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Trading Secrets A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

Second Circuit Largely Affirms $18.1 Million Trade Secrets Misappropriation Verdict

Posted in Data Theft, Trade Secrets

On February 6, 2013, the federal Second Circuit Court of Appeals affirmed $15 million of a $18.1 million dollar jury verdict (onto which the trial court tacked on an additional $1.5 million in interest) in favor of a New York subway brake manufacturer on its trade secret misappropriation claim against a former licensee turned competitor.  Faively Transport USA, Inc. v. Wabtec Corp., No. 11-3518-cv, 2013 WL 440200 (2nd Cir. Feb. 6, 2013).  The legal issues are interesting, sure, but I’d like to focus on the more valuable lesson of the wisdom of settlement that this case screamed for.

The litigation lasted nearly five-and-a-half years, and involved a Swedish arbitration, two American district court cases and two 2nd Circuit appeals.  The lawyers were from globally-renowned law firms.  All told, the litigation involved no less than four trials (an arbitration, two preliminary injunction hearings, and a jury trial), two federal appeals, and mountains of briefing in all those proceedings.  In the end, plaintiff got $20 million in damages and interest, with apparently no fee awards.  I have to ask:  was it worth it?

Here’s what happened.  Faively claimed that Wabtec took its subway-car air-brake system technology, resulting in Wabteck’s landing a subway modernization contract with the New York Transit Authority in 2007 (and perhaps other deals).  Between 1993 and 2005, Wabtec designed brake systems under a license agreement with its sister company, SAB Wabco.  Faively bought SAB Wabco in 2004, including its licensing agreements, and terminated Wabtec’s license effective yearend 2005.  Wabtec claimed to have “reverse engineered” its own air brake system prior to the end date, without using any of Faively’s drawings or information to which it had access under the license agreement.  No less than seven times was that claim rejected by an arbitration panel, two federal trial judges, two federal appellate panels, and a federal jury.

Plaintiff Faively European arm first sued Wabtec in October 2007 in Sweden for misappropriation of Faively’s trade secret drawings.  While the arbitration was pending, that same plaintiff sued in the New York Southern District for an injunction against further use of the Faively’s subway brake secrets.  The District Court agreed that Wabtec likely misused Faively’s trade secrets, and granted the injunction.  The Second Circuit also agreed that Wabtec likely misused the secrets, but vacated the injunction due to the absence of irreparable harm.

Back to Sweden, the arbitration panel’s December 2009 award rejected Wabtec’s claim (its third, by that time) that it properly reverse-engineered its brake system.  The panel awarded Faively Europe a $3.9 million royalty, based on projected profits through 2011.  The panel’s award apparently excluded any of Faively USA’s claims against Wabtec, and the panel reportedly said that Faively USA was the primary victim of Wabtec’s trade secret misuse. The award did not appear to include any attorneys’ fees.

So, in May 2010, Faively went back to New York, where its USA-arm filed a separate trade secret misappropriation suit based on the air brake system.  Wabtec filed a motion to dismiss, which the court denied.  Wabtec later filed a motion for summary judgment based in part on its reverse-engineering claim, which the court rejected for a fourth time.  In fact, the court granted Faively’s motion for summary judgment on Wabtec’s trade secret misappropriation liability, and set the case for trial on damages.

Undeterred, Wabtec went to trial on Faively’s damages in late June 2011.  After trial, the jury rejected Wabtec’s argument that it came up with its systems on its own (fifth rejection), and awarded Faively $18.1 million in compensatory damages.  No fees were awarded, probably because New York has not adopted the Uniform Trade Secrets Act, which in section 4 permits attorney fee awards for willful and malicious misappropriation. 

On August 1, 2011, the district court denied Wabtec’s post-trial motion in which it re-asserted its reverse engineering theory (sixth rejection), and entered judgment on the jury’s verdict, plus $1.5 million in pre-judgment interest.  The Second Circuit’s February 6th decision again rejected, for a seventh time, Wabtec’s argument in its appellate brief that it properly reverse engineered its subway brakes (as well as Wabtec’s other arguments).

What did we learn from this case?  Protracted trade secret litigation can be very expensive. Only the parties can tell if it was worth it in this case.