[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
__________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
No. 03-11565 July 21, 2004
__________________ THOMAS K. KAHN
CLERK
D.C. Docket No. 99-02553-CV-BE-NE
PEAT, INC., an Alabama corporation,
Plaintiff-Counter
Defendant-Appellee,
versus
VANGUARD RESEARCH, INCORPORATED,
a Virginia corporation,
Defendant-Counter-
Claimant-Appellant.
____________________
Appeal from the United States District Court
for the Northern District of Alabama
_____________________
(July 21, 2004)
Before CARNES and WILSON, Circuit Judges, and JORDAN*, District Judge.
JORDAN, District Judge:
*
Honorable Adalberto Jordan, United States District Judge for the Southern District of
Florida, sitting by designation.
Following a two-week trial, a jury found that Vanguard Research, Inc. breached
its contract with PEAT, Inc. and appropriated PEAT’s trade secrets in violation of the
Alabama Trade Secrets Act, ALA. CODE § 8-27-1 et seq. The jury awarded PEAT
$325,981.01 in compensatory damages on the breach of contract claim, as well as
$1,819,334,00 in compensatory damages and $8,890,000 in punitive damages on the
trade secrets claim. The district court denied Vanguard’s motions for judgment as a
matter of law and for new trial, but reduced the punitive damages award to $78,000
and entered judgment accordingly.
Vanguard now appeals the adverse judgment on the trade secrets claim, but not
the jury verdict or award on the breach of contract claim. Vanguard argues that there
is insufficient evidence to support the verdict on the trade secrets claim, that it is
entitled to a new trial due to the improper admission of a Rule 1006 summary exhibit
purporting to list PEAT’s trade secrets, that the award of compensatory damages is
excessive, and that the evidence does not support an award of punitive damages. As
explained below, we reject all of Vanguard’s arguments concerning the sufficiency
of the evidence, conclude that a new trial is required due to the erroneous and
prejudicial admission of the summary exhibit, and do not reach the challenges to the
2
damages awarded by the jury.1
I
Like most commercial litigation, this action was complicated, and had many
twists and turns, both procedural and substantive. We summarize the proceedings
and facts only insofar as necessary to provide context for our decision.
A
The dispute between PEAT and Vanguard arose out of a marketing and license
agreement between the two entities to create plasma energy systems, which use
extreme temperatures generated by plasma energy to treat hazardous waste without
leaving behind harmful byproducts. PEAT referred to this plasma energy technology
as “Thermal Destruction and Recovery” (TDR), while Vanguard called it “Plasma
Energy Pyrolosis System” (PEPS).
Vanguard started doing business with PEAT’s prior parent company, Mason
& Hanger, in the early 1990s through a series of non-exclusive marketing agreements.
Vanguard essentially provided marketing and expertise in the area of government
contracting, while Mason & Hanger provided technology for use in plasma energy
systems through a subsidiary, Plasma Engineering Applied Technology, Inc. (old
1
Although we reverse, we commend the district court for its handling of the trial and of the
many issues presented during the two-week proceeding.
3
PEAT).
In 1994, Dr. Marlin Springer and other old PEAT engineers applied for a patent
for a process to treat waste using plasma energy. The patent was issued in 1996 to
Dr. Springer as U.S. Patent No. 5,534,659, and became an asset of old PEAT.
Two years later, in 1996, several investors, including Dr. Springer, bought from
Mason & Hanger the assets of old PEAT, including the ‘659 patent. The new
company retained the PEAT name. Vanguard, which tried unsuccessfully to
purchase old PEAT or be included as part of the purchasing group, continued to work
with PEAT after it became a separate company.
PEAT and Vanguard entered into a “teaming agreement” in late 1996 to
pursue a contract with the Tennessee Valley Authority. In August of 1997, PEAT
granted Vanguard an exclusive license for its technology (described as “the system
known as PEPS”) for the program involving the TVA and for “all follow-on programs
and systems to this initial program.” Shortly thereafter, the parties submitted a
proposal to the TVA for a Phase I project to develop a plasma energy system.
PEAT and Vanguard executed a new marketing and license agreement in
December of 1997. This agreement did not grant Vanguard a license to make, use,
or develop a plasma energy system. Instead, the agreement provided that a separate
license would be negotiated for each subsequent contract, that Vanguard would use
4
PEAT as the sole source for manufacturing all plasma energy systems, and that PEAT
retained exclusive rights, title, and interest in all of its intellectual property
(including technical and proprietary information). The agreement also contained a
merger clause. At trial, PEAT asserted that this merger clause superseded the 1997
license it granted to Vanguard, while Vanguard maintained that the merger clause did
not affect the 1997 license, which was separately provided for the TVA Phase I
project and for all “follow-on programs and systems.”
