International Medical Devices, Inc. et al v. Robert Cornell et al

Filing 698

ORDER RE: PLAINTIFFS POSTTRIAL MOTION FOR AWARD OF REASONABLE ROYALTIES, DISGORGEMENT, STATUTORY DAMAGES, PREJUDGMENT INTEREST, AND EXEMPLARY DAMAGES, (668) by Judge Consuelo B. Marshall: Accordingly, the Court GRANTS in part Plaintiffs Motion as fol lows: - for the CUTSA violation and Dr. Cornells breach of the NDA, a reasonable royalty in the amount of $5,772,044, plus exemplary damages in the amount of $11,544,088; - for the use of a counterfeit mark claim, statutory damages in the a mount of $1,000,000. The Court DENIES in part Plaintiffs Motion for disgorgement of $325,000. Plaintiffs are ordered to prepare a proposed judgment consistent with this Order and the Order re Motion for Permanent Injunction, and file the same with the Court no later than April 30, 2024. IT IS SO ORDERED. (shb)

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O 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 INTERNATIONAL MEDICAL DEVICES, INC.; et al., 12 Plaintiffs, 13 v. 14 ROBERT CORNELL, MD, an individual; et al., 15 Defendants. 16 Case No.: 2:20-cv-03503-CBM (RAOx) ORDER RE: PLAINTIFFS’ POSTTRIAL MOTION FOR AWARD OF REASONABLE ROYALTIES, DISGORGEMENT, STATUTORY DAMAGES, PREJUDGMENT INTEREST, AND EXEMPLARY DAMAGES. (668) 17 18 The matter before the Court is Plaintiffs’ Post-Trial Motion for Award of 19 Reasonable Royalties, Disgorgement, Statutory Damages, Prejudgment Interest, 20 and Exemplary Damages. (Dkt. No. 668 (the “Motion”).) The Motion is fully 21 briefed. (Dkt. Nos. 772, 777.) I. 22 23 24 A. BACKGROUND The Complaint On April 15, 2020, Plaintiffs International Medical Devices, Inc. (“IMD”), 25 Menova International, Inc. (“Menova”) and James Elist, MD (“Dr. Elist”) 26 (collectively, “Plaintiffs”) brought this suit against Defendants Robert Cornell, 27 MD (“Dr. Cornell”); Robert J. Cornell M.D., P.A.; Augmenta, LLC; AM 28 Founders, LLC; Augmenta Investors, LLC; Jonathan Clavell Hernandez, MD; 1 1 Clavell Urology, LLC; OAM LLC; Cornell Cosmetic Urology, LLC; David Louis 2 Nichols; Huck Medical Technologies, Inc.; Hans Mische; Hans Mische, LLC; Run 3 Wang, MD; RW Global Men’s Health Consulting Services, PLLC; Capital 4 Urology Associates, LLC; Richard B. Finger; and LATA Lignum LLC 5 (collectively the “Defendants”). (Dkt. No. 1.) The First Amended Complaint 6 (“FAC”) asserts the following claims: (1) Misappropriation of Trade Secrets 7 under Defend Trade Secrets Act (“DTSA”), 18 U.S.C. §§ 1836 et seq. (against all 8 Defendants); (2) Misappropriation of Trade Secrets under Cal. Uniform Trade 9 Secrets Act (“CUTSA”), Cal. Civ. Code §§ 3426 et seq. (against all Defendants); 10 (3) RICO under 18 U.S.C. § 1962(c) (against all Defendants); (4) RICO under 18 11 U.S.C. § 1962(d) (against all Defendants); (5) Trademark Infringement under 15 12 U.S.C. §§ 114, 1125(a) (against. Dr. Cornell, the Cornell PA, Dr. Clavell, and the 13 Clavell PA); (6) Counterfeit Mark under 15 U.S.C. § 1117 (against Dr. Cornell, 14 the Cornell PA, Dr. Clavell, and the Clavell PA); (7) Copyright Infringement 15 under 17 U.S.C. § 501 (against Drs. Cornell, Mische, and Nichols); (8) Breach of 16 Contract (against Dr. Cornell and Dr. Wang); (9) Breach of Contract (against Dr. 17 Wang); (10); Breach of Covenant of Good Faith and Fair Dealing (against Dr. 18 Cornell and Dr. Wang); (11) Violation of California’s Unfair Competition Law 19 (“UCL”), Cal. Bus. & Prof. Code § 17200 (against all Defendants); (12) 20 Declaratory Relief (against all Defendants); (13) False Advertising under 15 21 U.S.C. § 1125(a) (against Dr. Cornell and Augmenta, LLC). (Dkt. No. 96.) 22 B. The Preliminary Injunction 23 On January 1, 2021, the Court issued a preliminary injunction precluding 24 Defendants from (1) using or disclosing Plaintiffs’ trade secret information; (2) 25 commercializing, marketing, advertising, promoting, offering for sale, and/or 26 profiting from the Augmenta implant, U.S. Patent No. 10413413 (“’413 Patent”), 27 and Patent Application No. 16/238,821 (“’821 Application”); (3) referencing, 28 mentioning, promoting, advertising, marketing and/or using the Penuma mark in 2 1 commerce; and (4) acting in a way likely to cause confusion, mistake, or 2 deception on the part of consumers as to the origin or sponsorship of Penuma. 