. v. Count Romi, Ltd., 290 N.Y.S.2d 125 (1st Dep’t 1968) ................................................................. 8 Lesjac Realty Corp. v. Mulhauser, 251 N.Y.S.2d 62 (Sup. Ct. Nassau Cnty. 1964).............................................. 27 Little Genie Prods. LLC v. PHSI Inc., No. 2:12-cv-00357-RSM, 2014 WL 3050326 (W.D. Wash. July 2, 2014) ........................................................................... 29 M.D. Mark, Inc. v. Kerr-McGee Corp., 565 F.3d 753 (10th Cir. 2009)....................................................................... 26 Mallis v. Bankers Trust Co., 717 F.2d 683 (2d Cir. 1983).......................................................................... 26 McRoberts Protective Agency, Inc. v. Lansdell Protective Agency, Inc., 403 N.Y.S.2d 511 (1st Dep’t 1978) ............................................................... 13 Merck Eprova AG v. Gnosis S.P.A., 760 F.3d 247 (2d Cir. 2014).......................................................................... 28 Page iv Michel Cosmetics, Inc. v. Tsirkas, 282 N.Y. 195 (1940) .............................................................................. 11, 12 Ming Tung v. China Buddhist Ass’n, 996 N.Y.S.2d 236 (1st Dep’t 2014) ................................................................. 4 Minn. Mining & Mfg. Co. v. Technical Tape Corp., 192 N.Y.S.2d 102 (Sup. Ct. Westchester Ctny. 1959), aff’d, 266 N.Y.S.2d 1021 (2d Dep’t 1962)................................................................ 8 In re Mud King Prods., Inc., 514 B.R. 496 (Bankr. S.D Tex. 2014) ........................................................... 17 Ronson Art Metal Works, Inc. v. Gibson Lighter Mfg. Co., 159 N.Y.S.2d 606 (1st Dep’t 1957) ......................................................9, 10, 11 Rooney v. Tyson, 91 N.Y.2d 685 (1998)..................................................................................... 3 Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984) ................................................................................. 5, 26 Santa’s Workshop, Inc. v. Sterling, 153 N.Y.S.2d 839 (3d Dep’t 1956)................................................................ 14 Sonoco Prods. Co. v. Johnson, 23 P.3d 1287 (Colo. App. 2001) ................................................................... 29 Straus v. Notaseme Hosiery Co., 36 S. Ct. 288 (1916) ............................................................................... 12, 13 Suburban Graphics Supply Corp. v. Nagle, 774 N.Y.S.2d 160 (2d Dep’t 2004).......................................................... 13, 14 Thyroff v. Nationwide Mut. Ins. Co., 8 N.Y.3d 283 (2007) ...........................................................................4, 16, 17 Trademark Research Corp. v. Maxwell Online, 995 F.2d 326 (2d Cir. 1993).......................................................................... 27 Underhill v. Schenck, 238 N.Y. 7 (1924) ........................................................................................ 13 Page v Zylon Corp. v. Medtronic, Inc., No. 650523/08, 2015 WL 1779010 (Sup. Ct. N.Y. Cnty. Apr. 17, 2015) ................................................................ 7 STATUTES AND OTHER AUTHORITIES 22 N.Y.C.R.R. § 500.27 ...................................................................................... 2 CPLR § 5001 ..................................................................................... 2, 25, 27, 29 Restatement (Third) of Unfair Competition §45 ................................................... 5 Uniform Trade Secrets Act ................................................................................ 16 1 Preliminary Statement1 Under New York law, damages in a trade secret case are measured by the plaintiff’s lost profits or the defendant’s unjust gains – or by a reasonable royalty if neither of those measurements is appropriate. As held by the District Court and the overwhelming majority of courts around this country, the costs that a defendant avoids as a result of its misappropriation of property is a component of plaintiff’s losses and defendant’s unjust gains. While no New York state court has ruled on this issue, the same result is warranted here. This is particularly true under the facts of this case. The District Court held that CSS’s increased sales and Tyden’s lost profits were not readily calculable, which was a finding that the Second Circuit did not disturb. A-421 to A-422.2 Accordingly, at trial, Tyden introduced evidence showing the costs that CSS, a startup company formed to compete with Tyden, avoided through its deliberate theft of Tyden’s trade secrets. Because CSS profited and was unjustly enriched by avoiding the significant research and development, labor, and capital costs it would have incurred had it developed its own manufacturing processes from scratch, an award of damages measured by those costs is a wholly appropriate 1 Defined terms have the same meaning as in Tyden’s opening brief. 2 References to the Joint Appendix are cited herein as “A-”. 