E.J. Brooks Co. v. Cambridge Sec. Seals, 26

• Decision Date: 03 May 2018
• Docket Number: No. 26,26
• Citation: 105 N.E.3d 301,31 N.Y.3d 441,80 N.Y.S.3d 162
• Parties: E.J. BROOKS COMPANY, Doing Business as TydenBrooks, Appellant–Respondent, v. CAMBRIDGE SECURITY SEALS, Respondent–Appellant.
• Court: New York Court of Appeals Court of Appeals

31 N.Y.3d 441

105 N.E.3d 301

80 N.Y.S.3d 162

E.J. BROOKS COMPANY, Doing Business as TydenBrooks, Appellant–Respondent,

v.CAMBRIDGE SECURITY SEALS, Respondent–Appellant.

No. 26

Court of Appeals of New York.

May 3, 2018

Kramer Levin Naftalis & Frankel LLP, New York City (Daniel B. Goldman, Kerri Ann Law, Claudia Pak and Sam Koch of counsel), for appellant-respondent.

Kasowitz Benson Torres LLP, New York City (Daniel J. Fetterman, Howard W. Schub, Amber T. Wallace and Fria R. Kermani of counsel), for respondent-appellant.

OPINION OF THE COURT

FEINMAN, J.

123 The United States Court of Appeals for the Second Circuit has asked us to decide "[w]hether, under New York law, a plaintiff asserting claims of misappropriation of a trade secret, unfair competition, and unjust enrichment can recover damages that are measured by the costs the defendant avoided due to its unlawful activity" ( E.J. Brooks Company v. Cambridge Security Seals, 858 F.3d 744, 752 [2d Cir. 2017] ). Under our common law, compensatory damages must return the plaintiff, as nearly as possible, to the position it would have been in had the wrongdoing not occurred—but do no more. Accordingly, we answer this question in the negative.¹

I.

E.J. Brooks Company d/b/a TydenBrooks is the largest manufacturer of plastic indicative security seals in the United States. TydenBrooks acquired Stoffel Seals Corporation, and thereafter came into possession of Stoffel's fully-automated process for manufacturing plastic indicative security seals. According to TydenBrooks, several Stoffel/TydenBrooks employees defected to a rival manufacturer, Cambridge Security Seals (CSS), bringing the confidential Stoffel process with them. In 2012, TydenBrooks brought an action in the United States District Court for the Southern District of New York against CSS and those former employees, asserting causes of action based on, inter alia,common-law misappropriation of trade secrets, unfair competition and unjust enrichment.² Following a jury trial, CSS was found liable under all three of these theories.

On the issue of damages, TydenBrooks sought to measure its injury by the costs CSS avoided as a result of its unlawful activity. Under this "avoided costs" theory, TydenBrooks sought monetary relief in an amount equal to the difference between the costs CSS actually incurred in developing and using the TydenBrooks' manufacturing process and the costs that CSS would have incurred had it not misappropriated TydenBrooks' process. At trial, TydenBrooks' damages expert testified that CSS would have had to incur an additional $6.1 million to $12.2 million, at a minimum, to develop the manufacturing process for its first-generation machines without making use of its knowledge of TydenBrooks' information.³

TydenBrooks did not present any evidence, or otherwise argue, that CSS'ss avoided costs could be a proxy for its own losses (such as its investment losses). Instead, CSS'ss avoided costs were presented exclusively as a measure of the benefit CSS derived from the misappropriation, which TydenBrooks asserted was its per semeasure of damages. Specifically, TydenBrooks' expert testified that, among the three theories of damages he was familiar with—"lost profits," "disgorgement of unjust gains" and "reasonable royalty damages"—his avoided cost calculation was a "type of disgorgement," which he explained was a measure of how much a company "gain[ed] by taking and using information that didn't belong to them." TydenBrooks consistently took the position, both before and during trial, that its own financial losses were irrelevant to its "avoided costs" theory of damages. For instance, TydenBrooks brought motions in limineto, among other things, exclude evidence that any customers it lost to CSS were due to factors other than CSS'ss misappropriation. The court granted the motions, holding that such evidence was irrelevant because "TydenBrooks is not claiming damages from the loss of customers," but rather, "based on the idea that, by stealing TydenBrooks' trade secrets, CSS was able to avoid development costs...."

At the close of trial, the court charged the jury on damages based solely on an avoided costs theory:

"In evaluating cost savings, you are to use the standard of comparison method. Under this method, you are to compare actual costs incurred by the defendant you are considering with the costs it would have incurred to produce the same products without the use and knowledge of TydenBrooks' manufacturing process.... The difference between the costs actually incurred by the defendant you are considering and the amount he would have incurred in the absence of misappropriation and/or unfair use is the amount of damages that you should award to TydenBrooks."