3 (Dkt. No. 138.) 4 C. 5 The injunction remains in full force and effect. (Id.) Summary Judgment/Adjudication On September 14, 2021, Defendants filed a motion for summary judgment 6 on all of Plaintiffs’ claims. (Dkt. No. 253.) The Court granted Defendants’ 7 Motion as to Plaintiffs’ Tenth Cause of Action for breach of the covenant of good 8 faith and fair dealing and dismissed the claim. (Dkt. No. 527.) The Court also 9 granted Defendants’ Motion as to Plaintiffs’ Eighth Cause of Action for breach of 10 the nondisclosure agreement against Dr. Run Wang. The Court otherwise denied 11 the Motion. (Dkt. No. 527 at 28.) 12 On September 14, 2021, Plaintiffs filed a motion for summary adjudication 13 on their trademark (Fifth Cause of Action), counterfeit (Sixth Cause of Action), 14 copyright (seventh cause of action), breach of contract (Eighth and Ninth Causes 15 of Action), and good faith and fair dealing claims (Tenth Cause of Action). (Dkt. 16 No. 254.) The Court granted Plaintiff’s Motion as to the Seventh Cause of Action 17 for copyright infringement and held that Plaintiffs are “entitled to damages and 18 permanent injunctive relief” as to that cause of action. (Dkt. No. 528 at 19.) The 19 Court also granted Plaintiffs’ motion as to the Ninth Cause of Action for breach of 20 the Consulting Services Agreement1 against Dr. Wang.2 (Dkt. 528 at 24-25.) The 21 Court otherwise denied the Motion. (Id.) 22 D. 23 Damages Prior to trial, by stipulation, the parties agreed that the Court, not the jury, 24 25 26 27 28 On October 6, 2017, Dr. Wang entered into a Consulting Services Agreement with IMD, and served on IMD’s board of advisors until August 2020. In February 2020, Dr. Elist discovered that Dr. Wang was listed as a CEO of Augmenta on Augmenta’s website. (Dkt. No. 528.) 2 At trial, Plaintiffs elected to pursue nominal damages on this claim, which the jury awarded in the amount of $1. (Dkt. No. 649 at 7.) 1 3 1 would consider harm and the appropriate compensation of Plaintiffs related to 2 trade secret liability and Dr. Cornell’s breach of the non-disclosure agreement. 3 (Dkt. No. 599.) Specifically, the Parties agreed that, as Plaintiffs were unable to 4 prove or quantify damages with particularity as to these claims, the Court would 5 consider a reasonable royalty award if the jury found liability on either of these 6 claims. (Id. at 1-3.) The parties also agreed that the Court would determine 7 trademark infringement damages, pursuant to Fifty-Six Hope Rd. Music, Ltd. v. 8 A.V.E.L.A., Inc., 778 F.3d 1059, 1075 (9th Cir. 2015), which held that a 9 disgorgement award is equitable. 10 E. 11 Trial and Jury Verdict On June 16, 2023, this case proceeded to trial. The jury found in favor of 12 Plaintiffs for: (1) misappropriation of four of Plaintiffs’ trade secrets under the 13 California Uniform Trade Secrets Act (“CUTSA”), (2) infringement of Plaintiff 14 Menova’s registered trademark (the “Penuma Mark”), (3) use of a counterfeit 15 Penuma Mark, (4) infringement of Plaintiffs’ copyrighted video, and (5) breach of 16 the Non-Disclosure Agreement (“NDA”) by Dr. Cornell. (Dkt. No. 649.) The 17 jury also found invalid, by clear and convincing evidence, two patents issued to 18 certain Defendants. (Id.) The jury awarded Plaintiffs $1,650 for Defendants’ 19 copyright infringement of a Penuma informational video based on an invoice for 20 the creation of the video. (Id. at 6, Trial Ex. 314.) The jury also awarded nominal 21 damages for Dr. Wang’s breach of the Consulting Services Agreement. (Dkt. No. 22 649.) 