2 way to compensate Tyden for its deprivation of property. An award of prejudgment interest also should be awarded consistent with CPLR § 5001(a). Argument I. This Court’s Jurisdiction is Limited to the Certified Questions Pursuant to 22 N.Y.C.R.R. § 500.27, this Court’s jurisdiction is limited to the two questions certified from the Second Circuit: (i) whether a plaintiff asserting claims of misappropriation of a trade secret, unfair competition, and unjust enrichment can recover damages measured by the costs the defendant avoided due to its unlawful activity?; and (ii) if so, is prejudgment interest mandatory pursuant to CPLR § 5001(a)? CSS does not dispute either the basis of jurisdiction or the two certified questions. (CSS Br. at xii). Yet CSS’s entire fact section – devoted to complaining about Tyden’s purported operational, integration and mismanagement problems and its baseless claim that Tyden’s lawsuit was an effort to slow down CSS from entering the market (CSS Br. at 3-6) – is a transparent effort to re- litigate evidentiary issues that are not before this Court. CSS’s Statement of Facts contains fifty citations – any citation to A-403 or above – to evidence that was excluded by the trial court, which rulings were affirmed on appeal. A-5 at 4 n.2 (“CSS challenges the District Court’s preclusion of certain evidence at trial . . . . [W]e reject each of these challenges.”). These so-called facts were never presented 3 to the jury and have no place in this appeal.3 Suffice it to say, had CSS been permitted at trial to tell the false tale presented in its brief to this Court, Tyden would have put on a vigorous defense. This Court should give no weight to any of the so-called facts contained in CSS’s “Statement of Facts” and relied on elsewhere in its brief, and it should reject CSS’s improper attempt to circumvent this Court’s jurisdiction to re-litigate properly precluded evidence. See generally Rooney v. Tyson, 91 N.Y.2d 685, 689 (1998) (“The focus and role of this Court are confined by the precise and narrow question certified under the collaborative juridical arrangement.”). II. Defendant’s Avoided Costs is a Proper Measure of Damages in a Case for Theft of Trade Secrets Nothing in CSS’s brief overcomes the strong showing in Tyden’s opening brief that the amount of costs that a startup company avoided as a result of its theft of plaintiff’s trade secrets is an appropriate measure of damages. While CSS argues that such measure is inconsistent with New York law, nothing in its brief supports that position. 3 The parties submitted essentially identical appendices to this Court and the Second Circuit. Pages A-403 and above were included so that the Second Circuit could render a decision on CSS’s appeal of numerous evidentiary rulings, which are irrelevant to the certified questions here. 4 A. An Award of Avoided Costs Is Consistent with Existing New York Precedent Measuring damages by the cost a defendant avoided by its theft of another’s trade secrets is wholly consistent with several well-established propositions under New York law. First, it is consistent with the principle that “there is no wrong without a remedy.” See Jacobus v. Colgate, 217 N.Y. 235, 254 (1916); Ming Tung v. China Buddhist Ass’n, 996 N.Y.S.2d 236, 252 (1st Dep’t 2014) (quoting maxim in dissent). Second, it is consistent with New York case law that permits 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); In re Estate of Rothko, 43 N.Y.2d 305, 323 (1977). Third, it is consistent with this Court’s guidance that the common law must be ever evolving to deal with the misappropriation of personal property. Thyroff v. Nationwide Mut. Ins. Co., 8 N.Y.3d 283, 288, 291 (2007) (“it is the strength of the common law to respond, albeit cautiously and intelligently, to the demands of commonsense justice in an evolving society”). Finally, it is consistent with New York law on unjust enrichment, where courts generally consider “the benefit received by the defendant.” Empire Fin. Servs., Inc. v. Bellantoni, 861 N.Y.S.2d 898, 900 (4th Dep’t 2008). By avoiding millions of dollars in development costs through its 5 willful trade secret misappropriation, CSS was unjustly enriched at Tyden’s expense. In addition to being consistent with New York precedent, as demonstrated in Tyden’s opening brief, such a measure of damages 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). See Opening Br. 21. The avoided cost measure of damages is also recognized by the Restatement (Third) of Unfair Competition. See Opening Br. 28-29. The United States Supreme Court has described the right to exclude others as an essential property right 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). Where one misappropriates another’s property right, damages are typically measured in one of three ways: plaintiff’s losses, defendant’s unjust gains or by a reasonable royalty. See Opening Br. 17. In all of its prior briefing in federal court, CSS affirmatively argued that damages in trade secret cases are measured in these three ways under New York law. According to CSS, “pursuant to New York law, ‘[t]he amount of damages recoverable in an action for misappropriation of trade secrets may be measured either by the plaintiff’s losses or by the profits unjustly received by the 6 defendants.” Memorandum of Law in Support of Defendant CSS’s Motion to Vacate or Modify the Judgment, No. 12-cv-2937 (S.D.N.Y. June 11, 2015), ECF No. 343 at 4 (“CSS JNOV Br.”) (emphasis added); see also Brief and Special Appendix for Defendants-Appellees-Cross-Appellants, Nos. 16-207, 16-259 (2d Cir. Apr. 21, 2016), ECF No. 48 at 13 (“CSS Second Circuit Br.”) (“Pursuant to well-established New York law, the damages recoverable in an action for misappropriation of trade secrets or confidential information ‘may be measured either by plaintiff’s losses or by the profits unjustly received by the defendant.”) (emphasis added). CSS explained that “[w]hen a plaintiff is unable to show lost profits or measure the defendant’s gain, courts may then calculate a reasonable royalty as an alternative method of damages.” (CSS JNOV Br. at 4 (emphasis added); CSS Second Circuit Br. at 15 (emphasis added)). CSS also represented to the District Court that “courts may look at avoided development costs as a factor in determining a reasonably royalty.” (CSS JNOV Br. at 5). CSS argued in federal court – contrary to the view of Tyden and the District Court – that avoided costs is not a component of plaintiff’s losses or defendant’s gains. Faced with pages and pages in Tyden’s opening brief of trade secret cases around the country awarding avoided costs in factually similar cases, CSS has reversed course, 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 7 compensation.” (CSS Br. at xii, 12-17). CSS now argues that “New York courts have repeatedly held that plaintiffs are only entitled to collect their own losses, regardless of the defendant’s gain.” (Id. at 20). But contrary to CSS’s latest position, New York cases have used defendant’s unjust gains as a measurement of damages in unfair business competition cases and specifically for claims of trade secret misappropriation. Zylon Corp. v. Medtronic, Inc., No. 650523/08, 2015 WL 1779010 (Sup. Ct. N.Y. Cnty. Apr. 17, 2015) is illustrative. In that case, plaintiffs alleged that defendant stole the process they developed for forming zero-fold balloons used in angioplasty balloon catheters. In considering whether the plaintiff’s damage expert could offer certain opinions about the defendant’s unearned profits, the court explained that “[w]here confidential information has been misappropriated, damages are measured by the plaintiffs’ loss of profits – i.e. ‘the amount that the plaintiff made except for the defendant’s wrong.’” Id. at 16. The court further explained that these damages “‘may be measured by either the plaintiff’s loss or the profits unjustly gained by defendants through the use of the trade secret.’” Id. (emphasis added; citation omitted). Applying this law, the court permitted the expert to offer a “damage[] opinion as to [the defendant’s] past and future profits made from the use of Plaintiffs’ alleged trade secrets.” Id. See also Epstein Eng’g, P.C. v. Cataldo, 1 N.Y.S.3d 38, 39 (1st Dep’t 2015) (“Plaintiff may elect to measure its 8 damages in this unfair competition action by reference to the profits made by defendants from clients or business opportunities diverted from plaintiffs.”). This principle is not novel or unique under New York law. Over a half century ago, in Extrin Foods, Inc. v. Leighton, 115 N.Y.S.2d 429, 439-40 (Sup. Ct. Kings Cnty. 1952), a New York court required defendants to account for “the profits earned from the manufacture, sale and distribution of the [flavoring emulsion prepared using plaintiff’s trade secrets] and for damages sustained by plaintiff for the wrongful misappropriation of the formula.” In that case, plaintiff claimed that defendants had unlawfully manufactured and distributed certain flavoring products using plaintiff’s secret formulae and processes. Likewise, in Lawrence of London, Ltd. v. Count Romi, Ltd., 290 N.Y.S.2d 125, 126-27 (1st Dep’t 1968), the First Department awarded damages for wrongful misappropriation measured by defendant’s unjust gains. In that case, plaintiff claimed that the defendant wrongfully misappropriated certain styles of women’s raincoats and a customer list. Id. Based on defendant’s sales of plaintiff’s styles minus certain overhead, the appellate court increased the amount awarded from $4,933.34 to $30,402.78, plus interest. Id.; see also Minn. Mining & Mfg. Co. v. Technical Tape Corp., 192 N.Y.S.2d 102 (Sup. Ct. Westchester Ctny. 1959), aff’d, 266 N.Y.S.2d 1021, 1021 (2d Dep’t 1962) (ordering accounting of 9 defendants’ profits where plaintiff alleged that defendants misappropriated processing methods used to make tape products). Certain of CSS’s own cases concern damages based on a defendant’s unjust gains. For example, CSS cites Hyde Park Prods. Corp. v. Maximilian Lerner Corp., 65 N.Y.2d 316, 319 (1985), where defendants breached the covenant of good will in connection with the sale of a business. (CSS Br. at 13-14). The referee awarded damages equal to defendants’ entire profits on sales to plaintiffs’ customers without allowing defendants to introduce evidence that certain sales did not result from the improper solicitation. The court ordered a reassessment of damages not because defendant’s sales were used as the measurement, but because defendants should have been allowed to “rebut plaintiff’s evidence” by showing that the sales “did not result from solicitation.” 