Health Law Daily $280 million punitive-damages award in trade secrets theft found to be constitutionally excessive
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Monday, August 24, 2020

$280 million punitive-damages award in trade secrets theft found to be constitutionally excessive

By Jeffrey H. Brochin, J.D.

Conduct by a software company was found to warrant punitive damages, but not reprehensible to an extreme degree; punitive damages required to be capped per Wisconsin and federal law.

A federal appeals court affirmed a district court jury’s $140 million compensatory verdict against a healthcare software company’s use of a comparative analysis based on stolen trade secrets, and the district court’s elimination of a $100 million verdict for uses of "other information," but remanded the $280 million punitive-damages award as constitutionally excessive (Epic Systems Corp. v. Tata Consultancy Services Ltd., August 20, 2020, Kanne, CJ).

Unauthorized access to proprietary files. Epic Systems (Epic) is a leading developer of electronic-health record software that manages relevant information about patients in a central location. Epic provides versions of their software to some of the top hospitals in the United States, and to America’s largest healthcare facility operator, Kaiser-Permanente (Kaiser), via access to a web portal called UserWeb" that provides various resources and supplies an online forum where Epic’s customers can share information.

Tata Consultancy Services, Ltd (TCS), is a healthcare record competitor that was also hired as a consultant to Kaiser, but under very strict conditions pertaining to access to Epic’s Kaiser files. TCS illegally accessed Epic’s UserWeb system between 2012-2014 and downloaded over 6,000 documents that contained Epic’s confidential information, including some of its trade secrets. The unauthorized access came to light in early 2014, when a TCS employee attended meetings concerning TCS’s newly-developed Med Mantra software, and was "astounded" because he had seen Med Mantra several times before and, due to its improvement he was concerned that some of the information from Kaiser had been used to improve Med Mantra. A visit to the product development team confirmed his suspicions when he was shown a spreadsheet that compared Med Mantra to Epic’s electronic-health-record software. He was subsequently provided with a less detailed document referred to as the "comparative analysis," part of TCS’s efforts to sell Med Mantra in the U.S., and specifically to Kaiser.

Jury trial and verdict changes. Epic was informed of the breach of their trade secrets, filed suit in district court, and after a jury trial, the jury returned a $940 million total damages award:

$140 million for uses of the comparative analysis, $100 million for uses of other confidential information, and $700 million in punitive damages. The court then addressed several post-trial motions, including TCS’s three motions for judgment as a matter of law on liability and damages. although the court upheld the jury’s liability verdict and its $140 million compensatory-damages award based on TCS’s uses of the comparative analysis, the court struck the $100 million compensatory award for "other uses" of Epic’s confidential information and reduced the punitive-damages award to $280 million. Both parties appealed.

Applying Wisconsin law. TCS challenged the district court’s decision to leave intact the $140 million compensatory award related to the comparative analysis, as well as the district court’s punitive damages decisions. On cross-appeal, Epic challenged the district court’s decision to vacate the $100 million compensatory award based on "other uses" of Epic’s confidential information. The appeals court began its analysis by noting that when hearing state-law claims that arise under diversity jurisdiction, federal courts are obliged to follow state decisional law, as well as all other state law, and, when a federal jury awards compensatory damages based on a state-law claim, state law applies to the appellate review of that damages award. Furthermore, when state law provides the basis for liability, the punitive-damages award must be consistent with state law.

Because Epic’s damages award for unjust enrichment was based on its claims under Wisconsin law for misappropriation of its trade secrets and confidential information, the award of punitive damages to Epic had to be based on Wisconsin law.

Upholding the compensatory award. TCS argued that there was no logical connection between the basis for liability and the jury’s damages verdict. Specifically, TCS argued that a reasonable jury could not find that TCS received a $140 million benefit by incorporating Epic’s confidential information and trade secrets into what TCS characterized as a "stale marketing document." The appeals court disagreed, finding that unjust enrichment damages are available as a remedy for a defendant’s misappropriation of trade secrets and are also available as a remedy for Wisconsin tort claims.

Calculating the benefit conferred on a defendant to determine unjust enrichment damages is a context specific analysis, and the jury could award avoided research and development costs based on TCS gaining a significant "head start" in in its operation, and based on the record, the jury would have a sufficient basis to award Epic $140 million in compensatory damages based on the head start that TCS gained in development and competition.

Punitive amount unconstitutional. The court referenced Wisconsin law which requires the imposition of compensatory damages in order for punitive damages to be awarded. TCS was incorrect that Wisconsin law required Epic to prove an actual injury in order to obtain punitive damages. However, the appeals court agreed with TCS that the punitive-damages award of $280 million violated its due process rights under the federal Constitution and Wisconsin law. The Due Process Clause of the Fourteenth Amendment imposes constitutional limitations on punitive damages which may be imposed to further a state’s legitimate interests in imposing punishment for and deterring illegal conduct, but punitive damages violate due process when the award is "grossly excessive" in relation to those interests.

The U.S. Supreme Court has established three guideposts for testing the excessiveness of punitive damages: (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 in comparable cases. The appeals court found that although TCS’s conduct did involve a repeated course of wrongful acts, it did not rise to the level of "reprehensible to an extreme degree." They also found that the ratio of the $280 million award that the district court entered to the $140 million compensatory award amounted to more than a 1:1 ratio, and therefore concluded that the federal Constitution prohibited a punitive-damages award exceeding a 1:1 ratio.

For the foregoing reasons, the appeals court remanded the matter for reduction in punitive damages.

The case is Nos.: 19-1528 and 19-1613.

Attorneys: Rick Richmond (Jenner & Block LLP) for Epic Systems Corp. Christopher Egleson (Sidley Austin LLP) for Tata Consultancy Services Ltd. and Tata America International Corp. d/b/a TCS America.

Companies: Epic Systems Corp.; Tata Consultancy Services Ltd.; Tata America International Corp. d/b/a TCS America

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