Storagecraft Tech. Corp. v. Kirby

• Decision Date: 11 March 2014
• Docket Number: No. 12–4182.,12–4182.
• Citation: 744 F.3d 1183
• Parties: STORAGECRAFT TECHNOLOGY CORPORATION, Plaintiff–Appellee, v. James KIRBY, an individual, Defendant–Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

744 F.3d 1183

STORAGECRAFT TECHNOLOGY CORPORATION, Plaintiff–Appellee,

v.James KIRBY, an individual, Defendant–Appellant.

No. 12–4182.

United States Court of Appeals, Tenth Circuit.

March 11, 2014.

Richard F. Ensor of Vantus Law Group, P.C., Salt Lake City, UT, for Defendant–Appellant.

Thomas R. Karrenberg (Heather M. Sneddon with him on the brief), of Anderson & Karrenberg, P.C., Salt Lake City, UT, for Plaintiff–Appellee.

Before TYMKOVICH, SEYMOUR, and GORSUCH, Circuit Judges.

GORSUCH, Circuit Judge.

James Kirby says the jury's award against him is too much. True, he helped start and served as a director of StorageCraft, a computer software company. True, after a falling out with his colleagues he stole the computer source code on which the company's products depend. True, he shared the source code with NetJapan, a rival company that quickly produced a competing software product much like StorageCraft's. But the jury's $2.92 million trade secret misappropriation award is still too much. Too much, Mr. Kirby says, because he never used the secret for his own personal profit. And too much because StorageCraft never sought to prove at trial that NetJapan made commercial use of its trade secret either. Maybe he was angry about how his former colleagues had treated him, maybe he disclosed the trade secret to a rival out of vengeance. But without firmer proof that someone profited from his misdeed Mr. Kirby insists the jury's verdict should be overturned.

The trouble is Utah law doesn't distinguish between a misappropriator's venial motives. When someone steals a trade secret and discloses it to a competitor he effectively assumes for himself an unrestricted license in the trade secret. And that bears its costs. After all, what value does a trade secret hold when it's no longer a secret from the trade? The misappropriator may act with a wish to line his pockets or satisfy a vendetta or for some other purpose still. All the same Utah's trade secret statute holds him to account for the full value of the license he arrogated to himself. Just as the district court held.

I

Mr. Kirby's argument otherwise takes various but related forms. In its first and most ambitious guise Mr. Kirby insists a trade secret plaintiff cannot seek and obtain a “reasonable royalty” measure of damages—as StorageCraft did in this case—without proving the misappropriating defendant made commercial use of the secret. He presses this same essential point in at least three different ways—suggesting he is entitled to judgment as a matter of law because the record contains no evidence of commercial use, claiming that a new trial is warranted for the same reason, and arguing the district court erred by failing to give a jury instruction requiring proof of commercial use. But however the argument is dressed, underneath lies the same problem: Utah's trade secret statute, the law governing Mr. Kirby's case, expressly allows a reasonable royalty measure of damages when the misappropriator uses or discloses the trade secret. And no one disputes that Mr. Kirby did at least that— disclosing the secret to NetJapan.

Utah's Uniform Trade Secrets Act provides three possible measures of damages for misappropriation—the defendant's unjust enrichment, the plaintiff's “actual loss,” or “a reasonable royalty.” Utah Code Ann. § 13–24–4(1). This last option is sometimes described as “the price that would be set by a willing buyer and a willing seller” for a license in the trade secret, a measure of damages that seeks to recreate “an actual market transaction ... [in] which both parties gain from the transaction.” Restatement (Third) of Unfair Competition § 45 cmt. g (1995). At trial, the district court allowed StorageCraft to present evidence premised on a reasonable royalty damages theory. The company argued that its source code was its lawful trade secret; that Mr. Kirby stole it; that he disclosed it to a rival; that in doing so he effectively assumed for himself a license to reveal the trade secret to StorageCraft's competitor; that this diminished the value of its intellectual property and the products depending on it; and that Mr. Kirby should pay a royalty reflecting that much, whether or not he or NetJapan have to date made commercial use of that intellectual property in products of their own.

