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Damages

Message Received: Trade Secret Law Damages Available for Sales Outside US

by Amol Parikh | Jul 18, 2024 | Copyrights, Trade Secrets

The US Court of Appeals for the Seventh Circuit affirmed, in a matter of first impression, a district court’s decision to apply trade secret law extraterritorially and award trade secret damages for foreign sales while also finding that the copyright damages award needed to be reduced to eliminate foreign sales. Motorola Solutions, Inc. v. Hytera Communications Ltd., Case Nos. 22-2370; -2413 (7th Cir. July 2, 2024) (Hamilton, Brennan, St. Eve., JJ.)

Motorola Solutions and Hytera compete globally in the market for two-way radio systems. Motorola spent years and tens of millions of dollars developing trade secrets embodied in its line of high-end digital mobile radio (DMR) products. Hytera struggled to overcome technical challenges to develop its own competing DMR products. After failing for years, Hytera hatched a plan to “leap-frog Motorola” by stealing its trade secrets. Hytera, headquartered in China, hired three engineers from Motorola in Malaysia, offering them high-paying jobs in exchange for Motorola’s proprietary information. Before the engineers left Motorola, acting at Hytera’s direction, they downloaded thousands of documents and computer files containing Motorola’s trade secrets and copyrighted source code. Hytera relied on the stolen material to develop and launch a line of DMR radios that were functionally indistinguishable from Motorola’s DMR radios. Hytera sold these DMR radios in the United States and abroad.

Motorola sued Hytera for copyright infringement and trade secret misappropriation. The jury found that Hytera had violated both the Defend Trade Secrets Act of 2016 (DTSA) and the Copyright Act. The jury awarded compensatory damages under the Copyright Act and both compensatory and punitive damages under the DTSA for a total award of $765 million. The district court later reduced the award to $544 million, which included $136 million in copyright damages and $408 million in trade secrets damages. Hytera appealed.

Hytera conceded liability and instead challenged the damages award under both the Copyright Act and the DTSA. Among other things, Hytera argued that copyright and trade secret damages should not have been awarded for its sales outside the US. With respect to the copyright award, the Seventh Circuit agreed that Motorola failed to show a domestic violation of the Copyright Act and therefore was not entitled to recover damages for any of Hytera’s foreign sales of infringing products as unjust enrichment. Specifically, to show a domestic violation of the Copyright Act, Motorola had asserted that its code was copied from servers based in Chicago. While the district court accepted Motorola’s argument, the Seventh Circuit found that this factual finding lacked adequate support in the record, citing Motorola’s expert’s admission that there was no evidence of downloads from the Chicago servers. The Court instead found that given the location of the employees in Malaysia, it was likelier that the code was downloaded from Motorola’s Malaysia server. The Court therefore reversed the $136 million copyright award and remanded with instructions to limit the copyright award to Hytera’s domestic sales of infringing products.

The Seventh Circuit affirmed with respect to the trade secret award. Like the [...]

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Robbing Peter to Pay Paul? Supreme Court to Consider Scope of Lanham Act “Defendant’s Profit” Award

by Kathleen Lynch | Jul 11, 2024 | Cert Alert, Trademarks

The Supreme Court has agreed to consider the breadth of a damages award in a long-running trademark dispute between two real estate companies. Dewberry Group, Inc. v. Dewberry Engineers, Inc., Docket No. 23-900 (Supr. Ct. June 24, 2024).

Dewberry Group and Dewberry Engineers both offer commercial real estate services in the same geographic area. The two companies dispute the use of the name “Dewberry” for use in real estate: Dewberry Group has acquired common law rights, and Dewberry Engineers owns registered trademarks. Dewberry Engineers sued Dewberry Group, but the initial litigation ended in settlement in 2007. As part of the settlement, Dewberry Group agreed to various terms, including that it would use a specific logo and an abbreviated name in certain overlapping markets.

