It is every company’s nightmare: a spy infiltrates the heart of the business and delivers a potentially fatal strike by stealing its valuable IP.
This was the scenario apparently confronting tech company Appian, which in 2020 said it had discovered that a “spy” had stolen trade secrets.
Appian took action by suing the software company, Pegasystems, for trade secrets theft, and on May 9, a Virginia court delivered a record $2 billion jury verdict in its favour.
In the wake of the verdict, Appian general counsel Christopher Winters insisted that the lofty amount was justified.
“We put forward strong evidence that Appian trade secrets were misappropriated by Pegasystems. The award of substantial damages to Appian is entirely appropriate given the nature and extent of what Pegasystems did,” he said.
According to Appian, the corporate espionage had cost them 201 customers over eight years, which led to software company Pegasystems being “unjustly enriched” by $479 million as a result.
During the trial, Pegasystems had countered that the information at issue could not be categorised as “trade secrets” because some of it was sourced from publicly available materials.
The company has since confirmed that it plans to appeal the verdict and “vigorously” pursue post-trial remedies to overturn what it has lambasted as an “unjust result”. A full statement can be viewed here.
Speaking to WIPR, Muhammad Faridi, partner at Patterson Belknap Webb & Tyler, who represented Appian, predicted that the verdict could herald a seachange in trade secrets litigation.
“The sheer dollar amount that the jury awarded to Appian is the largest to be handed down by the Virginia state or federal jury to our knowledge, and it’s also one of the most significant trade secret verdicts recorded in the US,” confirmed Faridi.
“The sheer dollar amount that the jury awarded to Appian is the largest to be handed down by the Virginia state or federal jury to our knowledge.”
Muhammad Faridi, Patterson Belknap Webb & Tyler
A tangled web
Trade secret theft by insiders such as employees continues to pose mammoth risks for companies when it comes to safeguarding their IP and future profits. The cost can equate to 1 to 3% of the gross domestic product (GDP) of advanced countries, according to a 2021 report, “Quantifying Trade Secret Theft: Policy Implications”, produced by the Centre for International Governance Innovation.
For the US alone, this means the annual cost of trade secret theft can be estimated at between $180 and $540 billion.
In addition to the startling Appian verdict, May also saw a former Coca-Cola chemical engineer sentenced to 14 years in prison after being convicted of stealing trade secrets worth $120 million to benefit a China-based company.
As Faridi explained, these developments could prompt increased scrutiny and a hardened judicial attitude towards cases involving trade secrets.
“The case sends a message to those who misappropriate trade secrets, so that anyone who’s thinking of engaging in similar types of schemes will be brought to justice when the conduct is ultimately discovered,” he said.
According to Carolyn Hoecker Luedtke, partner with Munger, Tolles & Olson, the presence of highly controversial details in a case—supported by evidence—will motivate a jury to impose harsh penalties.
“One lesson from the Appian verdict is that when a plaintiff is able to uncover these types of ‘sensational’ facts, it can lead a jury to want to punish the defendant, and the flexibility of trade secret remedies allows for some pretty staggering numbers to serve as punishment,” she noted.
A ‘secret agent’
And the details cited by Appian were sensational. During the trial proceedings, the jury heard from Appian that Pegasystems had instructed its third-party contracting service to recruit someone who was not “loyal” to Appian.
Appian then provided further evidence that the contractor, who was allegedly referred to as a “spy” internally at Pegasystems, took clandestine video recordings of the Appian development environment for use by Pegasystems when producing competitive materials and evaluating improvements to its platform.
Noted Faridi: “This conduct spanned over eight years beginning in February of 2012 and lasting until 2021. And my view is that the jury certainly took that into account when evaluating liability as well as damages. It’s hard for us to say exactly what drove the jury’s determination, but we can only assume that it was the significant and substantial evidence that we put forward.”
And there were other signs that courts are adopting an increasingly steely approach in this area of litigation.
Pegasystems had countered that the time the alleged conduct took place was not covered by a statute of limitations, a stance that was ultimately dismissed by the court before the trial.
As Faridi explained: “The defendant argued that this misappropriation took place in 2012 and that Appian had plenty of time to uncover this conduct. The court rejected that defence. So that sends a message to the appropriators that they can’t just hang their hat on the notion that if conduct uncovered by the plaintiff took place a long time ago, then there should be no recompense.”
In his view, juries and courts have become “rightfully” sceptical of this form of a defence.
“So there is now a message to the broader marketplace that you can’t just hope that the passage of time will help you shield and cover up the misappropriation,” he emphasised.
“When a plaintiff is able to uncover these types of ‘sensational’ facts, it can lead a jury to want to punish the defendant.”
Carolyn Hoecker Luedtke, Munger, Tolles & Olson
’False identities’ claim
As part of its case, Appian put forward evidence that Pegasystems CEO Alan Trefler had even attended and participated in a meeting with the contractor and received Appian’s trade secrets.
This alleged conspiracy was designated “Project Crush” within Pegasystems, Appian said. Appian also alleged that a Pegasystems employee reviewing the materials had exclaimed that “the company should never lose to Appian again”.
During the trial, the tech company also held that Pegasystem’s product development team reviewed the materials provided by the contractor and changed the course of Pegasystems’ product engineering to exploit Appian tech.
Appian presented documents and testimony that Pegasystems made use of the trade secrets gleaned from the contractor to make improvements to the Pegasystems platform.
According to Appian, Pegasystems employees used false identities to access Appian information and trial versions of Appian’s software, which were then used for competitive purposes. Trefler allegedly used an alias, “Albert Skii”, to obtain access to Appian information.
One Pegasystems employee was said to have created a fake persona and a company to dupe Appian into providing him with access to its platform. Other Pegasystems employees allegedly obtained access to Appian’s software via Pegasystems’ partners in India, using credentials provided to those partners under licence.
Pegasystems said it “acknowledged”a small number of employees accessed public Appian free trials.
“We took corrective action and implemented technical blocks to prevent such access to Appian free trials in the future,” said the company, which added that the “implication” in an Appian press release that Trefler accessed any Appian free trials is “categorically false”.
In light of this verdict, Faridi contended that the case delivered another powerful message.
“The damages awarded will be significant if the plaintiff is able to establish that the information is a trade secret, that it was misappropriated, and that the plaintiff was damaged or that the defendant obtained unjust enrichment as a result of the misappropriation.”
Significant hurdles
And despite his team’s notable victory, Faridi cautioned that plaintiffs in trade secrets lawsuits should still be wary of facing substantial obstacles.
“One of the chief things that the plaintiff needs to establish is that the disputed information qualifies as trade secrets; that it derives independent economic value from the secrecy surrounding this information, and that it took reasonable measures to protect it.”
In this case, however, Faridi held that the evidence that Appian’s legal team presented to the jury was “overwhelming”.
“We took depositions from Pegasystem employees located throughout the world including India. We engaged in significant expert discovery. But, ultimately, the outcome depends on the weight of the evidence. Here, the jury was resoundingly convinced of the significant liability that Pegasystems had, and of the damage that Appian incurred as a result of this ‘unjust enrichment’.”
“This verdict highlights the potential for very large damages awards in trade secret cases where the alleged facts are particularly egregious,” according to Amy Candido, partner at Wilson Sonsini.
“Juries understand trade secrets and are willing to deliver harsh punishment for corporate theft when presented with compelling evidence.”
Increased trade secret litigation
The “attention-grabbing” $2 billion verdict for Appian, she forecast, will underscore the importance of trade secret litigation to protect IP assets, and “will likely contribute to a continued increase in trade secret litigation”.
And while she noted the outlandish facts of this case may be atypical, Candido predicted that increased job mobility and information management issues created by remote working, would lead to more “eye-catching” trade secret verdicts in the years to come.
William Stroever, member and co-chair of the IP department at Cole Schotz, also believed that the verdict could prompt more litigation, “Any time there is a large verdict, you are going to see an increase in claims brought under similar theories, and trade secret misappropriation will be no exception.”
“I do not expect multi-billion dollar damages awards to become commonplace—and no doubt this specific award will be reviewed on appeal.”
Teague Donahey, Holland & Hart
Trade secrets as a form of IP protection could also become more en vogue, he predicted. “Trade secrets are often less appreciated by businesses than other ‘traditional’, more concrete types of IP. A headline-catching verdict like this one is going to make people think twice about what they own and what their competitors are doing.”
But Teague Donahey, partner at Holland & Hart, took a more cautious view. “Certainly the magnitude of the jury verdict here was eye-opening. But every case must be adjudicated on its own facts, and I do not expect multi-billion dollar damages awards to become commonplace—and no doubt this specific award will be reviewed on appeal.”
A boundless scope
Pegasystems will not have to pay Appian the amount awarded by the jury until all appeals are exhausted and the judgment is finalised.
But if the verdict is upheld, the jury’s finding that Pegasystems’ conduct was willful and malicious may entitle Appian to a further award of attorney’s fees under Virginia law.
This scenario could encourage brands and their IP counsel to be bold, according to Steven Ragland, partner with Keker, Van Nest & Peters.
“It could embolden trade secret misappropriation plaintiffs who feel they have been wronged to take a case all the way to trial and reject settlement offers that they feel do not fully compensate them for their loss,” he said.
Similarly, he noted that it could increase the amount of pre-trial settlements some defendants may be willing to pay.
“Given the relative ease with which digital assets can be absconded with, and the ability of sophisticated players to circumvent digital firewalls, it’s certainly possible that we will see multi-billion dollar verdicts in the future,” he predicted.
“Gone are the days of smuggling a few documents out in a briefcase. These days an entire knowledge centre can fit onto a single thumb drive, so the scope of misappropriation is practically boundless.”
Images: Shutterstock / Oleksii Synelnykov, Theeradech Sanin, Jirsak
