Parties often push experts to testify outside their area of expertise and leave it up to the expert to push back when uncomfortable.  If the expert fails to do so, a party's aggressiveness may come back to haunt it before the Court.  That is why the Scentsational case, although nonprecedential, serves as a cautionary tale for intellectual property litigators.

Scentsational's interactions with Pepsi began in 2001, when it first shared trade secrets relating to the development and commercialization of scented packaging for beverages.  Over the next nine years, the two companies executed four confidentiality agreements and a funded development agreement.  Scentsational's founder also made technical presentations about the technology to Pepsi scientists and engineers, including in January 2008 and March 2010, and provided product samples to Pepsi.  Soon after the March 2010 presentation, however, the project lost steam and Pepsi decided to terminate the relationship with Scentsational.

Upon Pepsi's shelving of the project, Scentsational immediately went to talk to Coca-Cola about how its technology could benefit Coke's products.  In August 2010, Scentsational and Coke executed an agreement to begin the project and completed the initial phase (Phase I).  However, before they started Phase II -- or executed the Phase II agreement -- Coke discovered a number of Pepsi patent applications that had been filed between 2008 and 2011 and, unbeknownst to Scentsational, allegedly incorporated the same Scentsational trade secrets that were now being exploited on Coke's behalf.  Coke therefore terminated the relationship.

Faced with the loss of millions of dollars had the Coke products gone to market, Scentsational sued Pepsi in the U.S. District Court for the Southern District of New York for trade secret misappropriation, correction of inventorship on the patent applications that allegedly incorporated Scentsational's trade secrets, breach of the confidentiality agreements, and related business torts.  After discovery, Pepsi moved for summary judgment on all of the claims.  Although the Court noted that the evidence was thin, it allowed the trade secret misappropriation, correction of inventorship, and breach of contract claims to proceed.  However, the Court found that the argument for lost profits was too speculative -- especially when Scentsational's own technical expert opined that there was a 35% chance of the project producing a commercialized product -- and therefore entered summary judgment on that portion of the misappropriation claim.

Then the case was transferred to a new judge.

Pepsi moved in limine to exclude testimony from all three of Scentsational's experts under Daubert v. Merrrill Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).  On the eve of trial, the new judge granted the motions with regard to Scentsational's technical expert and damages expert.  The technical expert was, admittedly, a packaging expert knowledgeable about both materials and related FDA regulations.  However, she was seeking to testify on the existence of Scentsational's trade secrets, regulatory requirements related to those trade secrets, Scentsational's relationship with Pepsi, and Scentsational's business opportunities with Coke.  At Pepsi's urging, the Court found she was not an expert in commercialization, and was therefore unqualified to testify on those issues.  With regard to the existence and misappropriation of trade secrets, she was seeking to provide a factual narrative and reach legal conclusions, both of which would be improper.  And because the damages expert's opinions rested on her conclusions, his testimony would be unfounded and was therefore stricken as well.

In light of the striking of Scentsational's two key experts from the case, the new judge allowed Pepsi to move again for summary judgment.  The Court then granted the summary judgment motion.  She began by repeating the earlier judge's conclusion that Scentsational's damages calculation was too speculative to justify seeking lost profits, based substantially on the likelihood of the Coke project going forward to commercialization being less than 35%.  And because Scentsational hadn't presented evidence of other damages theories, the lack of causation of lost profits doomed the claims for trade secret misappropriation and breach of contract.  Finally, because Scentsational was relying solely on the putative inventor's testimony on the issue of inventorship (without independent corroboration), the Court found that it could not establish by clear and convincing evidence that he was actually an inventor of the subject matter of the contested patent applications.

Scentsational then appealed to the U.S. Court of Appeals for the Federal Circuit (which had jurisdiction over the appeal because of the correction of inventorship claim).  It argued primarily that the District Court's Daubert decisions were incorrect.  The Federal Circuit first found that the District Court's clearly reasoned Daubert decision on the lack of causation of damages and lost profits was well within the discretion afforded to a district court.  Given that decision, the Federal Circuit then considered whether there was any other damages theory that could support a reversal of the summary judgment in Pepsi's favor.  But the panel found that Scentsational had either waived or failed to support damages for Phase II alone or nominal damages both below and on appeal.  Finally -- providing more reasoning than the District Court -- the Federal Circuit found that Scentsational had failed to provide corroborating evidence of inventorship.  Indeed, it sought to leverage its trade secret misappropriation evidence as proof of inventorship (an argument that it failed to raise below), which failed on both the substantive grounds that supported affirmance of the summary judgment decision on the trade secret claim and on the basis that Scentsational waived the argument.

While the merits of the Scentsational case provide little guidance to other parties, other than the need to aggressively police nondisclosure agreements, the grounds for resolution provide a clear warning.  The Federal Circuit will have little sympathy for a party that has stretched an expert's testimony beyond the bounds of her expertise, and will uphold a district court's decision disqualifying an expert who falls prey to that trap.

Scentsational Technologies LLC v. PepsiCo, Inc. (Fed. Cir. 2019)
Nonprecedential disposition
Panel: Chief Judge Prost and Circuit Judges Lourie and Bryson
Per curiam