Ten years later, Dewberry Group rebranded and attempted to register new marks containing the word “Dewberry” and abandoned the logo and name specified by the settlement agreement. In 2020, Dewberry Engineers again sued Dewberry Group, this time for violating the terms of the confidential settlement agreement and for infringing Dewberry Engineers’ trademarks. The lower court granted Dewberry Engineers summary judgment, a permanent injunction and monetary damages. The damages award included profit disgorgement pursuant to the Lanham Act, 15 U.S.C. § 1117(a), under which the US Court of Appeals for the Fourth Circuit ordered Dewberry Group’s affiliates to disgorge almost $43 million in profits. Dewberry Group appealed, and the Fourth Circuit affirmed in a 2 – 1 decision.

Dewberry Group petitioned for certiorari on the issue of damages, arguing that the Fourth Circuit’s decision to allow Dewberry Engineers to collect damages based on Dewberry Group’s affiliates’ profits “silently invites courts to ignore corporate separateness in trademark disputes without regard to veil-piercing principles.” Dewberry Group argued that the Fourth Circuit decision was substantively incorrect and contradictory to Ninth and Eleventh Circuit decisions as well as the Lanham Act. According to Dewberry Group, the $43 million “never passed through [Dewberry Group’s] hands,” and in fact the company “had zero net profits.” Because the Lanham Act allows only for disgorgement of a defendant’s profits – not defendant’s affiliates’ profits or a penalty against the defendant – Dewberry Group contended that the damages award was improper.

The issue presented is: Whether an award of the “defendant’s profits” under the Lanham Act, 15 U.S.C. § 1117(a), can include an order for the defendant to disgorge the distinct profits of legally separate non-party corporate affiliates.

What Do You Meme? TFW Commercial Use Outweighs Fair Use

by Anisa Noorassa | Jun 20, 2024 | Copyrights

The US Court of Appeals for the Eighth Circuit affirmed a district court’s copyright infringement decision, finding that a congressional reelection campaign’s use of a popular meme to solicit donations was commercial in nature and therefore not fair use. Laney Griner v. King for Congress, Case No. 22-3623 (8th Cir. June 7, 2024) (Benton, Erickson, Kobes JJ.)

Laney Griner owns the copyright for the popular meme “Success Kid,” which is a photograph of then 11-month-old Sam Griner with his hand in a fist clenching sand at the beach.

Griner took the photograph in 2007. The photograph went on to become one of the first viral memes, with billions of internet users spreading the image with a variety of captions. Griner registered the copyright of the Success Kid meme in 2012 and has since licensed that photograph to many companies, including Virgin Mobile, Vitamin Water, Microsoft and Coca-Cola, for commercial use.

Steven King served as a congressional representative from Iowa from 2003 to 2021. During his 2020 reelection campaign, the King for Congress Committee, which supported the congressional campaign, posted the meme on its website, Facebook and Twitter in an effort to seek donations:

After requesting the removal of the posts to no avail, Griner filed a lawsuit for copyright infringement and violation of Sam’s privacy. The jury found that neither the committee nor the congressman violated Sam’s privacy, but it did find that the committee (but not the congressman) had “innocently” infringed Griner’s copyright. The jury awarded $750 in damages, which is the statutory minimum. The committee appealed.

The committee argued that its use of the meme was fair use under Section 107 of the Copyright Act. Under the Copyright Act, four factors define fair use:

The purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes
The nature of the copyrighted work
The amount and substantiality of the portion used in relation to the copyrighted work as a whole
The effect of the use upon the potential market for or value of the copyrighted work

The Eighth Circuit found that the first factor weighed against the committee since the post clearly used the meme to call for donations and was undoubtedly commercial in nature. The commercial nature of the use voided the committee’s argument that the meme had been used millions, if not billions, of times without permission by users across the internet. Likewise, the “transformative elements” that the committee added (original text) were not persuasive enough to overcome this commercial nature. The Court found that the third factor also weighed against the committee since the “most substantial part of the work,” the “Success Kid himself,” was used in the committee’s post. The Court found that the fourth factor weighed in neither party’s favor, despite the fact [...]