23 F. 24 Evidentiary Hearing On October 25, 2023, the Court held an evidentiary hearing on Plaintiffs’ 25 Motion. (Dkt. No. 690.) During the evidentiary hearing, experts for both parties 26 testified, exhibits were received into evidence, and Jonathan Elist testified 27 regarding IMD’s damages. (Dkt. No. 671.) Plaintiffs seek the following: (1) 28 reasonable royalties in the amount of $14,668,744 for the Second Cause of Action 4 1 for trade secret misappropriation under the California Uniform Trade Secrets Act 2 (“CUTSA”), Cal. Civ. Code §§ 3426 et seq. (plus exemplary damages up to two 3 times the royalty award for willful and malicious misappropriation); (2) 4 reasonable royalties in the amount of $14,668,744 for the Eighth Cause of Action 5 for breach of contract against Dr. Cornell; (3) disgorgement of profits in the 6 amount of $325,000 under the Fifth Cause of Action for trademark infringement, 7 to be trebled, including prejudgment interest; and (4) $1,000,000 in statutory 8 damages for offering services under a counterfeit mark pursuant to the Sixth 9 Cause of Action. (Dkt. No. 668.) 10 II. 11 12 13 A. DISCUSSION Reasonable Royalty Award for Defendants’ Violation of CUTSA and Dr. Cornell’s Breach of the NDA A reasonable royalty award under CUTSA is “a court-determined fee 14 imposed upon a defendant for his or her use of a misappropriated trade secret.” 15 Ajaxo, Inc. v. E*Trade Fin. Corp., 187 Cal. App. 4th 1295, 1308 (2010). “When 16 calculating a monetary remedy for the past use of a misappropriated trade secret, a 17 court ‘may order’ reasonable royalties ‘[i]f neither damages [for actual loss] nor 18 unjust enrichment caused by misappropriation are provable.’” Id. (quoting Cal. 19 Civ. Code § 3426.3(b)) (alteration in original). Under CUTSA, the relevant time 20 period for calculating a royalty award must be “no longer than the period of time 21 the use [of the trade secret] could have been prohibited.” Cal. Civ. Code § 22 3426.3(b); see also Univ. Computing Co., v. Lykes-Youngstown Corp., 504 F.2d 23 518, 534 (5th Cir. 1974) (“Unlike a patent which is totally protected for the period 24 of time for which it is granted, the protection afforded a trade secret is limited— 25 for it is protected only so long as competitors fail to duplicate it by legitimate, 26 independent research.”). 27 28 A reasonable royalty should approximate “the price that would be set by a willing buyer and a willing seller for the use of the trade secret made by the 5 1 defendant.” Ajaxo, Inc., 48 Cal. App. 5th at 160 (quoting Rest.3d Unfair 2 Competition (1995) § 45, com. G, p. 518.) The proper measure of the royalty, 3 then, is “what the parties would have agreed to as a fair price for licensing the 4 defendant to put the trade secret to the use the defendant intended at the time the 5 misappropriation took place.” Ajaxo, Inc., 48 Cal. App. 5th at 161 (quoting Univ. 6 Computing Co., 504 F.2d at 539. Overall, the hypothetical negotiation inquiry 7 “offers no promise of mathematical precision” but is instead meant to provide 8 “flexibility [that] is consistent with the policies underlying trade secret 9 protection.” Ajaxo, Inc., 48 Cal. App. 5th at 161-62. The hypothetical negotiation 10 framework is commonly employed to assess reasonable royalty damages in 11 intellectual property litigation, including matters involving the misappropriation of 12 trade secrets. Id. 13 1. Mr. Arst’s Expert Opinion 14 Plaintiff’s expert, Kevin Arst, is a senior managing director of Ankura 15 Consulting Group, Inc., which helps its clients including corporations, law firms, 16 government entities, and investors – understand and evaluate financial aspects of 17 intellectual property. (Declaration of Kevin Arst (“Arst Decl.”), Dkt. No. 668-1, ¶ 18 3.)3 Mr. Arst has been a consultant focused on financial issues pertaining to 19 intellectual property since 1999. (Id. at ¶ 4.) Mr. Arst is also a Certified Public 20 Accountant licensed in the State of California, Certified in Financial Forensics 21 (“CFF”) by the American Institute of Certified Public Accountants (“AICPA”), 22 and a Certified Licensing Professional (“CLP”). (Id. at ¶ 5.) Mr. Arst has been 23 named one of the World’s Leading IP Strategists by Intangible Asset Management 24 and served as an Officer of the Licensing Executives Society United States & 25 Canada (“LES”), one of the U.S.’s largest IP trade associations. (Id.) He is also a 26 past Chair of the Valuation and Taxation Committee of the LES. (Id.) 27 28 3 The Court admitted Mr. Arst’s Declaration into evidence at the Evidentiary Hearing on October 25, 2023. 