65 N.Y.2d at 320, 322. As several of the cases that CSS relies upon acknowledge, there are a wide variety of commercial business practices denominated as unfair competition and the relief granted must be tailored to the facts and circumstances of the case. In Ronson Art Metal Works, Inc. v. Gibson Lighter Mfg. Co., 159 N.Y.S.2d 606 (1st Dep’t 1957) – cited by CSS at page 15 of its brief – the First Department explained, “[t]he incalculable variety of illegal commercial practices denominated as unfair competition is proportionate to the unlimited ingenuity that overreaching entrepreneurs and trade pirates put to use.” Id. at 609-10. Accordingly, “in 10 assessing damages or requiring an accounting therefor, the nature and effect of the unfair competition becomes important.” Id. at 610. “The disposition of each case largely ‘depends’ upon the precise state of facts disclosed” and “the relief granted should be tailored to achieve the nice balance of adequately redressing the wrong with the imposition of punishment for the exercise of a legitimate business function.” Id. As that appellate court remarked: “Differently stated . . . ‘[i]n a case of unfair competition, the court will endeavor to adapt its relief to the general equities of the particular situation, as nearly as it is possible to do so.’” Id. (citation omitted). This Court has echoed those same principles. See Electrolux Corp. v. Val-Worth, Inc., 6 N.Y.2d 556, 571 (1959) (cited by CSS at pages 17-18 and stating: “‘What is true of all actions, is especially true in a suit for unfair competition: disposition of each case peculiarly depends upon the precise state of the facts disclosed.’” (citation omitted)); Duane Jones Co. v. Burke, 306 N.Y. 172 (1954) (cited by CSS at pp. 14, 24 and 28 and stating that “when from the nature of the case the amount of the damages cannot be estimated with certainty, or only a part of them can be so estimated, 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.”) 11 Wholly ignoring the above principles, CSS erroneously claims that Ronson supports its narrow interpretation of New York law. The plaintiff in Ronson complained that the defendant copied its design, slogan and advertising to cause consumer confusion. Id. at 228. The referee awarded it all of defendant’s profits. The court reversed, finding that the plaintiff’s patents had expired thereby permitting the defendants to “legitimately duplicate plaintiff’s product and sell it for less.” Id. at 232. Accordingly, the court found “the net proceeds of the defendants’ sales generally could not be deemed to constitute a trust in favor of the plaintiff.” Id. As that appellate court explicitly noted: “On the record before us, we are not persuaded that an award of defendants’ entire profits, as found by the Referee, would be proper in the circumstances of this case.” Id. (emphasis added). CSS’s reliance on Michel Cosmetics, Inc. v. Tsirkas, 282 N.Y. 195 (1940) as support for its damage limitation is equally misplaced. In that case, this Court expressly acknowledged that a defendant’s “gains” may provide a basis for damages: The defendants have wronged the plaintiff. They must pay to the plaintiff the damages they have caused the plaintiff by that wrong. A wrongdoer who has imitated the containers of the plaintiff and has used the secret formulas and processes belonging to the plaintiff might be compelled to ‘yield up his gains to the true owner, upon a principle analogous to that which charges a trustee with the profits acquired by wrongful use of the property of the cestui que trust.’ 12 Id. at 199. But based on the evidence offered in that case, this Court ultimately found such a measure to be inappropriate. The defendant in Michel Cosmetics had manufactured lipsticks using plaintiff’s formula and sold them in containers similar to plaintiff’s to deceive buyers into believing they were buying plaintiff’s products. Id. at 198. The referee awarded all of defendant’s sales on the lipsticks. This Court reversed that award based on the evidence presented, which established that the defendant’s products had not been sold to the plaintiff’s customers and had not been sold in the same countries where the plaintiff distributed its products. Id. at 200-01. CSS also overstates the holding of the Supreme Court’s decision in Straus v. Notaseme Hosiery Co., 36 S. Ct. 288 (1916). (CSS Br. at 14-15). Again, the Court there did not hold that damages in trade secret cases are limited solely to plaintiff’s losses, but rather found that such damages were not appropriate based on the facts of that particular case. In that case, (i) the defendant had used a mark, which the Patent Office had refused to register upon plaintiff’s application, which the public therefore had a right to use; (ii) the imitation was a result of an innocent error; and (iii) the evidence did not show that any substitution in fact occurred – “[t]he goods were different in character, were called by a different name, were sold mainly in different places and by parties not likely to be mistaken for each other.” 13 Id. at 289. “Taking all these considerations into account,” the Court found it unjust to award any monetary damages. Id. CSS’s reliance on many of the other cases in its brief fares no better. The vast majority of cases that CSS cites concern unfair business competition where the wrongdoing did not involve the theft of another’s manufacturing processes, and many concerned the theft of a customer list where it makes sense to measure damages based on the customers diverted. See, e.g., Suburban Graphics Supply Corp. v. Nagle, 774 N.Y.S.2d 160, 163-64 (2d Dep’t 2004) (theft of customer list caused customer diversion); Allan Dampf v. Bloom, 512 N.Y.S.2d 116, 117 (2d Dep’t 1987) (solicitation of plaintiff’s patients using stolen patient list); McRoberts Protective Agency, Inc. v. Lansdell Protective Agency, Inc., 403 N.Y.S.2d 511, 512-13 (1st Dep’t 1978) (false representations concerning plaintiff caused customer diversion); Am. Elecs., Inc. v. Neptune Meter Co., 290 N.Y.S.2d 333, 335 (1st Dep’t 1968) (conspiracy by defendants to “secure[] for themselves at plaintiffs’ expense a public contract for the manufacture and installation of toll collection equipment” on highway); Underhill v. Schenck, 238 N.Y. 7, 