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The $X Factor: Demystifying Damages Calculations

by Keval Amin | Jun 13, 2024 | Patents

The US Court of Appeals for the Federal Circuit affirmed a district court’s decision to deny a defendant’s motion for a new trial on damages, finding that the plaintiff’s damages expert sufficiently showed that prior license agreements were economically comparable to a hypothetically negotiated agreement between the parties. EcoFactor, Inc. v. Google LLC, Case No. 23-1101 (Fed. Cir. June 3, 2024) (Reyna, Lourie, JJ.) (Prost, J., dissenting).

EcoFactor owns a patent directed to mitigating strain on the electricity grid by adjusting thermostat settings within HVAC systems. The patent describes a system where thermostats collect internal temperature readings and use them alongside external temperatures to estimate internal temperature change rates, including future predictions. EcoFactor sued Google alleging infringement based on Google’s Nest smart thermostat products.

After discovery, Google sought summary judgment, arguing that claims of EcoFactor’s patent were invalid as abstract ideas under 35 U.S.C. § 101. The district court denied this motion as well as Google’s Daubert motion to exclude the testimony of EcoFactor’s damages expert. At trial the jury found that Google infringed EcoFactor’s patent and awarded damages. The district court denied Google’s subsequent motions for judgment as a matter of law on noninfringement and for a new trial on damages. Google appealed.

Google raised three key issues. First, it argued that the district court erred in denying its motion for summary judgment. Second, Google asserted that the district court erred in denying its motion for judgment as a matter of law concerning the noninfringement of EcoFactor’s patent. Third, Google claimed that the district court wrongly denied its motion for a new trial on damages, arguing that EcoFactor’s damages expert opinion was based on unreliable methodology.

The Federal Circuit upheld the district court’s decision to deny summary judgment because there were genuine issues of material fact warranting a trial. The Court also affirmed the jury’s infringement verdict against Google, finding that it was supported by substantial evidence. Despite Google’s argument that its Nest thermostats did not meet the claims of EcoFactor’s patent, the Court concluded that expert testimony and corroborating documentation demonstrated otherwise.

On the damages issue, Google argued that EcoFactor’s expert testimony was unreliable because there was no evidence that the parties to the three license agreements used by the expert actually applied the royalty rate stated in the agreement. While Google acknowledged that each of the license agreements include a specified royalty rate, Google argued that each also included a “whereas” clause indicating that the licensee would pay EcoFactor a lump sum amount “set forth in this Agreement based on what EcoFactor believes is a reasonable royalty calculation of [$X] per-unit for . . . estimated past and [] projected future sales of products accused of infringement in the Litigation.” Google asserted that while the agreements may have included a stated rate, there was no evidence that the agreements actually applied the rate in calculating the lump sum payment.

The Federal Circuit rejected Google’s argument. The Court explained that the proposed royalty rate was derived from three [...]

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Foreign Sales to Foreign Customers Are Not Actionable Under the Lanham Act

by Sarah Bro | May 9, 2024 | Trademarks

Issuing a revised opinion following the Supreme Court’s 2023 decision in Abitron Austria GmbH v. Hetronic Int’l, Inc., the US Court of Appeals for the Tenth Circuit determined that none of the defendant’s purely foreign sales to foreign customers can premise liability for the plaintiff’s Lanham Act claims and that any permanent injunction issued against the defendant cannot extend beyond qualifying domestic conduct. Hetronic International, Inc. v. Hetronic Germany GmbH; Hydronic-Steuersysteme GmbH; ABI Holding GmbH; Abitron Germany GmbH; Abitron Austria GmbH; Albert Fuchs, Case Nos. 20-6057; -6100 (10th Cir. Apr. 23, 2024) (Murphy, McHugh, Phillips, JJ.)

Hetronic is a US company that manufactures radio remote controls for heavy-duty construction equipment. Hetronic sued its foreign distributors and licensees (collectively, Abitron) in the US District Court for the Western District of Oklahoma for trademark infringement when, following termination of the Hetronic distribution and license agreements, Abitron reverse-engineered Hetronic’s products and began manufacturing and selling their own copycat products bearing Hetronic’s trade dress (a “distinctive black-and-yellow color scheme”). Abitron’s sales of the copycat products took place primarily in Europe. In the first rounds of this dispute, the district court rejected Abitron’s argument that Hetronic sought an impermissible extraterritorial application of the Lanham Act, and a jury awarded Hetronic $96 million in damages related to Abitron’s global use of Hetronic’s marks. Abitron was also permanently enjoined from using the marks anywhere in the world. Abitron appealed to the Tenth Circuit.

