The Second Circuit just raised the bar for recovering avoided costs as unjust enrichment in a Defend Trade Secrets Act (“DTSA”) case. With a successful DTSA claim, a trade secret owner may obtain an injunction against further use or disclosure of the trade secrets, recover actual damages, and recover damages for unjust enrichment caused by the misappropriation not otherwise included in the damages award.

In Syntel, the Second Circuit foreclosed recovery of avoided costs where the record contained no evidence showing a diminution in value to the trade secret. Syntel Sterling Best Shores Mauritius Ltd. v. The TriZetto Grp., Inc., — F.4th —, 2023 WL 3636674 (2d Cir. May 25, 2023).

Following a trial on the merits, Syntel faced a judgment of over $500 million and a permanent injunction for misappropriating trade secrets from its former business partner, TriZetto. The evidence showed Syntel avoided approximately $285 million in development costs by misappropriating TriZetto’s software and cost TriZetto an $8.5 million profit opportunity. In addition to contesting liability, Syntel appealed to the Second Circuit and requested an order vacating the avoided costs award.

Syntel’s appeal asked the Second Circuit to determine whether the DTSA permits recovery of avoided costs as unjust enrichment given the facts of this case. The Second Circuit sided with Syntel and vacated the $285 million avoided costs award.

The Second Circuit found TriZetto suffered no compensable harm beyond the lost $8.5 million profit opportunity. TriZetto’s trade secrets did not lose value and, in fact, appreciated in value since the date of misappropriation. Also, the permanent injunction denied Syntel any further opportunity to profit from any costs it might avoid by misappropriation. The district court’s $285 million avoided costs award, the Second Circuit explained, operated more as a penalty than as compensable damages available under the DTSA.

The Second Circuit’s opinion parted ways with the Third and Seventh Circuits, which have both permitted avoided costs despite a permanent injunction prohibiting further use and no evidence of actual damages. See PPG Indus., Inc. v. Jiangsu Tie Mao Glass Co., Ltd., 47 F.4th 156 (3d Cir. 2022); Epic Sys. Corp. v. Tata Consultancy Servs., Ltd., 980 F.3d 1117 (7th Cir. 2020) (applying Wisconsin’s Uniform Trade Secrets Act). The Second Circuit, by contrast, now requires evidence that the misappropriating party used the trade secret to develop or sell a competing product or to gain a significant head start into the market or otherwise caused a diminution in the value of the trade secret.