6 1 Mr. Arst applied a hypothetical negotiation framework to determine a 2 reasonable royalty for licensing Plaintiffs’ trade secrets. Mr. Arst set forth the 3 following in structuring the hypothetical negotiation: 4 IMD expected the trade secret and other confidential information that it provided to Cornell under the breached contract would remain confidential and would not be disclosed or used by Cornell and the other Defendants to raise capital and develop a competitive medical implant product. However, IMD’s trade secret and confidential information was used to develop the competitive Augmenta implant and was used as the basis for Cornell’s patent applications (which resulted in the issuance of two patents), which publicly disclosed Plaintiff IMD’s trade secrets. An owner of intellectual property in IMD’s position would reasonably expect a third party wishing to use that intellectual property to seek a license to do so, as is typical in matters involving technology transfer. 5 6 7 8 9 10 (Arst. Decl. at ¶ 43.) 11 Mr. Arst testified that the hypothetical negotiation framework generally 12 assesses the amount that a willing licensor and a willing licensee would have 13 agreed upon for a license of intellectual property. (Id.) He stated that parties to 14 the hypothetical negotiation would have reasonably foreseen the risk that the 15 hypothetical license would pose to IMD including licensing a competing business. 16 (Id.) 17 To determine the appropriate reasonable royalty, Mr. Arst considered the 18 following factors: (1) the date of, and parties to, the hypothetical negotiation; (2) 19 the structure of the hypothetical license; (3) the factors set forth in Univ. 20 Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 539 (5th Cir. 1974)4 21 and their influence on the hypothetical negotiation; (4) the cost, market, and 22 23 24 25 26 27 28 University Computing Co. v. Lykes-Youngstown Corp. set forth the following factors for calculating a fair licensing price (1) the resulting and foreseeable changes in the parties' competitive posture; (2) what prices past purchasers or licensees may have paid; (3) the total value of the secret to the plaintiff, including the plaintiff's development costs and the importance of the secret to the plaintiff's business; (4) the nature and extent of the use the defendant intended for the secret; and (5) finally whatever other unique factors in the particular case which might have affected the parties' agreement, such as the ready availability of alternative processes. 504 F.2d at 539. 4 7 1 income valuation methodologies; and (5) the bargaining strengths of the licensor 2 and licensee. (Id.) 3 Mr. Arst ultimately applied an Income Approach to calculate the reasonable 4 royalty. (Id.) While he considered other accepted valuation methodologies 5 including the Cost Approach and the Market Approach, he ultimately concluded 6 that the evidence does not support using these methodologies. (Id.) The Income 7 Approach is a method of determining net present value of anticipated future cash 8 flow. Mr. Arst considered the following in applying the Income Approach: (1) 9 Deendants’ expectations of the revenues and profits for Augmenta; (2) 10 Augmenta’s anticipated revenues and profits that could be reasonably attributed to 11 the misappropriated trade secrets; and (3) converting the revenues to a present 12 value lump-sum royalty using an appropriate discount rate based on the risk 13 involved in the project. (Id. at ¶ 110). 14 To assess Dr. Cornell’s expectations of Augmenta’s revenues, Mr. Arst 15 relied on a financial forecast detailing the first five years of the Augmenta 16 implant’s commercial launch prepared by Dr. Cornell and Mr. Richard Finger5 in 17 June 2018. (Arst. Decl. at ¶ 111; Trial Ex. 215.) The June 2018 forecast 18 anticipated approximately $182 million in revenue in the first five years of 19 Augmenta’s commercial launch. (Id.) Mr. Arst considered additional financial 20 forecasts for Augmenta circulated in October and December 2018 which projected 21 similar revenue amounts. (Trial Ex. 6-41.) In October 2020, another forecast 22 indicated approximately $347 million in revenue for Augmenta over a ten-year 23 period. (Trial Ex. 76-046.) 