But For a Lack of Damages: Misappropriation of Trade Secrets Claim Fails in Utah District Court

In LifeVantage Corp. v. Domingo, No. 2:13-CV-1037-JNP-PMW, 2016 WL 4705540 (D. Utah Sept. 8, 2016), summary judgment on the plaintiff’s claim that the defendants misappropriated trade secrets hinged solely on the question of damages.  Judge Parrish heard the arguments.

LifeVantage Corporation sells nutraceutical products through a network of distributors, each of whom has a contractual relationship with LifeVantage.  The contract has a provision preventing distributors from disclosing confidential information, including trade secrets. Mr. Domingo was LifeVantage’s lead distributor.

Mr. Domingo posed three arguments supporting his motion for summary judgment on LifeVantage’s claim of misappropriation of trade secrets. First, that the claim failed because LifeVantage presented no evidence of misappropriation, second, that the information in question did not qualify as a protectable trade secret, and finally that LifeVantage presented no evidence of damages caused by the defendant’s alleged misappropriation.  The court held that under the Utah Uniform Trade Secrets Act, LifeVantage’s misappropriation claim “fail[ed] for lack of damages” and that this obviated the need to examine the other two arguments.  LifeVantage v. Domingo, 2016 WL 4706389, at *16.

The court cited Borghetti v. Sys. & Computer Tech, Inc., 199 P.3d 907, 916 (Utah 2008), which held that under Utah law a plaintiff must come forward with “evidence that rises above speculation and provides a reasonable, even though not necessarily precise, estimate of damages.”  The court also pointed out that “LifeVantage has not demonstrated that the damages it seeks were caused by the misappropriation.  And the statute expressly requires such causation.” See Utah Code § 13-24-4(1).  Although LifeVantage claims that it was harmed by the alleged misappropriation, it did not—in the court’s view—provide adequate evidence rising above mere speculation of harm, nor a “reasonable” estimate of damages.

While the court stated that the Utah Supreme Court has not established what must be shown to demonstrate causation in this context, it pointed out that LifeVantage could not satisfy “even the most liberal ‘but-for’ test.” LifeVantage v. Domingo, 2016 WL 4706389, at *16.  Crucially, LifeVantage’s damages expert testified that he had not done “any kind of damage calculation for a claim of misappropriation of trade secrets.” Id.

Some Utah State courts, however, have given more weight to the non-economically quantifiable harms of trade secret disclosure. In InnoSys, Inc. v. Mercer, 2015 UT 80, ¶ 54, 364 P.3d 1013 reh’g denied (Jan. 7, 2016), the Utah Supreme Court reversed the dismissal of a misappropriation of trade secrets claim, even though the plaintiff made no “attempt to quantify the economic impact on [the plaintiff] or to measure the extent of any unjust enrichment flowing to [the defendant.]” Id. at 1026.   Then-Justice Parrish dissented from the holding in InnoSys.  

While there may remain discrepancies between state and federal courts on this issue, parties pursuing misappropriation claims in Utah should be prepared to demonstrate a causal link and provide reasonable damage calculations.  One means of doing so may include drafting nondisclosure agreements to provide for the clawback of any bonuses or severance payments in the event of trade secret misappropriation.  Such a clause may not survive restrictions on liquidated damages, but could suffice to overcome a summary judgment challenge on lack of damages and causation in trade secret misappropriation.