United States: "Head Start" Damages Affirmed Against Employee Who Started Competitor in China

Brandon H. Elledge is a Partner in our Tysons office.

An often sought remedy in trade secret cases is unjust enrichment, which Defend Trade Secrets Act (DTSA) and several uniform state trade secret acts permit plaintiffs to seek for the unlawful benefit received by defendants "that is not addressed in computing damages for actual loss." 18 U.S.C. 1836(b)(3)(B)(i)(II). In some instances, unjust enrichment may be the most coveted bucket of relief because it can yield the largest potential recovery. It can come in different forms depending on the jurisdiction and which benefit is sought to be disgorged. For example, unjust enrichment trade secret damages may be the profits received on a particular contract that a competitor bid on and won using your trade secrets. Another common unjust enrichment theory of recovery seeks the "costs savings" a competitor may have received in getting a product to market more quickly or efficiently by virtue of its misappropriation.

Earlier this month (in another trade secret dispute involving a Chinese-based competitor), the Court of Appeals in Sabre GLBL, Inc. v. Shan, 2019 WL 2880999 (3rd. Cir. July 3, 2019), affirmed the confirmation of a $1.1 million arbitration award that was based on "head start" unjust enrichment damages a competitor gained through a former employee's misappropriation. The arbitrator in the underlying proceeding notably had rejected the plaintiff's "cost savings" damages.

The case involved a former Sabre employee and consultant, Melody Shan a/k/a Shan Melody Xiaoyun. Shan worked for this Texas-based technology solutions provider to the tourism industry in various capacities in the United States and China for two decades. Sabre had a restrictive covenant agreement in place with Shan, which prohibited unauthorized disclosure and use of its confidential information and restricted certain competition and interference with its customers and employees for a post-termination period. While still employed at Sabre, Shan started and obtained a 68% ownership interest in a competing Chinese company, Pi-Solution Hangzhou, and began recruiting Sabre employees and customers for that company. In September 2014, Shan resigned from Sabre and returned to China, where she continued to work on her competing venture.

After Sabre discovered what happened and sued Shan, the parties ended up in arbitration proceedings. The arbitrator found Shan liable for violations of the New Jersey Trade Secrets Act (NJTSA) and breaches of fiduciary duty, among other claims. In addition to disgorgement of Shan's $200,000 salary earned during her disloyal employment period, the arbitrator awarded Sabre $1,173,318 in "head start" damages. Such damages were characterized as "the benefit Shan received from her misconduct based on her equity interest in Pi-Solution Hangzhou, which obtained an unlawful development and operations head start as a result of Shan's misconduct."

The accounting period for these types of unjust enrichment damages can be contested expert fights and may depend on the theoretical period of time by which the defendant could have acquired knowledge of the trade secret through legitimate means or on which the defendant could have successfully operated had no misappropriation occurred. In Sabre, the arbitrator found that the "Head start damages represent the benefit to Shan from the increase in Pi-Solution Hangzhou's value, as of December 31, 2014, as a result of the company's being two years further along than it otherwise would have been in developing and commercializing its products and services."

With respect how these "head start" damages were calculated, Sabre's expert based his valuation on what an actual outside investor was willing to pay for a certain percentage of the competing company Shan had set up. Then:

[Sabre's expert] first determined the incremental value of the head start to Pi-Solution Hangzhou by estimating the value of the company as of December 31, 2014, with and without the head start and taking the difference between the two. He then multiplied this figure by 68 percent, Shan's ownership interest in Pi-Solution Hangzhou, ... , to determine the amount Shan personally benefitted from her misappropriation and disloyalty. In this manner, [Sabre's expert] determined that the incremental value Pi-Solution Hangzhou received from the two-year head start was $1,725,467, and Shan's share of this incremental value was $1,173,318.

The Court of Appeals concluded that the arbitrator did not act in manifest disregard of the law by accepting this "head start" calculation.

In contrast to this valuation-based "head start" damages, the Court noted that "[s]aved development costs . . . represent the benefit to Shan from Pi-Solution Hangzhou's ability to avoid incurring certain research and development costs by using the confidential information and trade secrets Shan misappropriated rather than developing that information on its own." The Court held that the arbitrator's finding that Sabre failed to prove Pi-Solution Hangzhou's cost savings had no impact on the award of "head start" damages.

Even though Sabre applied the normal deferential standard to an arbitrator's ruling – "Arbitrators have wide latitude in how they conduct proceedings," as the Court noted – it serves as a good reminder not just to the harm a remotely working employee may do to a company's trade secrets, but of the various ways (depending on the jurisdiction) in which a plaintiff may seek unjust enrichment damages in a trade secret dispute. Indeed, Shan argued that "head start" damages were not legally permissible in this case under applicable law, but the Court of Appeals rejected that argument, recognizing that such law permitted plaintiffs "to adapt their damage theory to fit within the particular facts of the case."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions