E.J. Brooks Co. v. Cambridge Sec. Seals, Docket Nos. 16-207-cv(L)

• Decision Date: 05 June 2017
• Docket Number: 16-259-cv(XAP),Docket Nos. 16-207-cv(L),August Term, 2016
• Citation: 858 F.3d 744
• Parties: E.J. BROOKS COMPANY, d/b/a TydenBrooks, Plaintiff–Counter–Defendant–Appellant–Cross–Appellee, v. CAMBRIDGE SECURITY SEALS, Defendant–Counter–Claimant–Appellee–Cross–Appellant.
• Court: U.S. Court of Appeals — Second Circuit

858 F.3d 744

E.J. BROOKS COMPANY, d/b/a TydenBrooks, Plaintiff–Counter–Defendant–Appellant–Cross–Appellee,

v.CAMBRIDGE SECURITY SEALS, Defendant–Counter–Claimant–Appellee–Cross–Appellant.^*

Docket Nos. 16-207-cv(L)

16-259-cv(XAP)

August Term, 2016

United States Court of Appeals, Second Circuit.

Argued: November 14, 2016

Decided: June 5, 2017

DANIEL GOLDMAN (Kerri Ann Law, Claudia Pak, Sam Koch, on the brief), Kramer Levin Naftalis & Frankel LLP, New York, NY, for Plaintiff–Counter–Defendant–Appellant–Cross–Appellee.

HOWARD SCHUB (Daniel J. Fetterman, on the brief), Kasowitz, Benson, Torres & Friedman LLP, New York, NY, for Defendant–Counter–Claimant–Appellee–Cross–Appellant.

Before: KEARSE, LOHIER, and DRONEY, Circuit Judges.

LOHIER, Circuit Judge:

Both parties challenge a judgment of the United States District Court for the Southern District of New York (Preska, then C.J. ) following a jury trial. At trial, plaintiff E.J. Brooks Company, d/b/a TydenBrooks ("TydenBrooks"), largely prevailed in its claims against defendant Cambridge Security Seals ("CSS") and three former TydenBrooks employees (with whom TydenBrooks thereafter settled) for misappropriation of trade secrets, unfair competition, and unjust enrichment under New York law.¹ This case principally involves questions of New York law relating to whether a plaintiff asserting these claims can recover damages measured by the costs the defendant avoided rather than the losses the plaintiff sustained by virtue of the misappropriation and unfair competition. On appeal, the parties agree that there is no decision of the New York State courts to which we can confidently point to decide whether the defendant's avoided costs are a permissible measure of damages for these claims. Nor, in our view, have the New York courts clearly answered a second question that we are asked to consider, namely, whether prejudgment interest under section 5001(a) of New York's Civil Practice Law and Rules ("CPLR") is mandatory where a plaintiff recovers, if appropriate, damages as measured by the defendant's avoided costs.

For these reasons, the appeal and cross-appeal present two damages-related questions that have not been resolved by the New York Court of Appeals and implicate significant New York State interests. As we reject CSS's other challenges,² the resolution of these two questions may dispose of this appeal. Accordingly, we affirm the judgment as to liability, reserve decision as to damages, and certify the following two questions to the New York Court of Appeals:

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 New York Civil Practice Law and Rules § 5001(a) is mandatory where a plaintiff recovers damages as measured by the defendant's avoided costs.

BACKGROUND

TydenBrooks is the largest manufacturer of plastic security seals in the United States. CSS was founded in 2010 and began manufacturing plastic security seals at the end of 2011. As relevant here, in 2012 TydenBrooks filed this lawsuit against CSS and former TydenBrooks employees who went to work for CSS, accusing them of misappropriation of trade secrets, civil conspiracy, unfair competition, and unjust enrichment, all in violation of New York law.

At trial, TydenBrooks claimed that CSS had copied and profited from TydenBrooks's automated process for manufacturing plastic security seals, which are used to detect and prevent tampering with containers and other products. In support of its claim, TydenBrooks introduced evidence that it treated the process as a trade secret. That contention was vigorously disputed by CSS, which sought to introduce evidence that TydenBrooks's manufacturing process was neither secret nor unique. The jury ultimately found that CSS was liable for misappropriation of a trade secret, unfair competition, and unjust enrichment.

The issue of damages proved to be thornier. TydenBrooks initially sought recovery of its lost profits and sales and disgorgement of CSS's gross profits. It later abandoned those theories, electing instead to pursue an "avoided costs" theory in which damages are calculated as the total costs CSS avoided by not developing its own manufacturing process. To support its avoided costs theory at trial, TydenBrooks relied primarily on the testimony of its damages expert, Dr. Robert Vigil. Dr. Vigil estimated that, as a result of its misappropriation of the manufacturing process, CSS saved between $6.1 million and $12.2 million in costs—or $7.8 million to $16.6 million when he included costs associated with employee benefit payments.³ In his calculations, Dr. Vigil assumed that CSS's capital cost savings equaled the capital costs that TydenBrooks incurred to develop its own machines in the first instance. For its part, CSS did not introduce any expert trial testimony relating to damages and elected instead to rely on its cross-examination of Dr. Vigil. On cross-examination, Dr. Vigil acknowledged that he tried but failed to calculate CSS's profits because the "profit information from [CSS] was not sufficient."

At TydenBrooks's request, the District Court instructed the jury that TydenBrooks sought damages on each of its claims "based on the defendants' avoided costs." It explained that the jury would have to 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's] manufacturing process." The District Court also instructed the jury that it should consider three factors in measuring damages: (1) whether CSS "realized savings in research and development costs, including the time and resources typically devoted to researching and developing a new manufacturing process," (2) whether CSS "gained a competitive advantage in being able to bring its plastic indicative security seals to market earlier than competitors," and (3) whether CSS "realized any savings in [its] operating costs, including savings from the avoidance of certain labor expenses and from increased productivity resulting from the efficiencies of the [misappropriated] manufacturing process."

On May 4, 2015, the jury rendered a verdict in favor of TydenBrooks and awarded it $3.9 million in total damages against CSS: $1.3 million each for three of TydenBrooks's four claims under New York law (misappropriation of trade secrets, unfair competition, and unjust enrichment). The District Court entered judgment on the verdict against CSS in the amount of $3.9 million on May 13, 2015. The following day, TydenBrooks moved to amend the judgment to include prejudgment interest from February 11, 2011 to May 13, 2015 at nine percent per annum under sections 5001 and 5004 of the CPLR. In December 2015 the District Court denied TydenBrooks's motion, noting that the jury was specifically instructed that "[d]amages are assessed from the date of the misappropriation and/or unfair use through the date on which the verdict is given." In the District Court's view, that instruction provided "a clear reason to believe that the jury's damage award was intended to compensate Plaintiff for injuries suffered during the same time period that an award of prejudgment interest would otherwise account for." As a result, the District Court concluded, "to award [TydenBrooks] additional interest for that prejudgment period ... would constitute a windfall double recovery."

This appeal and cross-appeal followed.

DISCUSSION

1. Damages and Avoided Costs

As noted, the District Court instructed the jury that TydenBrooks sought damages on each of its claims "based on the defendants' avoided costs," which required the jury to 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's] manufacturing process." Joint App'x 918–19. CSS argues that it was error to instruct the jury that damages could be calculated based on CSS's "avoided costs." It insists that New York law rejects such a measure of damages if the plaintiff's losses and the defendant's profits are themselves calculable.

We have recognized that the profit unjustly received by a defendant in trade secret cases is "an appropriate measure of damages under New York law." Softel, Inc. v. Dragon Med. & Sci. Commc'ns, Inc. , 118 F.3d 955, 969 (2d Cir. 1997) (citing David Fox & Sons, Inc. v. King Poultry Co. , 23 N.Y.2d 914, 298 N.Y.S.2d 314, 246 N.E.2d 166 (1969) ). We have also recognized that "[t]he amount of damages recoverable in an action for misappropriation of trade secrets" may alternatively "be measured ... by the plaintiff's losses," although we have said this without specifically referencing New York law. A.F.A. Tours, Inc. v. Whitchurch , 937 F.2d 82, 87 (2d Cir. 1991). And in those trade secret cases where measuring either the defendant's profits or the plaintiff's losses is too hard or speculative, we have approved the concept of a "reasonable royalty award" that "attempts to measure a hypothetically agreed value of what the defendant wrongfully obtained from the plaintiff." Vt. Microsystems, Inc. v. Autodesk, Inc. , 88 F.3d 142, 151 (2d Cir. 1996).

Even the "avoided costs" measure of damages finds some support in New York law. A century ago in New York Bank Note Co. v. Hamilton Bank Note Engraving & Printing Co. , the New York Court of Appeals suggested that awarding the plaintiff the amount of costs saved by the defendant as a result of its wrongful use of a proprietary device might reflect an appropriate measure of damages under some circumstances. 180 N.Y. 280, 295–97, 73 N.E. 48 (1905). There, the plaintiff, New York Bank Note Company, had been awarded all of the profits of the defendant, who had used New York Bank...