24 25 To assess a royalty rate that would capture the portion of the Augmenta implant’s anticipated revenues and profits that could be reasonably attributed to 26 27 28 5 Mr. Richard Finger is the owner of Lata Lingum, which holds an indirect interest in Augmenta LLC, and had a role in developing the financial forecasts included in the Confidential Offering Memoranda of Augmenta Investors LLC. 8 1 the misappropriated trade secrets, Mr. Arst considered two transactions. The first 2 was a negotiation between IMD and Fort Washington Pharma in 2016 involving a 3 license. (Trial Ex. 415.) Fort Washington Pharma was to make an upfront cash 4 payment of $5 million and additional cash payments amounting to $25 million 5 over the following four years. (Id.) Mr. Arst also considered the royalty rates and 6 payments set forth in the document entitled “Penuma Term Sheet” to calculate a 7 30% royalty rate. (Arst. Decl. at ¶ 120.) The second transaction was between 8 OAM LLC6 and Augmenta LLC. (Trial Ex. 206-008-10.) OAM LLC received 9 15% of the membership units of Augmenta LLC in exchange for its contribution 10 of “preliminary designs, provisional patent application, and any other intellectual 11 property.” (Id.; Arst Decl. at ¶ 118.) Based on the two transactions, Mr. Arst 12 concluded that 20% of the Augmenta implant’s anticipated sales and profits could 13 be reasonably attributed to IMD’s trade secrets which served as the basis for the 14 design and anticipated market entry of the Augmenta implant. (Id.) 15 As for the duration of the license, Mr. Arst proposed a ten-year term based 16 on Defendants’ expected use of the licensed trade secrets. Mr. Arst also 17 considered Augmenta’s October 2020 ten-year forecast of sales, IMD’s 2016 18 Penuma Term Sheet which specified royalty payments for more than ten years, 19 and the 20-year legal life of Defendants’ patents. (Id. at ¶114.) Mr. Arst applied 20 the 20% royalty rate to Augmenta’s June 2018 forecasted revenues which yielded 21 a nominal royalty stream of $187.2 million over a ten-year period. (Id. at ¶ 131.) 22 Mr. Arst converted the $187.2 million to a present value, lump-sum royalty by 23 using a 35% discount rate,7 which he determined to be an appropriate rate for a 24 25 26 27 28 6 OAM LLC is a limited liability company formed by Dr. Cornell who is a 60 percent member and Mr. Mische who is a 40 percent member. It was responsible for developing designs and IP for Augmenta LLC and is a five percent member of Augmenta, LLC. 7 Mr. Arst used a 35% discount rate based on guidance provided by “Valuation and Dealmaking of Technology Based Intellectual Property” which indicates a 359 1 project like Augmenta due to its use of new technology. (Id. at ¶ 132.) Mr. Arst 2 also applied a 1% risk factor to account for the risk that Augmenta would not get 3 FDA approval. (Id. at ¶¶ 135-141.) 4 Mr. Arst prepared the chart below, entitled “Present Value of Royalties 5 from Augmenta Revenues” which is attached to his declaration as Exhibit C. 6 (Dkt. No. 668-4.) The chart provides a reasonable royalty calculation for years 7 one through ten, after applying the 20% royalty rate and the discount factors. (Id.) 8 Mr. Arst calculated a lump-sum, present value royalty of $14,668,744, after 9 applying a $772,039 discount to remove the value of Plaintiffs’ withdrawn trade 10 secret related to antibacterial agents.8 (Id. at ¶¶ 135-145.) 11 12 13 14 15 16 17 18 2. Dr. Hatch’s Expert Opinion 19 Defendants’ expert, Dr. John Hatch works for Applied Economics 20 Consulting Group. which conducts economic and financial analysis for clients 21 across several industries. (Trial Tr. 174:10-11.) Dr. Hatch works on valuation 22 related to civil litigation damages, including valuations of intellectual property. 23 24 25 26 27 28 40% discount rate for “very high risk, such as making a new product with new technology to a new segment.” (Id. at ¶ 130). 8 Plaintiffs withdrew their allegation that Defendants misappropriated the concept of using antibacterial or anti-microbial coating in a cosmetic penile implant. (Dkt. No. 249.) Thus, the Court issued an Order precluding Mr. Arst from opining on damages for concepts that are not alleged as misappropriated trade secrets in this case. (Dkt. No. 539.) 