The prime contract for Phase I – which called for a fixed plasma energy system
– was executed in February of 1998, and PEAT and Vanguard entered into a
subcontract around that time for their work on Phase I. PEAT designed the system
for Phase I in Alabama and assembled it at Vanguard’s facility in Virginia during
1998. Throughout Phase I, Vanguard criticized various aspects of PEAT’s work. Not
surprisingly, at trial the parties presented very different versions of PEAT’s
performance, as well as what problems existed, how significant those problems were,
and who was responsible for them.
In June of 1998, Vanguard made a proposal for Phase II of the project – which
called for a mobile plasma energy system – and identified PEAT as a subcontractor.
PEAT received a letter subcontract for certain tasks in Phase II from the
government’s prime contractor the following month, and thereafter began working
5
with Vanguard on Phase II conceptual issues. Vanguard executed its Phase II contract
with the prime contractor in November of 1998. Though the parties traded various
proposals for the scope of work on Phase II, Vanguard and PEAT never executed a
subcontract between themselves for Phase II.
Some of the work on Phase II was performed simultaneously with the work on
Phase I. PEAT claimed that during its work on Phase II it shared much sensitive
propriety information with Vanguard (though it also claimed that it had given
Vanguard such information throughout the work on Phase I). Vanguard, for its part,
denied that PEAT had passed on or divulged any trade secrets.
While undergoing Phase I testing in January of 1999, the plasma energy system
designed by PEAT experienced an explosion which blew an 80-pound door off the
incinerator. Again, the parties disagreed as to the causes of, and responsibility for, the
explosion. Vanguard blamed PEAT’s poor design – which it claimed was unsafe –
for the explosion, while PEAT generally said the explosion was caused by the failure
of various safety components and insufficient time to develop one of the relevant
processes.
The following month, Vanguard ordered PEAT to stop work on Phase I and
Phase II. According to Vanguard, it became clear after the explosion that PEAT
could not do the job. PEAT, on the other hand, asserted that Vanguard used the
6
explosion as a pretext for replacing PEAT as the provider of the plasma energy
system. PEAT claimed that, following its termination, Vanguard misappropriated
its trade secrets and used them to modify the Phase I system and subsequently build
the Phase II system.
B
Whether or not information constitutes a trade secret is generally a question of
fact under Alabama law. See, e.g., The Soap Co. v. Ecolab, Inc., 646 So.2d 1366,
1372 (Ala. 1994). To qualify as a trade secret under the Alabama Trade Secrets Act,
information must (1) be used or intended for use in a trade or business; (2) be
included or embodied in a formula, pattern, compilation, computer software, drawing,
device, method, technique, or process; (3) not be publicly known and not generally
known in the trade or business; (4) not be readily ascertained or derived from publicly
available information; (5) be the subject of reasonable efforts to maintain its secrecy;
and (6) have significant economic value. See ALA. CODE § 8-27-2(1). Cf. Ex Parte
Miltope Corp., 823 So.2d 640, 643-45 (Ala. 2001) (granting petition for writ of
mandamus and setting aside trial court’s discovery ruling which required disclosure
of customer orders received by corporation and of minutes of meetings of
corporation’s board of directors, as such information constituted trade secrets under
§ 8-27-2(1)). As the plaintiff, PEAT had the burden of establishing each of these
7
statutory elements as to each claimed trade secret, see Public Systems, Inc. v. Towry,
587 So.2d 969, 971 (Ala. 1991), and a hotly contested issue at trial was whether
PEAT satisfied this burden.
C
Before the presentation of evidence, Vanguard filed a motion in limine
objecting to PEAT Exhibit 145, a compilation of documents purporting to list PEAT’s
trade secrets.2 In its motion, Vanguard argued that Exhibit 145 was not admissible
as a business record under Rule 803(6) because Dr. Springer had said in his
deposition that it was prepared for PEAT’s counsel after the litigation began. R.
10:200. During argument on the motion, PEAT conceded that Exhibit 145 had been
prepared by PEAT personnel, at the request of PEAT’s counsel, in response to
Vanguard’s discovery request that PEAT identify what trade secrets were allegedly
misappropriated. R. 16:1 at 17.
