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Peter Toren | Experienced Intellectual Property Lawyer

Trade Secrets Lessons from Epic Systems Corp. v. Tata Consultancy Services

This is one of the largest-ever awards in a trade secret case. For smaller companies, it may be large enough to put them out of business. It is critical, therefore, that companies take steps, including training employees not to steal trade secrets.”

On August 20, the Seventh Circuit in Epic Systems Corp. v. Tata Consultancy Services Ltd & Tata America Interntional Corp d/b/a/ TCS America No. 1950 (7th Cir. Aug. 20, 2020) upheld an award of damages against Tata for theft of trade secrets relating to Epic’s health care software. After a jury trial in 2016, a jury found that Tata must pay $240 million in a compensatory damages to Epic, and $700 million in punitive damages. The district court later struck $100 million in compensatory damages and reduced the punitive damage award from $700 million to $280 million under a Wisconsin statute that caps punitive damage awards at two times compensatory damages. In the August 20 decision, the Seventh Circuit agreed with the district court that the jury could award punitive damages but found that the $280 million punitive damages amount was excessive and remanded the case with instructions to reduce that award.

Reasonable Measures

It has been said that the sine qua non of a trade secret case is that the victim must take “reasonable measures” to protect its trade secrets because defendants can almost always argue that there were additional measures that the plaintiff could and should have undertaken. However, the test focuses primarily on the actions of the owner and on the economic circumstances surrounding the particular industry and is a question of fact. The extent of the owner’s security measures need not be absolute but must be reasonable under the totality of the circumstances depending on the facts of the specific case. At least one court has characterized the test for reasonable measures as “modest.” On the one hand, failing to protect a secret “is persuasive evidence that the secret has no real value” and is undeserving of the law’s protection.” Further, “[i]f the owner fails to attempt to safeguard his or her proprietary information, no one can be rightfully accused of misappropriating it.” Thus, where an alleged trade secret is disclosed to a third party who has no duty to maintain its secrecy, the disclosure of such information by the third party prevents the owner of such property from making a claim under the DTSA. The owner of the information “must assess the value of the material it seeks to protect, the extent of theft, and the ease of theft in determining how extensive their protective measures should be.”

There are many reasonable measures that plaintiffs can institute, but perhaps the most important are nondisclosure agreements between a company and an employee or with a third party. Because the owner of a trade secret cannot unilaterally impose a duty on third parties to maintain information as secret, the easiest, most direct and most important way to put third parties on notice is through a confidentiality agreement. Indeed, [s]ome courts have found confidentiality policies to be the most important measure to maintain secrecy. On the other hand, the failure to institute a confidentiality agreement may doom trade secret claims because it belies the owner’s claim that the information has economic value to its competitors.

Here, the court emphasized that the plaintiff restricted the access to the confidential information and that those who do so “are required to maintain the confidentiality of this information, and they are expected to allow specific individuals access to this sensitive information on a ‘need-to-know basis only” Id. at 3. Further, to implement these restrictions in order to obtain access to this information, users were provided with credentials and must prove they are authorized to access such information. Only a very limited number of individuals were provided with this ability.

Damages

Turning now to the question of damages, the Wisconsin Uniform Trade Secrets Act provides for actual damages, unjust enrichment “caused by the misappropriation of the trade secret that is not addressed in computing damages for actual loss”; or a reasonable royalty. Unjust enrichment damages are based on the value of the benefit conferred upon the defendant and the amount of damages based on the market on the market value of the trade secret. Id. at 14. Here, the court found that there is “sufficient evidence that the defendants used the misappropriated [trade secrets] to gain a ‘significant head start in their operation.” Id. at 15 (citation omitted). In other words, the award of damages is determined on “would it have cost the defendants to independently develop the trade secrets at issue.” Id.

In approving this determination the Seventh Circuit focused on the benefit defendant “received from avoided research and development costs, not the cost [plaintiff] incurred when creating the same information.” Id. at 16. In addition, the court noted that defendant also destroyed evidence “of additional downloaded documents that contained information helpful to [plaintiff] and harmful to [defendant]. Id. at 18 (quotation omitted). Based on this legal analysis, the jury could conclude that defendant could destroy evidence of “additional downloaded documents that ‘contained information helpful to [plaintiff] and harmful to [defendant].’” Id. at 18 (quotation omitted). Further, the court found that the jury could find that the trade secrets provided a “head start” to the defendant. In other words, the stolen information provided the defendant with a “free shot—using the stolen information—to determine whether it would be profitable to improve the [product] and implement a variety of tactics to enter the United States electronic-health-record market.” Id. at 19. “Based on this intermediate finding a jury could determine that a reasonable valuation of this benefit is the cost [defendant avoided by not having to develop this information by itself.” Id. at 19.

Interestingly, the court found that it was proper for the jury to determine the amount of damages by the cost of the research and development costs in India, and not the United States where the product was developed. This reduced the amount of damages from approximately $200 million to $140 million. In short, the “evidence also allowed the jury to conclude that avoided research and redevelopment costs were a reasonable valuation of the benefit [plaintiff] received from using the [product] which contained stolen information.” Id.at 20.