10 1 (Id. at 174:13-17.) He has been involved in eighteen publications pertaining to 2 valuation topics, including valuing businesses, minority interests, intangible 3 assets, and intellectual property. (Id. at 174:21-175:1.) 4 Dr. Hatch opined that Mr. Arst’s reasonable royalty suffers from the 5 following flaws: (1) use of a ten-year royalty term; (2) application of the income 6 approach; (3) use of Augmenta’s “speculative” forecast; and (4) use of an over- 7 inflated royalty rate calculation. (Trial Tr. 223:23-224:3.) Dr. Hatch opined that 8 ten-years is greater than the period of time during which IMD could have 9 prohibited Dr. Cornell from using the trade secrets, because it exceeds the period 10 of the NDA. (Id.) He further opined that during the hypothetical negotiation, the 11 licensor would not require the licensee to pay a royalty to use trade secrets that 12 would expire after an NDA. (Id. at 179:9-13.) 13 Dr. Hatch criticized Mr. Arst’s use of the income approach on the basis that 14 there have been no sales of the Augmenta to date due to the preliminary injunction 15 entered in this case. (Trial Tr. 175:21-25.) Since there has been no revenue to 16 which one could apply a royalty rate, Dr. Hatch opined the income approach 17 yields a royalty of zero. (Id. at 177:7-12.) Dr. Hatch further criticized Mr. Arst’s 18 use of Augmenta’s “speculative” forecast because it did not exist at the time of the 19 hypothetical negotiation. He opined that the correct method is to use actual results 20 to replace forecasts or assumptions that were present at the time of the 21 hypothetical negotiation, and under the circumstances presented here, the results 22 would be zero since there have been no sales of Augmenta. (Id. at 182:15-19.) 23 Dr. Hatch testified that during the hypothetical negotiation, the parties would have 24 used IMD’s operating margin as informative of the royalty agreement. (Id. at 25 184:2-185:12.) He stated that Mr. Arst over inflated the royalty rate calculation 26 by focusing on the unrealized operating margin in Augmenta’s forecast. (Id. at 27 187:21-188:1.) He also criticized Mr. Arst’s consideration of the Penuma Term 28 Sheet in calculating the royalty rate because the terms of that license were not 11 1 agreed upon. (Id. at 189:16-190:5.) 2 Dr. Hatch used the Market Approach to propose a reasonably royalty model 3 based on the following: (1) OAM LLC’s transfer of all intellectual property 4 related to the Augmenta design to Augmenta LLC “in exchange for 15% of the 5 membership units” in Augmenta, LLC (Trial Ex. 206); and (2) Lata Lingum’s9 6 $300,000 contribution to Augmenta LLC in exchange for an indirect 37.4% 7 ownership interest. (Trial Tr. 201:12-203:13.) Based on these two “arm’s length” 8 transactions, Dr. Hatch calculated the value of OAM LLC’s 15% equity interest in 9 Augmenta LLC to be $136,405. (Trial Tr. 204:23-24.) Dr. Hatch opined that the 10 value of the trade secrets is 60% of OAM’s total interest of $136,405, which is 11 $81,843. (Id. at 206:21-25.) Dr. Hatch alternatively calculated a lump-sum 12 royalty rate using a running royalty rate of 4.5% for a five-year term, based on 13 IMD’s operating margin in 2017. (Id. at ¶ 231:10-233:18.) Using the same 14 discount rate and parameters as Mr. Arst, Dr. Hatch proposed a lump-sum royalty 15 of approximately $180,000. (Id. at ¶ 217:19-22.) 16 3. The Court’s Findings re Reasonable Royalty 17 It is undisputed that IMD and Defendants are direct competitors of cosmetic 18 penile implants. In October 2018, Defendants prepared and circulated a 19 Confidential Offering Memorandum from Augmenta Investors LLC which 20 informed prospective investors that “the success of our business will depend, in 21 significant part, on . . . preserving our trade secrets.” (Trial Ex. 6-020.) The nature 22 and extent of Defendants’ use of IMD’s trade secrets weighs in favor of a 23 reasonable royalty higher than that proposed by Dr. Hatch. The genesis of the 24 Augmenta Implant was the March 30, 2018 training Dr. Cornell attended with Dr. 25 Elist where he observed Dr. Elist perform four Penuma implant procedures. (Jury 26 27 28 9 AM Founders LLC held the remaining 85% ownership interest in Augmenta LLC. Richard Finger owned Lata Lignum LLC which partly owned AM Founders LLC. 12 1 Trial Tr. 1190:21-1191:8.) Dr. Cornell used the trade secrets as a basis for the 2 provisional patent application he filed less than four month later. (Trial Exs. 29, 3 78.) 