Although Vanguard reiterated its position that Rule 803(6) did not allow the
introduction of Exhibit 145 because it was not prepared in the ordinary course of
business, R. 16:1 at 18-19, PEAT nevertheless argued that Exhibit 145 was
analogous to a discovery response. Alternatively, PEAT asserted that Exhibit 145
2
Exhibit 145 is reproduced in the appendix, and is described in more detail later in the
opinion.
8
was “[its] best attempt to summarize the entire universe of trade secrets, to summarize
voluminous documents that [it] had prepared, [it] had . . . provided to Vanguard.” R.
16:1 at 19-20. Vanguard responded that PEAT could not introduce its own discovery
responses because they were hearsay (though Vanguard could use such responses as
admissions against PEAT if it wished), and that there was no list of trade secrets to
summarize under Rule 1006: “This is something that was made where different
people sat around and said, well, what can we come up with and claim to be trade
secrets. It doesn’t meet the criteria for admission. It is fine for discovery, it is fine
to use to ask questions . . ., but it’s just not the kind of record that is allowed in under
the rules of evidence.” R. 16:1 at 20-22.
After PEAT replied that Exhibit 145 was a “classic summary” because the
contents were voluminous and could not be examined in court, the district court
overruled the objection and told Vanguard it could question witnesses “as to the
veracity of the information in Exhibit 145.” R. 16:1 at 22. The district court also
permitted Vanguard to have a standing objection to Exhibit 145. R. 16:1 at 22.
Notwithstanding the standing objection allowed by the district court, Vanguard
lodged a contemporaneous objection when PEAT sought to introduce Exhibit 145
through Dr. Springer. R. 16:2 at 231 (“Same objection as we discussed previously.”).
The district court noted the objection and, consistent with its prior ruling, overruled
9
it. R. 16:2 at 231.
II
After thorough examination of the record, including a review of the entire
2500-page trial transcript, we reject, without further discussion, Vanguard’s argument
that there is insufficient evidence to support the verdict on PEAT’s trade secrets
claim. The district court’s denial of Vanguard’s motion for judgment as a matter of
law on that claim is therefore affirmed. See Eleventh Cir. Rule 36-1.
Reluctantly, however, we conclude that the district court erred in admitting
Exhibit 145, and that the error is sufficiently prejudicial to require a new trial. In
light of our grant of a new trial, we do not reach Vanguard’s arguments that the
compensatory damages are excessive and that the evidence does not permit an award
of punitive damages.
A
We review the admission of Exhibit 145 for abuse of discretion, which means
that we look to see if the district court “made a clear error of judgment . . . or . . .
applied an incorrect legal standard.” Alexander v. Fulton County, 207 F.3d 1303,
1326 (11th Cir. 2000) (citation and internal quotation marks omitted). Although
Alabama law controlled the substantive issues in this diversity action, “the
admissibility of evidence in federal courts is governed by federal law,” Borden, Inc.
10
v. Florida East Coast Ry. Co., 772 F.2d 750, 754 (11th Cir. 1985), so we turn to Rule
1006, the provision under which Exhibit 145 was admitted.
In relevant part, Rule 1006 provides that “the contents of voluminous writings,
records, or photographs which cannot conveniently be examined in court may be
presented in the form of a chart, summary, or calculation[.]” Once admitted, a Rule
1006 exhibit constitutes substantive evidence. See, e.g., United States v. Smyth, 556
F.2d 1179, 1184 (5th Cir. 1977) (“Although the word ‘evidence’ does not appear in
its text we construe the rule as treating summaries as evidence[.]”). And because
“summaries are elevated under Rule 1006 to the position of evidence, care must be
taken to omit argumentative matter in their preparation lest the jury believe that such
matter is itself evidence of the assertion it makes.” Id. at 1184 n.12.
The materials or documents on which a Rule 1006 exhibit is based must be
made available for “examination or copying . . . by other parties at [a] reasonable time
and place,” but need not be admitted into evidence. If they are not introduced,
however, those materials or documents must be admissible under the Federal Rules
of Evidence. In other words, Rule 1006 is not a back-door vehicle for the introduction
of evidence which is otherwise inadmissible. See generally J. MCLAUGHLIN, J.
WEINSTEIN, & M. BERGER, 6 WEINSTEIN’S FEDERAL EVIDENCE § 1006.03[3] (2d ed.
2004) (“Charts, summaries, and calculations are only admissible when based on
11
original or duplicate materials that are themselves admissible evidence.”); C.A.
