The District of Maryland recently awarded a software developer a mere $1.00 in nominal damages for contract and trade secret claims against a former employee, citing the immateriality of the defendant’s breach and plaintiff’s failure to prove a fair licensing price for its misappropriation damages.
in AirFacts, Inc. v. de AmezagaAirFacts, a developer of accounting software for airlines, filed suit against Diego de Amezaga, its former director of product development, alleging that de Amezaga’s subsequent employment violated his employment agreement with AirFacts and that de Amezaga had misappropriated various trade secrets.
As part of his employment with AirFacts, de Amezaga signed an employment agreement which, among other things, required him to indemnify AirFacts for any “material” breaches of the agreement. Much of de Amezaga’s work in the last few months of his employment involved developing and pitching proration software, which assisted airlines in determining their share of revenue from multi-airline ticket sales. In February 2015, he resigned from his position with AirFacts. On his last day of employment, de Amezaga emailed various documents related to the proration software to his personal email address.
Approximately one month later, de Amezaga applied for a job with a travel agency. As part of his application, he emailed the agency two flowcharts he had created while employed with AirFacts that he had downloaded from an online portal using his AirFacts employee credentials. De Amezaga claimed he sent the flowcharts to the travel agency “to help them understand the work he did for AirFacts.” He was not ultimately hired by the travel agency and began working for an airline instead.
After AirFacts filed suit for breach of contract, misappropriation of trade secrets under Maryland law, and conversion, the case was extensively litigated. After two appeals to the Fourth Circuit, the issues were narrowed to (1) whether de Amezaga’s breach of the employment agreement by retaining AirFacts files was material and (2) what, if anything, AirFacts deserved in damages for the breach and for any trade secret misappropriation.
On the breach of contract claim, the court found that de Amezaga’s decision to email the proration documents to his personal email account was only an immaterial breach of his employment agreement because AirFacts had not demonstrated that the act caused it any harm or prejudice. There was no evidence the retained documents contained confidential information of a customer or had any effect on AirFacts’ relationship with its customers. As to AirFacts’ argument that the breach spurred the company to hire lawyers and conduct a forensic investigation of de Amezaga’s behavior, the court deemed this argument “circular:” if the costs of litigation were enough to make a breach material, a party could transform any breach into a material one simply by initiating litigation. Ultimately, de Amezaga’s breach was immaterial.
On the trade secrets claim, AirFacts sought reasonable royalty damages, intended to reflect “a fair price for licensing the defendant to put the trade secret to the intended use of the defendant at the time the misappropriation took place.” To calculate a reasonable royalty rate, the courts conceive a “hypothetical royalty negotiation” between the parties and then estimate what would be the resultant license fee. This analysis includes consideration of several factors, including any change in the plaintiff’s competitive posture, the prices paid by any past purchasers or licensees, the value of the secret to the plaintiff, and the nature and extent of the use the defendant intended.
The court examined the requisite factors in turn but ultimately concluded AirFacts had not proven a fair licensing price for de Amezaga’s disclosure of the flowcharts. The disclosure did not change AirFacts’ competitive posture, in large part because the travel agency to which he was applying was not a competitor of AirFacts. There was no evidence the disclosure had harmed or prejudiced AirFacts in any way. AirFacts had never licensed the flowcharts or any similar product, so there was “no way to know the prices past purchasers or licensees may have paid for them.” Because the value of the flowcharts was not destroyed by de Amezaga’s conduct, their value as a secret was irrelevant; AirFacts retained whatever use the flowcharts had. Finally, the court determined that de Amezaga had not intended harm to AirFacts and submitted the flowcharts to a potential employer “only to demonstrate a sample of his work product.” Having failed to show a reasonable royalty rate under the relevant factors, judgment was granted to Amezaga on the trade secret claim.
Having sided with the company only in finding an immaterial breach of the employment agreement, the court awarded AirFacts just $1.00 in nominal damages.
Even after the two appeals, AirFacts ultimately fell victim to the constraints and omissions of its own employment agreement. Because de Amezaga’s indemnification obligations were only triggered if his breach was “material,” the lack of evidence suggests that de Amezaga’s misconduct caused significant harm to AirFacts guided the court’s analysis. Further, without a written agreement on how to calculate damages in the event of misappropriation, AirFacts faced an uphill battle in attempting to prove a reasonable royalty rate. The District of Maryland’s decision is a reminder to review the language of employment agreements, especially for director-level positions who may have access to valuable trade secrets.