Using an estimate of the research and development costs associated with a trade secret can be a useful valuation method and an appropriate measure of pecuniary loss where the theft is intended as a shortcut allowing a competitor to avoid the time and expense involved in developing a competing product or procedure. Research and development costs may also be a straightforward method, as most businesses will track the costs associated with a particular project and should be able to provide testimony showing the investment in employee work hours, equipment costs, and other expenses related to the trade secret. Valuing a trade secret in this way has the additional advantage of being a widely-used measure for the valuation of assets, both in business accounting and transactions, and in court during civil litigation, so the court and parties may be on familiar ground. Research and development costs may understate the loss in cases where the trade secret, while central to a profitable product or service, was developed without much expense or many years before. In May 2009, the U.S. Sentencing Guideline Commission submitted an amendment which expressly recognizes this factor as one that may be considered. Under the amendment, "the court may estimate loss using the cost of developing that information or the reduction in the value of that information that resulted from the offense.
The new provision responds to concerns that the guidelines did not adequately explain how to estimate loss in a case involving proprietary information such as trade secrets." Amendments to the Sentencing Guidelines, U.S. Sentencing Guideline Commission, (May 1, 2009) (emphasis added), available at http://www.ussc.gov/2009guid/20090501_Reader_Friendly_Amendments.pdf. The advantages to using research and development costs to value a trade secret are that they provide an accurate estimate of the trade secret value and the proof comes in economic terms that are regularly used in a civil context. The disadvantages are that it may require expensive expert testimony and increased complexity of proof at sentencing, and that it may not accurately reflect the harm to the victim in a particular case, especially where the theft would not substantially reduce the victim’s competitive advantage derived from the trade secret.
The amount for which the defendant sold or tried to sell the trade secret.
Although not a traditional economic measure of the value of a trade secret, the cost set by a defendant in the "thieves' market" may be a useful measure of pecuniary harm in several scenarios. In cases where attempt or conspiracy are charged, either because the case is a government sting operation where no trade secret material is actually misappropriated, or where valuation of the trade secret in court would compromise the secrecy of the information, the price set by the defendant will often be the most accurate value. See United States v. Hsu, 155 F.3d 189 (3d Cir. 1998). Some types of trade secret information, including marketing plans, proprietary customer lists, or sales data, are otherwise hard to value. In a case where government investigators are alerted to a trade secret theft early in the process and are able to arrange an undercover purchase of the stolen material, there may be compelling reasons to value the trade secret at the sale price offered by the defendant. Similarly, in a government sting operation where a defendant believes that he is purchasing stolen trade secrets, the price that the defendant is willing to pay can provide a measure of the intended pecuniary harm. This method may be particularly useful in cases where the trade secret material is not a model, plan, or formula for a particular product, but rather relates to marketing or bid information which would be of value to a competitor, if known. For example, corporations regularly prepare cost estimates to be used in developing a competitive bid proposal for a contract.
The amount for which the defendant sold or tried to sell the trade secret.
Although not a traditional economic measure of the value of a trade secret, the cost set by a defendant in the "thieves' market" may be a useful measure of pecuniary harm in several scenarios. In cases where attempt or conspiracy are charged, either because the case is a government sting operation where no trade secret material is actually misappropriated, or where valuation of the trade secret in court would compromise the secrecy of the information, the price set by the defendant will often be the most accurate value. See United States v. Hsu, 155 F.3d 189 (3d Cir. 1998). Some types of trade secret information, including marketing plans, proprietary customer lists, or sales data, are otherwise hard to value. In a case where government investigators are alerted to a trade secret theft early in the process and are able to arrange an undercover purchase of the stolen material, there may be compelling reasons to value the trade secret at the sale price offered by the defendant. Similarly, in a government sting operation where a defendant believes that he is purchasing stolen trade secrets, the price that the defendant is willing to pay can provide a measure of the intended pecuniary harm. This method may be particularly useful in cases where the trade secret material is not a model, plan, or formula for a particular product, but rather relates to marketing or bid information which would be of value to a competitor, if known. For example, corporations regularly prepare cost estimates to be used in developing a competitive bid proposal for a contract.
