Fourth Circuit Rules On Admissibility Standard In Trade Secrets Case

by Parker Poe Adams & Bernstein LLP
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In a per curiam opinion that began and ended with the same expression of deep reluctance, the Fourth Circuit Court of Appeals vacated a key ruling by the District Court for the Eastern District of Virginia regarding the admissibility of evidence at trial in E.I. DuPont de Nemours & Co. v. Kolon Industries, Inc., No. 12-1260 (April 3, 2014) (unpublished).  Noting that the trade secrets trial had lasted seven weeks with the jury deliberating two days before finding for the plaintiff in an amount of $919 million, the Fourth Circuit was clearly pained in deciding to overturn the District Court’s decision and remand for a new trial.  But the issue on appeal rested on the fundamental question of whether the defendant in that trade secret misappropriation case had been prevented from offering evidence to the jury that would have tended to refute the fundamental precept of the very existence of the trade secret in the first place.  In this case, the Fourth Circuit found that the defendant had been denied that right.  And through this opinion, the Fourth Circuit provides some guidance, perhaps, as to the admissibility of evidence in trade secrets cases  in the future. 

 E.I. DuPont de Nemours & Co. (”DuPont”) sued Kolon Industries, Inc. (”Kolon”) under Virginia’s Uniform Trade Secrets Act, claiming that Kolon had willfully and maliciously misappropriated 149 DuPont trade secrets concerning DuPont’s Kevlar product, a high-strength, para-aramid fiber that is five times stronger than steel.  DuPont maintained that Kolon, a South Korean company that produces its own synthetic fibers and had pursued but suspended development of its own para-aramid product, sought out and hired five former DuPont employees to work on and improve Kolon’s para-aramid manufacturing technology and resolve quality issues with Kolon’s product.  DuPont further claimed, and the jury ultimately found, that Kolon, through the hiring of these former employees, knowingly acquired a myriad of DuPont trade secrets concerning Kevlar, involving both technical and business/marketing confidential information.” 

In a motion in limine filed before trial, DuPont argued that Kolon should be precluded from presenting any argument or evidence at trial that DuPont had disclosed its alleged trade secrets in a prior lawsuit — the Akzo Litigations.  DuPont argued that such evidence was not relevant to the proceedings, as the alleged prior disclosure in the Akzo Litigations did not reveal the totality of the trade secrets in the present lawsuit against Kolon.  DuPont argued that a trade secret remains a trade secret even if part of the information has been disclosed.  A partial disclosure simply does not mean that the totality of the secret has been revealed and therefore, evidence regarding some alleged partial disclosure is irrelevant.  The district court agreed, stating:  “Kolon ha[d] produced no evidence that any particular trade secret, much less a trade secret that is at issue in this litigation, was disclosed in the litigation between [DuPont] and Akzo, N.V.”   With this statement, the district court set a seemingly high standard for admissibility on an all or nothing approach.   The jury subsequently found for DuPont in the amount of $919 million. 

On appeal, Kolon argued that the district court abused its discretion in precluding the introduction of any evidence regarding the Akzo Litigations.  According to Kolon, the excluded evidence would have tended to demonstrate that “[a]t least 42 of the trade secrets DuPont has asserted … involve information that was wholly or partially disclosed during the [prior] litigation.”  By precluding the introduction of such evidence, the District Court, according to Kolon, limited Kolon’s ability to challenge a key element of being a protectable trade secret:  that the information is not generally known or readily ascertainable by proper means to the public.  DuPont, of course, took a different tact, and, mirroring the District Court’s language, argued that Kolon had failed to produce any evidence that “any particular trade secret, much less a trade secret that is at issue in this litigation, was disclosed.”   

After stating that it would only overturn the District Court’s evidentiary ruling if it were arbitrary and irrational, the Fourth Circuit reversed the District Court.  Apparently, the Court of Appeals simply could not affirm a ruling that would set the bar for admissibility at such a high level:

“The district court’s conclusion that ‘Kolon has produced no evidence that any particular trade secret, much less a trade secret that is at issue in this litigation, was disclosed in the litigation between the plaintiff and Akzo,’  … is simply too stringent for admissibility.  Under the circumstances of this case, we think a ’strikingly similar’ standard of relevance is enough.” 

But what exactly does “strikingly similar” mean in this context?  The Fourth Circuit added some guidance on this point:

“[T]o show the relevance of the evidence, Kolon simply needed to make a plausible showing that, either directly or circumstantially, one or more elements of DuPont’s misappropriation claims, e.g., the reasonableness of its efforts to maintain confidentiality, was less likely true.  Equivalently, Kolon simply needed to make a plausible showing that, either directly or circumstantially, one or more elements of its defenses, either to liability or to the quantum of damages, e.g., the reasonableness of its asserted belief that its consultants were not disclosing trade secrets, was more likely true than not true” (emphasis in original). 

The Fourth Circuit continued to caution that it was not saying that all evidence in the Akzo Litigations was admissible for purposes of the Kolon trial.  Rather, the Court was making it clear that its concerns were directed at the “blanket exclusion” of evidence on the topic by the District Court.  The judgment was vacated and remanded to the District Court with instructions to “determine in a more nuanced and particularized manner” what evidence was to be admitted or excluded. 

The interesting part of this opinion, although not expressly stated, is that the Court of Appeals was only addressing the issue of admissibility of evidence for the jury to consider, and not the ultimate standard that the jury would use to determine whether the trade secret existed.  Indeed, in seeking an en banc review, which was denied, DuPont argued that the elements of the claim are clear and the Fourth Circuit’s ruling only would only stand to confuse the jury by bringing ultimately irrelevant information before it.  DuPont’s argument though missed the mark for the Fourth Circuit.  The elements of a trade secret under Virginia’s Uniform Act remain the same after this opinion.  For example, the information must be the subject of “reasonable” efforts under the circumstances to maintain the secrecy of the information and must derive its value from “not being generally known” or “readily ascertainable by proper means” to be a trade secret.  Va. Code 59.1-336 (2013).  The Fourth Circuit opinion, of course, changes nothing here.  What the Fourth Circuit did, though, was to open the door a bit, to give some latitude to a defendant to convince the judge and jury that the information, whether related to secrecy or value, was actually disclosed either in whole, or in part, sufficiently, that someone could re-engineer the alleged secret.  Establishing the trade secret before the jury is not simply a black and white issue, but rather is a healthy shade of gray.  And while perhaps a bit challenging, this standard provides some balance between the interest of the defendant in challenging the existence of the trade secret itself and the right of the plaintiff to not have a jury confused with wholly irrelevant matters.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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