As a matter of first impression, the Tenth Circuit fashioned its own test to determine the extraterritoriality of the Lanham Act, upholding the district court’s ruling but narrowing the injunction to only the countries where Hetronic marketed or sold its products. Abitron appealed to the Supreme Court.

The Supreme Court granted certiorari to resolve a circuit split over the Lanham Act’s extraterritorial reach. Specifically, the Supreme Court was asked to decide whether the Lanham Act applies to “purely foreign sales that never reached the United States or confused U.S. customers” and considered its long-standing presumption against extraterritoriality, with the first step of its analysis consisting of asking whether Congress has “affirmatively and unmistakably instructed” that a particular statute “should apply to foreign conduct.” As the second step, the Supreme Court determined whether a claim seeks a permissible domestic or impermissible foreign application of a statute.

The Supreme Court held that Sections 32(1)(a) and 43(a)(1)(A) of the Lanham Act are not extraterritorial and that the infringing conduct – being “use in commerce” of a trademark – determines the dividing line between foreign and domestic application of the Lanham Act. The Supreme Court vacated the Tenth Circuit’s findings and remanded for further proceedings, instructing the Tenth Circuit to reevaluate which of Abitron’s allegedly infringing activities count as use in commerce under the Supreme Court’s exterritoriality frameworks and to determine on which side of the dividing line Abitron’s conduct falls.

With the Supreme Court having already determined step one, on remand, the Tenth Circuit started with step two of the extraterritoriality analysis and found [...]

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Reasonable Royalty Available for Foreign Activities (But Not This Time)

by Amol Parikh | Apr 11, 2024 | Patents

The US Court of Appeals for the Federal Circuit affirmed a district court’s decision to preclude a patent owner from seeking damages based on method claims infringed outside of the United States but confirmed that reasonable royalties are available based on foreign activities. Harris Brumfield v. IBG LLC, Case No. 22-1630 (Fed. Cir. Mar. 27, 2024) (Prost, Taranto, Hughes, JJ.)

Trading Technologies International (TT), whose successor is Harris Brumfield, filed a lawsuit against IBG in 2010 alleging infringement of four patents directed to graphical user interfaces for commodity trading and methods for placing trade orders using those interfaces. During the underlying proceeding, the district court issued several orders. The district court granted IBG’s motion for summary judgment that the claims of two of the patents were invalid. The district court also excluded one of TT’s damages theories concerning foreign activities. Prior to trial, the district court found that two of the patents were invalid as patent ineligible and that the other two patents contained patent eligible subject matter. The district court also excluded one of TT’s damages theories concerning foreign activities.

The case proceeded to trial on the two remaining patents, and the jury found the asserted claims of those two patents infringed. IBG proposed $6.6 million in damages, which corresponds to the total demanded by IBG using IBG’s proposed royalty rate measured against domestic usage, rather than global users. By contrast, TT proposed damages of $962 million, which included all worldwide users of the accused product, regardless of whether they performed the claimed method. The jury agreed with IGB and awarded TT $6.6 million. the district court denied TT’s post-verdict motion for a new trial on damages, a motion in which TT alleged that IBG had misrepresented how it calculated the damages figures it presented to the jury. TT appealed.

Under the Supreme Court’s 2018 decision in WesternGeco v. Ion Geophysical, a patent owner can recover damages in the form of foreign lost profits when infringement is found under 35 U.S.C. § 271(f)(2) of the Patent Act. TT argued that under WesternGeco, it can seek damages in the form of a reasonable royalty based on IBG “making” the accused product in the US, even though the products were used overseas. The Federal Circuit engaged in a detailed description of WesternGeco, concluding that the Court must examine the particular acts alleged to constitute infringement under particular statutory provisions to determine if the allegations focus on domestic conduct. The Court explained that under § 271(a), the making, using, offering to sell and selling provisions are limited to domestic acts. The Court acknowledged that the WesternGeco framework applies to reasonably royalty awards (not just lost profits) and that a reasonable royalty would be the amount a hypothetical infringer would pay to engage in the domestic acts constituting the infringement.

