Appellate Court of Maryland Provides Guidance on Calculating Damages in Trade Secret Cases
December 28, 2023
By: Veronica J. Mina
In Ingram v. Cantwell-Cleary Co., Inc., No. 421, 2023 Md. App. LEXIS 871 (Md. App. Dec. 22, 2023), the Appellate Court of Maryland held, among other things, that, when possible, a court should look to the gross sales the defendant received from customers wrongly diverted to the defendant as a result of a trade secret misappropriation and apply the plaintiff’s own profit margin to the defendant’s sales totals, rather than utilizing the past gross sales from the plaintiff with a predictive-modeling approach. In addition, the court explained that a plaintiff must demonstrate a causal relationship between the misappropriation of trade secrets and the losses incurred, and the proper damages period covers the period of time that the information would have remained unavailable to the defendant in the absence of the misappropriation to the time it would have taken the defendant to obtain the information by proper means, such as by reverse engineering or independent development.
Cantwell-Cleary, Co., Inc. (“Cantwell-Cleary” or the “Company”), has operated as a family business since the 1960s, selling packaging materials, paper products, janitorial and sanitation supplies, and office supplies. The Company provides clients with custom-made packaging for their products that is designed and manufactured by third-party vendors to protect the products in transit. Cantwell-Cleary is owned by Shirley Cleary, who ran the business alongside her late husband, Vincent Cleary Sr., and all the Cleary children – one of them being Vince Cleary, Jr. (“Vince Jr.”). After Vincent Cleary Sr.’s death, Vince Jr. took control of the day-to-day operations and, ultimately, after a family feud regarding control of the Company, left Cantwell-Cleary to start a competitor company known as Cleary Packaging, LLC (“Cleary Packaging”). In his efforts to compete, Vince Jr. took with him numerous employees, including Kevin Barstow (“Mr. Barstow”), Timothy Ingram (“Mr. Ingram”), and Dennis Ibbott (“Mr. Ibbott”), as well as clients, trade secrets, and other confidential business information belonging to Cantwell-Cleary. Cleary Packaging then began selling its clients the same shipping and packaging products that they had previously purchased from Cantwell-Cleary, thereby causing the Company ultimately to lose nearly $12 million in total gross sales during a three-year period.
Cantwell-Cleary brought two lawsuits in the Circuit Court of Maryland for Anne Arundel County. The first, against Mr. Barstow, asserted claims for breach of contract and injunctive relief for violating the Company’s “Duty of Confidentiality and Covenant Not to Compete” agreement (“Non-Compete” or “Agreement”), along with a claim for misappropriation of trade secrets in violation of the Maryland Uniform Trade Secrets Act (“MUTSA” or “the Act”). The second lawsuit was filed against Mr. Ingram and Mr. Ibbott, including claims for breach of contract and injunctive relief against each for violating the Non-Compete and for misappropriation of trade secrets in violation of the MUTSA. The two actions were consolidated for trial.
The circuit court found Mr. Barstow liable for breach of contract and misappropriation of trade secrets in violation of the MUTSA. Mr. Ingram and Mr. Ibbott also were found liable on all counts, including breach of the duty of loyalty and civil conspiracy. As a result, the court ordered Mr. Barstow, Mr. Ingram, and Mr. Ibbott to pay damages in the amount of $780,757.32, $867,335.44, and $273,004.72, respectively. The trial court, however, denied Cantwell-Cleary’s petition for attorneys’ fees after finding no malice, which it later reversed in a written order without explanation. The circuit court also awarded injunctive relief against all three defendants for violation of their Non-Competes. Thereafter, Mr. Barstow and Mr. Ingram (“Appellants”) appealed and presented four questions for review: (1) did the trial court err in not enforcing the liquidated damages provision of Appellants’ Non-Compete Agreements with Cantwell-Cleary?; (2) did the trial court err by concluding that customer lists and pricing information constituted trade secrets under the MUTSA?; (3) was the trial court’s award of damages for misappropriation of trade secrets based upon a speculative methodology for approximating Cantwell-Cleary’s lost profits?; and (4) did the trial judge abuse his discretion in clarifying his factual findings in support of his ruling denying Cantwell-Cleary’s motion for attorneys’ fees?
The Appellate Court of Maryland affirmed the trial court’s holdings with respect to the first two issues, but found the circuit court erred as a matter of law with respect to the third issue when relying on Cantwell-Cleary’s expert’s damages calculations, which, according to the Appellate Court, impermissibly included lost sales that were not proven to have flowed from the acts of misappropriation. With respect to the last issue, the court found that the trial judge abused his discretion when deciding without explanation that Appellants engaged in conduct that amounted to malice with respect to their misappropriation of trade secrets, but not for purposes of awarding attorneys’ fees under the MUTSA.