WRIGHT & V.J. GOLD, 31 FEDERAL PRACTICE AND PROCEDURE § 8043, at 527 (2000)
(“Rule 1006 evidence may also be excluded where the source materials are
inadmissible hearsay or even where just some parts of those materials are
inadmissible hearsay.”). For example, we explained in United States v. Goss, 650
F.2d 1336, 1344 n.5 (5th Cir. Unit A 1981), that Rule 1006 does not permit “the
admission of summaries of the testimony of out-of-court witnesses” because such
testimony would be hearsay. See also United States v. Francis, 131 F.3d 1452, 1457-
58 (11th Cir. 1997) (rejecting challenge to admission of Rule 1006 summaries of
intercepted phone calls, in part because underlying calls and transcripts were admitted
into evidence); United States v. Norton, 867 F.2d 1354 1363 (11th Cir. 1989)
(assumptions in Rule 1006 exhibit must be “‘supported by evidence in the record’”);
United States v. Atchley, 699 F.2d 1055, 1058-59 (11th Cir. 1983) (affirming
admission, under Rule 1006, of chart reflecting telephone toll records which had
themselves been introduced under Rule 803(6)) .
Exhibit 145 fails to satisfy this foundational evidentiary requirement, as it is
comprised of classic hearsay – statements made outside of court by persons other than
the declarant, introduced for the truth of the matter asserted (that PEAT in fact had
trade secrets it shared with Vanguard), and not admissible under any hearsay
12
exception. Exhibit 145 contains numerous self-serving documents prepared by PEAT
after this action was filed: (a) a list prepared by a PEAT engineer of 109 “[t]rade
secrets shown, discussed, or provided to [Vanguard];” (b) a “recap” of “[t]rade
[s]ecrets provided to [Vanguard]” dated January 7, 2000, with conclusory statements
like “[c]hamber configuration trade secrets include the size and shape of both
rectangular and cylindrical chambers, instrumentation locations, and entrance and exit
locations for the various chamber penetrations when used to process a mixture of
organic and non-organic waste materials in a reducing atmosphere to produce a syn-
gas;” and (c) a checklist, dated December 30, 1999, and devoid of explanation, of 23
PEAT “trade secrets.” Exhibit 145 also includes a copy of the ‘659 patent issued to
Dr. Springer on July 9, 1996, and, worst of all, two memoranda (each seven pages
long) prepared by Dr. Springer, PEAT’s principal and corporate representative, on
January 14, 2000, after the litigation began. The memoranda, though similar, are not
identical. In the first memorandum, Dr. Springer provides a definition of trade secrets
which is broader than that set forth in Alabama law. Dr. Springer prefaces the second
memorandum with the following sentence: “The following is a discussion of process
capabilities and design and manufacturing issues that include proprietary information
and trade secrets provided to Vanguard by PEAT since 1992.”
Dr. Springer goes on, in each of the memoranda, to make the following
13
conclusory statements and claims, many of which go beyond the existence of trade
secrets and comment on Vanguard’s alleged misappropriation and intent:
“Since 1992 . . . PEAT personnel have continually shared many trade
secrets with [Vanguard].”
“It became clear early in the PEPS Phase [I] Project that Vanguard's
intent was to assimilate . . . trade secrets associated with the design,
manufacturings, and procurement of key equipment and major
subsystems (PEAT’s designated role).”
“The source of this knowledge [i.e., the technology] and basis for
considering it a trade secret was the lack of information available in the
industry.”
“[K]nowledge of different vendor capabilities to meet . . . specifications
is considered a trade secret.”
“The processing chamber and control system is highly proprietary and
the detail design of both are considered trade secret.”
“It also became evident that Vanguard employees had been instructed
to mount a relentless effort toward gathering sufficient trade secret
information in order to take over design, manufacturing, procurement,
integration, and operation of future PEPS.”
As noted earlier, Exhibit 145 was not compiled in the ordinary course of
business. Instead, PEAT and its employees (including Dr. Springer) prepared Exhibit
145 during the course of this litigation to respond to Vanguard’s discovery request
that PEAT identify what trade secrets were allegedly misappropriated. Dr. Springer
essentially admitted that Exhibit 145 was overbroad, as he compiled the information
14
“to include everything [he] thought might be a trade secret.” R. 16:2 at 264, 267
(emphasis added). Moreover, as was made clear below, Exhibit 145 was based in
large part on the first-hand knowledge of PEAT’s employees. R. 16:1 at 17 (PEAT’s
counsel: “it was prepared by PEAT personnel . . . in response to a request . . . asking
PEAT to identify what trade secrets we contended were misappropriated by
Vanguard”); R. 16:1 at 264, 445 (testimony to the same effect by Dr. Springer).