Despite finding that reasonable royalties are permitted under WesternGeco, the Federal Circuit affirmed the district court’s exclusion of TT’s damages theory because TT’s infringement theory about making the accused product [...]

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Gentlemen, Start Your Engines: Even Bland Works Support Copyright

by Kathleen Lynch | Mar 7, 2024 | Copyrights

The US Court of Appeals for the Sixth Circuit affirmed an award of profit disgorgement and attorneys’ fees in a copyright infringement case, holding that even “workaday” or “humdrum” subject matter can support a valid copyright. Premier Dealer Servs. Inc. v. Allegiance Adm’rs LLC, Case No. 23-3394 (6th Cir. Feb. 26, 2024) (Sutton, C.J.; Clay, Bloomekatz, JJ.)

Premier and Allegiance both administered car dealers’ loyalty programs. Customers enrolled in these programs were required to meet certain conditions (such as changing the car’s oil at predetermined intervals), and if a part under warranty broke, the dealer would help the car owner initiate a claim through the loyalty program administrator. In conjunction with administering these programs, Premier created a loyalty certificate. The certificate collected the customer’s personal information and provided the program’s terms and conditions. Premier registered its certificate for copyright protection in 2008.

In 2018, Tricolor – one of Premier’s large, long-standing customers – switched its program to Allegiance. When Allegiance took over, it repurposed Premier’s loyalty certificate by simply updating the administrator’s contact information. Allegiance and Tricolor continued to use the otherwise unaltered certificate. Premier sued for copyright infringement.

The district court found that the certificate’s “dull” subject matter did not preclude copyright protection, enjoined Allegiance from further copyright infringement, and awarded Premier disgorgement of Allegiance’s profits as well as attorneys’ fees, totaling more than $1 million. Allegiance appealed, challenging the certificate’s copyrightability and the damages calculations.

As to the copyrightability of the certificate, the Sixth Circuit explained that while copyright requires originality, it is a low threshold that can be shown by making “non-obvious choices” or evidencing some creative spark. “[A]rtistic merit” is not necessarily required. The Court noted three categories that copyrights will not cover:

Facts that already exist in the world (although the expression of facts may be copyrightable)
Merger, “when there is only a single way to express a given set of facts” and
Scenes a faire, in which industry norms require expressing facts in a particular way.

Premier’s copyright was registered and therefore presumed valid, meaning the burden was on Allegiance to rebut that presumption. The Sixth Circuit rejected Allegiance’s challenge to the originality of Premier’s copyright, primarily because copyrights “protect all manner of works – mundane or lofty . . . so long as they satisfy the modest imperatives of originality.” Allegiance argued that Premier’s forms collected client information in a way that was unoriginal, because there was only one way to collect the information (merger) and because the layout was typical for the industry (scenes a faire). The Court looked to areas in which Premier indicated creativity, noting that its forms differed from other loyalty program certificates in evidence. Further, Premier made the creative choice to allow program members to select from various schedules for oil changes, instead of a single predetermined timetable. This and other evidence suggested choice, ideas and creativity, despite the functionality of the loyalty certificates.

The Sixth Circuit hinted at how Allegiance might have better established the [...]

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Yo-Ho-No Vicarious Liability for Online Piracy Without Financial Benefit

by Karen Gover | Feb 29, 2024 | Copyrights

The US Court of Appeals for the Fourth Circuit reversed-in-part, vacated-in-part and affirmed in part a district court decision that found an internet service provider liable for $1 billion in damages for vicarious and contributory copyright infringement. Sony Music Entm’t., et al. v. Cox Commc’ns, Inc., Case No. 21-1168 (4th Cir. Feb. 20, 2024) (Harris, Rushing, JJ., Floyd, Sr. J.) (per curiam).

