A recent decision by the U.S. Court of Appeals for the Federal Circuit in the case of AMS-OSRAM USA Inc. v. Renesas Electronics America Inc. offers valuable lessons that can arise from failed merger transactions, and in particular liabilities that can arise when a party breaches its contractual confidentiality obligations. In particular, the case highlights important principles about trade secret protection, and contract and tort remedies for the unauthorized use of a party’s proprietary technology by the proposed counter party to a merger transaction that has failed.
After multiple trials and appeals, in April 2025, the Federal Circuit substantially affirmed an Eastern District of Texas’ judgment against the defendant Renesas Electronics America Inc. (formerly Intersil Corporation (“Intersil”) for misappropriation of trade secrets owned by the plaintiff Texas Advanced Optoelectronic Solutions Inc. (“TAOS”) and breach of contract. The damages totaled $32,811,154. The Court also awarded TAOS attorneys’ fees in the amount of $3,908,811. Expensive lessons to learn by any measure.
Background
The legal dispute between TAOS and Intersil arose from failed merger negotiations that took place in 2004. The negotiations were covered by a confidentiality agreement signed by both parties in June of 2004, that expired three years later, in June 2007. During merger talks, TAOS gave Intersil confidential business information about its ambient light sensor technology (“CBI”) used in electronic products to adjust screen brightness in response to incident light. Shortly after merger negotiations ended in August of 2004, less than 3 months after the parties signed the confidentiality agreement, TAOS launched a product embodying its CBI technology. Contrary to the confidentiality agreement, Intersil began using the CBI technology to develop its own competing lines of products that it identified as “Primary Products” and “Derivative Products.” Intersil became an approved Apple vendor for Apple’s iPod Touch in September 2006. It became an approved vendor for Apple’s iPhone 3G in March 2008. Intersil sold substantial volumes of its light sensor chips to Apple based on the CBI technology it stole from TAOS after it became an approved Apple vendor.
The First Round of Federal Court Proceedings
In November 2008, TAOS sued Intersil for patent infringement, trade secret misappropriation, breach of contract, and tortious interference with prospective business relations. The patent infringement claim was later dropped. The jury found Intersil liable for misappropriation of trade secrets under Texas law and breach of contract under California law. It ordered Intersil to disgorge profits of $48,783,007, awarded $10,000,000 in exemplary damages for the trade secret claim, and awarded $12,000,000 as a reasonable royalty for the contract claim. The District Court subsequently eliminated the contract damages as duplicative of the trade secret award.
On appeal in 2018, the Federal Circuit affirmed the bases of both liability and exemplary damages for misappropriation, but remanded the case to the District Court to re-determine the proper monetary award. The Appeal Court held that TAOS’s request for a trade secret award consisting of disgorgement of Intersil’s profits had to be made by the District Court, not the jury, because disgorgement is an equitable remedy not a measure of TAOS’s losses, and certain facts on which to base the remedy still needed to be determined, notably the length of any head start period Intersil gained by stealing TAOS’s trade secrets. The Fourth Circuit also vacated the trial court’s exemplary damages award because it was predicated on the amount of actual damages, which would be re-tried upon remand to the District Court. Finally, the Appeal Court vacated the District Court’s decision that contract damages were duplicative of the disgorgement award, and remanded the issue to the District Court to decide how to proceed on the contract claim.
The Second Round of Federal Court Proceedings
A second jury trial was held in April 2021. At its conclusion, the jury issued an advisory verdict on disgorgement of profits for trade secret misappropriation (decided by the court) of $8,546,000 for the Primary Products. It found that TAOS’s trade secrets were not lawfully accessed by Intersil – read, reverse engineered – until January 2006, and the head-start period was 26 months. The jury awarded TAOS $64,000,000 in exemplary damages for Intersil’s fraud, malice or gross negligence in misappropriating TAOS’s trade secrets. The jury awarded TAOS reasonable royalty damages for breach of the confidentiality provisions in the contract for 2 products: (1) $6,701,743 on Primary Products, and (2) $6,637,693 on Derivative Products.
