17 May’19

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

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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 3rd 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.

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