Thus, Vanguard correctly argued below that the underlying materials or information
on which Exhibit 145 was based were not admissible under Rule 803(6) because they
were prepared during, and for use in, litigation. R. 16:1 at 19. See Noble v. Alabama
Dept. of Environmental Management, 872 F.2d 361, 366 (11th Cir. 1989) (document
prepared in anticipation of litigation is not “compiled as a matter of regular practice”
for purposes of Rule 803(b)). That meant that Exhibit 145 could not be introduced
under Rule 1006. “Summaries of records prepared for litigation are indeed
inadmissible[,] . . . and inadmissible documents are not made admissible by being
summarized.” AMPAT/Midwest, Inc. v. Illinois Tool Works, Inc. 896 F.2d 1035,
1045 (7th Cir. 1990). See also Heckett v. Housing Authority, 750 F.2d 1308, 1311-12
(5th Cir. 1985) (race of each landlord, which was determined based on conversations
with a few owners, constituted inadmissible hearsay, and could not form part of Rule
1006 exhibit); Paddack v. Dave Christensen, Inc., 745 F.2d 1254, 1260 (9th Cir.
15
1984) (audit report should not have been admitted under Rule 1006 because it was
based in part on information derived from “[u]nion sources . . . not subject to cross-
examination,” and witness could not identify what portions of report were not derived
from inadmissible hearsay). In sum, Exhibit 145 was based on inadmissible hearsay
and contained conclusory allegations concerning Vanguard’s alleged
misappropriation and intent. The district court abused its discretion in admitting it
under Rule 1006.
B
Not every evidentiary error, of course, requires reversal. Our cases, consistent
with Rule 61 of the Federal Rules of Civil Procedure,3 hold that a new trial is
warranted only where the error has caused substantial prejudice to the affected party
(or, stated somewhat differently, affected the party’s “substantial rights” or resulted
in “substantial injustice”). See, e.g. Hall v. United Ins. Co. of America, 2004 WL
915912, *2 (11th Cir. April 30, 2004) (“substantial prejudice”); Alexander, 207 F.3d
at 1330 (“substantial injustice”); Noble, 872 F.2d at 367 (“affect substantial rights”).
Notwithstanding the difference in terminology, the inquiry is always directed to the
3
In pertinent part, Rule 61 provides: “No error in either the admission or exclusion of
evidence . . . is ground for granting a new trial or for setting aside a verdict . . . unless refusal to take
such action appears to the court inconsistent with substantial justice. The court at every stage of the
proceeding must disregard any error or defect in the proceeding which does not affect the substantial
rights of the parties.”
16
same central question – how much of an effect did the improperly admitted or
excluded evidence have on the verdict?
To answer this question, we look to a number of factors, including the number
of errors, the closeness of the factual disputes (i.e., the strength of the evidence on the
issues affected by the error), and the prejudicial effect of the evidence at issue. We
also consider whether counsel intentionally elicited the evidence, whether counsel
focused on the evidence during the trial, and whether any cautionary or limiting
instructions were given. See, e.g., Aetna Cas. & Sur. Co. v. Gosdin, 803 F.2d 1153,
1160 (11th Cir.1986); Nettles v. Electrolux Motor AB, 784 F.2d 1574, 1581 (11th Cir.
1986). Every case must of course be evaluated on its own terms, but our decisions
provide some guidance as to when error is harmless. Compare, e.g., Alexander, 207
F.3d at 1329-30 (evidentiary error found harmless where there were proper limiting
instructions and “the verdicts were the product of such one-sided evidence” such that
it was “unlikely, indeed remote, that the jury could have been swayed erroneously by
the wrongfully admitted evidence”), with, e.g., U.S. Steel, LLC v. Tieco, Inc. 261 F.3d
1275, 1288 (11th Cir. 2001) (improper admission of state judicial opinion required
a new trial where opinion was used by one of the parties “throughout the trial” to help
establish disputed facts and counsel told the jury in closing argument “to use the
opinion to make credibility determinations”); Gosdin, 803 F.2d at 1160 (reversing
17
where there was only circumstantial evidence (though “substantial” according to the
opinion), no limiting instructions were given, and counsel asked a key witness about
the wrongfully admitted evidence); We do not lightly cast aside the result of a
complex two-week jury trial. But we are convinced that the admission of Exhibit 145
caused substantial prejudice to Vanguard and that a new trial on the trade secrets
claim is required.
