LEONIE M. BRINKEMA, District Judge.
This Memorandum Opinion supplements the oral ruling from the bench and provides additional explanation for the Order issued on January 8, 2016, in which the Court denied the Plaintiff's Motion for a
This civil action began on January 5, 2015, when plaintiff Afilias PLC ("plaintiff" or "Afilias") filed a ten-count civil action against defendants Architelos, Inc. ("Architelos") and its co-founder and Chief Executive Officer Alexa Raad ("Raad") (collectively, "defendants"), alleging respectively in Count One, Misappropriation of Trade Secrets; in Count Two, Conspiracy to Injure Another in Trade, Business, Reputation (violation of the Virginia Business Conspiracy Act); in Count Three, Tortious Interference with Contracts; in Count Four, Rights to Patent No. 8,800,044; in Count Five, Rights to Patent Application No. EP 20130158369; in Count Six, Rights to Patent Application EP 20120760627; in Count Seven, Rights to Patent Application CA 2866822; in Count Eight, Rights to Patent Application 13/416,688; in Count Nine, Conversion; and in Count Ten, Civil Conspiracy. With respect to the patent rights, plaintiff sought declaratory judgments that the rights to each patent or application belonged to Afilias.
Defendants originally counterclaimed on various theories, including tortious interference with contract, but later voluntarily dismissed their first and second counterclaims.
Plaintiff's remaining claims alleging trade secret misappropriation (Count One), violation of the Virginia Business Conspiracy Act (Count Two), tortious interference (Count Three), rights to the '688 patent application (which the parties refer to as the '801 patent) (Count Eight), conversion (Count Nine), and civil conspiracy (Count Ten) were tried to a jury during a trial that began on August 18, 2015. No counterclaims remained for trial.
During the trial, Afilias presented the expert testimony of Dr. Seth Nielsen ("Dr. Nielsen"), who concluded that the '801 patent held by Architelos "contained the proprietary information from the Afilias abuse tool from 2011" and that "the Afilias proprietary information is embodied in [Architelos'] NameSentry [product]," which is based on the '801 patent. Trial Tr. 377:6-8, 385:25-386:6. Architelos did not present any expert testimony on the issue of misappropriation but presented evidence and testimony that the allegedly proprietary information was generally known in the industry and was disclosed publicly by Afilias.
On the issue of damages, Afilias presented the expert testimony of Dr. Brian Becker ("Dr. Becker"), who based his expert analysis in part on a 2011 or 2012 estimation made by Architelos to potential investors that sales of its anti-abuse products would total $332 million between 2012 and 2020.
During closing arguments, plaintiff's counsel submitted to the jury that it could either measure damages according to the research and development costs Afilias had invested in its semi-automated anti-abuse tool, which the plaintiff calculated to be $1.2 to $1.5 million and described as "the minimum that [Afilias] would be entitled to," or could calculate damages according to Dr. Becker's reasonable royalty rate as applied to the projected revenues Architelos had presented to potential investors, for a total of $31 million.
Before the conclusion of the trial, the Court ruled against Afilias on its claim to the '801 patent and declined to grant a declaratory judgment as to that patent.
Afilias, an Irish corporation headquartered in Dublin, Ireland, wholly owns subsidiaries in Canada ("Afilias Canada") and the United States ("Afilias USA"), and is a domain registrar managing the world's second largest domain registry, including the registry for the .info top-level domain ("TLD").
Defendant Architelos, which also works in the domain industry and manages "new and existing internet domains," is incorporated in Delaware and headquartered in Leesburg, Virginia. Compl. ¶ 3. Architelos has three full-time employees and employs approximately six independent contractors. Answer [Dkt. No. 35] ¶ 117, Mar. 13, 2015. Co-defendant Raad co-founded Architelos in 2001 and serves as the company's Chief Executive Officer. Answer ¶ 117; Compl. ¶ 4.
Although Afilias named only Architelos and Raad as defendants in this action, Afilias' Complaint also alleged that several of Afilias' former employees and contractors functioned as co-conspirators with Architelos and Raad. Compl. ¶¶ 5-9. Specifically, the Complaint named Michael Young ("Young"), who served as the Vice President of Technology at Afilias Canada until he left in February 2011 to join Architelos,
As to these co-conspirators, the Complaint alleged that each had signed agreements in which they agreed that they would not disclose any of Afilias' proprietary or confidential information, remove it from Afilias' premises, or use Afilias' proprietary information for their own benefit. Compl. ¶¶ 13-15. These agreements defined proprietary and confidential information very broadly.