In addition to addressing the “cross-appeal of the district court’s decision to vacate the jury’s $100 million compensatory damages award for [defendant’s] ‘other uses’ of [plaintiff’s] confidential information,” which is beyond the scope of this article, the Seventh Circuit also addressed the jury’s compensatory or punitive damages award. Id. at 21.  Here, the jury awarded punitive damages in the amount of $700 million, which was reduced by the district court to $280 million based on a Wisconsin law capping statutory punitive damages at two times the amount of compensatory damages. The defendants attacked the compensatory damages award on four grounds, only two of which are relevant for this article. First, defendants argued that it must be set aside because it was based on a claim that cannot support punitive damages as a matter of law. Second, defendant argued that the punitive damages award was constitutionally excessive.

Punitive Damages

Turning first to the whether the claims can support a punitive-damages award, the court simply noted that the violation of the Wisconsin Uniform Trade Secrets Act provides for punitive damages where the damage award is based on unjust enrichment. It also dismissed defendant’s argument that punitive damages should be assessed because the court overturned the $100 million award for defendant’s other uses of the trade secrets. Id. at 33-35.

In addition, with regard to whether the constitutionality of the punitive-damage award of $280 million violates the due process clause under the federal constitution and Wisconsin law, the court noted that there are a number of “guideposts” to whether the award of punitive damages is unconstitutional: (1) the reprehensibility of the defendant’s conduct; (2) the disparity between the actual harm suffered and the punitive award and (3) the difference between the award authorized by the jury and the penalties imposed by the comparable cases. Id. at 36 (quotation omitted).

The court noted that the first of these three factors – reprehensibility ­– is the most important. When determining reprehensibility of the conduct, the Supreme Court has indicated five factors to weigh. With regard to the first of these factors, the court determined that it favored defendant because plaintiff “did not suffer physical harm as a result of [defendant’s] conduct.” Id. at 37. While the Seventh Circuit ultimately did award compensatory damages to the victim, the court’s distinction between intangible and tangible harm seems incorrect, since both types of harm damage the plaintiff equally.

Next, the court also found in favor of defendant because the court “did not believe that [defendant’s] conduct evinced an indifference or reckless disregard of the safety of others.” Id.

However, with regard to the last reprehensibility factor, “whether the harm was the result of intentional malice, trickery or deceit, or more accident,” which the Supreme Court considers the most important fact, the court found in plaintiff’s favor:

But even though it is hard to quantify, [plaintiff] likely suffered a competitive harm; [defendant], a potential competitor, had access to [plaintiff’s] confidential information for years without [plaintiff’s] knowledge. This gave [defendant [insight into the strengths and weaknesses of [plaintiff’s] software, regardless of whether [defendant] was able to turn that knowledge into a direct economic harm to [plaintiff]. Id. at 39.

The court also noted that defendant’s misconduct was exacerbated by its “repeated attempts to deceive [plaintiff] and concluded that “[t]he harms to [plaintiff resulted from [defendant’s conduct.” Thus, “[t]his factor weighs in favor of finding [defendant’s] conduct reprehensible and supports some award of punitive damages.” Id. at 39. Further, while the court agreed with the district court that the defendant’s conduct was reprehensible, it disagreed with the amount awarded, noting that a number of factors weigh against justifying the award of punitive damages. Thus, according to the court, the ratio of actual damages to punitive damages “exceeds that outmost limit of the due process guarantee.” Accordingly, the court remanded the case to the “district court to amend its judgment and reduce the punitive damages to, at most $140 million.”

Lessons Learned

There are a number of important lessons that parties should learn from this case. First and foremost, the cost of stealing trade secrets can be very high. Here, the defendant may have to pay as much as $240 million, which, while not the highest amount of damages awarded in a trade secret case, is a lot money even for large companies. This is one of the largest-ever awards in a trade secret case. For smaller companies, it may be large enough to put them out of business. It is critical, therefore, that companies take steps, including training employees not to steal trade secrets. The company’s culture must be such that this sort of behavior is simply not tolerated. It is critical that companies take all reasonable measures to protect their valuable trade secrets, and the measures must be commensurate with the value of the secrets.

Next, companies should be aware that a trade secrets damage award is not necessarily based on actual damages but can be based on an enrichment theory. Here, the jury based its award on research and development costs, which may far exceed actual damages, and in this case exceed $200 million, which is likely far less than the actual damages. Id. at 9. In this case, the damages were based on the “head start” that the stolen trade secrets provided to the defendant. This gave the defendant an unfair advantage. It is also is a different situation from most trade secret cases, where the defendant seeks immediately to compete with the plaintiff. Similarly, the court agreed with the defendant that the amount of the unjust enrichment should be premised on the amount of labor costs in India, which are substantially less than the cost of doing business in the United States. The author is not aware of any other case that made this sort of determination.

Further, the court was particularly troubled by the fact that the defendant attempted to cover up the theft of trade secrets through lies and used the trade secrets, which supports the punitive damage award. This suggests that, where a defendant is caught red-handed, instead of attempting to hide its misconduct through nefarious means, it is better to take its medicine and move on or face an even more significant damage award.

Finally, the court noted that the destruction of evidence by the defendant meant that plaintiff could fill in holes in its case and the jury could conclude that the defendant “destroyed evidence that contained information helpful to [plaintiff] and harmful to [defendant]. Id. at 18.

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