First, Exhibit 145 went to a critical issue in this case – whether PEAT had trade
secrets as defined by § 8-27-2(1). As noted earlier, PEAT had the burden of proving
each of the statutory elements as to each claimed trade secret. See, e.g., Towry, 587
So.2d at 971.
Second, Exhibit 145 was prejudicial. It contained numerous hearsay assertions
by non-testifying PEAT employees with suggestive headings concerning what trade
secrets existed and were provided to Vanguard. To make matters worse, Dr. Springer
made conclusory accusations against Vanguard in his two memoranda and even
commented on Vanguard’s alleged intent. These statements (really accusations) by
Dr. Springer meant that Exhibit 145 was not confined to whether PEAT had trade
secrets, but carried over to the separate questions of whether Vanguard
misappropriated any of those secrets in violation of Alabama law, and whether
Vanguard’s misappropriation was “willful and malicious,” the standard for awarding
18
punitive damages under the Alabama Trade Secrets Act. ALA. CODE § 8-27-4(3); R.
20:2 at 2528 (jury instruction).
Third, even though PEAT used Exhibit 145 with its witnesses to establish the
existence of trade secrets, the evidence on the issue was close. As discussed below,
PEAT’s own witnesses admitted that Exhibit 145 was overbroad, and generally were
not able to identify trade secrets with much particularity. Moreover, Vanguard
presented a fair amount of evidence suggesting that PEAT did not have any protected
trade secrets.
Looking first at PEAT’s own evidence, Dr. Springer, who was PEAT’s
corporate representative, testified (a) that Exhibit 145 was “a list of everything that
PEAT personnel, myself and my engineering staff, felt constituted proprietary and
technical information that included trade secrets,” R. 16:1 at 231 (emphasis added);
(b) that Exhibit 145 was a list of “everything [he] thought might be a trade secret,”
R. 16:2 at 264, 267 (emphasis added); (c) that one of the items in Exhibit 145 –
emissions test data sent to state agencies – was claimed as a trade secret even though
it was available for public review, R. 16:1 at 265-66; and (d) that there was “some
overlap” in the list of trade secrets in Exhibit 145, R. 16:1 at 273. Thomas Kelly,
PEAT’s chairman of the board (and a 20% shareholder), acknowledged that, prior to
suing Vanguard, PEAT did not have a list or inventory of its trade secrets. R. 16:3
19
at 408. Moreover, when PEAT sold its assets to DAE Technologies in late 2001 and
early 2002, and conveyed all of its intellectual property, not all of the trade secrets
listed in Exhibit 145 were contained in the schedule to the contract detailing the trade
secrets being sold to DAE. R. 16:3 at 408-13; Def. Exh. 321. Mr. Kelly had an
explanation for this apparent discrepancy based on his reading of the DAE contract
and the schedule – e.g., he said that the term “all data” covered what was not
specifically listed, R. 16:3 at 413 – but the important point is that his testimony on
this issue was not overwhelming.
PEAT’s experts did not fare much better in specifically identifying the trade
secrets, and sometimes presented alternative versions of what the trade secrets were.
Richard Linsday, a chemical engineer specializing in thermal dynamics and heat
transfer, testified that the items listed in Exhibit 145 were “normally considered to be
trade secrets within the practice in [the] industry,” R. 16:4 at 761, but he hedged his
answer on cross-examination, saying that the items were “areas that would typically
be areas for consideration of the trade secrets,” R. 16:4 at 780 (emphasis added).
When asked if the list in Exhibit 145 was vague, he conceded that “trade secrets
generally are relatively elusive,” R. 16:4 at 780-81, and when asked what it was about
specific items in Exhibit 145 (e.g., rapid quench of gases) that made them trade
secrets, he answered as follows: “I probably can’t tell you exactly what it is because
20
I couldn’t. But I can tell you . . . the general area.” R. 16:4 at 781. When questioned
further, Mr. Lindsay said (somewhat tautologically) that “the result that produces the
result you want defines the trade secret,” and admitted he was “just saying this is the
area that trade secrets lie in. I can’t give you the exact trade secret.” R. 16:4 at 782,
783. In the end, Mr. Lindsay said that trade secrets might be the “way the whole
system fits together,” without further elaboration. R. 16:4 at 784, 787, 789.
