In this first blog of 2020 in the continuing series on trade secrets and the methodologies utilized in determining damages, we are highlighting “head start” damages as described in the US Court of Appeals case Sabre GLBL, Inc. v. Shan.

The defendant in this case was Shan, who worked for Sabre for nearly 20 years both in the US and China. The Plaintiff, Sabre, is a Texas-based technology solutions provider to the global travel and tourism industry. In 2013, Shan began a new consulting position with Sabre and entered into an Employee Intellectual Property and Confidentiality Agreement with Sabre which prevented her from disclosing Sabre’s confidential information or using the information for her own benefit or for the benefit of a third party. Additionally, this agreement, which included a binding arbitration clause, restricted Shan’s ability to compete with Sabre and interfere with Sabre’s employee, contractor and customer relationships.

In conflict with this agreement and while still employed by Sabre, Shan stated a competing company in China and began recruiting Sabre employees and soliciting Sabre customers to her new company. In 2014, Shan resigned from Sabre and returned to China to continue to work on this competing company. Sabre soon filed a complaint against Shan alleging breach of the agreement and her fiduciary duty to Sabre by misusing Sabre’s confidential and trade secret information. The case was then moved to arbitration pursuant to the binding arbitration clause.

After a five-day arbitration hearing, the arbitrator awarded Sabre two categories or damages for Shan’s breach. The first category of damages was disgorgement of $200,000 in salary Shan received during the period of time where the bad acts occurred. The second category of damages awarded by the arbitrator were head start damages which represented the benefit Shan received from her misconduct. The arbitrator awarded $1.17 million in head start damages based on her equity interest in the new company and a determination that it had obtained an unlawful development and operations head start as a result of Shan’s misconduct. The arbitrator found Shan liable for additional claims and granted Sabre injunctive relief and attorney’s fees. Sabre then moved to confirm the outcome at the District Court and both parties appealed the District Court decision.

The focus of Shan’s appeal related to the head start damages awarded by the arbitrator and confirmed by the District Court. The head start damages were based on an expert report filed on behalf of Sabre on the premise that Shan’s breach gave her company a two-year head start which the company would not have received but for Shan’s misconduct. The damages expert quantified the value Shan obtained through this two-year head start by determining the incremental value of the head start by estimating the value of the company, as of the damages date, with and without the head start and taking the difference between the two. The expert then multiplied this value by Shan’s ownership interest in the company (68%) to determine the amount Shan personally benefitted from her misappropriation. The arbitrator awarded Sabre damages based on this methodology and noted that the expert used an accepted and credible approach in calculating the benefit to Shan.

Shan challenged the award of head start damages on the grounds that the arbitrator manifestly disregarded various aspects of law in granting the relief. One aspect of Shan’s argument is that head start damages and saved development costs are the same thing, a premise the Appeals Court found faulty. The Court noted that the expert in this case made clear in his report and testimony that head start damages and saved development costs are separate damages that seek disgorgement of two different benefits Shan receives as a result of her misconduct. Head start damages represent the benefit to Shan from the increase in her company’s value as a result of it being two years further along that it otherwise would have been in developing and commercializing its products and services. Head start damages are distinct from saved development damages which represent the benefit to Shan from her company’s ability to avoid certain R&D costs by relying on confidential and trade secret information that was misappropriated. In fact, the expert at arbitration calculated both forms of damages but the arbitrator held that Sabre failed to prove the saved development costs.

Shan also challenged the head start damages as being too speculative. However, as we have discussed in a previous blog related to the Investment Value Approach to Damages, the Court here found the expert’s basis for damages credible. The expert in this case calculated head start damages by relying on the valuation of Shan’s company as determined by what an actual outside investor was willing to pay for a certain percentage interest in Shan’s company.  This is another example of the flexible approach being properly utilized by the trade secret damages expert to illustrate the damage to a company from misappropriation of its trade secret. Moreover, this case provides a strong example of how the diligence of the expert enabled the judge in a later proceeding to review the report and testimony from an earlier venue to overcome subsequent challenges.