We have reported on various aspects of the EU Trade Secrets Directive on this blog. The legal requirements for something to qualify as a trade secret, the misappropriation of trade secrets and the remedies that exist to rectify such misappropriation, as well as the protection of trade secrets during court proceedings have all been discussed. However, in order to be properly prepared for trade secrets litigation and enforcement – both in Belgium and across the EU – you also need to know what damages are potentially available for trade secrets misappropriation and more importantly what evidence will have to be shown to the court.
Article 14 of the EU Trade Secrets Directive requires member states to ensure that the competent authorities can order the infringer to pay the trade secret holder “damages appropriate to the actual prejudice suffered as a result of the unlawful acquisition, use or disclosure of the trade secret.” Such damages should “take into account all appropriate factors, such as the negative economic consequences, including lost profits, which the injured party has suffered, any unfair profits made by the infringer and, in appropriate cases, elements other than economic factors, such as the moral prejudice caused to the trade secret holder by the unlawful acquisition, use or disclosure of the trade secret.” In the alternative, and to the extent appropriate, a lump sum can be awarded as damages, calculated “on the basis of elements such as, at a minimum, the amount of royalties or fees which would have been due had the infringer requested authorisation to use the trade secret in question.”
Article 14 of the EU Trade Secrets Directive requires proof of knowledge, intent or, at the very least, negligence on behalf of the misappropriating party for there to be compensation for the damage suffered. However, because the EU Trade Secrets Directive sets out minimum protections, member states are not required to include this type of “tort liability” for trade secret misappropriation. For example, pursuant to Article XI.336/5 of the Belgian Economic Code, the fact that trade secret misappropriation has taken place is a sufficient basis for a claim for damages. Therefore, under Belgian law, evidence of careful behavior or good faith cannot justify the trade secret misappropriation nor can it constitute grounds for disputing damages claimed by the trade secret holder.
The damages regime under the EU Trade Secrets Directive is very similar, indeed, nearly identical, to the regime set out in Article 13 of the Enforcement Directive (2004/48/EC) with respect to the enforcement of intellectual property rights in the EU. As a result, important lessons for its interpretation and application can be drawn from past practices and experiences within the general IP framework.
Quantifying Compensation under Belgian Law
The compensation for trade secret misappropriation must make up for the harm actually suffered, based on the restitutio ad integrum principle. Nothing more, but certainly nothing less, than the damage incurred by the trade secret holder should be compensated. The burden of proof lies with the trade secret holder: if the claimant fails to bring any evidence whatsoever that he or she has suffered prejudice as a result of the infringement, the courts will generally not award any damages (or will limit the damages to a symbolic 1 EUR). Furthermore, neither the EU Trade Secrets Directive nor the implementing Belgian Trade Secrets Act provides for the award of punitive damages.
Damages for trade secret misappropriation are calculated either on the basis of lost profits and costs incurred, or as a lump sum.
- Lost profits: the profits that the trade secret holder would have made if no misappropriation had taken place. This can be calculated either by reference to the profit margin of the trade secret holder (taking into account the value of the trade secret, the existence of substitutable products, the production capacity of the trade secret holder and the intensity of competition on the market) or on the basis of royalties that would have been received by the trade secret holder if it had agreed on a license with the misappropriating party.
Either the profit margin of the trade secret holder or the royalty rate should be multiplied by the infringing volume (i.e., the number of products manufactured or commercialized while making use of the acquired or disclosed trade secret).
- Incurred losses: the remaining negative economic or immaterial consequences inflicted on the trade secret holder as a result of the misappropriation (for example, damage to the trade secret holder’s exclusive position or reputation and any costs incurred to put a halt to the infringement).
Indirect damage thus covers costs incurred in the detection, investigation and enforcement of the infringement (such as expert fees, and any costs related to the discovery and prosecution of the misappropriation, to the extent they were directly associated with the enforcement of the trade secret), “moral damages” that result from damage to the goodwill related to the goods and the trade secret holder (loss of an exclusive position), compensation for the loss of clientele, potential loss of monopoly or exclusivity. Moral damages or harm to reputation are often difficult to quantify and courts generally determine the amount of these damages ex aequo et bono (a lump sum).
- Finally, damages can also be awarded as a lump sum. Both the Enforcement Directive and the EU Trade Secrets Directive established that the lump sum must also be determined with reference to commonly charged license compensation or royalties. Pursuant to the implementation of Article 14 of the EU Trade Secrets Directive in Belgium, a lump sum can only be awarded to the extent that the scope of the damage cannot be determined in any other way (Article XI.336/5 of the Belgian Economic Code).
In practice, national member state courts still enjoy a large amount of freedom in deciding whether to allow damages. The appointment of a court expert to calculate the exact amount of damages is fairly common.
Unlike what is required for the existence of a trade secret, one will not have to demonstrate what reasonable measures were taken to assess the value of trade secrets. However, the post factum gathering of such valuation evidence is often very difficult or even impossible. In order to reduce the evidentiary burden, , we highly recommend that you keep track of all your costs, expenses, royalty fees and arrangements, valuation assessments of the protected information / know-how (e.g., in the framework of a merger or acquisition) and the profit margin obtained from the commercialization of the products or services developed on the basis of your trade secrets. The more objective, ante factum evidence a trade secret holder has available in support of its damages claim, the more inclined a court will be to award damages for trade secret misappropriation.