Alternatively, he said that, with respect to some items that were repeated in some
form or another in Exhibit 145, “the trade secret is where it’s placed in the process.”
R. 16:4 at 792. PEAT’s other expert, Thomas Eddy, a mechanical engineer with a
master’s degree who did his thesis on plasma, admitted that 10 of the items in Exhibit
145 were included in Dr. Springer’s patent and therefore were not trade secrets. R.
16:4 at 851. Mr. Eddy identified some specific matters that he believed were trade
secrets (e.g., the configuration of the interiors, the design of the chamber, and the
refractory information), and testified generally that, aside from the patent, the items
listed in Exhibit 145 were trade secrets in the industry. R. 16:4 at 853-54, 875. Yet
when asked on direct examination to identify some examples of PEAT trade secrets,
Mr. Eddy could not always be specific: “[A] lot of these are tied together. It’s not
like you can just separate them. They are kind of in groups.” R. 16:4 at 852. Indeed,
on cross-examination, Mr. Eddy could not point to a single specific formula that was
21
a PEAT trade secret and was given to or shared with Vanguard. R. 16:4 at 917.
For its part, Vanguard presented evidence that PEAT did not have any trade
secrets under Alabama law. John Sumner, one of Vanguard’s founders and officers,
and a deputy program manager for the plasma energy system program, testified that
although PEAT personnel discussed proprietary information at meetings with
Vanguard (like a meeting in January of 1998), they never referred to such information
as trade secrets. Mr. Sumner also said he did not recall anyone at PEAT using the
term trade secrets. R. 16:6 at 1121. John Vavruska, Vanguard’s expert on chemical
engineering, testified that there were about 24 patents issued for the use of plasma for
waste, and that proprietary information did not necessarily constitute trade secrets.
R. 16:6 at 1181, 1187. He also stated that “none” of the items listed in Exhibit 145
were trade secrets, explained why he so opined, told the jury that about two-thirds of
the items in Exhibit 145 were covered by claims in the ‘659 patent or could be readily
inferred from language in the patent by someone with reasonable skill, and testified
that the general incantation of a process or formula did not constitute a trade secret
unless PEAT provided specifics. R. 16:6 at 1189, 1254, 1266-67. Jay Ramamurthi,
a Vanguard industrial engineer and project manager, stated that Vanguard did not use
any PEAT trade secrets on Phase II, and explained how Vanguard was able to
complete the system for Phase II without using PEAT’s unique technology or trade
22
secrets. R. 16:8 at 1725-28. John Kantak, a Vanguard senior vice-president,
explained that when VRI and PEAT engineers worked together in teams and shared
information, the data Vanguard requested from PEAT engineers was not trade secret
information. R. 16:8 at 1978-79. Finally, Gordon Smith, Vanguard’s corporate
representative, told the jury that the 1998 Phase II work by PEAT was not marked as
trade secrets. R. 20:1 at 2334.
Like PEAT’s witnesses on the issue of trade secrets, Vanguard’s witnesses
were repeatedly challenged about their testimony on this topic, and we do not mean
to suggest otherwise. For example, Mr. Vavruska, though not pressed on specifics,
conceded on cross-examination that information for use in a specific process (i.e., a
unique application to one’s own process) could be a trade secret. R. 16:6 at 1262.
And Mr. Ramamurthi admitted, also on cross-examination, that there were “unique”
and “proprietary” aspects to Vanguard’s Phase II system, R. 16:8 at 1747, thereby
suggesting that PEAT’s system was also unique and proprietary in some ways, and
maybe even included specific trade secrets. What matters for our purposes, however,
is that Vanguard put on substantial evidence – from both fact and expert witnesses
– to counter the claim that PEAT had trade secrets as defined by § 8-27-2(1).
Fourth, PEAT’s reliance on Exhibit 145 at critical times showed how
important it was in the evidentiary puzzle. When Vanguard moved for a judgment
23
as a matter of law on the trade secrets claim, the district court asked “What are the
trade secrets?” PEAT responded that “[t]hey were identified specifically by Dr.
Eddy,” and told the district court that Exhibit 145 “listed” the trade secrets. R 16:8
at 2421 (explaining that the trade secrets were “the use of [the process]” or the
“knowledge of what not to use”).4 Then, in closing argument, in an effort to convince
the jury that it had trade secrets, PEAT invoked Exhibit 145: “You will have . . .