19-20 (1924) (“wrong to be redressed is not the misappropriation of his property” but rather “the reduction of the profits of his business through the unfair competition of his associate who has turned out to be a rival”). Consistent with the principles set forth above, the damage awards in many of CSS’s cases were simply based on the 14 facts and evidence presented in those actions. See, e.g., Hertz Corp. v. Avis, Inc., 485 N.Y.S.2d 51, 54 (1st Dep’t 1985) (refusing to order discovery of Avis’s financial records, “[which] would be relevant only to establish Avis’ profits, which in turn would be relevant only as a measure of Hertz’s lost profits” because “Hertz has disclaimed any loss of profits as a result of Avis’s action”); Downes v. Culbertson, 275 N.Y.S. 233, 247 (Sup. Ct. N.Y. Ctny. 1934 (refusing to award damages for false statements about plaintiffs’ book because “[n]o evidence was offered connecting the decline in sales with the acts of the defendants”); Santa’s Workshop, Inc. v. Sterling, 153 N.Y.S.2d 839, 844 (3d Dep’t 1956) (finding it “unnecessary to consider the extent of defendant’s increased profits” because there was “a substantial dispute between the parties as to the defendant’s profits”). Undoubtedly there are some New York cases – including some cited above – in which the court has stated that the damages awarded must have some connection to the plaintiff’s losses. See, e.g., Hertz Corp., 485 N.Y.S.2d at 54 (“The law appears to be reasonably clear in New York that in an unfair competition case a plaintiff is ‘entitled to recover as damages the amount of loss sustained by it, including opportunities for profit on accounts diverted from it through the defendant’s conduct.’”); Am. Elecs., Inc., 290 N.Y.S.2d at 335 (“The basic rule of damage in a case of unfair business competition is the amount plaintiff would have made except for defendant’s wrong”); Suburban Graphics 15 Supply Corp., 774 N.Y.S.2d at 163-64 (“The measure of damages in a case of unfair competition is the amount which the plaintiff would have made but for the defendant’s wrong, and not the profits received by the defendants.”). Putting aside the factual differences between this case and those cited, as noted above, compare supra at 1-2 and 11-14, an award of avoided costs is not inconsistent with this precedent. Where, as here, plaintiff’s lost profits and defendant’s unjust gains could not be calculated, the defendant’s avoided cost is an appropriate proxy for plaintiff’s losses, particularly its investment losses. Awarding CSS’s avoided costs was undoubtedly the most intelligent and accurate estimate which the nature of this case permitted. B. Numerous Other Courts have Recognized An Avoided Cost Measure of Damages Because there is no New York state law addressing avoided costs, Tyden’s opening brief cited numerous state and federal cases nationwide that describe avoided costs as a component of a defendants’ unjust gains or a plaintiff’s losses, and hold that such damages are appropriate in a trade secret case. In response, CSS argues that these non-New York state cases do not “justify a change from ‘well settled’ principles of New York law.” (CSS Br. at 33). In support of its argument, CSS cites several cases that stand for the unremarkable proposition that decisions of other states do not effect questions that are well settled in New York. (Id.). But there are no well settled principles in New York on an avoided cost 16 measure of damages – that is precisely why the Second Circuit certified, and this Court accepted, the questions pending before this Court. In these circumstances, considering what other courts did in similar circumstances is entirely proper. See Thyroff v. Nationwide Mut. Ins. Co., 8 N.Y.3d 283, 290 (2007) (considering how other federal and state courts, including courts outside New York, dealt with the issue presented by the certified questions). CSS next challenges the relevancy of the non-New York cases, claiming that many are from jurisdictions that have express statutory authority, having enacted a version of the Uniform Trade Secrets Act (“UTSA”). (CSS Br. at 34-35). The UTSA, however, developed entirely from common law, having “codifie[d] the basic principles of common law trade secret protection.” Uniform Trade Secrets Act with 1985 Amendments at 1, available at http://www.uniformlaws.org/shared/docs/trade%20secrets/utsa_final_85.pdf. Indeed, courts accepted avoided costs as a measure of damages in trade secret cases well before UTSA’s enactment in 1979. See, e.g., Int’l Indus., Inc. v. Warren Petroleum Corp., 248 F.2d 696, 702 (3d Cir. 1957) (“Where the thing appropriated or infringed is a process rather than a manufactured article, the profits are simply measured by the savings determined by the standard of comparison computation.”), cert. denied, 355 U.S. 943 (1958). In any event, whether a particular state has a specific statute is irrelevant. There is no such express statute 17 in New York and thus the common law governs. Consistent with New York precedent that the common law must be ever evolving to deal with the misappropriation of personal property, see Thyroff, 8 N.Y.3d at 290, considering other factually similarly cases – whether they are governed by state statutes or not – is appropriate. Citing to In re Mud King Prods., Inc., 514 B.R. 496, 524 (Bankr. S.D Tex. 2014), CSS argues that “‘no case allows development costs where defendant’s profits are shown.’” (CSS Br. at 36). But this is not such a