Sony Music along with 52 other music companies filed suit against Cox Communications in July 2018, alleging both contributory and vicarious liability based on copyright infringement by Cox’s customers. Sony argued that Cox knew that some of its customers used its service to download or distribute songs over the internet without permission but chose not to cancel their subscriptions. The Digital Millennium Copyright Act (DMCA) created a safe harbor for internet service providers in such circumstances but a prior case against Cox held that it did not qualify for the safe harbor because “its repeat infringer policy as implemented was inadequate under the DMCA.” In the present case, the jury found Cox liable for vicarious and contributory infringement of all 10,017 copyrighted works alleged to have been infringed and found that Cox’s infringement was willful. The jury awarded Sony more than $99,000 per work infringed, totaling $1 billion in statutory damages. Cox appealed.

The appeal garnered noteworthy amici in support of both sides. Cox was supported by the Electronic Frontier Foundation, the American Library Association and the Center for Democracy and Technology, among others. Sony was supported by the National Music Publishers’ Association, the Songwriters of North America, the Nashville Songwriters Association International and the Copyright Alliance.

Cox raised many questions of law concerning the scope of secondary liability and what constitutes a compilation or derivative work in the digital age. The Fourth Circuit upheld the jury verdict finding Cox liable for contributory copyright infringement, rejecting Cox’s arguments that its service was also used for lawful activity and that its contribution must amount to aiding and abetting the infringement. The Court explained that “supplying a product with knowledge that the recipient will use it to infringe copyrights is exactly the sort of conduct sufficient for contributory infringement.” The Court concluded that the jury saw sufficient evidence that Cox knew specific users were repeatedly infringing but chose not to terminate their service.

The Fourth Circuit, however, reversed the jury’s verdict of vicarious liability, finding that Cox did not profit from its subscribers’ acts of infringement and so did not meet the legal prerequisite for that form of secondary liability. Reviewing landmark cases on vicarious liability, the Court explained that “the crux of the financial benefit inquiry is whether a causal relationship exists between the infringing activity and a financial benefit to the defendant . . . the financial benefit to the defendant must flow directly from the third party’s acts of infringement to establish vicarious liability.” Since Sony failed to show that Cox profited from its subscribers’ infringing activity, it failed to establish vicarious liability.

The [...]

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Remedies as Big as Your Bamba

by Thomas DaMario | Aug 10, 2023 | Trademarks

Following the district court’s finding of trademark infringement on summary judgment, the US Court of Appeals for the Sixth Circuit affirmed the district court’s subsequent award of profits, costs and attorneys’ fees in favor of the trademark holder. La Bamba Licensing, LLC v. La Bamba Authentic Mexican Cuisine, Inc., nka La Villa Rica Mexican Cuisine, Inc., Case No. 22-5853 (Gilman, Larsen, Nalbandian, JJ.)

La Bamba Licensing operates a series of Mexican restaurants in the Midwest under the name “La Bamba.” It obtained various federal trademark registrations in 1998. Almost 20 years later, La Bamba Authentic Mexican Cuisine (now known as La Villa Rica) opened a Mexican restaurant under the name “La Bamba Authentic Mexican Cuisine” with a single location in Lebanon, Kentucky. Shortly after learning of the La Villa Rica restaurant, La Bamba Licensing sent a cease-and-desist letter to La Villa Rica demanding that La Villa Rica cease use of the LA BAMBA mark. La Villa Rica responded but refused to alter its conduct because it did “not see any basis for [La Bamba Licensing’s] demands.” Three months after sending the cease-and-desist letter, La Bamba Licensing filed suit in the Western District of Kentucky alleging trademark infringement and unfair competition. More than one year later, La Villa Rica changed the name of its restaurant to “La Villa Rica Authentic Mexican Cuisine, Inc.”

The district court ultimately granted summary judgment in favor of La Bamba Licensing on all pending claims and permanently enjoined La Villa Rica from using the LA BAMBA mark. La Bamba Licensing subsequently filed a motion seeking profits, costs associated with bringing the action and attorneys’ fees. Following an evidentiary hearing, the district court granted La Bamba Licensing’s motion and awarded all three forms of relief. La Villa Rica appealed the district court’s decision to award profits and attorneys’ fees but did not appeal the award of costs or the district court’s calculation of either profits or attorneys’ fees.