4 The period of time during which the use of the trade secrets could have 5 been prohibited is five years based on the duration of the NDA Dr. Cornell signed 6 on March 30, 2018. (Trial Ex. 14.) Therefore, Plaintiffs are entitled to a royalty 7 award that is limited to a five-year period. The Court calculates the reasonable 8 royalty rate based on Mr. Arst’s calculations, after applying the 20% royalty rate 9 and the discount factors as set forth in Exhibit C to his declaration. (Dkt. No. 668- 10 4.) The sum of years one through five is $6,544,083. The Court subtracts 11 $772,039 to account for the withdrawn trade secret related to antibacterial agents. 12 Thus, the Court awards Plaintiffs a reasonable royalty of $5,772,044. 13 B. 14 Exemplary Damages “If willful and malicious misappropriation exists, the court may award 15 exemplary damages in an amount not exceeding twice” the amount of the 16 reasonable royalty. Cal. Civ. Code § 3426.3(c). Plaintiffs seek exemplary 17 damages on the basis that Defendants’ trade secret misappropriation was “willful 18 and malicious.” Malice may be proven either expressly by direct evidence 19 probative of the existence of ill-will, or by implication from indirect evidence. 20 Neal v. Farmers Ins. Exch., 21 Cal.3d 910, 923 n.6 (1978); Ajaxo Inc., 135 Cal. 21 App. 4th at 66-67. 22 To support an award for exemplary damages, Plaintiffs cite to Dr. Cornell’s 23 April 23, 2018 email to Mr. Mische asking if there was anything in the NDA 24 requiring that Cornell stay “under the radar on the patent, etc.” (Jury Trial Tr. 25 1254:1-25; Trial Ex. 17.) Plaintiffs contend that this email reveals Dr. Cornell’s 26 state of mind that “he needed to go undetected because he was violating the law.” 27 Moreover, while raising funds to commercialize Augmenta, Augmenta Investors 28 LLC included the following in its Offering Memorandum: “Dr Elist may threaten 13 1 or commence litigation relating to intellectual property rights.” (Jury Trial Tr. 2 1061:20-1065:2; Trial Ex. 6, 206.) Plaintiffs also contend that Dr. Cornell “raced 3 to the USPTO to apply for a patent based on some of the misappropriated trade 4 secrets.” 5 Dr. Cornell attended the training with Dr. Elist on March 30, 2018, and 6 signed the NDA that same day. (Trial Ex. 14.) Within days, Dr. Cornell began 7 working on a provision patent application for a cosmetic penile implant, which 8 was filed on July 23, 2018—less than four month later after the training with Dr. 9 Elist. (Trial Ex. 17.) The Court finds the conduct in which the Defendants 10 engaged amounted to a willful and malicious misappropriation. See Mattel, Inc. v. 11 MGA Entm’t, Inc., 801 F. Supp. 2d 950, 954-55 (C.D. Cal. 2011) (granting $85 12 million exemplary damages award based on counter-defendant toy company’s 13 “nefarious tactics,” which included using “false pretenses to access competitors’ 14 private” information and using stolen “trade secret information to preempt 15 [counter-claimant’s] unreleased products[.]”). Accordingly, the Court awards 16 exemplary damages of $11,544,088—twice the reasonable royalty award. 17 C. Disgorgement for Trademark Infringement 18 Under the remedies provision of the Lanham Act, a court may award (1) the 19 defendant’s profits, (2) the damages sustained by the plaintiff, and (3) the costs of 20 the action. 15 U.S.C. § 1117(a). “[D]isgorgement of profits is a traditional 21 trademark remedy.” Jerry's Famous Deli, Inc. v. Papanicolaou, 383 F.3d 998, 22 1004-05 (9th Cir. 2004) (describing the remedy in enforcement of trademark 23 injunction cases, as “akin to an award of the infringer’s profits under trademark 24 law”). Disgorgement of profits “is intended to award profits only on sales that are 25 attributable to the infringing conduct.” Lindy Pen Co., Inc. v. Bic Pen Corp., 982 26 F.2d 1400, 1408 (9th Cir. 1993). 