case. As the District Court held, CSS’s increased sales and Tyden’s lost business were not readily calculable. See supra at 1. CSS’s next complaint – that “[m]any of the cases cited by TydenBrooks do not even award avoided developments costs” (CSS Br. at 37) misses the point. Whether a court ultimately awarded avoided cost damages or found such measure inappropriate based on the facts and circumstances of a particular case is irrelevant. What matters is that avoided costs were considered and found to be a viable and proper measure of damages for trade secret claims. Finally, CSS complains that the avoided cost damage award was “not shown to represent anything but a number pulled from thin air.” (Id. at 41). In so arguing, CSS ignores the plethora of evidence at trial supporting the jury’s award. Defendants offered the testimony of three experts: (i) Dr. James Kirk, a retired 18 professor emeritus of mechanical engineering from the University of Maryland, A- 154 at 195:10-13; (ii) Dr. William Howard, who earned his Ph.D. in mechanical engineering at the University of Pennsylvania and possessed decades of experience in designing manufacturing machinery, A-237 at 522:2-3-525:21; and Dr. Robert Vigil, a Ph.D. in economics, A-275 at 674:22-25. 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 to show that CSS’s process were an exact duplicate of Tyden’s process. A-161 at 221:1 to A-163 at 232:21; A-170 at 259:25-260:4; A- 161 at 221:12-22. Among other things, Dr. Howard testified that he visited Tyden’s facility on at least three occasions to examine its manufacturing processes, reviewed the extensive footage that Dr. Kirk took of CSS’s manufacturing processes, reviewed numerous engineering designs related to the two processes and read the relevant deposition testimony. A-238 at 527:14-528:11. Based on his extensive industry experience, 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. Dr. Howard also opined that without the knowledge of TydenBrooks’ manufacturing 19 processes, CSS’s manufacturing processes would not have been fully effective from the start. A-239 at 530:22-531:6. Relying on Dr. Howard’s analysis, 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 number he opined to be between $7.8 to $16.6 million. A-275 at 676:18-24; A-278 at 686:10-17. In performing his calculation, Dr. Vigil testified that he considered capital costs (i.e., the “materials or parts costs that you have to pay to actually build the machines at issue,” which he determined using Tyden’s records) and labor costs (i.e., “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,” which he determined using CSS’s records). A-276 at 677:2-12, 677:22 to 678:1; A-277 at 683:5-8. In addition to expert testimony, the jury heard testimony from several fact witnesses, including Boyd Coggins, who described in great detail the development of Tyden’s manufacturing processes over decades. A- 119 at 56:4 to A-120 at 57:20; A-121 at 63:12 to A-134 at 114:13; A-137 at 128:1 to A-141 at 144:3. In its case-in-chief, CSS offered the expert testimony of Mr. Clifford Broderick, who worked in the field of manufacturing machinery and equipment. A-325 at 873:2-6. Mr. Broderick testified that CSS’s equipment could be designed 20 and manufactured in a 6- to 12-month period using a small team. A-325 at 873:8- 16; A-329 at 889:9-11. He further opined that a subsequent line, a second or third generation line, should take about three to four months. A-329 at 890:3-6. Mr. Broderick admitted on cross examination that he had never seen Tyden’s processes, did not review any relevant documents, had spent a mere two hours touring CSS’s facility and had spoken to only two CSS employees, one of whom was previously employed at Mr. Broderick’s company. A-327 at 882:7-883:10. In rendering his opinion, Mr. Broderick testified that he did not even know how long it actually took CSS to get a subsequent line up and running. A-329 at 890:7-9. 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. Contrary to CSS’s claim, the jury’s award was not “pulled from thin air” but rather was based on strong evidence by credible witnesses as to the costs CSS avoided by stealing Tyden’s trade secrets. The measure used – and the evidence supporting the calculation – was consistent with that used in numerous other trade secret cases around the country. C. An Avoided Cost Measure of Damages is Consistent with Public Policy and the Holding of Numerous Other Courts CSS claims that an award of avoided costs would violate fundamental principles of New York law and public policy. That argument also fails. 21 Without citing a single case, CSS claims that “avoided costs are unrelated to compensating a plaintiff for its injury; rather avoided costs would operate to punish the defendant for their wrongdoing” and argues that such measure would “eliminate the distinction between compensatory and punitive damages.” (CSS Br. at 27-28). This is not true. Avoided costs are compensatory; they compensate a plaintiff for the value of its trade secret and the time, labor and expenditures the plaintiff invested in developing that trade secret, which the defendant was able to avoid. Other courts that have awarded such damages have similarly described them as compensatory. See, e.g., Dresser-Rand Co. v. Virtual Automation Inc., 361 F.3d 831, 838 (5th Cir. 2004) (explaining that “the jury awarded Dresser–Rand compensatory damages on its fraud and misappropriation counts in the amount of $2.2 million, the value of its