Rising employee mobility, remote work, and artificial intelligence pose unprecedented risks to organizations’ trade secrets, while litigation reaches record highs.¹ Amid this evolving legal landscape, University Computing Company v. Lykes-Youngstown Corporation continues to be cited in both state and federal courts. Recent opinions in Arxada Holdings NA Inc. v. Michael Harvey et al. and Trinseo Europe GmbH v. Harper et al. cite the University Computing decision more than fifty years after it was decided.^{2 3} In this article, we explore how damages experts should apply the factors outlined in the University Computing decision when performing reasonable royalty calculations.

In trade secret disputes, plaintiffs may seek damages in the form of lost profits, unjust enrichment, or reasonable royalties.^{4 5} When calculating reasonable royalties, experts seek “to reproduce the amount the defendant would have paid to license the plaintiff’s trade secrets in a hypothetical negotiation just before the misappropriation began.⁶” This approach requires experts to consider a range of factors, keeping both the plaintiff and defendant in mind.

A Flexible and Imaginative Framework

The United States Court of Appeals for the Fifth Circuit concluded in University Computing Company v. Lykes-Youngstown Corporation that “every case requires a flexible and imaginative approach to the problem of damages.⁷” The court identified five factors for experts to consider when determining reasonable royalties in trade secret disputes:

• Resulting and foreseeable changes in the parties’ competitive posture.
• Prices past purchasers or licensees may have paid.
• 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.
• Nature and extent of the use the defendant intended for the secret.
• Unique case-specific factors that might have affected the parties’ agreement, such as the ready availability of alternative processes.⁸

When applied rigorously, these factors allow experts to construct credible, fact-grounded hypothetical negotiations.

A Hypothetical

Assume the plaintiff alleges that the defendant misappropriated its trade secrets, used them to launch offerings identical to certain of the plaintiff’s product lines, and lured the plaintiff’s customers with lower prices. A damages expert could seek to construct a hypothetical negotiation that: (a) places the plaintiff, an established company, in a position to cede market share in exchange for royalties; and (b) enables the defendant, a startup, to make and sell products to a variety of customers. An expert for either party can apply the University Computing factors to structure the hypothetical negotiation.

Past Licensing Activity 

First, the expert should assess whether the plaintiff has ever licensed the trade secrets at issue. If so, those agreements can provide valuable benchmarks. Prior licensing terms can guide the hypothetical negotiation; disregarding them risks proposing terms that appear unrealistic compared with what either party has agreed to in the past.

An initial view might favor a lump-sum royalty to spare the plaintiff ongoing monitoring costs and to allow the defendant to benefit from outperforming its sales projections. However, if the plaintiff regularly licenses similar trade secrets and, as a matter of policy, agrees only to running royalties, the expert would likely apply a running royalty structure to the hypothetical negotiation.

Given the nature of trade secrets, many companies avoid licensing to preserve their competitive advantages. In such cases, the remaining University Computing factors offer additional avenues for the expert to explore.

Revenue: Competitive Posture, Importance to Plaintiff, and Defendant’s Intended Use

A damages expert should consider how each party expects its competitive posture to change and should quantify those expectations through revenue impacts. In this example, the expert can gauge the parties’ negotiating positions by projecting expected sales. 

On one side of the hypothetical negotiation is the defendant. As a startup, it plans to disrupt the market and to grow as quickly as possible. Business plans, if produced, can provide insight into how the defendant planned to use the trade secrets. Absent formal plans, the expert may glean the defendant’s intentions from contemporaneous evidence, such as emails about prospective customers, pricing strategies, and sales pipelines. All key assumptions must be anchored in reliable sources. In the hypothetical negotiation, the defendant would agree to pay a royalty only if it could generate enough sales to do so.

On the other side of the hypothetical negotiation is the plaintiff. As an established company, it values the trade secrets and expects to lose a portion of its market share if the defendant licenses them. The expert can estimate the plaintiff’s lost sales by comparing two scenarios: 

• Scenario 1: The plaintiff does not license the trade secrets and experiences stable sales growth.
• Scenario 2: The plaintiff licenses the trade secrets and experiences decreased sales as competition increases.

For Scenario 1, the plaintiff’s contemporaneous forecasts can provide a defensible foundation. Many companies forecast sales using historical data and assumed growth rates. The expert should assess these forecasts against the company’s historical sales and consider third-party industry growth estimates where appropriate.  

For Scenario 2, the expert should start with Scenario 1 and adjust for the competitive effects of the defendant’s entry and growth. If the expert assumes that the defendant would capture a portion of the plaintiff’s sales each year, that assumption must be grounded in facts and circumstances. Applying an arbitrary capture rate to the plaintiff’s total sales, particularly sales unrelated to the trade secrets, undermines credibility. Linking the trade secrets to at-risk revenue from specific product lines and customers is more defensible.

