Franzoni and Kaushik on Damages for Trade Secret Misappropriation

As the title suggests, this paper is not about patent remedies, but since trade secrets are an alternative option for inventors—and since I’m interested in, in fact writing a book about, IP remedies generally, I thought I would mention it here.  The authors are Luigi Alberto Franzoni and Arun Kumar Kaushik, and the paper is Lost Profits and Unjust-Enrichment Damages for the Misappropriation of Trade Secrets, 53 J. Legal Stud. 237 (2024).  Here is a link to the journal’s website, and here is the abstract:

            This paper analyzes civil remedies for the misappropriation of trade secrets. We study the impact of different damages doctrines on firms’ competitive behavior and on the incentives to misappropriate. We find that the owner of a trade secret is better off under the lost-profits regime, while the rival (independently of whether he obtained the technology by misappropriation or by independent development) is better off under the unjust-enrichment regime. The unjust-enrichment regime provides fewer incentives to misappropriate and yields a smaller market deadweight loss. The choice between the two rules essentially depends on the lawmaker’s goal.

This is an interesting paper in its application of game theory to the topic of damages.  The model assumes that the defendant is either an honest or a dishonest rival, but that the trade secret owner has imperfect knowledge of which.  I would note, however, that as the authors state toward the end of the article, their “analysis assumes away some important factors,” including “the possibility that the rival develops a product to which consumers attach a greater value” and “litigation costs”; and the authors “posit errorless adjudication” (p.262; cf. p.247).  (Errorless adjudication in particular may be a stretch in the real world, as Norman Siebrasse has pointed out in connection with the Canadian Supreme Court’s analysis of how to calculate the infringer’s profits in patent litigation, see here.)  Most of the analysis also assumes that the rival/defendant is as efficient as, or slightly more efficient than, the trade secret owner (with a substantially more efficient infringer being considered later in the paper).  Of course, if enforcement is perfect and adjudication error-free, the rival will always be deterred with unjust enrichment damages; but if enforcement is not perfect and the rival is less efficient, the trade secret owner will be worse off, perhaps a lot worse off, if misappropriation occurs and causes the secret to become widely known (and thus no longer a secret), in which case I would think lost profits are unambiguously the correct remedy.  (Maybe the authors would agree, see p.260 n.24.)  For now, I remain convinced that the best operable rule in the real world is one that permits the trade secret owner the option of either lost profits or the infringer’s profits, whichever is higher, with reasonable royalties being preferable in a case in which the misappropriation was initially inadvertent (e.g., the defendant started using the secret information before learning that it was disclosed in breach of a duty of secrecy); but I could be wrong, and this paper does highlight the consumer welfare tradeoffs of awarding lost profits versus infringer’s profits under its assumed conditions.