No Lost Profits Damages in Trade Secret Misappropriation Case

October 2, 2014

The Massachusetts Supreme Judicial Court ("SJC") recently analyzed the use of expert testimony regarding "lost profits" damages in a case from Suffolk Superior Court's Business Litigation Session, and provided some guidance relative to the appropriate measure of damages in cases involving misappropriation of trade secrets.

In LightLab Imaging, Inc. v. Axsun Technologies, Inc., LightLab Imaging, Inc. ("LightLab") filed suit in Suffolk Superior Court, alleging that a competitor, Volcano Corporation ("Volcano"), was using its trade secrets relative to certain laser technology after a joint venturer, Axsun Technologies, Inc., ("Axsun") secretly offered itself for sale to Volcano and divulged LightLab's specifications for that technology. At the outset of the case, the court granted a preliminary injunction. Later, a jury returned a favorable verdict for LightLab, concluding that Axsun had violated the confidentiality provision of its contract with LightLab. The jury also found that Volcano tortiously interfered with LightLab's contract and business relationship with Axsun, and that Volcano had misappropriated LightLab's trade secrets. On a separate count under M.G.L. c. 93A, the court found that Axsun and Volcano acted knowingly and willfully, thus entitling LightLab to $400,000 in damages plus attorney's fees totaling $4,500,000.

Despite the favorable verdict, LightLab appealed to the SJC for direct appellate review on several issues, including a challenge of the trial judge's decision to exclude expert testimony on LightLab's future lost profits. During the damages phase of the original trial, the judge questioned LightLab's designated expert extensively about his chosen methodology and use of the economic theory of "first mover advantage." The judge ultimately decided to exclude this opinion on future lost profits because it was not based on a "demonstrated reliable methodology capable of being validated and tested" as is required. LightLab argued that the exclusion of the expert's testimony made it impossible for LightLab to proceed with the damages phase of the trial.

On appeal, LightLab asserted that the expert used the discounted cash flow method, an extremely common method for this type of calculation. The SJC disagreed, and affirmed the trial judge's decision. The Court deferred to the trial judge's determination that the expert relied on the economic principle of "first mover advantage" as part of his methodology but gave only conflicting and inconsistent testimony about whether there was any economic literature that actually supported quantifying lost profits that way.

At the conclusion of the opinion, the Court expressed its concern that traditional lost profits analysis as a measure of damages may not be an adequate model for analyzing harm caused by misappropriation of trade secrets, especially for start-up businesses. Some start-ups run for years before turning a profit, but the Court noted that this should not render them "damage proof". The Court recognized that there are other theories of damages that may better lend themselves to misappropriation of trade secret cases and that such theories may be ripe for testing in our courts in the near future.