Epic Systems Corp. v. Tata Consultancy Services Ltd.
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Amended Opinion Hedges Constitutionality of Punitive Damages Award

The US Court of Appeals for the Seventh Circuit amended its August 2020 opinion in Epic Systems v. Tata Consultancy to clarify that its analysis of punitive damages applies only to this particular case. Epic Systems Corp. v. Tata Consultancy Services Ltd., Case Nos. 19-1528, -1613 (7th Cir. Nov. 19, 2020) (Kanne, J.)

In the district court action, the jury found that Tata Consultancy Services Ltd. (TCS) used fraudulent means to access and steal Epic System’s trade secrets and other confidential information, and awarded $240 million in compensatory damages and $700 million in punitive damages. The district court reduced the compensatory damage award to $140 million and reduced the punitive damages award to $280 million based on a Wisconsin statutory cap on punitive damages. Both sides appealed.

On appeal, TCS contested the award of $280 million in punitive damages for various reasons, including that the award was not in line with the due process clause of the 14th Amendment. In its amended opinion, the Seventh Circuit clarified that “the Constitution is not the most relevant limit to a federal court when assessing punitive damages, as it comes into play only after the assessment has been tested against statutory and common law principles. . . . Indeed, a federal court can and should reduce a punitive damages award sometime before it reaches the outermost limits of due process.”

The Seventh Circuit analyzed the three “guideposts” for determining whether there is a due process violation with respect to punitive damages awards:

  • The reprehensibility of the defendant’s conduct
  • The disparity between the actual harm suffered and the punitive award
  • The difference between the award authorized by the jury and the penalties imposed in comparable cases.

The Court’s analysis of the first guidepost remained relatively unchanged from its original opinion, in which the Court found that a punitive damages award was justified.

The Seventh Circuit deviated from its original opinion in its analysis of the second and third guideposts. The Court found that determining the harm in the second guidepost was somewhat more difficult, because the $140 million compensatory award was based on benefit to TCS, not harm to Epic. However, the Court noted that in such instances, “few awards exceeding a single-digit ratio between punitive damages and compensatory damages will satisfy due process.” In its original opinion, the Court concluded that “a 2:1 ratio exceeds the outermost limit of the due process guarantee.” As amended, however, the Court softened this language and clarified that the 2:1 ratio exceeds only the outermost limit “in this case.” The Court explained that although TCS’s conduct was reprehensible, it was not egregious. The Court similarly concluded that the third guidepost warranted a 1:1 ratio of punitive to compensatory damages. Here again, while the Court’s original opinion applied to the “federal constitution,” the amended opinion reduced the scope of the holding to “this case” only.

Practice Note: While the Seventh Circuit originally seemed to indicate that any punitive damages award that exceeds a compensatory award [...]

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Epic Punitive Damages Award Violates Due Process

Addressing the appropriateness of three separate damages awards totaling $520 million, the US Court of Appeals for the Seventh Circuit affirmed the lower court’s award of $140 million in compensatory damages, but found that $280 million in punitive damages does not meet the Due Process Clause of the Fourteenth Amendment. Epic Systems Corp. v. Tata Consultancy Services Ltd., Case Nos. 19-1528, 19-1613 (Aug. 20, 2020) (Kanne, J.).

Epic Systems is a leading developer of electronic health record software, which it licenses to top hospitals in the United States. Each customer-licensed module is specific to the customer’s needs and can be customized to ensure proper integration with the customer’s systems. In order to facilitate customization and updates to the software, Epic provides a web portal called “UserWeb,” which provides access to various resources including administrative guides, training materials, software updates and forums. UserWeb also contains confidential information about the health-record software itself, and as such, Epic restricts access to the UserWeb portal via credentialed logins. Those with access are also required to keep all UserWeb information confidential.

In 2003, Kaiser Permanente—the largest managed healthcare organization in the United States—obtained a license to use Epic’s software. Due to the size and complexity of integrating and maintaining the software, Kaiser hired Tata Consultancy Services (TCS) to help with updates and integration. TCS has its own electronic health record software, Med Mantra, which was known to Epic. Accordingly, Kaiser imposed numerous rules for TCS to follow in order to maintain the confidentiality of Epic’s software. TCS employees claimed that they could perform their required tasks faster if they had full access to UserWeb, which Kaiser repeatedly asked Epic to grant to TCS. Epic repeatedly declined this request.

Undeterred, TCS was able to find another way into Epic’s UserWeb. TCS hired an employee who had full access to UserWeb, which he gained from working for a different organization that also helped manage Kaiser’s integration of Epic’s software. While in his previous position, the employee had falsely claimed to be a Kaiser employee, thus allowing him full access to UserWeb. The employee shared these credentials with numerous TCS employees, who then had unfettered access to UserWeb, which contained confidential information relating to Epic’s healthcare software.

TCS used this information to generate a “comparative analysis” document, an 11-page spreadsheet that compares TCS’s software, Med Mantra, to Epic’s software. TCS wanted to sell Med Mantra directly to Kaiser, and the first step was to be sure that “key gaps” in the Med Mantra software were addressed before the attempted sale. After viewing a presentation that included the comparative analysis document, one TCS employee alerted Kaiser and Epic to the existence of the document and the fact that TCS had gained access to UserWeb.

A few months later, Epic filed suit against TCS, alleging that TCS used fraudulent means to access and steal Epic’s trade secrets and other confidential information. After a trial, the jury returned a verdict in favor of Epic on all claims. During the damages trial, [...]

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