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Seventh Circuit Sends Health Care Software Company Plaintiff Back to District Court for $660 Million Seventh Circuit Sends Health Care Software Company Plaintiff Back to District Court for $660 Million

Seventh Circuit Sends Health Care Software Company Plaintiff Back to District Court for $660 Million (or More) Reduction in Damages Award in Trade Secrets Case

The Seventh Circuit recently dealt a blow to plaintiffs in trade secrets cases, vacating a jury verdict totaling $1.04 billion and remanding the case to the district court with instructions not to exceed $280 million in damages. Epic Systems Corp. v. Tata Consultancy Services Ltd., Case Nos. 19-1528 and 19-1613 (7th Cir. Aug. 20, 2020). According to the complaint, Tata Consultancy Services (“TCS”) downloaded thousands of documents containing Epic’s trade secrets, using an old user access account to an Epic internal testing and support system that had not been purged. Epic repeatedly turned down a client’s requests that TCS be able to access to the system. Using this old account, TCS accessed Epic’s confidential information to compile a spreadsheet comparing its products to Epic’s, which it used to develop and market its own software products to clients, including Epic clients. Epic sued in the Western District of Wisconsin asserting multiple causes of action, including breach of contract, fraudulent misrepresentation, misappropriation of trade secrets, unfair competition, deprivation of property, and unjust enrichment. During the discovery process, Epic learned that TCS had failed to preserve relevant evidence. The court imposed a sanction on TCS by advising the jury to make an adverse inference that the destroyed evidence contained information helpful to Epic and harmful to TCS.

The jury found in favor of Epic on all counts and awarded Epic $140 million in compensatory damages for the benefit TCS received for the spreadsheet, $100 million for the benefit it received from Epic’s “other confidential information,” and $700 million in punitive damages. The district court upheld the $140 million compensatory damages award, but vacated the $100 million award and reduced the punitive damages award to $280 million, due to Wisconsin’s punitive damages cap. Both parties appealed.

The Seventh Circuit considered the basis under which the damages had been awarded. Epic argued that the proper calculation of damages for its unjust enrichment claim should reflect its actual research and development costs—the costs that TCS avoided by stealing Epic’s trade secrets. In support, Epic presented an expert who itemized Epic’s expenditures in developing these trade secrets and confidential information. TCS, on the other hand, argued that the damages should instead be based on the benefit that TCS received from its wrongful acts—a much lower figure, especially given that TCS could use overseas labor to save 30-40% of its labor costs.

The district court ultimately based the damages on the benefit TCS obtained from using the comparative analysis that contained Epic’s confidential information. The Seventh Circuit held that the damages should be based on the research and development costs that TCS avoided by stealing the trade secrets and confidential information, because the benefit represented a “head start” in competition and development. However, the cost of Epic’s coding that TCS did not receive, the decay in the value of technology over time and reductions in labor costs should be considered in adjusting the number downward. Given all these factors, the $140 million jury award for the benefit TCS received from the comparative spreadsheet was reasonable.

However, the $100 million jury award for the benefit TCS received from accessing the “other confidential information” was not reasonable, despite the adverse inference instruction. Even with the assumption that TCS destroyed evidence that was helpful to Epic and harmful to TCS, there was no actual evidence that TCS had ever used Epic’s “other information” and the inference is meant “to plug evidentiary holes [and not to] hold all the water.” Therefore, the district court had properly vacated the $100 million compensatory damages award.

As to the punitive damages, the Seventh Circuit explained that the Due Process Clause of the Fourteenth Amendment imposes constitutional limits on punitive damages, and such damages cannot be “grossly excessive.” The court held that although TCS’s conduct involved a repeated course of wrongful acts, and its conduct caused Epic harm, the conduct was not “reprehensible to an extreme degree” to justify such a large punitive damages award. TCS had not harmed anyone physically, nor did its behavior evince an indifference to or a reckless disregard of others’ safety. Moreover, because Epic was one of the largest producers of electronic-health-record software, it was not financially vulnerable. While the jury awarded $140 million in compensatory damages, that award was based on the benefit to TCS, and not the harm (particularly economic harm) suffered by Epic. Accordingly, the court concluded “based on the substantial compensatory award and the circumstances of this case—that a 2:1 ratio exceeds the outer limit of the due process guarantee.” Thus, it remanded the case to the district court with instructions to reduce the punitive damages award, with guidance that “the ratio relative to the $140 million compensatory award should not exceed 1:1.”

This case provides two helpful takeaways for lawyers advising clients on protecting their trade secrets and more broadly securing their company data.

First, maintain access verification procedures and regularly audit systems to ensure that you are not leaving your key systems vulnerable to unauthorized access. Here, the individual with access to the Epic system obtained it by falsely identifying himself to Epic as a client’s employee. The individual gained this access at a prior company, and the access was maintained as he transitioned to a new company. Procedures should be in place to verify identity and role prior to providing access and to periodically audit access to ensure it is limited to those with authority to use the system.

Second, consider the “head start” in competition and development when assessing the proper calculation for damages when framing pre-litigation and litigation demands in a dispute. Those costs can be based on actual research and development, but adjusted as needed to account for the costs that the misappropriating company might incur to bring the product to market. In assessing potential damages, the opinion also offers guidance on the magnitude of punitive damages that may be available, even under fairly egregious facts, particularly where the damages are based on the benefit to the misappropriating company instead of the economic harm to the plaintiff.

For guidance on protecting your system access or handling these types of matters, please contact Reena Bajowala or another member of Ice Miller’s Information Technology and Software Disputes practice.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
 
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