The Big Apple’s reliance on trade secrets ‘common law’—and some surprising rulings in its courts—have left it an unfavourable choice for claimants, says James Pooley.

Most people see New York as a global leader in finance and business. Much less known—except perhaps among trade secret lawyers—is the state’s reputation as an outlier, anchored in outmoded jurisprudence.

The model Uniform Trade Secrets Act (UTSA) was first released in 1979, with an updated version in 1985. But New York stands alone among the states in refusing so far to adopt the statute. Instead, it continues to rely on the ‘common law’ of trade secrets as described in the 1939 Restatement of Torts §§ 757–759, a cramped summary that requires information to be ‘in continuous use’ in the business and that doesn’t apply to so-called ‘negative secrets’, such as experiments showing what doesn’t work, or ‘ephemeral events’ such as secret bids, unannounced products, or financial information.

The US Supreme Court has identified two policies supporting the common law of trade secrets: the “maintenance of standards of commercial ethics and the encouragement of invention”. Kewanee Oil v Bicron, 416 US 470, 481 (1974).

The first principle focuses on preventing bad behaviour, and it informed a general consensus among common law courts that damage awards should not only compensate the plaintiff for the defendant’s bad acts but also provide a disincentive for those who might be inclined to misappropriate.

As a result, calculation of damages has traditionally included not only harm to the plaintiff but also any ‘unjust enrichment’ enjoyed by the defendant. In effect, trade secret damage awards have always been intentionally generous, directed at deterrence as well as full compensation.

This double-tracked approach to remedies has since been codified in statutes, first in the UTSA, and then in 2016 with the passage of the federal Defend Trade Secrets Act (DTSA). Both of these laws use exactly the same damage measure, expressed in the conjunctive: a plaintiff may recover for its “actual loss . . . and damages for any unjust enrichment” so long as there is no double counting.

Typically, the unjust enrichment has been calculated by referring to the plaintiff’s cost to develop the trade secret, and this ‘avoided cost’ theory has become very popular among plaintiffs, who usually find it difficult to prove actual damages from misappropriation.

New York courts ‘less hospitable’

But the US operates as a federal system, and interpretation of each state’s law is controlled by its own courts. As already noted, New York remains rooted in a narrow representation of the common law. Even so, it surprised many when in 2018 the highest court of New York held that a defendant’s avoided costs may not be awarded to a plaintiff unless there is proof of a “causal relation . . . between the gains of the aggressor and those diverted from his or her victim”.  EJ Brooks v Cambridge Sec Seals, 31 NY3d 441 (NY 2018).

In other words, actual loss and unjust enrichment were linked in a way that made it hard to establish the latter without proving the former. Given the inherent difficulty of proving any direct harm from misappropriation, with this new rule New York state courts suddenly became much less hospitable to trade secret claimants.

Unsurprisingly, following the EJ Brooks decision, New York plaintiffs filed mainly in federal court, asserting the DTSA (with its presumably clear and reliable damage guidelines) while avoiding any claims based on New York common law. And because federal courts of appeals in six of the 12 regional circuits had ruled that the UTSA damage provisions allow recovery of avoided development costs independently of any proof of harm to the plaintiff, it was generally accepted that all federal courts would interpret the same language of the DTSA in the same way.

That assumption was upended by the opinion in Syntel Sterling v Trizetto, 68 F4th 792 (2nd Cir 2023), in which the Second Circuit Court of Appeals—importantly, the one that sits in New York—reversed a jury award of $285 million against Syntel, a competitor of Trizetto who used stolen secrets to divert business from a common customer.

Departing from the rulings in the earlier UTSA cases, the Second Circuit held that any claim for unjust enrichment damages must take into account the nature and extent of the direct harm to the plaintiff. In this case, the judges pointed out, Trizetto had lost profits only for the one customer (amounting to $8.5 million), and the trial court had entered a permanent injunction that prohibited any further use of the purloined information.

As a result, the court reasoned, Trizetto still had control over its trade secrets, and the avoided cost award (which represented about half of what it had cost Trizetto to develop the information) appeared in effect to be punitive rather than compensatory.

To get to this result, the Court of Appeals rejected the reasoning of the other courts that had construed the identical damage framework from the UTSA. It did not directly confront the fact that the plain language of the DTSA and UTSA allowed the plaintiff to recover for any harm to itself ‘and’ any benefit conferred on the defendant.

Instead, it relied on a passage from a 1995 version of the Restatement of Unfair Competition purporting to construe the common law (ie, not the statutes) and observing that an unjust enrichment award required a ‘comparative appraisal’ of factors such as the nature and extent of the theft, the damage suffered by the plaintiff, and “the relative adequacy to the plaintiff of other remedies”.

Applying such an appraisal to the facts of this case, it concluded that the trial court’s injunction adequately cabined the risk to Trizetto’s trade secrets, which after all had only been misused in connection with a single customer.

If the court was concerned by the size and ‘punitive’ effect of the jury’s award, it is difficult to understand why it did not simply remand the case so that the trial judge could reassess the size of the monetary award in view of the permanent injunction.

Perhaps aware that it was stepping outside the normal boundaries of statutory interpretation by relying on a common law commentary, the court repeatedly emphasised that its decision was driven by the unique facts of the particular case. However, a substantial risk remains that other courts will accept this new, non-statutory gloss on trade secret damage claims.

Strategies following Syntel

Indeed, in a recent decision by the Seventh Circuit Court of Appeals, Motorola v Hytera, 108 F4th 458 (7th Cir 2024), the court seemed to embrace at least a part of the Syntel court’s reasoning, albeit in dictum explaining why a punitive damage award of over $270 million was not excessive under constitutional standards.

The court observed that damages for avoided R&D costs can differ from one case to another, depending on “how defendants used and profited from the stolen trade secrets”. For this it directly referenced the Second Circuit’s suggestion of a ‘comparative appraisal’ based on the common law Restatement of Unfair Competition. 108 F.4th at 501.

Importantly, the discussion was focused not on the availability of avoided cost damages, but on the due process implications of a large punitive damage award. As a result, it is too early to tell if the Second Circuit decision in Syntel will lead to a general narrowing of available damage theories for trade secret plaintiffs.

Still, at the moment there are lessons to be drawn and strategies to employ. First, plaintiffs can argue that Syntel was wrongly decided, or should be limited to its facts, as the court itself suggested. Second—and more reliably—counsel can closely examine and analyse the ways in which the alleged misappropriation has caused harm to the plaintiff, so that the damage expert can plausibly connect the defendant’s advantage with impact on the plaintiff.

In this regard, one might consider this observation from the Third Circuit in Oakwood Laboratories v Thanoo, 999 F3d 892, 913 (3d Cir 2021): “By statutory definition, trade secret misappropriation is harm. The trade secret’s economic value depreciates or is eliminated altogether upon its loss of secrecy when a competitor obtains and uses that information without the owner’s consent”.

In the meantime, when possible plaintiffs should choose a court outside of New York to file their misappropriation claim.