Trial judges are the keepers of the gate for expert testimony. They decide when to let expert testimony go in and when to lock it out. However, when their gatekeeping is challenged on appeal, how is the higher court to evaluate whether a trial judge took it seriously enough and properly evaluated the expert's reliability and relevance?
In an appeal of a $2.92 million trade secret misappropriation award, the 10th U.S. Circuit Court of Appeals recently struggled with that very question. "We have yet to identify some unifying theory or principle for discerning the precise point at which a district court’s gate-keeping findings prove sufficient," the three-judge panel noted.
Looking to its prior decisions interpreting Daubert, the panel extracted three "lessons" to be applied in evaluating the sufficiency of a trial judge's gatekeeping.
Theft of Software Source Code
The case, which arose out of Utah, involved the theft of computer source code from StorageCraft, a software company, by James Kirby, a software engineer who helped start and served as a director of the company. Kirby shared the code with NetJapan, a rival company that then produced a competing software product much like StorageCraft's.
After a jury awarded StorageCraft $2.92 million, Kirby appealed, challenging the outcome on various grounds. Several of his challenges related to the "reasonable royalty" formula used to calculate the damages.
For one, he argued that a trade-secret plaintiff should not be able to recover reasonable royalty damages without proof that the misappropriating defendant made commercial use of the secret. Arguing that the record contained no evidence of commercial use, he asserted that the verdict could not stand. The 10th Circuit panel rejected this argument based on Utah law, which allows such damages when the misappropriator uses or discloses the trade secret.
Kirby also argued that, because a reasonable royalty is meant to mimic the price the parties would have set for an actual license, the computation must consider the purpose of the license. Since he took the source code with no intent of using it, he contended, the amount of the award was excessive.
Unfortunately for Kirby, the evidence did not support that argument, the 10th Circuit said. "Instead, the evidence at trial showed that Mr. Kirby took StorageCraft’s trade secret and intentionally disclosed it to NetJapan, aware that NetJapan was an able competitor, and aware that NetJapan could well use the secret to compete with StorageCraft."
Challenge to Damages Expert
Having dismissed Kirby's other challenges, the 10th Circuit turned to his argument that the trial judge should not have admitted the testimony of StorageCraft's damages expert. However, before turning to Kirby's specific challenges, the panel discussed the "unifying theory or principle" that should guide it in deciding whether the trial judge adequately exercised the gatekeeping function.
The panel, in an opinion written by Circuit Judge Neil M. Gorsuch, outlined three principles that it extracted from a review of its prior precedent:
1. The trial judge cannot simply state on the record that he or she has decided to admit the expert testimony after due consideration. "Instead, the district court must furnish enough of a record to permit a reviewing court to say with confidence that it 'properly applied the relevant law.'"
2. The judge "must reply in some meaningful way to the Daubert concerns the objector has raised." If the challenge is to the expert's methodology, the panel said as an example, it is not sufficient for the judge to stress the expert's qualifications. At the same time, the judge need not address all of the possible reliability factors. "A district court's gatekeeping function is more flexible than that, requiring the court to focus its attention on the specific factors implicated by the circumstances at hand."
3. Even when the gatekeeping was insufficient, reversal is not necessary if the error was harmless. "If, for example, it is readily apparent from the record that the expert testimony was admissible, it would be pointless to require a new trial at which the very same evidence can and will be presented again," the panel explained. Also, the error would be harmless if other evidence was sufficiently strong to indicate that the improper evidence had no effect on the outcome.
With these principles in mind, the panel turned to Kirby's two objections. His first was that the expert failed to adopt his legal theory that trade secret royalty damages require proof of commercial use, but this was a legal argument, the panel said in rejecting the argument, not an objection to the expert or his methodology.
Kirby's second objection was to various assumptions the expert made in quantifying the costs StorageCraft incurred in developing the computer code. Kirby offered no evidence to support these objections, the panel said, while the record did contain evidence to support the expert's conclusions.
"The expert’s assumption, then, was grounded in record evidence, Mr. Kirby’s own testimony belies his methodological complaint, and we can rest assured that more words from the district court would not have altered the admissibility of the expert’s evidence."
The case is StorageCraft Technology Corp. v. Kirby, No. 12-4182 (10th Cir., March 11, 2014).