After the trial, the District Court issued its findings of facts and conclusions of law. It agreed with the jury that a proper disgorgement award was $8,546,000 for the Primary Product. It found that Texas law capped exemplary damages at twice the disgorgement award, or $17,092,000. The District Court entered a contract award consisting of reasonable-royalty damages of $6,637,693 and $613,014, respectively, from sales of Derivative Products and sales of Primary Products. The Court added an award of pre-judgment interest of $5,580,655.07 and $9,469,621.99 for the disgorgement and reasonable-royalty awards, respectively. The Court finally awarded TAOS $3,908,811 in attorneys’ fees for work on the contract claim, concluding the contract, governed by California law, provided for such fees.
On the second appeal to the Federal Circuit in April 2025, liability for misappropriation of trade secrets and breach of contract were not in dispute. Only damages. The Federal Circuit substantially affirmed the District Court’s monetary awards, except for the pre-judgment interest calculation.
First, the Federal Circuit affirmed the District Court’s disgorgement award. If affirmed the 26-month head-start period Intersil enjoyed after it stole TAOS’s trade secrets, but measured the period from February 2005 to April 2007. The Court agreed that sales of Primary Products after April 2007 were recoverable because Apple approved the designs in September 2006, during the head-start period, and the sales followed directly from Apple’s approval. The Court also agreed that all the Primary Products profits were attributable to the misappropriation of TAOS’s trade secrets that occurred during the head-start period.
Second, the Federal Circuit affirmed the reasonable royalty damages award. It first rejected Intersil’s argument the award resulted in an impermissible double recovery, holding that the disgorgement remedy related solely to sales of Primary Products sales and the reasonable royalty remedy related solely to sales of Derivative Products.
Third, the court held that TAOS had a reasonable expectation of compensation in the form of a reasonable royalty for the breach, and it rejected Intersil’s argument that the royalty award was unjustified because it was undisputed the Derivative Products did not actually embody the trade secrets. It held that it was sufficient that there was substantial evidence that Intersil used TAOS’s confidential information to develop the Derivative Products. The court found that, “[u]nder California law, a plaintiff may recover for the defendant’s breach of a confidentiality agreement not only if the defendant wholly incorporated the plaintiff’s contractually protected information into its own products, but also if the defendant used the plaintiff’s confidential information in the development or implementation of its own products.”
Fourth, the Federal Circuit affirmed the District Court’s ruling on exemplary damages and affirmed the District Court’s award of attorneys’ fees to TAOS, but reversed the District Court’s determination of pre-judgment interest and remanded the issue to the District Court for further calculation consistent with the appellate decision.
Notable Takeaways
First, when you prepare an agreement for a merger or other type of transaction that involves sharing technical information it’s important to negotiate terms that limit your exposure if a breach occurs. The terms may include a short confidentiality period, limits on liability, favorable choice of law provisions, and detailed forum selection provisions. Transactional lawyers should consult civil litigators – particularly those well versed in IP law – to consider hypothetical scenarios that could play themselves out if the transaction does not close. You would be wise indeed to avoid so-called standard agreements. They’re a trap for the unwary.
Second, when you evaluate the risks of the transaction you and your attorney should consider, and even expect, that a bona fide claim for breach of a confidentiality provision in a contract that protects the intellectual property embodied in a party’s technology is likely to be accompanied by a trade secret misappropriation claim. It’s a given. This significantly increases the risks of legal exposure because of the enhanced tort remedies available for misappropriation.
Third, a smart plaintiff’s lawyer will plead all of the claims that in good faith she can plead. To do otherwise, would be malpractice. The claims will include both contract and tort claims, and the complaint will request a jury trial. Jurors persuaded that a breach of contract has occurred are likely to be persuaded that misappropriation of trade secrets – or theft of other forms of intellectual property – has occurred too, particularly when the breach is egregious or clearly intentional, and the economic harm or unjust enrichment can be traced to the breach.
Fourth, an ounce of prevention is worth a pound of cure. Involve your attorney in the negotiations of important transactions early so she can advise you on the steps you should take to avoid or minimize the risks of intellectual property theft and almost certain litigation. She may be able to save you a lot of money. A lot.
About Finkel Law Group
Finkel Law Group, with offices in San Francisco and Oakland, has almost 30 years of experience representing plaintiffs and defendants in commercial contract and intellectual property litigation in federal and state court, including trade secret litigation. When your company needs intelligent, insightful, conscientious and cost-effective legal counsel to assist you with a lawsuit involving the defense or prosecution of your trade secrets, please contact us at (415) 252-9600, (510) 344-6601, or info@finkellawgroup.com to speak with one of our attorneys about your matter.