27 Plaintiffs request that the Court order disgorgement of the $325,000 Dr. 28 Cornell received for “design and development” of Augmenta, which included 14 1 “development, regulatory clearance and marketing of the Product.” (Trial Ex. 2 206.) In support of this, Plaintiffs contend that Dr. Cornell’s “‘marketing’ 3 consisted of brazenly using the name and goodwill of a competitor to confuse and 4 steal patients and help entice investors.” However, the $325,000 received for 5 “design and development” does not amount to profits that are subject to 6 disgorgement. See Grasshopper House, LLC v. Clean & Sober Media, LLC, 2021 7 WL 3702243, at *2 (9th Cir. Aug. 20, 2021) (“Disgorgement is limited to ‘the 8 financial benefit [defendant] received because of the advertising.’”) (quoting U- 9 Haul Int'l, Inc. v. Jartran, Inc., 793 F.2d 1034, 1042 (9th Cir. 1986).) 10 Accordingly, the Court DENIES Plaintiffs’ Motion for disgorgement of $325,000. 11 D. 12 Statutory Damages for Use of a Counterfeit Mark The jury found that Defendants Cornell and Cornell PA infringed upon and 13 counterfeited the registered Penuma Mark. As a result, Plaintiffs seek statutory 14 damages in the amount of $1 million. In counterfeit mark cases, a plaintiff may 15 elect an award of statutory damages for “any such use in connection with the sale 16 [or] offering for sale. . . of goods or serves.” 15 U.S.C. § 1117(c). District courts 17 have discretion in determining statutory damages, subject to the statutory 18 minimum ($1,000) and maximum ($200,000). 15 U.S.C. § 1117(c)(1). A finding 19 of willfulness subjects a defendant to an enhanced statutory maximum of 20 $2,000,000. 15 U.S.C. § 1117(c)(2). 21 Dr. Cornell advertised himself as a “Penuma penile enhancement specialist” 22 on his website and used the registered Penuma Mark, even though he knew he was 23 not an authorized Penuma specialist. (Trial Ex. 24.) Dr. Cornell continued to use 24 the Penuma trademark even after receiving two cease and desist letters from 25 Jonathan Elist. (Trial Exs. 25, 511.) Dr. Cornell also created a “waiting list” with 26 patient contact information for use once the Augmenta Implant was FDA 27 approved. (Trial Ex. 531.) Plaintiffs compiled a list of calls and website inquires 28 to Dr. Elist asking about Dr. Cornell’ availability for surgery, mentioning similar 15 1 procedures offered by Dr. Cornell, and inquiring whether Dr. Cornell offered the 2 same procedure as Penuma. (Trial Ex. 94A.) This is evidence that Dr. Cornell’s 3 use of the Penuma mark caused confusion among patients who thought Dr. 4 Cornell offered the Penuma implant and may have caused lost opportunities for 5 Plaintiffs. (Id., Jury Trial Tr. 1792:6-17.) Dr. Cornell knew he was not authorized 6 to use the Penuma mark or offer services related to Penuma. Thus, the Court 7 awards Plaintiffs $1 million in statutory damages for Defendants’ use of the 8 counterfeit mark. 9 III. CONCLUSION 10 Accordingly, the Court GRANTS in part Plaintiffs’ Motion as follows: x for the CUTSA violation and Dr. Cornell’s breach of the NDA, 11 12 a reasonable royalty in the amount of $5,772,044, plus 13 exemplary damages in the amount of $11,544,088;10 x for the use of a counterfeit mark claim, statutory damages in 14 15 the amount of $1,000,000. 16 The Court DENIES in part Plaintiffs’ Motion for disgorgement of 17 $325,000. Plaintiffs are ordered to prepare a proposed judgment consistent with 18 this Order and the Order re Motion for Permanent Injunction, and file the same 19 with the Court no later than April 30, 2024. 20 IT IS SO ORDERED. 21 22 DATED: March 28, 2024. 23 CONSUELO B. MARSHALL UNITED STATES DISTRICT JUDGE 24 25 26 27 28 10 To the extent the parties disagree with the Court’s calculation of the reasonable royalty, the parties shall request a hearing no later than April 5, 2024. The Court is available for a hearing to and including April 23, 2024. If there is no need for a hearing, the parties shall file a stipulation no later than April 5, 2024 advising the Court that no hearing is necessary. 16

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