A fascinating, salacious trade secrets case out of the Western District of Missouri and the Eighth Circuit Court of Appeals:
Hallmark Cards, Inc. hired Monitor Company Group, L.P. to provide research related to the greeting cards market. Monitor then took the research it had prepared for Hallmark and gave it to a related private equity firm called Monitor Clipper Partners, LLC (“Clipper”). Clipper then used this information to buy one of Hallmark’s competitors called Recycled Paper Greetings, Inc. Hallmark sued Monitor for breach of contract and Clipper for theft of trade secrets in violation of the Missouri Uniform Trade Secrets Act.
As it turns out, Hallmark is based in Kansas City, Missouri. In December 2001, Hallmark first hired Monitor, a Boston-based consulting firm to provide research related to consumer behavior in the greeting cards market. Monitor created several PowerPoint presentations to summarize its findings. Hallmark and Monitor then signed confidentiality agreements regarding the same.
As the names suggest, Monitor Company Group was closely affiliated with Monitor Clipper Partners. Clipper was a private equity firm founded by two of Monitor’s original partners and located in the same office building. Clipper’s investment strategy was based on leveraging Monitor’s network of consulting clients and the expertise gained in working with those clients. In fact, a team of Monitor consultants were dedicated exclusively to working with Clipper toward this end.
Shortly after Hallmark hired Monitor, Clipper became very interested in entering the greeting cards market. At around this time, the greeting card manufacturer Recycled Paper Greetings (“RPG”) was up for sale. Clipper contacted the team of Monitor consultants who had worked on the Hallmark matter and asked them for the greeting card market research they had prepared for Hallmark. Monitor provided Clipper with five PowerPoint presentations that summarized that data. Clipper then used this data in connection with its bid for RPG. Ostensibly, the data gave Clipper some general insights into the greeting cards market and the value of RPG. The data also allowed Clipper to obtain financing for its bid: Clipper was able to pitch itself to investors as having extensive experience in the greeting cards industry through its work with Hallmark. In the end, Clipper’s strategy was successful and they won the auction for RPG.
After Clipper’s purchase of RPG became public, Hallmark (quite reasonably) began to suspect that Monitor had disclosed the Hallmark research to Clipper and that Clipper had used it in winning the bid for RPG. Hallmark requested that both companies institute a litigation hold on all relevant documents. Both Monitor and Clipper maintained that Clipper had never possessed any of Hallmark’s materials. At the same time, Monitor and Clipper immediately launched a plan to systematically destroy all of the relevant documentary evidence and wipe the hard drives of the computers involved.
Hallmark initiated arbitration against Monitor in 2006 with claims for breach of contract and theft of trade secrets. Because Monitor and Clipper had done such a thorough job of destroying the relevant evidence, Hallmark had little evidence to prove its claims. Nonetheless, Hallmark eventually prevailed on its breach of contract claim. In ruling for Hallmark on the contract claim, the arbitrator held that Monitor had breached the confidentiality agreement by carelessly distributing certain of the Hallmark materials widely throughout the company. But the arbitrator further held any breach of the confidentiality agreement related to a single PowerPoint presentation for the “Greetings” project. In light of this, the arbitrator awarded Hallmark $3.2 million (the amount Hallmark paid Monitor for the Greetings project) and an additional $900,000 to account for the possibility of additional harm stemming from the breach.
After entering this decision, the arbitrator ordered Monitor to retain an independent forensic investigator to search Monitor’s computer systems for any of Hallmark’s proprietary information, report the presence of such information to Monitor and Hallmark and then delete that information. In 2008, this investigation revealed certain emails that clearly established Monitor consultants had intentionally provided all of the Hallmark research to their counterparts at Clipper. Hallmark moved in the district court to reopen arbitration and that motion was granted. Eventually, Hallmark and Monitor settled for a total of $16.6 million. The settlement expressly provided that it was for damages stemming from breach of contract.
