Trade Secrets Can Do Major Damage

Theft of trade secrets can result in enormous damage awards even where the harm to the trade secret holder caused by the theft is primarily a competitive economic harm and only minimally a direct economic harm.

Last month, Epic Systems Corporation ("Epic") petitioned[1] the United States Supreme Court to review the United States Court of Appeal for the Seventh Circuit’s decision[2] to reduce its punitive damages award from a two-to-one punitive damages to compensatory damages ratio to no more than a one-to-one ratio. The Seventh Circuit held that because the size of the compensatory damages award of $140 million was already “substantial,” the two to one ratio was “constitutionally excessive” in violation of the Due Process Clause of the United States Constitution. The Seventh Circuit ordered the damages reduction despite Wisconsin state law – under which Epic originally received the damages award – expressly allowing punitive damages at two times compensatory damages.

Epic is a maker of medical records management software for the United States healthcare industry. Tata Consultancy Services Limited and Tata America International Corporation (“Tata”) is a well-known multinational information technology services conglomerate. In Wisconsin federal district court, Epic accused Tata of downloading thousands of documents containing Epic’s confidential information and trade secrets without permission from 2012 to 2014. Tata used the downloaded information to prepare a “comparative analysis” spreadsheet that compared Tata’s own health-record software to Epic’s software. Tata then used the spreadsheet in an attempt to enter the United States health-record-software market, steal Epic’s client, and close the functionality gaps in its own software.

A jury ruled in Epic’s favor on Wisconsin state law claims including misappropriation of trade secrets. The jury then awarded $140 million in compensatory damages for the benefit that Tata received from using the comparative-analysis spreadsheet and a whopping $700 million in punitive damages. Post-trial, the district court reduced the punitive damages to $280 million based on Wisconsin’s two-to-one statutory damages cap[3]. As mentioned, on appeal, the Seventh Circuit further reduced the punitive award to be no greater than the $140 million in compensatory damages.

A notable point about compensatory damages is that Epic suffered minimal direct economic harm as a result of Tata’s conduct. For example, Tata did not interfere with the functionality or the operation of Epic’s software and was not successful in stealing Epic’s client. At the very least, Epic did not suffer $140 million in quantifiable harm. Despite the lack of substantial direct economic harm, Epic was still able to obtain the large compensatory damages award for what was essentially only “competitive harm”. Specifically, the Seventh Circuit expressly endorsed “head start” unjust enrichment damages as the basis for calculating Epic’s compensatory damages. In doing so, the Seventh Circuit noted that Tata gained “a significant head start” in its operation from the downloaded information that ended up in the comparative analysis spreadsheet. To wit, the information allowed Tata to avoid research and development costs that otherwise would have been required by Tata to independently uncover or utilize Epic’s trade secrets.

An important point that trade secret holders should take away from this case is that they can win sizable compensatory damages even if they largely suffer only competitive harm – and little or no direct economic harm – caused by the misappropriation of their trade secrets. Of course, if Tata had independently improved its competing health-care record software and had not misappropriated trade secrets from Epic, then Epic would have needed a different intellectual property protection mechanism, such as a patent that covered functionality of Tata’s health-care record software, to protect it from competitive harm.

Another notable aspect of this case is that Epic’s failure to prevent Tata from downloading information from a password-protected customer installation of Epic’ system over a period of two years did not defeat the information’s trade secret status. As with most states, Wisconsin state law requires information to be “the subject of efforts to maintain its secrecy that are reasonable under the circumstances” for the information to receive trade secret protection.[4] In this case, a Tata employee shared his fraudulently obtained login credentials that gave him unfettered access to the customer system with dozens of other Tata employees whose own login credentials gave them only limited access to the information in the system. Using the shared login credentials, Tata employees accessed the customer system thousands of times and downloaded over 6,000 documents totaling over 150,000 pages containing Epic’s confidential information and trade secrets. However, the fact that the unauthorized use of the shared credentials went undetected by Epic for two years did not mean that the information Tata downloaded lost its trade secret status. It was enough that Epic required the customer to maintain the confidentiality of the sensitive information in the system and expected the customer to allow only specific individuals access to the sensitive information on a “need-to-know" basis only.

Thus, another takeaway, in the circumstances of this case at least, is that “reasonable efforts” did not require the trade secret holder (Epic) to prevent all unauthorized access to the computer databases holding its secret information. However, under different circumstances, Epic’s efforts may not have been considered reasonable. For example, if, in the future, cost-effective machine learning-based software that can reliably detect unauthorized use of shared credentials becomes widely used in corporate contexts, then trade secret holders may then be expected to use such software to protect trade secret information in computer databases as they are expected today to at least password-protect such information. Trade secret holders would be wise to regularly review their trade secret protection measures to ensure they comply with best practices under the appropriate state law.

For trade secret holders, this case demonstrates the size of the teeth that can bite a defendant that misappropriates your trade secrets. Yet, defendants can take some solace that where the compensatory damages are already substantial, there is potential precedent for having punitive damages limited to at most the amount of the compensatory award. Although should the Supreme Court grant Epic’s petition, the one-to-one damages cap may be removed. We will continue to watch developments regarding Epic’s petition to the Supreme Court.

Let us know if you have questions about this case or trade secrets in general. Our practitioners are here to help you protect your intellectual property, whether it be by trade secret, patent, trademark, or copyright.

I would like to thank Agatha Liu, Ph.D., for her input to this article.

[1] Epic Systems Corporation, Petitioner v. Tata Consultancy Services Limited, et al., Respondent, Petition for Writ of Certiorari to the United States Court of Appeals for the Seventh Circuit, No. 20-1426 (April 6,2021).

[2] Epic Systems Corp. v. Tata Consultancy Services Ltd., 971 F.3d. 662 (7th Cir. 2020).

[3] “Punitive damages received by the plaintiff may not exceed twice the amount of any compensatory damages received by the plaintiff or $200,000, whichever is greater.” Wis. Stat. § 895.043(6).

[4] Wis. Stat. § 134.90(1)(c)

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