
Latest Update: Interlocutory Appeal Regarding Damages Shot Down
In a key ruling, the Fifth Circuit Court of Appeals has thrown out an interlocutory appeal related to establishing reasonable royalties under the Defend Trade Secrets Act (DTSA).
The court found the district court’s guidance on assessing damages to be misguided, mostly because the case had yet to reach trial and the plaintiff had not proven liability.
This ruling implies that concerns over damages might ultimately be unnecessary.
The case in focus is Silverthorne Seismic, L.L.C. v. Sterling Seismic Servs., Ltd., No. 24-20006 (5th Cir.
Jan. 3, 2025).
Background of the Case
Silverthorne entered into a licensing agreement that allowed seismic data to be shared with Casillas Petroleum Resource Partners II, LLC, a firm involved in oil and gas exploration.
In this arrangement, Silverthorne provided seismic data to Sterling, a processing company, which then handled the data for Casillas.
However, issues arose when Sterling improperly shared unlicensed data with Casillas, leading to its distribution to potential investors.
In response, Silverthorne took legal action against Sterling for misappropriation of trade secrets under the DTSA, seeking reasonable royalties for the unauthorized data disclosure.
Before the trial began, the district court utilized a definition of “reasonable royalty” from the 1974 case, University Computing.
This definition required Silverthorne to show what the parties would have agreed upon had they discussed using the alleged trade secret.
Since this precedent predates the DTSA, it primarily deals with reasonable royalties in the context of trade secret usage, not unauthorized disclosures.
Silverthorne highlighted its challenge in proving what Sterling—acting as a data processor and not an end-user—might have been willing to pay for the data.
Consequently, the district court referred a crucial question to the appellate court regarding whether a plaintiff can establish reasonable royalty damages based on the willingness of external buyers who aren’t involved in the lawsuit.
The Court’s Majority Opinion
Ultimately, the Fifth Circuit dismissed the appeal, explaining that it did not present a controlling legal issue.
The court stated that interlocutory appeals are allowed only when they address significant legal matters that would have a real impact on the district court’s actions.
They clarified that an issue doesn’t become controlling simply because it complicates a case or may reduce the need for a post-judgment appeal.
By applying these standards, the court concluded that damage questions generally gain importance only after the plaintiff has established liability, unless the damages inquiry is fundamentally crucial.
Since Silverthorne had not yet proven liability and was not barred from presenting evidence regarding damages under the district court’s ruling on “reasonable royalty,” the Fifth Circuit decided that answering the certified question would not meaningfully influence the outcome of the litigation.
As a result, the court vacated the order allowing the appeal, dismissed it due to lack of jurisdiction, and sent the case back to the lower court without further comment on the reasonable royalty standard.
Dissenting Perspective
In a dissenting opinion, Judge Higginson expressed concern that the appeal had been greenlit by a seasoned district judge, who felt hindered by outdated Fifth Circuit precedents.
He noted that a unanimous panel of Fifth Circuit judges had been in favor of revisiting and clarifying the reasonable royalty standard under the DTSA.
However, the majority classified this request as imprudent, delaying clear resolution on a significant issue as the case returned to the district court unresolved.
Judge Higginson stressed that the reasonable royalty standard was highly relevant to this case, arguing that University Computing conflicted with the principles of the DTSA.
He elaborated that the majority’s stance did not reflect the guidance provided in 28 U.S.C. § 1292(b), which grants courts broad discretion to address discrete legal questions that could help direct the entire case toward resolution, thereby conserving time and resources.
From this practical perspective, the reasonable royalty standard was indeed pivotal to the proceedings, as it shaped the types of evidence and testimony relevant to Silverthorne’s damage claims.
Judge Higginson contended that it was essential for the court to address this matter comprehensively; failing to do so would merely lead to a drawn-out trial cycle followed by another appeal.
Regarding the certified issue, Judge Higginson pointed out that the DTSA allows for reasonable royalties not just for trade secret usage, but also for disclosures.
He argued that the district court mistakenly limited the University Computing standard by confining reasonable royalties strictly to scenarios involving commercial use, thus stripping away potential pathways for recovery.
He suggested that courts should have the flexibility to determine a suitable method for establishing reasonable royalties under the DTSA, taking into account factors like industry benchmarks and prices agreed upon by third parties.
Source: Natlawreview