Investment Value Archives - Foresight Valuation Group

Trade Secret Damages Expert Blog: Head Start Damages

Posted on January 28, 2020 6:36 pmModified on January 28, 2020 6:39 pmby Lynn Dudinsky

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.

Trade Secret Damages Expert Blog: Flexible Approach Gone Wrong

Posted on August 28, 2019 6:48 pmModified on August 28, 2019 6:50 pmby Lynn Dudinsky

This is the third blog in our series on trade secrets and the methodologies utilized in calculating trade secret misappropriation damages. In the previous blog, we discussed the Wellogix, Inc. v. Accenture, L.L.P. case where the flexible approach to trade secret damages calculations was utilized by the expert to determine compensatory damages based on the investment value of Wellogix. In this blog, we are reviewing the Waymo, LLC, v. Uber Technologies, Inc. case which provides a cautionary tale of what can happen when a expert does not align his or her opinion with the requirements of the flexible approach to trade secret damages.

In this case, Waymo filed suit against Uber after a former manager of Waymo’s self-driving car project allegedly misappropriated Waymo’s trade secrets in the creation of his new company, Otto, which was quickly acquired by Uber for nearly $700 million to further the development of Uber’s self-driving car initiatives. Waymo’s complaint alleged a number of causes of action, including the violation of Defense of Trade Secret Act against Uber. The facts of this case have been widely publicized given the companies involved and the $2.7 billion in damages requested by Waymo. Rather than restating the facts and procedural background of this case, this blog is focused on the damages methodology and how the failure to adhere to the principles described in the previous blogs led the Judge to exclude the damages expert’s testimony and opinion.

The information contained in this blog is derived from United States District Judge Willian Alsup’s November 2, 2017 order following Uber’s motion to exclude Waymo’s damages expert and to exclude evidence of financial information presented by the expert, which was granted in part and denied in part. Judge Alsup’s order included an analysis of the following factors that must be present for a witness to testify: (a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (b) the testimony is based on sufficient facts or data; (c) the testimony is the product of reliable principles and methods; and (d) the expert has reliably applied the principles and methods to the facts of the case.

As discussed in the previous blogs in this series, the courts, especially in trade secret cases, have recognized that the various forms of damages in misappropriation cases necessitate the use of a flexible approach to calculating damages for claims of misappropriate of trade secrets. However, the flexible approach to calculating damages does not require the court to ignore the factors described by Judge Alsup that must be present for an expert witness to testify. In this case, Judge Alsup concluded that the expert’s opinions must be excluded because they do not qualify as expert testimony and because they are substantially more prejudicial than probative. The following discussion focuses on Judge Alsup’s opinion regarding what factors were not met by the expert and why the failure to meet these factors could not be overcome by reliance on the flexible approach.

The first factor outlined by Judge Alsup is the requirement that the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue. Regarding this factor, Judge Alsup stated that the evidence relied upon by Waymo’s damages expert “can speak for itself, and his only contribution would be to pile on a misleading façade of expertise.” This conclusion is based on Judge Alsup’s belief that the expert “essentially parroted” the opinion of another Waymo expert and “applied no ‘specialized knowledge’ by simply multiplying” the time savings opinion of the other expert by a dollar figure pulled from an internal Uber presentation. The failure to meet the requirement of specialized knowledge to assist the trier of fact is summarized by Judge Alsup when he stated that “[s]traighforward application of grade-school arithmetic to uncomplicated numbers is well within the ken of the average juror.” Due to the lack of specialized knowledge utilized by the expert, Judge Alsup believed that the expert’s analysis was “nothing more than lawyer argument dressed up as expert opinion” and therefore ruled that the expert’s opinion should be excluded due to “its danger of confusing the issues, misleading the jury, and causing unfair prejudice.”

Judge Alsup also highlighted the requirement that the expert’s testimony is based on sufficient facts and the product of reliable principle and methods. This requirement was not met, according to Judge Alsup’s order, on multiple occasions when the expert relied upon the full value of an acquisition to opine on the value of one or more misappropriated trade secrets. Judge Alsup noted that the expert agreed that the full value of these acquisitions included a number of benefits outside of the trade secret, such as employees, tangible property, and certain legitimate forms of intellectual property. However, the application of the full value of the acquisition to a single trade secret was described by Judge Alsup as “absurd” since the expert “did no work whatsoever to account for the value of those legitimate benefits.” This approach of using the full value to determine damages was discussed in the previous blog where we highlighted the efforts of the expert in the Wellogix case to overcome any argument that the selected methodology was the least speculative and could be relied upon by the jury. The failure by Waymo’s expert to conduct a similar analysis led Judge Alsup to exclude his testimony.

Trade Secret Damages Expert Blog: The Investment Value Approach to Damages Calculation

Posted on May 17, 2019 8:43 pmModified on May 17, 2019 8:46 pmby Lynn Dudinsky

This is the second blog in our series on trade secrets and the methodologies utilized in calculating trade secret misappropriation damages. In the previous blog, we discussed the DSC Communications v. Next Level Communications case which provided an example of the flexible approach to the calculation of trade secret damages. In the DSC Communications case, the court awarded DSC damages based on the entire acquisition price of Next Level as it was the “least speculative method of deriving the value of the alleged trade secrets.” In this second blog of the series, we are reviewing the Wellogix, Inc. v. Accenture, L.L.P. case where the flexible approach to trade secret damages calculations is once again referred to by the United States Court of Appeals in their review of the lower court’s decision to award damages based on the investment value of the company.