The court reminded the jury that it "may award compensatory damages only for injuries that TydenBrooks prove[d] were proximately caused by a defendant's allegedly wrongful conduct" and "only for those injuries that TydenBrooks has actually suffered or which it is reasonably likely to suffer in the near future." However, the court did not explain how the jury could make the inference that CSS'ssavoided costs approximated the losses that TydenBrooks"actually suffered" or was reasonably likely to suffer in the near future. Separately, the court instructed the jury that if it found CSS liable for compensatory damages, it may award punitive damages, "[t]he purpose of [which] is not to compensate a plaintiff but to punish a defendant for wanton and reckless or malicious acts and thereby to discourage the defendant and other people or companies from acting in a similar way in the future."

The jury returned a verdict finding CSS liable for trade secret misappropriation, unfair competition and unjust enrichment. It assessed $1.3 million against CSS in "compensatory damages" on each claim, for a total of $3.9 million against CSS in compensatory damages. The jury did not award punitive damages.

Both parties filed postjudgment motions. First, TydenBrooks moved to amend the judgment to include prejudgment interest under CPLR 5001(a), which the court denied ( see E.J. Brooks Company v. Cambridge Security Seals , 2015 WL 9694522 [S.D.N.Y. Dec. 22, 2015] ).⁴ Second, CSS moved for judgment as a matter of law or a new trial or, in the alternative, to alter or amend the judgment, on the grounds that, among other things, avoided costs was an improper measure of damages. The court denied CSS's motion, holding that "the 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 defendant" ( E.J. Brooks Company v. Cambridge Security Seals, 2015 WL 9704079, at *4 [S.D.N.Y. Dec. 23, 2015] [citations and internal quotation marks omitted] ). The court held that avoided costs could be awarded as damages under either measure; that is, avoided costs could either measure the defendant's gains or, alternatively, the plaintiff's losses ( see id. at *4–*6 ).

The parties cross-appealed the District Court's denial of their respective motions to the Second Circuit. With respect to the avoided costs issue raised in CSS's motion, the Second Circuit noted that "neither [the Second Circuit] nor the New York courts appear to have approved the specific type of award in this case" ( E.J. Brooks, 858 F.3d at 750 ). On the one hand, the court acknowledged that the Restatement (Third) of Unfair Competition and Second Circuit precedent "commend[ ] using the amount of avoided costs as a measure of damages in unfair competition cases" ( id. at 749 ; see Matarese v. Moore–McCormack Lines, 158 F.2d 631 [2d Cir. 1946] ; Restatement [Third] of Unfair Competition § 45 cmts d, f [1995] ). On the other hand, the court noted that "New York courts have suggested that the measure of damages in trade secret cases, even when measured by reference to a defendant's profits, should correspond to a plaintiff's losses as a means of compensation" ( E.J. Brooks, 858 F.3d at 750 ; see Suburban Graphics Supply Corp. v. Nagle, 5 A.D.3d 663, 666, 774 N.Y.S.2d 160 [2d Dept. 2004] ; Hertz Corp. v. Avis, Inc., 106 A.D.2d 246, 485 N.Y.S.2d 51 [1st Dept. 1985] ), a proposition that the court deemed "contrary" to "the specific type of award in this case" ( E.J. Brooks, 858 F.3d at 750 ). "Assuming New York requires that trade secret damages bear some connection to the plaintiff's losses," the Second Circuit conceded that "it is not apparent ... that assessing damages based on the defendant's avoided costs satisfies the requirement" ( id. ). With respect to the prejudgment interest issue, the Second Circuit likewise stated that New York law was inconclusive as to whether prejudgment interest would be "mandatory" on the damages award in this case ( id. at 750–751 ).

Accordingly, the Second Circuit certified the following questions:

"1. Whether, under New York law, a plaintiff asserting claims of misappropriation of a trade secret, unfair competition, and unjust enrichment can recover damages that are measured by the costs the defendant avoided due to its unlawful activity.

"2. If the answer to the first question is 'yes,' whether prejudgment interest under [CPLR] 5001(a) is mandatory where a plaintiff recovers damages as measured by the defendant's avoided costs."

( Id. at 752 ). The Court accepted these questions on June 27, 2017 ( see 29 N.Y.3d 1045, 56 N.Y.S.3d 506 [2017] ).

II.

We turn first to the question of whether avoided costs are awardable as compensatory damages in an action based on a theory of unfair competition.

456789 The "fundamental purpose" of compensatory damages is to have the wrongdoer "make the victim whole" ( Sharapata v. Town of Islip, 56 N.Y.2d 332, 335, 452 N.Y.S.2d 347, 437 N.E.2d 1104 [1982] ; see Ross v. Louise Wise Services, Inc., 8 N.Y.3d 478, 489, 836 N.Y.S.2d 509, 868 N.E.2d 189 [2007] ; Matter of Rothko's Estate, 43 N.Y.2d 305, 322, 401 N.Y.S.2d 449, 372 N.E.2d 291 [1977] ). "Put another...