The evidence at trial showed that Afilias began experiencing abuse problems with the .info TLD. Specifically, in 2007 the Internet security company McAfee released a report listing "the world's riskiest top level domains" in which it described plaintiff's .info TLD as the riskiest TLD in the world. Trial Tr. 63:6-12. Afilias determined that the report's findings were accurate in that the .info TLD faced "a real problem" with "domain name abuse,"
The team's efforts included the development of an anti-abuse tool that combined many data feeds into one and used a filtering system to identify abusive domain names against which Afilias could then take "remedial steps."
Afilias alleged that Aaron, Young, and van Egmond misappropriated the trade secret and proprietary information they gained through working on plaintiff's anti-abuse tool and then used that information to develop defendant's NameSentry product and to apply for five different European, Canadian, and United States patents in their names and in Architelos' name. Compl. ¶¶ 17-18. One of these patents, the '801 patent,
In support of its renewed motion for judgment as a matter of law and alternative motions for new trial or remittitur, Architelos argues that Afilias failed to prove the existence of any trade secrets, that the amount of the jury award was not supported by the evidence and is a miscarriage of justice, and that the conversion and conspiracy claims are preempted under the Virginia Uniform Trade Secrets Act ("VUTSA"). Def.'s Mem. in Supp. of its Mot. for J. as a Matter of Law or, in the Alternative, for a New Trial or Remittitur [Dkt. No. 260] at 4-5, Sept. 8, 2015 ("JMOL Br."). Afilias counters that Architelos seeks to re-weigh the evidence and to "sidestep the consequences of a flawed trial strategy" in which Architelos failed to present any expert testimony of its own on either the trade secret or damages issues. Pl.'s Opp'n to Def.'s Mot. for J. as a Matter of Law Or, in the Alternative, For a New Trial or Remittitur [Dkt. No. 269] at 1, Sept. 21, 2015 ("JMOL Opp'n"). Afilias contends that both the jury's finding of trade secret misappropriation and its damages award were supported by the evidence,
Architelos argues that it is entitled to judgment as a matter of law on all counts because the jury's finding of liability and the damages awarded were not supported by the evidence. Under Fed. R. Civ. P. 50(b), judgment as a matter of law may be granted after a jury verdict is returned "only if, viewing the evidence in a light most favorable to the non-moving party (and in support of the jury's verdict) and drawing every legitimate inference in that party's favor, the only conclusion a reasonable jury could have reached is one in favor of the moving party."
With regards to liability, Architelos contends that Afilias failed to establish that the defendant's NameSentry product was "substantially derived" from Afilias' anti-abuse tool and was therefore a misappropriation of the alleged trade secrets contained in that tool, particularly because plaintiff's tool was only semi-automated, whereas NameSentry was fully automated, and because Afilias failed to present evidence of any algorithms related to its tool. JMOL Br. at 6-8. Architelos also argues that Afilias failed to establish that the allegedly misappropriated information was protectable as a trade secret because Afilias did not prove that the information derived economic value from not being known or readily ascertainable and Afilias did not show that it made reasonable efforts to maintain secrecy.
With respect to the known or readily ascertainable nature of the information, Architelos argues that Afilias failed to present any evidence that the information was not known in the domain abuse industry or was not readily ascertainable by those skilled in the field and that Afilias instead just pointed out the overlap or similarities between Afilias' tool and Architelos' product.
Regarding reasonable efforts to maintain secrecy, Architelos argues that Afilias not only publicly disclosed its purported trade secrets when it filed an application for new TLDs, JMOL Br. at 14, and when it filed its '351 patent application,
Afilias responds that the automation issue is irrelevant because trade secret misappropriation can be found even where the trade secret is modified or improved.
Afilias has the stronger argument with respect to liability, particularly in light of the substantial burden a movant seeking judgment as a matter of law faces in overcoming a jury verdict. Moreover, Architelos' argument that evidence of efforts to guard secrecy or to develop the product is irrelevant is not sound. As plaintiff correctly argues, JMOL Opp'n at 9, "[p]recautions taken . . . to preserve the secrecy of the information," as well as evidence that "acquisition of the information through an examination of a competitor's product would be difficult, costly, or time-consuming," demonstrate that the product is not readily ascertainable by proper means. Restatement (Third) of Unfair Competition § 39 cmt. f (1995). Afilias presented expert testimony and other evidence demonstrating that NameSentry contains many of the same features as the Afilias anti-abuse tool, in addition to evidence showing the time and effort Afilias invested in developing its tool, and expert testimony that developing the Afilias tool would take time and experimenting "to figure out."
