California Court Awards Trade Secret Damages Based on License Price

The California Court of Appeal for the Sixth Appellate District held that damages in a trade secret theft case should be based on the theoretical license price for the stolen technology rather than on the profits from sales of products made using the technology.
The case of Grail Semiconductor Inc. v. Mitsubishi Electric & Electronics USA, Inc. involved a new technology in memory chip design created by the co-founder of Grail.
Inventor Donald Stern combined the characteristics of SRAM, DRAM, and FLASH memory chips to create a new kind of chip. He patented his design for an “inductive storage capacitor” and in 2000 he incorporated a company called Grail Semiconductor (for the “Holy Grail” of memory technology) to commercialize the invention.
However, Grail failed to recruit investors and ran out of money.
In an effort to save his business, Stern met with two representatives of Mitsubishi. One of the Mitsubishi representatives signed a non-disclosure agreement (NDA) which obligated Mitsubishi to keep Stern’s proprietary information in strict confidence.
Stern said he later disclosed to one of the Mitsubishi representatives 16 items of confidential information.
The meeting did not result in any investment by Mitsubishi in Grail.
However, three years later Stern read about a technology being promoted by a company formed through a joint venture of Mitsubishi and Hitachi. The joint venture employed one of the Mitsubishi employees Stern had met with earlier.
The joint venture, Renesas Technology, was introducing a new memory cell that Stern believed incorporated Grail’s technology in violation of the NDA.
Grail sued in state court. The case eventually went to trial on only one cause of action, for breach of contract (the NDA).
(Stern also brought a separate action for patent infringement in federal court.)
A jury found that Mitsubishi had breached the NDA and that Grail was harmed by the breach. The jury awarded Grail damages of almost $124 million.
Mitsubishi moved for judgment notwithstanding the verdict on the grounds that the damages were excessive.
Both parties eventually appealed.
According to the Court of Appeals, the trial court found that
The jury had obviously based its award on the total value of the technology Mitsubishi had disclosed to Renesas in violation of the NDA, measured by estimates of cash flows predicted by the business plan.
The trial court found that:
the correct measure of damages for breach of an NDA was the value of the benefit conferred on the defendant, which in this case was the value of the technology taken by Mitsubishi—but not the total value, because Grail still had the ability to profit from its own technology. Instead, the jury should have determined damages according to the amount Mitsubishi would have paid on April 19, 2001 for a lump-sum, fully paid license to use the confidential information.
The Court of Appeals agreed that this measure was proper and that the trial court properly ordered a new trial so that a different jury could compute damages on this basis.

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