Earlier this month, in Ajaxo Inc. v. E*Trade Financial Corp., Case No. 1-00-CV-793529, the long-running dispute between Ajaxo Inc. and E-Trade over Ajaxo’s proprietary stock trading software took yet another turn following a two-part trial in Santa Clara County Superior Court.   In the latest round of this fight over trade secrets related to proprietary stock trading software, the California Court of Appeal delved into when a reasonably royalty may be recovered and the proof it takes to recover them.

Ajaxo first filed suit against E*Trade in 2000, alleging that E*Trade had violated Ajaxo’s non-disclosure agreement (NDA) and misappropriated Ajaxo’s trade secrets by improperly acquiring and using Ajaxo’s proprietary wireless stock trading software.  E*Trade had considered licensing the software from Ajaxo, but ultimately declined.  Ajaxo alleged that E*Trade then hired another wireless vendor, Everypath Inc., to develop the wireless trading software, and provided Everypath with the source code for the program acquired from Ajaxo.  Ajaxo sought lost profits of $500,000 per month for as long as the misappropriation continued, plus interest, unjust enrichment penalties pursuant to Civil Code section 3426.3, and reasonable royalties pursuant to Civil Code section 3426.3.

The first trial was held in March 2003.  The jury found in Ajaxo’s favor on the issue of liability and awarded Ajaxo $1.3 million on the breach of contract claim for breach of the NDA, but E*Trade successfully moved for non-suit on the issue of damages on the misappropriation claim.  Both parties appealed, and the appellate court remanded.

Following the remand, the case was tried to a jury in 2008.  The jury found that E*Trade had improperly benefited in the amount of $4 million from the use of Ajaxo’s trade secrets, but also found that E*Trade had expended $6 million in attempting to exploit the trade secrets, leaving no net recovery.  The case went up on appeal again and was again remanded, this time on the grounds that Ajaxo’s unjust enrichment claim wasn’t provable and that the trial court had erroneously excluded royalty damages.

On remand, E*Trade argued that Ajaxo had already recovered the entirety of its damages when the jury awarded $1.3 million for breach of the NDA.  E*Trade also argued that royalties were not provable, in large part because Ajaxo’s CEO had smashed a hard drive containing relevant evidence, included the original source code for the wireless trading software, with a hammer, and that this intentional destruction rendered it impossible to determine how much the code was actually worth as a trade secret.  Ajaxo argued its royalties ranged from $24 million to $3.3 billion.

Perhaps not surprisingly given the large range of royalties being sought, the trial court concluded that Ajaxo had failed to prove the amount of its royalties.  Further, the court found that Ajaxo had failed to tether its royalty claim to the actual misappropriation.  This holding was based on the fact that Ajaxo had already been compensated by the jury on its breach of contract claim, and on the fact that Ajaxo had destroyed evidence (by smashing the hard drive) while the case was awaiting trial, making it difficult to determine what trade secrets the source code contained or what they were worth.  Notably, Ajaxo’s witnesses, who purported to testify as to the value of the royalties under a variety of different theories, gave contradictory evidence and failed to rely on accepted valuation principles.  The court independently considered the fifteen-factor test for reliability of royalty damages set forth in Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970) and found Ajaxo had failed to prove its royalties, again pointing to the conflicting evidence offered by Ajaxo and Ajaxo’s destruction of evidence.  Accordingly, no further recovery was ordered.

The holding, which is being appealed yet again, is instructive to any company asserting a claim for royalties based on trade secret misappropriation.  It is simply not enough to show that your competitor took your trade secrets and made money.  Rather, the plaintiff must tie the profits directly to the use of the trade secret, and must take care to use accepted measures of profits in their particular industry, based on realistic expectations of royalties grounded in facts and evidence, not speculation.  Further, Ajaxo suggests that a trade secret plaintiff may not want to take a “shotgun” style approach to remedies.    The more theories of recovery the plaintiff pleads, the greater the danger the court or jury will find the evidence supporting each individual theory contradictory.  Also, don’t smash your sources of evidence with a hammer.