Specifically, Afilias' Executive Vice President and Chief Technology Officer testified that it took Afilias two and a half years and approximately $1.5 million to develop a model of its anti-abuse tool, Trial Tr. 138:18-25, 141:14-18, and Afilias' expert Dr. Nielsen, who was qualified as an expert in computer network security,
Architelos did not call any expert witness to counter plaintiff's Dr. Nielsen. Instead, Architelos relied primarily on the testimony of Aaron to demonstrate that the products were different, even though Aaron was a witness who the jury was permitted to disbelieve because he had a personal interest in this litigation and because he was shown during cross-examination to have copied language from Afilias documents, including ones related to NameSentry.
Architelos argues that the amount of the jury verdict was not supported by the evidence and that it should receive judgment as a matter of law on that basis. JMOL Br. at 15. Specifically, Architelos argues that the $10 million figure ultimately awarded by the jury could only have been based on the argument plaintiff's counsel made at the end of the trial and was never mentioned by any witness or supported by any properly admitted evidence.
Afilias counters that the $10 million award was properly based on a royalty rate applied to Architelos' sales projections and was "within the range of the credited testimony, which should not be reweighed." JMOL Opp'n at 17 (quoting
Regardless of which exhibit or what testimony the jury relied upon in calculating Architelos' future profits, plaintiff provided the jury with a large range of figures from which it could calculate a damages amount. The range was supported by plaintiff's expert testimony and by a number of exhibits, the authenticity and accuracy of which were essentially uncontested. Moreover, Architelos did not present any contrary evidence or expert testimony on damages, meaning the record contains only evidence supporting Afilias' estimations of the value of its misappropriated information. Because the Court cannot reweigh that evidence on a Rule 50(b) motion, the jury's award will not be overturned on defendant's motion for judgment as a matter of law, and such motion has been denied in total.
Architelos argues that if judgment as a matter of law is not warranted, it is instead entitled to a new trial. Motions for a new trial under Fed. R. Civ. P. 59 are subject to a "significantly different" standard than Rule 50(b) motions because the court "must weigh the evidence and consider the credibility of the witnesses," and it has discretion to set aside the verdict if that testimony and evidence is insufficient to support the verdict.
When a party seeks a new trial on the basis of a purportedly excessive damages award, "a district court sitting in diversity must apply state law standards" to determine whether the verdict provides a basis for granting a new trial.
Architelos contends that the jury award is against the clear weight of the evidence, is based on false evidence, and would result in a miscarriage of justice. JMOL Br. at 22. In response, Afilias argues that although the Court may now weigh the evidence and assess witness credibility, the Rule 59 motion fails for the same reasons that the Rule 50(b) motion does, and plaintiff's use of PX-463 does not constitute "false evidence." JMOL Opp'n at 23-25. Afilias further contends that the award is not a miscarriage of justice simply because Architelos will be unable to pay.
Afilias has the better of the argument. Although the Court can weigh the evidence in deciding this motion, defendant has failed to identify any evidence in the record that rebuts the plaintiff's evidence at trial, making it difficult to find that the verdict is against the "clear weight" of the evidence. In particular, by failing to present any expert testimony to counter plaintiff's damages expert, defendant left itself vulnerable to a large damages award. There is also nothing in the record upon which to find that the verdict is based on false evidence.
Furthermore, although neither party discussed the relevant state law in detail, there is little here to suggest that the jury verdict was not the product of a "fair and impartial decision" or that it was influenced by "passion, corruption, or prejudice." Although the award may be out of proportion to the injuries suffered, it is supported by the plaintiff's unrebutted evidence, it is the amount suggested by plaintiff's counsel during closing argument as the reasonable amount needed to make his client whole, and it is far less than the $48.8 million calculated by plaintiff's expert.
Accordingly, the defendant's alternative motion under Rule 59 has been denied.
Architelos argues that the civil conspiracy and conversion claims are preempted under the VUTSA because those claims were entirely predicated on plaintiff's allegations of trade secret misappropriation, JMOL Br. at 26, while Afilias counters that the claims are not preempted because the jury may have awarded damages on those claims for misappropriation of proprietary information rather than trade secrets. JMOL Opp'n at 27-28.
The VUTSA "displaces conflicting tort, restitutionary, and other law of this Commonwealth providing civil remedies for misappropriation of a trade secret;" however, the statute "does not affect . . . [o]ther civil remedies that are not based upon misappropriation of a trade secret." Va. Code Ann. § 59.1-341(A);
Architelos argues that the plaintiff based its conversion and civil conspiracy claims entirely on trade secret misappropriation allegations and offered no other basis for those theories of recovery. JMOL Br. at 26. Architelos points to the Complaint's allegations that "[t]he confidential and trade secret information Defendants removed from Afilias' offices and computer networks . . . belongs to Afilias" and that "Defendants wrongfully converted Afilias' confidential information and trade secrets when each acquired, retained and used Afilias' confidential information and trade secrets" as indications that Afilias based these claims upon trade secret misappropriation.