If Scenario 1 produces materially higher revenue than Scenario 2, the plaintiff would anticipate losing significant market share to the defendant and would demand a relatively high royalty. Conversely, if the defendant intends to target customers outside the plaintiff’s base, the two scenarios should converge. This implies a smaller revenue impact and supports a lower royalty. 

The expert must consider both parties to construct a reliable hypothetical negotiation. A plaintiff-only analysis that focuses on lost sales may misunderstand the defendant’s competitive position and its intended use of the trade secrets. A defendant-only analysis that focuses solely on the defendant’s business plan may ignore the plaintiff’s competitive position and the value it assigns to its intellectual property.

Costs: Value to the Plaintiff, Defendant’s Intended Use, and Alternative Processes

Although the parties may agree to a sales-based royalty, they would negotiate this royalty with profit in mind. To estimate profit, i.e., revenue less expenses, the expert should identify and quantify the incremental expenses each party would incur from using the trade secrets. 

First, the expert should challenge any assumption that the defendant will generate the same profit margins as the plaintiff using the trade secrets. Companies have different cost structures. A defendant with a smaller facility and less experience in applying the trade secrets will likely have higher unit costs. As a startup, it may also offer higher sales commissions to accelerate growth. These added costs compress margins and reduce the defendant’s capacity to absorb higher royalty rates. 

When refining the hypothetical negotiation, the expert should assess feasible alternative processes the defendant could use to manufacture comparable products. An alternative might save the defendant licensing fees but cost more to implement. If the alternative’s costs outweigh its benefits, the defendant remains economically motivated to license; if not, the expert must revisit the reasonable royalty terms. Lowering the royalty burden can shift the cost-benefit calculus in favor of licensing.

On the plaintiff’s side, operational data may show that it has honed its processes over time and manufactures products at-scale. The expert should identify which costs would decline if the plaintiff effectively shifted some production to the defendant’s facilities through a licensing agreement. If the plaintiff incurred substantial development costs to achieve its current capabilities, it may reasonably demand a higher royalty to recover that investment.

Conclusion

Experts often quantify trade secret damages using reasonable royalties. The University Computing framework provides five factors to guide a hypothetical negotiation between the plaintiff and the defendant. In this example, the expert applies these factors to the facts and circumstances of the case. The royalty increases as the defendant’s expected sales increase and the plaintiff’s expected sales decrease. However, it may decrease if the defendant’s margins are compressed by high manufacturing costs.

In practice, experts face more variables and uncertainty than this example presents. Rapid technological change and market dynamics add further complexity. Nevertheless, a careful application of the foregoing factors enables experts to avoid common pitfalls and deliver a well-supported, reliable opinion to the trier of facts.

The views and opinions expressed in this article are those of the authors.

References

1. Nicholas Schneider, “Examining Employee Mobility, Remote Work, and AI as Trade Secret Litigation Surges” Reuters, February 23, 2026. 

2. United States Court of Appeals, Fifth Circuit. Trinseo Europe GmbH v. Harper, et al., Published Opinion, January 21, 2026, p. 11, United States Court of Appeals for the Fifth Circuit, https://www.ca5.uscourts.gov/opinions/pub/24/24-20460-CV0.pdf.

3. Court of Chancery of the State of Delaware. Arxada Holdings NA Inc. v. Michael Harvey, et al., Post-Trial Opinion, January 28, 2026, p. 65, Court of Chancery of the State of Delaware, https://courts.delaware.gov/Opinions/Download.aspx?id=390650.

4. See 18 U.S.C. § 1836(b)(3)(B). United States, Congress, House. United States Code. Title 18, section 1836, Office of the Law Revision Counsel, May 1, 2026, uscode.house.gov/.

5. Plaintiffs may also seek damages under state laws. The expert should understand which remedies are available to the plaintiff under applicable laws. For example, the California Uniform Trade Secrets Act specifies: “If neither damages nor unjust enrichment caused by misappropriation are provable, the court may order payment of a reasonable royalty for no longer than the period of time the use could have been prohibited.”

California State Legislature. Civil Code. Section 3426.3. California Legislative Information, leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CIV&sectionNum=3426.3.

6. Court of Chancery of the State of Delaware. Arxada Holdings NA Inc. v. Michael Harvey et al., Post-Trial Opinion, January 28, 2026, p. 64, Court of Chancery of the State of Delaware, https://courts.delaware.gov/Opinions/Download.aspx?id=390650.

7. United States Court of Appeals, Fifth Circuit. University Computing Company v. Lykes-Youngstown Corporation, December 17, 1974, par. 69, Public.Resource.Org, https://law.resource.org/pub/us/case/reporter/F2/504/504.F2d.518.73-2688.html.