Regarding the initial issue of liquidated damages, the Appellants argued that the lower court erred in failing to enforce each Agreement’s liquidated damages clauses which fixed damages in the amount of $50,000 for any breach of the Non-Compete. In its analysis, the Appellate Court noted that the liquidated damages provision specified that Cantwell-Cleary was not precluded from pursuing “other rights it may have against [Appellants] for [] a breach.” Even without that language, the court recognized that Cantwell-Cleary was not prohibited from seeking monetary relief under an entirely separate statutory cause of action. Specifically, Section 11-1207(b)(1) of the MUTSA explicitly provides that its provisions “do[] not effect contractual remedies, whether or not based upon misappropriation of a trade secret.” Thus, the court adhered to well-settled law in Maryland and held that absent specific instances, such as quasi-contractual claims and certain tort claims, “it is clear that the existence of an agreement that imposes liquidated damages for a breach of a confidentiality clause or other conduct that is similar to the misappropriation of trade secrets does not necessarily foreclose the availability of monetary relief under [the] MUTSA.”
The Appellate Court also affirmed the trial court’s findings that customer lists and pricing information qualify as trade secrets under the MUTSA and that Appellants misappropriated such information. On the second issue presented, the court reiterated the two-part test for determining whether information qualifies as a trade secret: first, the information must derive independent economic value and, second, the information must be subject to reasonable efforts to maintain its secrecy. While citing a host of cases supporting the conclusion that customer lists and pricing information may qualify as trade secrets, the court found that the first part of the test was met, explaining that “customer information often derives independent economic value in a competitive sales industry because information about potential customers and their buying habits, a competitor’s pricing, business strategies, and vendors is a windfall, granting the recipient a key to undercut the competition’s pricing, outbid their vendor contracts, and attract their customers.” The court also affirmed the trial court’s finding that Cantwell-Clearly took sufficient efforts to maintain the secrecy of its information, such as restricting its access to certain employees and emphasizing its confidential nature in its employee handbook and Non-Competes. The decision further recognized that even without physically taking or copying confidential information, the unauthorized use of a trade secret by a former employee who has committed it to memory can nevertheless amount to the misappropriation of a trade secret.
Crucially, and as a matter of first impression, the Appellate Court’s ruling on the damages award provided guidance regarding the complicated task of measuring damages in trade secret misappropriation cases. There are three fundamental limitations on damages for a plaintiff’s loss: (1) the alleged loss must be attributable to the appropriation of the trade secret and the plaintiff bears the burden of proving the fact and cause of any loss for which recovery is sought (causation); (2) although the plaintiff may seek to prove both its own lost profits as well as the defendant’s gains, the plaintiff is permitted to recover only the greater of the two measures so as to prevent a double recovery (although the Act explicitly contemplates recovery of damages to include actual loss and unjust enrichment caused by the misappropriation); and (3) the durational period of such damages must be commensurate to the amount of time the information would have remained unavailable to the defendant in the absence of the misappropriation to the time it would have taken the defendant to obtain the information by proper means.
The court held that the circuit court erred in relying on Cantwell-Cleary’s expert’s calculations of its actual loss because the expert failed to provide an adequate rationale for his decision to use Cantwell-Cleary’s past gross sales to Appellants’ customers – rather than Cleary Packaging’s actual sales to those customers – as a base to calculate lost profits. Although an award of lost profits as consequential damages may be used on certain occasions based on the past profits of “an established business,” where post-breach profits of defendant are available and market conditions have changed, it is more feasible to use the defendant’s gross sales than extrapolate from plaintiff’s past sales. If a plaintiff seeks to use its past gross sales as opposed to the actual sales of the defendant, it must explain its rationale for doing so. Otherwise, using the court’s preferred approach, “[t]he plaintiff may provide lost profits by identifying specific customers diverted to the defendant. . . . If the evidence justifies the conclusion that the sales made by the defendant would have instead been made by the plaintiff in the absence of the appropriation, the plaintiff may establish its lost profits by applying its own profit margin to the defendant’s sales.” (Emphasis added by the Appellate Court).
The court also held that the damages award was erroneous because the expert’s calculation included losses attributable to customers who left Cantwell-Cleary, without proving those losses were caused by the misappropriation of the trade secrets. Further, the award of damages for a three-year period was erroneous given a lack of evidence establishing that the misappropriation continued to cause losses for that entire period.
Lastly, the trial court’s reversal on its finding of malice was found to be an abuse of discretion. Under the plain terms of the MUTSA, although a trial court ultimately is cloaked with the discretion to fashion (or not) a fee award, the court must make a factual finding of willful and malicious misappropriation as a predicate to exercising that discretion. The Appellate Court remanded the issue to the trial court to provide reasoning for finding a willful and malicious misappropriation.
The Appellate Court’s decision in Cantwell-Cleary has significant implications for cases involving the misappropriation of trade secrets and other confidential business information. While the opinion gives some overdue clarity as to how one measures a plaintiff’s damages in such high-stakes disputes, outstanding concerns nevertheless remain. For example, parties may find that the court’s preferred methodology may fail to make a plaintiff whole when a competitor intentionally underbids a project (due to defendant’s knowledge of the plaintiff’s pricing margins and other confidential information), thereby leaving a plaintiff’s profit margin – which is based upon defendant’s actual sales – lower than it should be. Companies should evaluate the pros and cons of their chosen approach to calculating their actual damages to ensure that they are compensated as much as possible for such harm.
Disclaimer: Associate Veronica J. Mina, who clerked at the Circuit Court of Maryland for Anne Arundel Count in 2021, had the opportunity to work on this case for Judge William C. Mulford, II. (Senior Judge), who presided over the trial phase of this litigation.