The value in maintaining the secrecy of this information prior to the submission of the bid is high, as the success of the proposal may turn on underbidding competitors. However, the value of the information will not match the cost of the underlying product, and the cost of developing the bid estimates may be substantially less than the value of maintaining the secrecy of the bid terms. In this case, the price negotiated by a defendant for the sale of the information may be the most straightforward method of valuing the trade secret. A similar argument can be made where the trade secret information consists of marketing plans or sales plans based upon customer data. One clear advantage to this method of valuation is that the defendant has already endorsed the price and will have an uphill battle explaining to the court why the trade secret has a value less than the price set by the defendant. Another advantage is that the prosecutor may avoid testimony on the actual trade secret at trial. The disadvantages to this method of valuation include the potential to underestimate "reasonably foreseeable pecuniary harm" and the fact that this method nominally validates a market for stolen trade secrets which may be substantially lower than the value assigned by the victim.
The amount for which similar trade secret information has been sold in the open market (such as the merger/acquisition price for the trade secret).
In some cases, a trade secret may be similar to other information that the victim company has sold in the past, even if the particular trade secret itself was not available for sale or licensing. Some examples include the development of pharmaceutical or chemical compounds that are intended for licensing and production by other corporations and where a consistent approach was taken by the developer of the trade secret in earlier negotiated agreements with legitimate businesses. In other cases, trade secret information may be valued by the company internally as part of a merger or acquisition of the company or for regulatory filings requiring a valuation of company assets. Whatever method of loss calculation is used, to ensure consistency or to explain any discrepancy with the value asserted in court, prosecutors should seek to identify any Securities and Exchange Commission filings or publicly available accounting documents where the victim valued its trade secret information. While internal valuations may contain less detail than is ideal for sentencing purposes, these estimates can provide a good starting point for the prosecution team. A reasonable licensing or royalty fee for the proprietary information, based on what a willing buyer would pay a willing seller in an arms-length transaction. Although trade secret material is not typically made available for use by others, in some cases an estimate of the reasonable fee that the trade secret owner would charge in a legitimate, arms-length transaction for use of the trade secret information can be used to determine the fee. In cases where the trade secret owner would not typically release the information outside the company, developing a reasonable royalty or licensing fee will often require the assistance of an independent expert. While this method may provide an accurate measure of pecuniary harm to the victim under the circumstances, the victim may feel that the trade secret is undervalued in relation to the cost of development and the reasons for maintaining secrecy, and this method may also require the testimony of an outside expert to determine the value.
The fair market value of the business or product line that could be infringed upon by a competitor with access to the trade secret.
In one scenario that has been repeated over the history of the Economic Espionage Act, the design specifications for a product are taken and the product is copied by a lower-priced manufacturer overseas. These cases are often discovered when the existing customers of the trade secret owner receive offers for a strikingly similar item at a reduced price. In these cases, which may come to light long after the actual theft took place, it is reasonable to argue that the intended pecuniary harm is the entire market where the copycat product was intended to compete. This is particularly true where the trade secret material relates to a highly specialized item or industrial process that is only produced by one company. Some examples of this type of item include the trade secrets underlying a metallurgical process to manufacture truck chassis parts, machinery and chemical solutions used to increase the speed of placing lids on canned goods, and a computer-based system for refinishing automobiles using die-cut stickers matched to numerous makes and models of cars. Production records, sales trends, the expected life of the product, and market share data that may already be in the possession of the victim company will provide a valuation based on the existing market. In some instances, records and business plans from the defendant or the company manufacturing the copied products may also be available to show the intended loss. The advantages to using this method include the fact that the value may be proved using existing data from the victim company and that it is an accurate measure of the intended pecuniary loss for small- market or highly specialized items. The disadvantage is that estimates of the future market share and product life may be difficult to acquire or overly speculative in industries where technology changes rapidly.
Any other methodology that calculates the reasonably foreseeable pecuniary losses caused by the defendant’s conduct.