lost development costs” as well as punitive damages); GlobeRanger Corp. v. Software AG U.S., Inc., 836 F.3d 477, 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 and describing such damages as compensatory); Bourns, Inc. v. Raychem Corp., 331 F.3d 704, 709-10 (9th Cir. 2003) (describing $9 million in damages, representing three years of development savings, as compensatory); In re Cross Media Mktg., Corp. v. Nixon, 06 Civ. 4228 (MBM), 2006 WL 2337177, at *5-6 (S.D.N.Y. Aug. 11, 2006) (explaining that 22 “the award of damages may be measured by the plaintiff’s losses, which may include the cost of developing the trade secret,” and that “the lack of actual profits does not insulate the defendants from being obliged to pay for what they have wrongfully obtained”). CSS’s claim that such a measure would wipe out the requirement of proximate causation is equally baseless. In this case, the District Court specifically 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. It is simply nonsensical to suggest that an award of avoided costs wipes out any other damage requirements. CSS next suggests that “recognizing avoided costs would create an inherently speculative measure of damages because they represent expenditures that never took place, and will never be reflected in actual invoices, time sheets or financial statements.” (CSS Br. at 28). But here Dr. Vigil testified that his labor costs were based on “information from Cambridge’s own records” and his capital costs were based on “information [] from Tydenbrook’s cost records.” A-276 at 677:22-678:1; A-277 at 683:5-8. As described in detail above (supra at 17-20), 23 there was ample evidence from which a jury could calculate and award Tyden’s avoided costs. CSS also suggests that avoided costs would encourage a plaintiff to hide relevant financial information, claiming that “TydenBrooks thus effectively hid its lack of losses from the jury.” (CSS Br. at 30). CSS further claims that “TydenBrooks waived its right to recover actual losses as part of a strategic move” and “[chose] to avoid discovery into its own losses.” (Id. at 21). Again, CSS misrepresents the evidence in this action. As the District Court held, CSS’s increased sales and Tyden’s lost business were not readily calculable, which was a finding the Second Circuit did not disturb. A-421 to A-422. 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. 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. 24 In fact, on cross examination, Dr. Vigil testified that “[t]he profit information from Cambridge was not sufficient.” A-280 at 695:17-18. CSS’s claim that Tyden cannot recover avoided costs as a form of unjust enrichment because “unjust enrichment is a cause of action, not a measure of damages” is most curious. (CSS Br. at 25). One of the causes of action in this action for which CSS was found liable is unjust enrichment. Finally, CSS claims that “[t]his case provides an excellent example of the injustice that would result from recognizing this new measure of damages that is untethered from plaintiff’s actual losses.” (Id. at 31). CSS argues that “TydenBrooks becomes $8-16 million richer because of CSS’s wrongdoing” and claims that “TydenBrooks would collect a 200-400% profit margin on all of CSS’s improper sales.” (Id. at 31-32). Putting aside the fact that this argument is an attack as to the weight of the evidence, CSS’s math is seriously flawed. The $8- $16MM range was not the amount awarded in this case. That number merely represents the range Dr. Vigil offered at trial; the jury awarded only $3.9MM, an amount less than CSS’s revenue as of June 2014. To the contrary, this case provides an excellent example of the injustice that would result if this Court declined to recognize avoided costs as a component in measuring CSS’s unjust gains. By avoiding millions of dollars in development costs through its trade secret misappropriation, CSS was unjustly 25 enriched at the expense of Tyden. And CSS’s misappropriation was egregious and tortious. As the trial evidence established, CSS not only stole Tyden’s trade secrets, but engaged in an elaborate cover-up to hide its tracks, including instructing Tyden’s former employees to lie about joining CSS, instructing a receptionist to lie to callers as to the true identities of its employees, and using anonymous emails, job listings and individual cellular phones to conceal its tortious acts from Tyden. (See Tyden’s Opening Brief at 8-9). There is no doubt as to CSS’s liability in this case. Tyden should not be unjustly denied damages 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. * * * Because avoided costs are a component of defendant’s unfair gains or plaintiff’s losses, such costs should be awarded as a measure of damages in a trade secret action under New York law. III. New York Law Mandates an Award of Prejudgment Interest Where Damages Are Calculated Based on a Defendant’s Avoided Costs CSS concedes that if a deprivation of property occurs, then an award of prejudgment interest under CPLR 5001(a) is appropriate. (CSS Br. at 52-53) (“If TydenBrooks had proven deprivation of or interference with its own property, such as lost sales to TydenBrooks, . . . it would have been eligible for prejudgment 26 interest on such a damage award from the date the claim arose.”). Turning the governing law on its head, CSS argues that “avoided costs . . . are unrelated to . . . the deprivation of property,” that “CSS’s use of TydenBrooks’s information did not interfere