Federal Circuit Panel Holds Trade Secret Disgorgement of Profits Must Be Awarded by Judge, Not Jury

Fenwick & West LLP

Fenwick & West LLP

In Texas Advanced Optoelectronic Solutions v. Renesas Electronics America, the Federal Circuit held that there is no right to a jury for determining disgorgement of profits for trade secret misappropriation under Texas common law.

Texas Advanced Optoelectronic Solutions sued Renesas Electronics America (formerly Intersil) in the Eastern District of Texas for both trade secret misappropriation and patent infringement of ambient light sensor technology used in cellphones and other devices. A jury found for TAOS on its trade secret claims and awarded disgorgement of Renesas’ profits, and Renesas subsequently appealed to the Federal Circuit, arguing in part that no Seventh Amendment right existed to have a jury determine disgorgement of profits in a trade secret matter.

As is standard for determining if a jury right exists, the court analyzed whether disgorgement of profits for a trade secret claim would have been addressed in a court of law or a court of equity back in 1791 (the year when the Seventh Amendment to the U.S. Constitution established a right to jury trials for suits in law, but not for suits in equity).

Before wading into that question, the court first looked at whether the disgorgement might have served as a proxy for more traditionally legal damages, such as evidence of the plaintiff’s losses or of a reasonable royalty rate. The court determined it did not serve as a proxy, noting that TAOS previously dropped its claim for lost profits, explicitly distinguished its request for a reasonable royalty from its request for disgorgement of profits and failed to prove that the disgorgement correlated with its losses.

The court then turned to the core question of whether disgorgement for trade secret misappropriation was available in courts of law or in courts of equity in 1791. According to the U.S. Supreme Court, disgorgement can serve as either a legal remedy or as an equitable remedy, depending on whether the underlying claim itself is legal or equitable. The Federal Circuit panel noted that when trade secret misappropriation claims first appeared in the early 1800s, they were brought in courts of equity. And although trade secret claims sound in tort, which is generally equitable, trade secret claims are a distinct form of tort for which the legal quasi-contract restitutionary remedy did not include awarding disgorgement (analogizing to similar determinations in patent, trademark and copyright law). With no disgorgement remedy available at law for other forms of intellectual property in 1791, the court concluded, there was no such remedy at law for trade secrets, either, and therefore it was not an issue that a jury should determine under the Seventh Amendment.

Although the historical basis is broadly worded, the Federal Circuit decision applies specifically to trade secret misappropriation under Texas common law. Nonetheless, it has the potential to extend to other sources of trade secret protection (including the Texas Uniform Trade Secrets Act and other state implementations of the Uniform Trade Secrets Act, as well as the federal Defend Trade Secrets Act). Regardless, a plaintiff seeking disgorgement for trade secret misappropriation under Texas common law might still be able to put the issue before a jury, so long as the plaintiff can convince the court that such disgorgement is an appropriate proxy for traditional legal damages such as a reasonable royalty rate.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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