Trade Secrets Experts: Two Circuits, Two Outcomes

By Robert J. Ambrogi
Bulletin Newsletter: February 2007

Two recent rulings from federal circuit courts reviewing expert testimony in trade secrets cases reached very different results, with one circuit upholding admission of the testimony and the other finding that the testimony was sufficiently harmful to require a new trial.

Taken together, the two cases shed light on the allowable boundaries for expert testimony in trade secrets litigation.

The most recent ruling, Synergetics v. Hurst, decided February 5th by the 8th U.S. Circuit Court of Appeals, upheld an expert’s testimony on economic damages, despite the appellant’s contention that it was based on incorrect assumptions about the relevant market.

The earlier case, Mike’s Train House v. Lionel, decided December 14th by the 6th U.S. Circuit Court, found that the trial court “abandoned its gate-keeping function” when it admitted expert testimony concerning the similarity of design drawings.

In Synergetics, a company that sells ophthalmic equipment used in eye surgery sued two former employees for trade secret misappropriation. A jury found in favor of the company and awarded compensatory and punitive damages. On appeal, the two employees contended that the trial court should have excluded the testimony of Synergetics’ expert witness.

The appellants argued that the expert’s methodology was unreliable because he based his opinion on just two suppliers of the device, Synergetics and the company started by the former employees, even though other suppliers posed significant competition in the market.

Affirming the trial court, the 8th Circuit rejected this argument for the reason that it spoke to the credibility of the testimony, not its admissibility. The expert had explained the methodology he used to calculate the damages, the court noted, and appellants had the opportunity to challenge his methodology through cross-examination and their own experts.

“While other methods for calculating damages may be available, so long as the methods employed are scientifically valid, Appellants’ mere disagreement with the assumptions and methodology used does not warrant exclusion of expert testimony,” the circuit court said.

An expert’s methodology was also at issue in Mike’s Train House, but here the 6th Circuit found that admission of the expert’s testimony was an error that may improperly have swayed the outcome of the trial. Given that the jury had awarded the plaintiff, Mike’s Train House (MTH) damages exceeding $40 million, the 6th Circuit’s remand for a new trial was a significant victory for Lionel.

The case alleged misappropriation of trade secrets in the design and manufacture of model trains. The expert, a professor of mechanical engineering, testified that model-train designs used by Lionel were copied from MTH.

To reach this conclusion, he compared designs from each company, evaluating them based on 21 criteria he had selected. Using these criteria, he calculated a score from zero to one to show the degree of association between designs.

The expert also reviewed the report of an expert who testified in a South Korean case involving the same designs and who also found significant copying. The MTH expert testified at trial that he had independently corroborated the South Korean expert’s conclusions using a regression analysis.

On appeal, the 6th Circuit chastised the trial court for admitting this testimony. In finding that the trial court abandoned its gate-keeping function, the 6th Circuit noted that it failed to make any findings regarding the reliability of the expert’s testimony or of the technique he used to reach his conclusion.

Noting that the expert created his criteria specifically for this case, the 6th Circuit said, “There is no evidence that his methodology had ever been tested, subjected to peer review, possessed a known or potential rate of error, or enjoyed general acceptance.”

The trial court further erred when it permitted the expert to testify to the conclusions of the South Korean expert, the circuit court decided. This testimony – based as it was on the report and conclusions of another expert that were not in evidence – was hearsay and should not have been admitted, the court said.

“Other circuits have squarely rejected any argument that Rule 703 extends so far as to allow an expert to testify about the conclusions of other experts,” the court said.

Noting that not all improper expert testimony requires a new trial, the 6th Circuit went on to consider the testimony’s impact on the trial’s outcome. It concluded that the testimony had a substantial effect on the verdict. He was the only expert to testify about the degree of copying between the drawing pairs, the court noted, and without his testimony, the jury would not have learned of the South Korean expert’s conclusions.

“Because MTH relied on [this] testimony as its source of expertise and analysis regarding the degree of copying, it is impossible to conclude with any certainty that [it] did not sway the jury’s verdict.”

The two cases are:

Synergetics v. Hurst, No. 06-1146 (8th Circuit, Feb. 5, 2007).
Mike’s Train House v. Lionel, No. 05-1095 (6th Circuit, Dec. 14, 2006).

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