Wellogix, Inc. (Wellogix) was the Plaintiff suing Accenture and SAP for alleged misappropriation of Wellogix’s trade secrets. Wellogix was the developer of software for the oil and gas industry that modernized the process by which oil companies estimated the costs related to the construction of oil wells, known as complex services. Wellogix was the only company offering complex services software at the time; however, the software was not a standalone solution and required 3^rd party software to perform accounting functions. Due to this requirement, Wellogix entered into an agreement with SAP to integrate Wellogix’s complex services software with SAP’s accounting software and in the process, Wellogix provided SAP with its source code. Wellogix also entered into a number of agreements with consulting firms, including Accenture, to promote its complex services software.

Following the development of the complex services solution, Wellogix participated in a number of pilot programs with various oil companies. In one pilot program, Wellogix and Accenture worked together to provide BP America, Inc. (BP) with access to the features of the software solution. While this and one other pilot with BP were considered a success, BP ultimately discontinued the projects and instead sought to implement a global software solution for BP’s entire system, not just complex services, and hired Accenture to identify and select the software provider. Without notifying Wellogix, Accenture worked with SAP to develop the complex services component of the global software for BP, and in doing so, allegedly accessed Wellogix’s source code that had been provided during a previous pilot program subject to confidentiality agreements. When Wellogix became aware of these events, it filed suit against BP, Accenture and SAP alleging that they had stolen and misappropriated Wellogix’s trade secrets. In the lower court case, the jury returned a verdict in Wellogix’s favor, awarding $26.2 million in compensatory damages and $68.2 million (reduced to $18.2 million) in punitive damages. The appellate court reviewed the record to determine whether there was sufficient evidence to support the jury’s verdict and the resulting damages awards. Of particular interest is the appellate court’s opinion on the compensatory damages awarded by the jury.

In our previous blog in this series, we introduced the flexible approach to calculating damages for claims of misappropriation of trade secrets that was described in the Bohnsack case. The court in this case also referenced the Bohnsack case when it described the variety of forms that damages in misappropriation cases can take. The court quoted one such form that was described in Bohnsack as the “value that a reasonably prudent investor would have paid for the trade secret.” (Bohnsack, 668 F.3d at 280) This form of damages is especially important in this case because Wellogix presented evidence that it was worth approximately $28 million based on an investment of $8.5 million by investors in exchange for a 31% equity stake in Wellogix. The timing of the investment also benefited the damages analysis as it occurred in the same year that Accenture and SAP allegedly misappropriated Wellogix’s trade secret.

It is important to note here that the damages were not based on the amount invested into the company, $8.5 million, but rather on the full investment value of company that was derived from the invested amount and the resulting equity stake. It is also important to note here that the court relied upon evidence presented by Wellogix demonstrating that Accenture’s misappropriation created a competitive disadvantage that caused Wellogix’s value to drop to zero and also caused Wellogix to lose out on potential deals with other oil and gas companies. The damages expert as well as the software expert played a pivotal role in this case and provided a useful framework for calculating damages for venture backed companies that have suffered from theft of trade secrets.

In response to Accenture’s arguments that the damages were too speculative since they were based on the decisions of venture capitalists relying on projections designed to yield a return on investment, the damages expert provided counter arguments that shed light on the validity of this approach and the steps a company seeking venture funding should take to protect the investment value approach in future trade secret litigation. In regards to the projections that led the venture capital investors to value the company and their investment, the expert provided evidence that the venture capitalists audited Wellogix’s financials, spoke with Wellogix’s partners and customers and performed additional due diligence to determine the competitive landscape. This level of analysis by the venture capital investors on the financials of Wellogix enabled the court to determine that the jury was reasonable in relying upon the investment value. Additionally, the expert emphasized the timing of the investment which occurred “right about the time that the theft occurred” which helped to establish the value of Wellogix prior to the theft. In an effort to substantiate the loss in value following the theft, the software expert testified that for the reasons described above, “the total value of Wellogix went to zero” following the alleged misappropriation.

Based on the information described above, the court determined that reasonable jurors could find that the above testimony established the market value of Wellogix immediately before and after the alleged misappropriation. Relying upon the flexible approach described in Bohnsack, the court then determined that there was sufficient evidence to support the compensatory damages award. As described in our previous blog post, courts rely upon the flexible approach to calculating damages in trade secrets cases where traditional measures of damages are inapplicable, and the only evidence of damages is based on information that the opposing party characterizes as “speculative”. In such cases, it is important for the expert to acknowledge the speculative nature of their damages theory and to identify factors that demonstrate that their selected methodology results in the least speculative method for damages calculations. In relying upon the efforts of the venture capitalists to validate the projections used to make an investment decision that was intended to provide a significant return on their investment, the expert in this case overcame the speculative nature of projections and was able to render an opinion that the court found to be reasonable under the flexible approach.

In the upcoming blog in this series, we will explore the Waymo v. Uber case where the damages methodology utilized did not meet the requirements of the flexible approach, resulting in the exclusion of the expert’s testimony and opinion.