Afilias argues that it "always maintained that Architelos misappropriated Afilias' non-trade secret, proprietary information, such as its approach to grouping customized abuse feed data . . . and the jury could have found . . . that the filtering system, while confidential, did not rise to the level of a trade secret," leading it to provide a separate damages award for the conversion of that information. JMOL Opp'n at 29. Afilias also contends that Architelos "inflicted a separate injury" on Afilias by publishing Afilias trade secrets in its patent applications, an injury that permitted the jury to make a separate damages award for unjust enrichment gained through a civil conspiracy.
Architelos has the better of the argument. First, Afilias' argument that the Court addressed and resolved preemption is incorrect. The Court did not instruct the jury on preemption and instead regarded the issue as a matter of law unresolved by the jury's verdict. Trial Tr. 1009:5-8 (stating after the jury verdict was returned that the Court was "a little concerned about the preemption concept" and would be "looking for case law" on the issue). In fact, the conversion instruction repeated Afilias' allegation that Architelos converted both its confidential and trade secret information but did not explain to the jury that the conversion claim would be preempted if it found that the converted information qualified as trade secret material.
Second, in its opposition brief Afilias makes contradictory arguments about what information it views as trade secret as opposed to merely confidential and fails to point to evidence it presented at trial that could support standalone claims for conversion and conspiracy. Afilias did not clearly specify during the trial or in its pleadings what aspects of its anti-abuse tool were trade secrets and what parts were simply confidential and proprietary. Instead, during closing arguments, plaintiff's counsel described conversion as "another way of saying something is taken. It's like if they took the trade secret, then they converted it."
Furthermore, in its opposition to defendant's motion, Afilias at one point states that information like the filtering system was a trade secret but then argues that the jury could have found that it was instead just confidential information. JMOL Opp'n at 29 ("Afilias presented evidence and argument that Architelos misappropriated Afilias' trade secrets, in the form of the many-to-one method and filtering system . . . Afilias always maintained that Architelos misappropriated Afilias' non-trade secret, proprietary information, such as its approach to grouping customized abuse feed data.").
Architelos argues that if judgment as a matter of law or a new trial is not warranted, then the Court should remit the damages award because the jury verdict will otherwise result in a miscarriage of justice. A court must "require a remittitur or order a new trial" if it determines that a jury verdict is excessive.
Both parties raise largely the same arguments regarding remittitur as they do with respect to defendant's Rule 50(b) and Rule 59 motions. In addition to those arguments, Afilias contends that Architelos cannot now argue that a damages award of $93,500 would be more appropriate when it did not make that argument or present evidence supporting it at trial, JMOL Opp'n at 26, while Architelos argues that the absence of evidence of willful or malicious action on its part, combined with its efforts to add value to the NameSentry product, makes the award excessive. JMOL Reply at 8-9. Architelos further asserts that Afilias "seeks far more than compensation" and that it "would be totally unjust to allow Afilias to destroy Architelos" through a jury award that is out of proportion to the injury suffered by Afilias.
The multi-million dollar disconnect between Architelos' projections and its actual revenue and profits does indicate that the jury award here is excessive. That gap is also reflected in the difference between Afilias' research and development costs and the profits made by Architelos on the NameSentry product, because Afilias spent $1.3 to $1.5 million on developing its anti-abuse tool, while Architelos has obtained less than $300,000 in revenue from NameSentry in the roughly four years it has offered the product. In addition, as discussed above, although preemption under the VUTSA eliminates half of the damages award, the remaining $5 million awarded for the misappropriation claim is still excessive when considered in the context of plaintiff's damages and defendant's actual profits. Because it is within the court's sound discretion to reduce this award, defendant's motion for remittitur has been granted. A number closer to the actual loss shown by Afilias—namely, its $1.3 to 1.5 million investment in research and development, in addition to the $300,000 in revenue Architelos gained from NameSentry— would be more proportional and better rooted in the evidence presented at trial. Accordingly, the judgment has been remitted to the amount of $2 million.
For the reasons stated in open court, as more fully developed in this Memorandum Opinion, the Defendant's Motion for Judgment as a Matter of Law or, in the Alternative, for a New Trial or Remittitur has been granted only to the extent that the judgment has been remitted to $2 million. This Memorandum Opinion accompanies the Order issued by this Court on January 8, 2016.