The Sixth Circuit started its analysis of the profits award by identifying the factors courts should consider, including the defendant’s intent to deceive, whether sales were diverted, the adequacy of other remedies, any unreasonable delay by the plaintiff in asserting its rights, public interest in making the misconduct unprofitable and “palming off” (i.e., whether the defendant used its infringement of the plaintiff’s mark to sell its own products to the public through misrepresentation). The Sixth Circuit noted that the district court relied on two factors—the defendant’s intent and public interest in making the misconduct unprofitable—plus the defendant’s “willfulness” in determining that an award of profits was appropriate. The Sixth Circuit credited the district court’s reasoning, noting that “[e]ven after La Villa Rica received a cease-and-desist letter containing notice of La Bamba’s registered mark, and ‘in the face of [its] attorney’s advice that [it] might have a problem,’ La Villa Rica continued to use the LA BAMBA mark for a year and a half and ‘offered no legally sufficient explanation or support for its actions.’”

La Villa Rica argued that [...]

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No Lost Value Damages Despite Trade Secret Misappropriation

by Jayita Guhaniyogi, PhD | Jun 8, 2023 | Trade Secrets

The US Court of Appeals for the Second Circuit vacated a damages award, finding that although there was liability for appropriating trade secrets, the trade secret proprietor was only entitled to compensatory damages under federal trade secret law, not avoided cost damages based on alleged estimated research and development or loss of value. Syntel Sterling Best Shores Mauritius, Ltd., et al. v. The TriZetto Grp., Inc., et al., Case No. 21-1370 (2d Cir. May 25, 2023) (Wesley, Raggi, Lohier, JJ.)

This case involved trade secrets concerning healthcare insurance software called Facets® that was developed by TriZetto and alleged misappropriation by a TriZetto subcontractor, Syntel Sterling. In 2010, TriZetto and Syntel entered a Master Service Agreement (MSA) under which Syntel agreed to support TriZetto’s Facets customers. In exchange, TriZetto granted Syntel access to its trade secrets related to Facets. In 2012, the parties amended the MSA to allow Syntel to compete directly with TriZetto for consulting services. A dispute arose in 2014 when Syntel’s competitor Cognizant acquired TriZetto. Syntel terminated the amended MSA and requested payment of rebates owed. TriZetto refused, raising concerns about Syntel’s continued use of confidential trade secrets post-termination.

Syntel filed suit for breach of contract in the Southern District of New York, and TriZetto counterclaimed. During trial, TriZetto proceeded on trade secret misappropriation counterclaims related to the Facets software under the Defend Trade Secrets Act (DTSA) and New York law. Syntel argued that the amended MSA authorized Syntel to compete for Facets services business while using TriZetto’s trade secrets.

During discovery, the district court issued a preclusion order that sanctioned Syntel for discovery misconduct, finding that “Syntel was actively creating a repository of [TriZetto’s] trade secrets on its own . . . to be used in future work.” Citing the preclusion order, the district court instructed the jury that Syntel had misappropriated two of 104 asserted trade secrets.

With respect to damages, TriZetto presented expert testimony that established that Syntel avoided spending about $285 million in research and development costs because of the misappropriation covering the period between 2004 and 2014, an amount that covered only a portion of TriZetto’s overall $500 million research and development costs. Syntel’s expert did not counter that amount. Instead, Syntel argued that these avoided costs did not apply here for several reasons: because the alleged misappropriation did not destroy the value of Facets since Syntel could have used Facets for free by entering a third-party access agreement with TriZetto because TriZetto continued to make millions using its Facets software, and because Syntel was not a software company but a competing service provider. The jury instructions included Syntel’s avoided development costs as one form of unjust enrichment that applied to the federal claims but not the state claims.

The jury returned a verdict in favor of TriZetto on all counts. The jury awarded TriZetto $285 million in avoided development costs under the DTSA as compensatory damages and double that amount in punitive damages. Following trial, Syntel renewed its motion for judgment as [...]

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