Exhibit 145 back in the jury room with you. And you heard all the evidence about
why it was created and what all is on it and the groups of things that are on it and all
that.” R.20:2 at 2549.
Fifth, because disputes between the parties as to Phase I had been submitted
to arbitration, PEAT’s trade secrets claim was limited to trade secrets obtained by
Vanguard “apart from the Phase I subcontract.” R. 20:2 at 2503 (jury instruction).
There was no clear demarcation from the evidence at trial as to which trade secrets,
if any, satisfied this limitation, and the general verdict, R. 21:215, does not identify
what trade secrets PEAT proved to the jury’s satisfaction.
Sixth, as far as we can tell, the district court did not give any limiting
instruction on the portions of Exhibit 145 which contained inadmissible hearsay or
4
The district court, in denying Vanguard’s motion, said it would let the trade secrets claim
“go to the jury and see if they can sort it out.” R 16:8 at 2421-22.
24
Mr. Springer’s conclusory comments and allegations about Vanguard’s alleged
misappropriation and intent. The district court read the statutory definition of a trade
secret to the jury, and instructed the jury that in deciding what trade secrets existed
it was not bound by the testimony of any witness or the notation on any document.
R. 16:2 at 168-69, 206-07; R. 20:2 at 2512-13. The district court also told the jury
that a patent is a matter of public record, and that information disclosed in a patent
cannot be a trade secret. R. 20:2 at 2518. These instructions, however, did not
sufficiently eliminate or reduce the prejudicial effect of the inadmissible evidence and
statements in Exhibit 145.
III
The trial transcript provides no clear answer as to what trade secrets PEAT had,
if any, in Phase II. As we see it, the evidence allowed the jury to find for either side
on this threshold issue. Because the evidence was so close, the admission of Exhibit
145 constituted reversible error.
The jury verdict and judgment in favor of PEAT on the trade secrets claim is
reversed, and that claim is remanded for a new trial. We reject Vanguard’s argument
that PEAT presented insufficient evidence on the trade secrets claim, and do not reach
Vanguard’s arguments concerning the compensatory and punitive damages awarded
25
by the jury on that claim.5
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.
5
The jury’s verdict in favor of PEAT on the breach of contract claim is not affected by the
grant of a new trial, as Vanguard did not appeal from that verdict.
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WILSON, Circuit Judge, concurring:
I agree with the result in this case. I write separately to emphasize that it is
only with great reluctance that I concur that the error in admitting Exhibit 145 was
sufficiently prejudicial to warrant a new trial.
My primary concern is whether Vanguard suffered any demonstrable prejudice;
it appears that Vanguard had access to Exhibit 145 long before trial, and had ample
opportunity to cross-examine PEAT’s witnesses about whatever problems existed in
the evidentiary submission. In addition, PEAT’s counsel crafted Exhibit 145 in
response to a discovery request from Vanguard; it is somewhat ironic that Vanguard
now argues to have the judgment overturned as a result of the very materials it asked
PEAT to prepare.
I am further concerned about the practical considerations of remanding this
matter for a new trial. We now allow Vanguard another bite at the apple in a case in
which we have already rejected the majority of Vanguard’s arguments, thus upsetting
our strong interests in finality and efficiency. This matter will now be litigated again,
at significant time and expense to the parties. Yet, Exhibit 145 contains inadmissible
hearsay that very well could have made a difference to the jury.
As our predecessor court has written, “[a]fter a long and hotly fought trial, an
appellate court is reluctant to overturn the rulings of a district judge.” Ramos v.
27
Liberty Mut. Ins. Co., 615 F.2d 334, 343 (5th Cir. 1980). It is not lightly that we
disturb a trial judge’s evidentiary findings, and it is with even greater unease that we
interfere with the result reached by a jury after an otherwise well-litigated case.
However, this was a complex and often confusing matter that turned on close factual
questions. In addition, the district court did not give a limiting instruction with regard
to any of Exhibit 145’s evidentiary problems. The presence of such an instruction
could very well have led us to a different result today.
As the Eighth Circuit has noted, “[w]here the subject matter of the litigation is
simple, the evidence straightforward, and the legal issues unconfused, courts are
properly reluctant to overturn the jury’s verdict and to grant a new trial.” Coast-to-
Coast Stores, Inc. v. Womack-Bowers, Inc., 818 F.2d 1398, 1403 (8th Cir. 1987). The
present case presents the infrequent occasion in which an error justifies a new trial
– a result we only reach with great caution.
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