Damages in Tort and Contract Law

Một phần của tài liệu The Economics of Trade Secrets: Evidence from the Economic Espionage Act (Trang 160 - 164)

CHAPTER 4 DAMAGES VALUATIONS OF TRADE SECRETS

4.4 Principles of Damages and Dispute Valuation

4.4.1 Damages in Tort and Contract Law

Given  that  the  origins  of  trade  secrecy  law  lie  in  tort  and  contract  law,  and  that   much  of  the  valuation  methods  used  in  EEA  cases  stem  from  civil  cases  (as  noted   in  Smith  (2002),  it  is  useful  to  discuss  damages  in  the  context  of  tort  and  contract   law.  

Reliance  and  Expectation  in  Damages  Measures  

Further  concepts  in  damages  calculations  can  be  found  in  the  legal  justification   for  their  existence.    Damages  are  traditionally  separated  into  restitution  (or   reliance212)  damages  and  expectations  damages.    Restitution  damages  return  the   victim  to  the  state  before  the  theft  (i.e.  make  the  victim  whole  but  for  the  theft.)     Expectations  damages,  on  the  other  hand,  compensate  the  victim  for  future   losses  (typically  on  the  basis  of  a  contractual  relationship.)    Put  differently,  by   Hall  and  Lazear  (1994),  “damages  are  generally  calculated  under  the  expectation   principle,  where  the  compensation  is  intended  to  replace  what  the  plaintiff   would  have  gotten  if  the  promise  or  bargain  had  been  fulfilled.”213  

 

Hall  and  Lazear  (1994)  provide  a  useful  graphical  representation  of  the  division   between  damages  before  a  trial  and  damages  after  a  trial.    As  they  note,  

restitution  and  expectations  damages  can  lie  in  both  the  damages  before  the  trial   and  after  the  trial.    

                                                                                                               

212  As  Hall  and  Lazear  (1994)  note,  restitution  and  reliance  are  related  concepts.    Restitution  is   used  in  cases  of  injury  or  theft  (and  is  therefore  relevant  to  the  EEA  cases.)    Reliance  is  used  in   cases  of  fraud  and  is  applicable  to  tort  and  contract  law.  

213  Hall  and  Lazear  (1994)  p.  481.  

Table  4-­2:  Hall  and  Lazaer  (1994)  Depiction  of  Damages214  

  The  EEA  employs  a  mix  of  both  restitution  damages  and  expectations  damages.    

Under  restitution  damages,  the  victim  is  compensated  for  the  theft  on  the  basis   that  the  stolen  trade  secret  had  value  (past  and  future)  that  the  victim  would   have  benefitted  from.    This  clearly  applies  to  the  damages  valuation  method  of   Actual  Damages  and  Fair  Market  Value  and  is  found  in  variations  of  other   models.    As  Hall  and  Lazear  (1994)  note,  the  but-­‐for  analysis  of  damages   valuations  relies  on  restitution  damages.  

 

Under  expectations  damages,  however,  the  relationship  between  the  victim  and   the  defendant  comes  into  play.    As  many  of  the  defendants  are  employees  or   contractors  (see  Chapter  3  for  a  discussion)  engaged  in  the  development  of  the   trade  secrets,  the  victim  rightfully  expected  that  the  trade  secret  would  have   maintained  its  secrecy  and  perhaps  been  further  developed.    This  is  particularly   so  in  cases  in  which  the  trade  secret  was  related  to  primary  research  which  had  

                                                                                                               

214Reprinted  from  Hall  and  Lazaer  (1994),  p.  478.  

yet  to  undergo  commercial  application.215    Furthermore,  the  argument  of   Reasonable  Royalty  comes  into  play  under  expectations  damages  in  which  the   defendant  could  have  engaged  in  a  contractual  relationship  with  the  victim  in   order  to  license  the  trade  secret.    In  these  cases,  the  defendant  violates  a   theoretical  licensing  agreement.      

 

However,  in  application,  the  EEA  cases  demonstrate  a  mix  of  restitution  and   expectations  damages.    As  noted  in  the  next  chapter,  Chapter  5,  the  damages   valuations  in  EEA  cases  vary  significantly.    In  many  cases,  a  wide  range  of   estimates  are  found  for  the  trade  secrets.    Furthermore,  the  actual  legislation   fails  to  show  a  clear  preference  for  restitution  or  expectations  damages.  As   discussed  in  Chapter  5,  the  principles  of  damages  valuations  in  EEA  cases  are   found  in  the  USTSA216,  which  allows  for  the  use  of  Actual  Damages,  Unjust   Enrichment  and  Reasonable  Royalty.    Furthermore,  the  Sentencing  Guidelines   advocate  the  use  of  the  Fair  Market  Value.    Thus,  neither  the  principles  of   restitution  or  expectations  damages  are  preferred  in  the  legal  infrastructure   surrounding  EEA  cases.  

 

Furthermore,  the  mix  of  restitution  and  expectations  damages  in  the  EEA   suggests  that  these  principles  can  be  manipulated  to  favour  one  party  over   another.    For  example,  if  the  victim  is  in  an  unfavourable  contract,  the  damages   expectations  based  on  expectations  may  exceed  that  of  restitution.    In  this  case,   the  use  of  restitution  damages  would  favour  the  victim.    Thus,  the  use  of  

restitution  or  expectation  damages  adds  another  layer  of  debate  in  the   calculation  of  damages  in  EEA  cases.  