After settling with Monitor for more than $16 million, Hallmark’s case against Clipper went to trial. The jury returned a verdict for Hallmark as follows: $21.3 million in compensatory damages and $10 million in punitive damages. After the trial, Clipper moved for judgment as a matter of law and to amend the verdict, arguing: (1) That the evidence did not support the verdict (2) That the jury award amounted to a double recovery for Hallmark (as it had already settled with Monitor) and (3) That the punitive damages award was a violation of due process. The district court denied both motions. Clipper appealed.
The Alleged Trade Secrets
Clipper raised two central challenges to the trade secrets claim: First, Clipper argued that Hallmark had publicly disclosed one of the conclusions contained in the PowerPoint presentations, thereby destroying any claim that the PowerPoint presentations were trade secrets. The court rejected this argument, holding that although Hallmark may have revealed one of the conclusions reached in those documents, it did not reveal the underlying data supporting that conclusion or the methodology used to reach that conclusion. Second, Clipper argued that four years had elapsed between the time that the PowerPoints were created and the time of the misappropriation. In other words, when Clipper misappropriated the PowerPoints, the information was already stale and was of no economic value. The court disagreed: Apparently, the record established that information on the greeting card market was very limited even in 2005, the point at which Clipper misappropriated the Hallmark data. Given the lack of data on the greeting card market, even a four year old presentation would be valuable.
The Double Recovery & Punitive Damages
Next, Clipper argued that the jury verdict amounted to a double recovery for Hallmark: Hallmark had already settled a similar claim against Monitor for millions, then went to trial against Clipper and was awarded another $30 million in damages. The Eighth Circuit rejected this argument, holding that the arbitration award and the trial award amounted to two separate awards for two separate injuries.
In evaluating the arbitration award for breach of contract, the court focused on two things: First, the contract between Hallmark and Monitor barred recovery for any special or consequential damages. Second, the settlement agreement between Hallmark and Monitor indicated that the damages paid were solely for breach of contract. The measure of damages paid as part of the arbitration settlement was the amount Hallmark had paid Monitor for the research at issue. In contrast, the jury verdict against Clipper was based on Clipper’s misappropriation of Hallmark’s trade secrets. Apparently, Hallmark advanced two different models of damages: One based on unjust enrichment and another based on a “reasonable royalty.” The unjust enrichment model calculated how much money Clipper saved by using Hallmark’s trade secrets instead of paying for its own research. The royalty model measured the amount that Clipper would likely have paid Hallmark for the use of the information. The later apparently involved some complicated calculations related to the value of the information in connection with the purchase of RPG (and factored in how much profit Clipper could have made from the sale of RPG in pegging the value of the trade secrets). In the end, the district court allowed both damages theories to reach the jury and allowed Hallmark to choose which one it wanted. Not surprisingly, Hallmark chose the royalty model which amounted to greater damages.
In my view, the Eighth Circuit’s logic here is somewhat suspect. Hallmark paid Clipper for certain market research and the parties entered a confidentiality agreement. Clipper clearly breached that agreement. In resolving that dispute, Clipper basically gave Hallmark a full refund of the money it paid for the research at issue. Let’s start here: There is no doubt that Hallmark was able to use the research in question. There is no doubt that the research had some value to Hallmark— in spite of Clipper’s breaching the confidentiality agreement. But Hallmark got a full refund to the tune of $16 million. So at this point, Hallmark has been made whole (arguably more than whole, because it got all of its money back plus any benefits it derived from the research).
Turning to the trade secrets issue: Monitor clearly misappropriated the trade secrets at issue. My problem is that Hallmark had already received a full refund for the research that made up the trade secrets. Hallmark had already been made whole. But Hallmark got to have its cake and eat it too: It got back the money it paid for the alleged trade secrets and still got to pursue a damages claim based on the misappropriation of those same trade secrets. This may not be the paradigmatic double recovery scenario, but it’s clearly a situation that should raise concerns in that direction. The Eighth Circuit’s analysis prizes form over substance and does not give the double recovery issue fair consideration.
The final issue on appeal was a challenge to the $10 million punitive damages award as unconstitutional, which the Eighth Circuit (rightly) laughed out of court.
The case is Hallmark Cards, Inc. v. Monitor Clipper Partners, LLC, 13-1905, 2014 WL 3408853 (8th Cir. July 15, 2014).