with TydenBrooks’s use of its own information” and that “TydenBrooks retained its manufacturing process and was free to use and enjoy it without restriction.” (CSS Br. at 48). But accepting defendants’ argument would mean that prejudgment interest would never be available in a trade secret case due to its intangible nature. To the contrary, the Supreme Court of the United States has recognized that trade secrets are properties, which afford the owner with the usual property rights, including the right to exclude others from disclosing or using the proprietary information. Ruckelshaus, 467 U.S. at 1002-03, 1010 (“This general perception of trade secrets as property is consonant with a notion of ‘property’ that extends beyond land and tangible goods and includes the products of an individual’s ‘labour and invention.’”). Because prejudgment interest is available regardless of whether the property in question – i.e., knowledge or information – is tangible or intangible, it should be awarded here. See Mallis v. Bankers Trust Co., 717 F.2d 683, 695 (2d Cir. 1983); see also M.D. Mark, Inc. v. Kerr-McGee Corp., 565 F.3d 753, 760, 766 (10th Cir. 2009) (rejecting argument similar to CSS’s). 27 CSS’s argument that Tyden “has already been made whole by the verdict” and that an award of prejudgment interest would constitute a “windfall” is wholly unsupported. (CSS Br. at 43-47). As explained in Tyden’s opening brief at 36-37, New York courts have found a windfall where the trial court charged the jury on interest or where the damages evidence presented at trial took into consideration the present value of money/costs. That was not the case here for the reasons explained in our opening brief at pp. 36-38. Nor can CSS prevail on its claim that avoid costs are “lump sum” damages for which New York courts do not award interest. Ironically, in one of the cases it cites where the jury awarded a “lump sum,” interest was awarded. See 23/23 Commc’ns Corp. v. Gen. Motors Corp., 683 N.Y.S.2d 43, 44 (1st Dep’t 1999) (awarding interest on “lump sum”). In another, Trademark Research Corp. v. Maxwell Online, 995 F.2d 326, 342 (2d Cir. 1993), the court found the “lump sum” included interest because the jury had specifically considered the accounting expert’s testimony calculating interest. And Lesjac Realty Corp. v. Mulhauser, 251 N.Y.S.2d 62 (Sup. Ct. Nassau Cnty. 1964), is inapposite because the court denied interest after finding that the jury’s damages calculations “are divorced from the evidence,” and the cases supporting the court’s holdings pre-dated CPLR § 5001. 28 Also meritless is CSS’s argument that avoided costs are not “damages incurred” such that the amount due can be calculated from a certain date. (CSS Br. at 52). CSS argues that prejudgment interest cannot accrue from February 2011 because it is illogical that on that day, CSS had already accrued all its savings. That is not true. As of that date, when CSS sent an email utilizing various trade secrets (not just “a single measurement” as CSS suggests (CSS Br. at 52), CSS had stolen and used Tyden’s trade secret. A-362, A-385 to A-390. Finally, CSS attacks the case law cited in Tyden’s opening brief on three principal grounds, none of which has merit. First, CSS claims that Tyden’s cited cases are “inapposite” because they awarded damages based on plaintiff’s losses. (CSS Br. at 49-50). Even if they did, that fact is irrelevant because none of them linked the interest award to that fact. Second, CSS complains that certain of Tyden’s cases are governed by different statutes (e.g., Copyright Act or Lanham Act). But 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. See Merck Eprova AG v. Gnosis S.P.A., 760 F.3d 247, 263-64 (2d Cir. 2014) (Although statutory provision governing recovery for violation of Lanham Act does not provide for prejudgment interest, such award is within discretion of trial court.); In Design v. Lauren Knitwear Corp., 782 F. Supp. 824, 837 (S.D.N.Y. 29 1991) (“the Copyright Act neither provides for nor prohibits an award of prejudgment interest”). Finally, one only needs to read the cases cited by Tyden to see how far CSS overreaches when it accuses Tyden of “mispresent[ing] the holdings of [certain] cases as being related to a defendant’s avoided costs.” (CSS Br. at 51). By way of example, in Little Genie Prods. LLC v. PHSI Inc., No. 2:12-cv-00357- RSM, 2014 WL 3050326 (W.D. Wash. July 2, 2014), part of the judgment included plaintiff’s “product development costs” for creating the copyright and the interest was awarded on the entire judgment. Similarly, in Sonoco Prods. Co. v. Johnson, 23 P.3d 1287, 1289-90 (Colo. App. 2001), the court awarded mandatory prejudgment interest even though the plaintiff was awarded the research and development costs that the defendant saved by stealing the information. For these reasons and those stated in our opening brief, an award of damages that was calculated using an avoided cost methodology should be entitled to mandatory prejudgment interest. 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 unlawful activity, and (ii) under 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 December 1, 2017 Kramer Leym Naftalis & Frankel LLP ML -(By: Daniel Goldman Kerri Ann Law Claudia Pak Sam Koch 1177 Avenue of the Americas New York, New York 1 0036 (212)715-9100 Attorneys for Appellant-Respondent 30 KL3 3148303.1 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 6,930 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.