Other methods for evaluating the loss suffered by the victim include an assessment of the costs to the victim in recovering from the theft and the costs of protecting confidential material from future misappropriation. Another method may include information showing the amount of money spent on improving the security of computer networks, physical storage, and employees to prevent future theft. Where susceptible to determination, in appropriate cases, another factor may include "the reduction in the value of that information that resulted from the offense." See Amendments to the Sentencing Guidelines, U.S. Sentencing Guideline Commission, available at http://www.ussc.gov/ 2 0 0 9 guid/20090501_Reader_Friendly_Amendments.pdf. At the time of publication, it was undetermined whether this amendment would become effective by November 1, 2009, under the Sentencing Guideline rulemaking process.
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The amount for which similar trade secret information has been sold in the open market (such as the merger/acquisition price for the trade secret).
In some cases, a trade secret may be similar to other information that the victim company has sold in the past, even if the particular trade secret itself was not available for sale or licensing. Some examples include the development of pharmaceutical or chemical compounds that are intended for licensing and production by other corporations and where a consistent approach was taken by the developer of the trade secret in earlier negotiated agreements with legitimate businesses. In other cases, trade secret information may be valued by the company internally as part of a merger or acquisition of the company or for regulatory filings requiring a valuation of company assets. Whatever method of loss calculation is used, to ensure consistency or to explain any discrepancy with the value asserted in court, prosecutors should seek to identify any Securities and Exchange Commission filings or publicly available accounting documents where the victim valued its trade secret information. While internal valuations may contain less detail than is ideal for sentencing purposes, these estimates can provide a good starting point for the prosecution team. A reasonable licensing or royalty fee for the proprietary information, based on what a willing buyer would pay a willing seller in an arms-length transaction. Although trade secret material is not typically made available for use by others, in some cases an estimate of the reasonable fee that the trade secret owner would charge in a legitimate, arms-length transaction for use of the trade secret information can be used to determine the fee. In cases where the trade secret owner would not typically release the information outside the company, developing a reasonable royalty or licensing fee will often require the assistance of an independent expert. While this method may provide an accurate measure of pecuniary harm to the victim under the circumstances, the victim may feel that the trade secret is undervalued in relation to the cost of development and the reasons for maintaining secrecy, and this method may also require the testimony of an outside expert to determine the value.
The fair market value of the business or product line that could be infringed upon by a competitor with access to the trade secret.
In one scenario that has been repeated over the history of the Economic Espionage Act, the design specifications for a product are taken and the product is copied by a lower-priced manufacturer overseas. These cases are often discovered when the existing customers of the trade secret owner receive offers for a strikingly similar item at a reduced price. In these cases, which may come to light long after the actual theft took place, it is reasonable to argue that the intended pecuniary harm is the entire market where the copycat product was intended to compete. This is particularly true where the trade secret material relates to a highly specialized item or industrial process that is only produced by one company. Some examples of this type of item include the trade secrets underlying a metallurgical process to manufacture truck chassis parts, machinery and chemical solutions used to increase the speed of placing lids on canned goods, and a computer-based system for refinishing automobiles using die-cut stickers matched to numerous makes and models of cars. Production records, sales trends, the expected life of the product, and market share data that may already be in the possession of the victim company will provide a valuation based on the existing market. In some instances, records and business plans from the defendant or the company manufacturing the copied products may also be available to show the intended loss. The advantages to using this method include the fact that the value may be proved using existing data from the victim company and that it is an accurate measure of the intended pecuniary loss for small- market or highly specialized items. The disadvantage is that estimates of the future market share and product life may be difficult to acquire or overly speculative in industries where technology changes rapidly.
Any other methodology that calculates the reasonably foreseeable pecuniary losses caused by the defendant’s conduct.
Other methods for evaluating the loss suffered by the victim include an assessment of the costs to the victim in recovering from the theft and the costs of protecting confidential material from future misappropriation. Another method may include information showing the amount of money spent on improving the security of computer networks, physical storage, and employees to prevent future theft. Where susceptible to determination, in appropriate cases, another factor may include "the reduction in the value of that information that resulted from the offense." See Amendments to the Sentencing Guidelines, U.S. Sentencing Guideline Commission, available at http://www.ussc.gov/ 2 0 0 9 guid/20090501_Reader_Friendly_Amendments.pdf. At the time of publication, it was undetermined whether this amendment would become effective by November 1, 2009, under the Sentencing Guideline rulemaking process.
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