No Lost Value Damages Despite Trade Secret Misappropriation | McDermott Will & Emery
The US Court of Appeals for the Second Circuit vacated a damages award, finding that although there was liability for appropriating trade secrets, the trade secret proprietor was only entitled to compensatory damages under federal trade secret law, not avoided cost damages based on alleged estimated research and development or loss of value. Syntel Sterling Best Shores Mauritius, Ltd., et al. v. The TriZetto Grp., Inc., et al., Case No. 21-1370 (2d Cir. May 25, 2023) (Wesley, Raggi, Lohier, JJ.)
This case involved trade secrets concerning healthcare insurance software called Facets® that was developed by TriZetto and alleged misappropriation by a TriZetto subcontractor, Syntel Sterling. In 2010, TriZetto and Syntel entered a Master Service Agreement (MSA) under which Syntel agreed to support TriZetto’s Facets customers. In exchange, TriZetto granted Syntel access to its trade secrets related to Facets. In 2012, the parties amended the MSA to allow Syntel to compete directly with TriZetto for consulting services. A dispute arose in 2014 when Syntel’s competitor Cognizant acquired TriZetto. Syntel terminated the amended MSA and requested payment of rebates owed. TriZetto refused, raising concerns about Syntel’s continued use of confidential trade secrets post-termination.
Syntel filed suit for breach of contract in the Southern District of New York, and TriZetto counterclaimed. During trial, TriZetto proceeded on trade secret misappropriation counterclaims related to the Facets software under the Defend Trade Secrets Act (DTSA) and New York law. Syntel argued that the amended MSA authorized Syntel to compete for Facets services business while using TriZetto’s trade secrets.
During discovery, the district court issued a preclusion order that sanctioned Syntel for discovery misconduct, finding that “Syntel was actively creating a repository of [TriZetto’s] trade secrets on its own . . . to be used in future work.” Citing the preclusion order, the district court instructed the jury that Syntel had misappropriated two of 104 asserted trade secrets.
With respect to damages, TriZetto presented expert testimony that established that Syntel avoided spending about $285 million in research and development costs because of the misappropriation covering the period between 2004 and 2014, an amount that covered only a portion of TriZetto’s overall $500 million research and development costs. Syntel’s expert did not counter that amount. Instead, Syntel argued that these avoided costs did not apply here for several reasons: because the alleged misappropriation did not destroy the value of Facets since Syntel could have used Facets for free by entering a third-party access agreement with TriZetto because TriZetto continued to make millions using its Facets software, and because Syntel was not a software company but a competing service provider. The jury instructions included Syntel’s avoided development costs as one form of unjust enrichment that applied to the federal claims but not the state claims.
The jury returned a verdict in favor of TriZetto on all counts. The jury awarded TriZetto $285 million in avoided development costs under the DTSA as compensatory damages and double that amount in punitive damages. Following trial, Syntel renewed its motion for judgment as a matter of law and alternatively moved for a new trial or remitter. The district court denied the post-trial motions, decreased the punitive damages to $285 million (i.e., equal to the compensatory damages) and entered a permanent injunction against Syntel.
Syntel did not appeal the preclusion order, the related finding of misappropriation as to the two (out of 104) trade secrets or the permanent injunction order. Syntel appealed on three grounds:
- That TriZetto failed to identify the trade secrets with specificity
- That the amended MSA authorized Syntel to use 102 of TriZetto’s 104 trade secrets to compete for the Facets services business
- That avoided costs were improper under the DTSA.
The Second Circuit affirmed the district court as to the first two grounds but reversed on damages. The Court vacated the jury award of $570 million and remanded for further proceedings.
As to the first ground for appeal, the Second Circuit, reviewing the totality of evidence, found that TriZetto met its burden under both the DTSA and New York law in presenting sufficient evidence on what the secrets were, how they were developed, their value to TriZetto and the fact that the secrets were maintained as confidential. Based on that evidence, the Court concluded that a reasonable jury could have determined that the asserted trade secrets were adequately identified and qualified as trade secrets.
As for the second ground of appeal, Syntel attacked the district court’s deference to the jury on the legal issue of interpretation of an unambiguous contract. Syntel argued that by authorizing Syntel to compete with TriZetto, the 2012 MSA amendment made an implied change in the definition of “Services” that authorized Syntel to continue to use 102 of the 104 TriZetto trade secrets in Facets when competing with TriZetto for consulting services. On reviewing the relevant provisions of the contract, the Second Circuit found that while the 2012 amendment specifically deleted the non-compete language, no changes were made to the definition of “Services,” and such changes could not have been implied given that the amended MSA specifically prohibited Syntel from “commercially exploit[ing]” any “TriZetto Data.” Based on the record, the Court found no basis for overturning the jury’s finding on misappropriation.
Syntel’s third ground of appeal attacked the district court’s upholding of the jury’s $285 million compensatory damages award under the DTSA. While both parties conceded that avoided costs are available under the DTSA, Syntel argued that in this specific case the DTSA did not permit recovering avoided costs under an unjust enrichment theory. The Second Circuit agreed, citing Section 1836(b)(3)(B)(i) of the DTSA. The Court noted that to avoid double counting, the statute only authorizes an award of “damages for actual loss by the misappropriation,” as well as “damages for any unjust enrichment by the misappropriation . . . that is not addressed in computing damages for actual loss.” Citing to common law principles of restitution, the Court interpreted the avoided costs provision of the DTSA to require “a comparative appraisal of all the factors of the case,” including “the nature and extent of the appropriation” and “the relative adequacy of other remedies,” to avoid an unjust windfall for trade secret holders. Based on the record, the Court found that Syntel’s misappropriation did not injure TriZetto in an amount more than its actual loss of $8.5 million in lost profits. Furthermore, because Syntel’s misappropriation did not diminish the value of the trade secrets, because Syntel did not develop its own software products based on TriZetto’s trade secrets, and because Syntel was permanently enjoined from continuing to use TriZetto’s trade secrets, the Court reasoned that TriZetto was not entitled to avoided costs as a form of unjust enrichment beyond the actual lost profits.
Concluding that the district court impermissibly discounted a comparative appraisal of actual damages in connection with the avoided costs award, the Second Circuit reversed, vacated the damages award and remanded for further proceedings.
Practice Note: Subcontractors of software service providers should be mindful of trade secret provisions that may still apply to non-compete language and should demand explicit clarification on whether use and confidentiality obligations extend to such non-competition activities allowed under service contracts.
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