Pure  Economic  Loss    

                                                                                                               

215  The  EEA  cases  involving  university  research  would  appear  to  be  obvious  examples  of  this.    See   U.S.  v.  Zhu,  Criminal  case  1:05-­‐cr-­‐10153-­‐GAO-­‐1  (Massachusetts,  filed  on  June  16,  2005)  and  U.S.  

v.  Okamoto,  Criminal  case  1:01-­‐cr-­‐00210-­‐DDD-­‐1  (Northern  District  of  Ohio,  filed  on  May  8,   2001).  

216  See  Uniform  trade  secrets  act,  available  at  http://nsi.org/Library/Espionage/usta.htm,   accessed  November  2008  and  D.O.J.,  (2008),  Prosecuting  IP  Crimes  Manual,  p.  267.  

 

A  controversial  topic  in  tort  law  is  that  of  pure  economic  loss  and  its  relation  to   economic  efficiency.    Pure  economic  loss  is  financial  loss  and  damages  that  are   purely  financial  and  independent  of  physical  inputs.    This  differs  from  

consequential  (or  parasitic)  losses,  which  involve  a  much  narrower  definition  of   all  losses.    As  Bussani  and  Palmer  (2003)  define  it,  “consequential  economic  loss   is  recoverable  because  it  presupposes  the  existence  of  physical  injuries,  whereas   pure  economic  loss  strikes  the  victim’s  wallet  and  nothing  else.”217  

 

It  is  tempting  to  consider  EEA  damages  calculations  as  pure  economic  losses  in   the  sense  that  trade  secrets  are  intangible  assets.    However,  this  would  represent   an  overly  simplistic  interpretation  of  the  delineation  between  pure  and  

consequential  losses.    Nonetheless,  the  damages  calculations  in  EEA  case  are,  in   general,  based  on  pure  economic  loss.  The  underlying  principles  of  damages   valuations  in  EEA  cases  are  based  on  cash  flow  analysis,  actual  expenditures  and   market  values.    All  of  these  concern  the  financial  impact  of  the  theft  and  not  any   physical  injuries.  

 

The  debate  amongst  legal  scholars  over  pure  economic  loss  arises  because,  in   some  jurisdictions,  pure  economic  losses  are  not  recoverable.218  Furthermore,  as   Gregen  (2006)  notes,  the  whether  pure  economic  losses  act  to  deter  or  redress   injury  is  the  subject  of  debate.      However,  a  sound  theory  can  be  found  in  Bishop   (1982)  in  his  argument  that  economic  loss  is  not  efficient  in  that  it  induces  “too   much  avoidance  activity  by  potential  tortfeasors219.”220  

 

Further  criticism  of  the  economic  efficiency  of  pure  economic  loss  can  be  found   in  reference  to  the  insurance  market221.    Under  pure  economic  loss,  as  Bishop   (1982)  notes,  the  cost  of  insurance  for  victims  or  tortfeasors  would  be  

prohibitively  high.    As  pure  economic  loss  can  be  much  more  than  losses   associated  with  physical  loss  (e.g.  the  cost  of  fixing  a  broken  leg  is  likely  to  be                                                                                                                  

217  Bussani  and  Palmer  (2003)  p.  6.  

218  Bussani  and  Palmer  (2003)  p.  7.  

219  A  tortfeasor  is  someone  who  commits  a  tort.  

220  Bishop  (1982)  p.  13.  

221  Bishop  (1982)  notes  that  this  is  a  commonly  used  rationale  in  the  pure  economic  loss  debate.  

less  than  the  lost  wages  as  a  result  of  an  injury),  an  insurance  market,  which  will   include  administrative  costs,  will  be  too  expensive  and  suffer  from  moral  

hazard222  issues.    Additionally,  pure  economic  loss  could  result  in  the  bankruptcy   of  the  tortfeasor  (or,  in  our  case,  defendant)  and  render  any  judgement  

unenforceable.    Given  that  the  EEA  sought  to  extend  the  reach  of  punishment  of   the  theft  of  trade  secrets  to  judgement-­‐proof  defendants  (as  discussed  in  Chapter   3,)  the  use  of  pure  economics  loss  presents  challenges  to  enforcement  of  the  act.  

 

This  debate  over  the  role  of  pure  economic  losses  in  the  context  of  the  EEA  adds   yet  more  legal  controversy  over  the  criminalization  of  the  theft  of  trade  secrets.      

The  difference  between  the  valuations  of  trade  secrets  argued  during  the  course   of  the  case  and  those  used  in  sentencing  (as  discussed  in  Chapter  5)  could  

suggest,  as  Bishop  (1982)  notes  in  relation  to  the  debate  over  economic  loss  that,  

“courts  in  deciding  cases  have  reached  results  that  seem  broadly  efficient.”223     Thus,  the  evidence  of  difference  of  valuations  used  in  sentencing  and  those   discussed  in  this  chapter  suggests  that,  in  EEA  cases,  the  courts  recognise  the   lack  of  economic  efficiency  found  in  the  pure  economic  loss  approach.  

 

Một phần của tài liệu The Economics of Trade Secrets: Evidence from the Economic Espionage Act (Trang 160 - 164)

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