The US Court of Appeals for the Fifth Circuit dismissed and remanded a district court certified interlocutory appeal concerning the standard for calculating a reasonable royalty under the Defend Trade Secrets Act (DTSA). The Court explained that the rate instruction issued by the district court was erroneous because the parties had not yet gone to trial and the plaintiff had not yet proven liability. Therefore, the issue of damages might never arise. Silverthorne Seismic, L.L.C. v. Sterling Seismic Servs., Ltd., Case No. 24-20006 (5th Cir. Jan. 3, 2025) (Smith, Clement, Higginson, JJ.) (Higginson, J., dissenting).
Silverthorne licensed seismic data to Casillas Petroleum Resource Partners II, LLC, an oil and gas exploration company. Under this arrangement, Silverthorne provided data to Sterling, a seismic data processer, which processed the data and sent it to Casillas. Because Sterling’s data processing required more data than what Casillas had paid for, Sterling was only permitted to forward the data that Casillas had licensed. However, Sterling sent Casillas unlicensed data, which Casillas allegedly showed to potential investors.
Silverthorne sued Sterling for trade secret misappropriation under the DTSA and sought reasonable royalties for Sterling’s improper disclosure. Shortly before trial, the district court issued an order adopting the Fifth Circuit’s definition of “reasonable royalty” in University Computing (1974), which, in this case, would have required Silverthorne to prove what the parties “would have agreed to for . . . use [of] the alleged trade secret.” University Computing predates the DTSA, which provides for reasonable royalties for “disclosure or use of a trade secret.” Silverthorne appealed the order, noting that it would not be able to prove what Sterling would have agreed to pay to use the data, since Sterling was a data processor and not an end user. The district court certified the following question for appeal:
[W]hether a plaintiff is entitled to prove reasonable royalty damages under the DTSA using willing buyer(s) detached from the parties to the litigation when willing buyers (here, oil and gas exploration companies) exist for plaintiff’s alleged trade secret (here, seismic data), but the defendant and comparable entities (here, seismic processors) do not buy or license that trade secret.
An administrative panel of the Fifth Circuit granted leave to appeal.
Majority Opinion
The Fifth Circuit dismissed the appeal as not involving a controlling question of law. The Court explained that interlocutory appeals are only permitted where an order involves a controlling question of law, the resolution of which would materially and immediately affect the outcome of litigation in the district court. The Fifth Circuit emphasized that a question is not controlling just because the answer would complicate a litigant’s ability to make its case or because the answer could save the parties from a post-judgment appeal. Applying these principles, the Court reasoned that damages issues generally do not control a case until the plaintiff establishes liability, unless the damages issue would be dispositive. Because Silverthorne had not yet established liability and was not barred from proving damages under the district court’s definition of “reasonable royalty,” the Fifth Circuit concluded that answering the certified question would not immediately and materially affect the outcome of the litigation. The Court thus vacated the order granting leave to appeal, dismissed the appeal for want of jurisdiction, and remanded for further proceedings without expressing an opinion as to the reasonable royalty standard.
Dissent
In dissent, Judge Higginson emphasized that the appeal was certified by a veteran district judge who felt compelled to adhere to outdated Fifth Circuit caselaw, and that a unanimous panel of Fifth Circuit judges agreed to revisit the issue and clarify the reasonable royalty standard under the DTSA. Despite this, the majority dismissed that grant as “imprudent” and returned the case to the lower court with no answer, almost a year later. Because the reasonable royalty standard was decisive for the litigation, and because University Computing was inconsistent with the DTSA, Judge Higginson stated that the Fifth Circuit should have answered the district court’s question.
Judge Higginson explained that the majority opinion was out of step with 28 U.S.C. § 1292(b), which gives the court significant discretion to address an isolated point of law “upon which in a realistic way the whole case or defense will turn” in order to avoid wasting judicial time and resources. Under this pragmatic approach, the case did pivot on the reasonable royalty standard, because it impacted the scope of evidence and the availability of testimony concerning Silverthorne’s damages. Judge Higginson also reasoned that discretion weighed in favor of finishing what the Fifth Circuit had started – to do otherwise would “amount[] only to ‘acquiescing in a useless trial and later appeal.’”
Turning to the certified question, the dissent explained that the DTSA authorizes reasonable royalties not just for the use of trade secrets, but also for disclosure. The district court’s application of University Computing, which limits reasonable royalties to commercial use, foreclosed this option. Judge Higginson also found that the district court erred in concluding that a party-specific hypothetical negotiation was the sole available measure of reasonable royalties. Rather, in Judge Higginson’s view, a court has discretion in selecting the methodology for arriving at a reasonable royalty under DTSA and may consider factors such as industry standards and prices paid by third parties.