Utah law allows a plaintiff to proceed just as StorageCraft did. Contrary to Mr. Kirby's supposition, nothing in the state's trade secret statute categorically restricts the availability of “reasonable royalty” damages to cases in which the misappropriator used a trade secret commercially rather than disclosed it to others. To the contrary, the statute expressly provides that “[i]n lieu of damages measured by any other methods,” the reasonable royalty measure of damages is available “for a misappropriator's unauthorized disclosure or use of a trade secret.” Utah Code Ann. § 13–24–4(1) (emphasis added). In this respect, Utah's statute tracks the Uniform Trade Secrets Act, which itself provides that reasonable royalty damages are a “general option” for cases involving disclosure as well as use. SeeUnif. Trade Secrets Act § 3 & cmt. (amended 1985); cf. Hertz v. Luzenac Grp., 576 F.3d 1103, 1115 (10th Cir.2009) (noting that under Colorado's materially identical trade secret statute reasonable royalty damages are allowed for a misappropriator's disclosure or use of a trade secret); Sonoco Prods. Co. v. Johnson, 23 P.3d 1287, 1290 (Colo.App.2001) (same).

Neither does Utah's policy choice on this score come without its reasons. In the first place, the line between use and disclosure is hardly as crisp as Mr. Kirby suggests. Can't disclosing a trade secret for a particular end or purpose (be it retribution or profit or otherwise) be a way of putting it to use, at least in a broad sense of the word? What happens when the disclosure is made to a third party (like NetJapan) with the intent the third party itself put the trade secret to commercial use in ways harmful to the secret's owner? Isn't at least that disclosure a use of the secret, whether or not the third party takes up the invitation?

Beyond these definitional difficulties, where (as here) a defendant discloses a trade secret to a rival company in a fit of retaliatory pique without any desire for personal riches, the other two measures of damages may not always be entirely fit for the task. An award based on unjust enrichment risks undercompensating the plaintiff when the defendant has no gains of his own to disgorge. SeeRestatement (Third) of Unfair Competition § 45 cmt. g (commending use of reasonable royalty measure of damages “when the plaintiff's loss ... is ... greater than any gain acquired by the defendant”). Though what the Utah statute calls the “actual loss” measure of damages doesn't suffer from this particular problem, it may invite practical difficulties of its own. In cases like ours the best evidence about the extent of the plaintiff's lost sales isn't readily available from the defendant before the court but resides instead in the hands of far-flung third parties like NetJapan. Proving a causal connection between the plaintiff's claimed lost profits and the defendant's conduct might be difficult, too, in these circumstances. Complexities like these may be surmountable, but the cost of doing so may be enough to explain why a state would wish to make reasonable royalty awards generally available to misappropriation plaintiffs. After all, it is hardly unknown for the law to resolve ambiguities about the appropriate quantity of damages against the proven wrongdoer rather than his victim. See, e.g., Russo v. Ballard Med. Prods., 550 F.3d 1004, 1021 (10th Cir.2008).

In recognizing this much we don't mean to suggest that the reasonable royalty measure of damages is always the most sensible remedy. Or that every state must be as solicitous to it as Utah. Rather than follow the Uniform Trade Secrets Act and deem the reasonable royalty remedy a “general option” for disclosure cases, some states allow the remedy only when the plaintiff is unable to prove the amount of its actual losses or the misappropriator's unjust gains. See Cacique, Inc. v. Robert Reiser & Co., 169 F.3d 619, 623 (9th Cir.1999). We can imagine arguments that might lead reasonable lawmakers in that direction as well, including worries that hypothetical royalty negotiation exercises themselves might be difficult to administer in certain circumstances or might yield damages in excess of the plaintiff's actual losses. Cf. Rite–Hite Corp. v. Kelley Co., 56 F.3d 1538, 1554 n. 13 (Fed.Cir.1995) (en banc) (finding in a patent case that the “willing licensor/willing licensee” description is “an inaccurate, and even absurd, characterization when ... the patentee does not wish to grant a license”); Mark A. Lemley, Distinguishing Lost Profits from Reasonable Royalties, 51 Wm. & Mary L.Rev. 655, 667 (2009) (worrying that “some patentees who can prove lost profits elect instead to seek a ‘reasonable’ royalty that is far in excess both of what the parties would have negotiated and of the actual losses the patentee suffered”).

In the end, though, arguments like these are more appropriately directed to those charged with writing Utah's trade secret statute than those charged with applying it. To decide this case it's enough for this court to recognize and respect Utah's policy choice to permit “reasonable royalty” awards as a “general option” in “disclosure” cases. We are in no position to override that legislative choice simply because we might prefer another. Neither does Mr. Kirby suggest Utah's legislative choice offends any higher principle of law that we do have the power to enforce. He does not, for example, suggest that the use of the reasonable royalty measure of damages in his case or more generally is so speculative that it offends the Federal Constitution's due process guarantee.

Instead, Mr. Kirby replies a good deal more...