Reap What You Sow – Sixth Circuit Affirms Recovery of Research and Development Costs to Agricultural Company in Trade Secret Case
The recent decision by the U.S. Court of Appeals, Sixth Circuit, Caudill Seed & Warehouse Co. v. Jarrow Formulas, Inc., illustrates the flexible approach taken by courts when considering the calculation of compensatory damages in trade secrets cases. No. 21-5345, 2022 WL 16846585 (6th Cir. Nov. 10, 2022) There, the Sixth Circuit affirmed a jury’s compensatory damages verdict which awarded the plaintiff its research and development costs for its misappropriated trade secret even though the underlying trade secret was not destroyed through disclosure or other means. Id. at *15.
Caudill Seed & Warehouse Co. (“Caudill”), a Kentucky manufacturer and distributer of agricultural products, expended significant time and resources developing its “seed to shelf” process for manufacturing and selling broccoli seed extract. Jarrow Formulas (“Jarrow”) enticed Caudill’s Director of Research to join Jarrow and bring with him the knowledge base required to manufacture its own rival product. Within four months of his joining, Jarrow successfully brought its activated broccoli seed extract to market, and did so before Caudill reached market.
Caudill sued and a jury found that Jarrow had willfully and maliciously misappropriated Caudill’s “seed to shelf” trade secret under the Kentucky Uniform Trade Secrets Act (KUTSA) and awarded Caudill $2,023,000 in compensatory damages and $404,605 in unjust enrichment damages, and the district court further awarded $1,000,000 in exemplary damages, $3,254,303.50 in attorney fees, and $69,871.82 in costs against Jarrow for a total award of nearly $7,000,000. Jarrow appealed to the Sixth Circuit.
Jarrow’s appeal challenged the award of research and development costs to Caudill, arguing that research and development costs are an inappropriate calculation of damages when the underlying trade secret has not been destroyed, and that it should be limited to the amount of actual loss suffered by Caudill as a result of the misappropriation.
In rejecting Jarrow’s argument, the Sixth Circuit began by noting that “courts, including our own, utilize several other measures of monetary relief” beyond actual loss. Id. at *13. One such measure is the value of the trade secret to the defendant at the time of the misappropriation, which can properly take into account the value derived to the defendant from its savings in research and development costs. The Court explained that this “flexible and comprehensive approach” is often needed in cases like this one where the parties are in direct competition, the process of developing the trade secret was difficult and lengthy, and the defendant’s conduct included many different uses of the plaintiff’s trade secret. Id. at *14.
Based on this benefit-to-defendant method of damage calculation, the jury found that Jarrow’s misappropriation of Caudill’s trade secret had a compensable value insofar as it allowed Jarrow to become a broccoli seed extract manufacturer in just four months. Caudill was thus entitled to the portion of its research and development costs which the jury found represented the amount Jarrow saved by not expending its own resources on research and development.
Next, the Sixth Circuit affirmed the jury’s award of $404,605 in unjust enrichment damages which represent the net profit Jarrow derived from the sale of four products that it was able to develop as a result of its misappropriation.
Finally, the Sixth Circuit affirmed the district court’s entry of exemplary damages and attorney fees and costs based on the jury’s finding that the misappropriation was willful and malicious. Jarrow argued that there was not sufficient evidence to support this finding. In rejecting this argument, the Court explained that the parties agreed-upon jury instructions requiring “behavior motivated by spite or ill will and disregard for the rights of another with knowledge of probable injury” appropriately defines willful and malicious conduct in the context of trade secret misappropriation. Id. at *17. Based on this standard, the Court held that there was sufficient evidence to support the jury’s finding when Jarrow’s conduct showed “ill will towards Caudill, and a disregard of Caudill’s rights.” Id. at *18.
Caudill Seed serves as an important reminder that there is not a “one-size-fits-all” method of calculating damages in trade secrets cases. Additionally, Caudill Seed confirms that, at least in the Sixth Circuit, research and development costs may be awarded to the plaintiff even when the value of the trade secret has not been destroyed.
Siena Sylvester also contributed to this article.