IP Law Daily, TRADE SECRETS—2d Cir.: Appeals court vacates jury’s award of $285 million in DTSA damages to software provider, (May 25, 2023)

By Cheryl Beise, J.D.

Under the facts of the case, the DTSA did not permit the software provider to recover an unjust enrichment award of avoided costs from a competitor.

Healthcare software provider TriZetto Group, Inc., was not entitled to an award of development costs a competitor avoided in creating a competing software product using TriZetto’s trade secrets, the U.S Court of Appeals for the Second Circuit has held. Evidence at trial supported a jury’s determination that TriZetto’s former business partner, Syntel Sterling Best Shores Mauritius Ltd., misappropriated 104 of TriZetto’s trade secrets, but the Defend Trade Secrets Act did not permit an unjust enrichment award of avoided costs under the facts of this case. While avoided costs are recoverable as damages for unjust enrichment under the DTSA, Syntel’s misappropriation did not injure TriZetto beyond its actual loss of $8.5 million in lost profits. The district court’s permanent injunction ended Syntel’s use of TriZetto’s trade secrets, and, therefore, its ability to profit from any avoided costs. The district court’s DTSA damages judgment was vacated and the case remanded for the district court to address the propriety of the jury awards based on TriZetto’s damages theory of awarding a reasonable royalty (Syntel Sterling Best Shores Mauritius Ltd. v. TriZetto Group, Inc., May 25, 2023, Lohier, R.).

The TriZetto Group, Inc. (TriZetto) developed and licensed software products in the healthcare industry, including its hospital administration software Facets, and also provided consulting services. TriZetto hired contractors to customize and integrate its own software into clients’ existing systems, including Syntel Sterling Best Shores Mauritius Limited (Syntel). In 2010, TriZetto and Syntel entered into a Master Services Agreement (MSA). In exchange for a guaranteed annual payment from TriZetto, Syntel agreed to support Facets customers on TriZetto’s behalf instead of competing with TriZetto for Facets services contracts. Under the MSA, TriZetto treated Syntel as a trusted business partner and gave Syntel’s employees access to its trade secrets to perform Facets-related services for TriZetto. In 2012, the parties executed an amendment to the MSA (Amended MSA), which allowed Syntel to compete directly with TriZetto in the consulting services market.

After TriZetto was acquired in 2014 by Syntel competitor Cognizant Technology Solutions Corp., Syntel issued a notice of termination of the MSA and later filed suit against TriZetto, asserting claims for breach of contract, intentional interference with contractual relations, and misappropriation of confidential information against TriZetto. TriZetto asserted counterclaims for misappropriation of trade secrets under the Defend Trade Secrets Act (DTSA), New York law, and copyright infringement.

A six-day jury trial was held in October 2020. The jury found in favor of TriZetto on all claims. The jury determined that TriZetto was entitled to $284,855,192 for the DTSA misappropriation claim, $142,427,596 for the New York trade secret misappropriation claim, and $59,100,000 for copyright infringement. The jury was asked to award a single compensatory damages figure that would not result in multiple recoveries for the same injury and awarded $284,855,192 in compensatory damages total. The damages award represented the development costs Syntel avoided by using TriZetto’s trade secrets. The jury also awarded TriZetto $569,710,384 in punitive damages. The district court denied Syntel’s post-trial motions, but remitted the punitive damages award to $284,855,192, which TriZetto accepted. The district court also entered a permanent injunction.

Syntel appealed, arguing that (1) TriZetto failed to identify the trade secrets with the requisite specificity at trial; (2) there was no misappropriation because the Amended MSA authorized Syntel to use 102 of the 104 TriZetto trade secrets at issue; and (3) the compensatory damages award based on avoided development costs is impermissible under the DTSA as a matter of law.

Identification of trade secrets. On the issue of identification of trade secrets, the Second Circuit held that a reasonable jury could have determined the asserted trade secrets were in fact trade secrets. TriZetto’s witnesses, including its fact witness Mr. Noonan and its technical expert Dr. Bergeron, provided extensive testimony identifying and describing the trade secrets. For each trade secret, Noonan explained (1) what the secret was, (2) how the secret was developed, (3) the value of the secret to TriZetto, and (4) that the secret was maintained as confidential. The jury also received the documents or source code tied to the asserted trade secrets. The appeals court affirmed the district court’s denial of Syntel’s post-trial motion on this issue.

Authorized use of 102 trade secrets. Syntel argued that even if the trade secrets were properly identified, the Amended MSA allowed Syntel to use 102 of the 104 claimed secrets. The district court rejected this argument for two reasons: (1) it was at odds with the unambiguous terms of the parties’ agreements as a matter of law, and (2) even if the agreements were ambiguous, the jury considered and rejected Syntel’s interpretation. Syntel contended that the district court improperly deferred to the jury on the legal issue of the interpretation of an unambiguous contract.

The Second Circuit described the parties’ dispute as boiling down to whether the deletion of the MSA’s noncompetition provision in the Amended MSA authorized Syntel to use TriZetto’s confidential information to compete with TriZetto. The appellate court agreed with the district court determined that the terms of the Amended MSA was unambiguous: Syntel was free to compete with TriZetto, but it was still obligated to abide by the MSA’s confidentiality provisions. “Even if we considered the Amended MSA to be ambiguous, there is no basis for reweighing the extrinsic evidence that Syntel claims supports its interpretation,” the court said. Syntel’s assertion that extrinsic evidence showed it was authorized to use TriZetto’s trade secrets raised factual issues properly relegated to the jury.

The district court properly denied Syntel’s post-trial motion on this issue. The district court’s judgment that Syntel misappropriated TriZetto’s intellectual property in violation of the DTSA and New York law was affirmed.

DTSA compensatory damages. Syntel argued that the compensatory award of damages under the Defend Trade Secrets Act was improper because the statute does not permit recovery of avoided costs as unjust enrichment damages.

Before the DTSA’s enactment, trade secret plaintiffs claiming misappropriation had to pursue remedies governed by state law. The DTSA did not preempt or displace state trade secret law remedies; instead, it created a federal civil cause of action for the misappropriation of trade secrets occurring on or after May 11, 2016. The DTSA’s compensatory damages provision, 18 U.S.C. § 1836(b)(3)(B)(i), allows a court to award: (1) “damages for actual loss caused by the misappropriation;” and (2) “damages for any unjust enrichment caused by the misappropriation … that is not addressed in computing damages for actual loss;” or (3) “in lieu of damages measured by any other methods … a reasonable royalty for the misappropriator’s unauthorized disclosure or use of the trade secret.” Accordingly, the DTSA permits a plaintiff to recover both its actual losses and a misappropriator’s unjust benefit caused by misappropriation, so long as there is no double counting, the Second Circuit observed.

The parties conceded that avoided costs are recoverable as damages for unjust enrichment under the DTSA, but they disputed whether avoided costs were available under the particular facts of this case. For purposes of determining whether unjust enrichment in the form of avoided costs was permissibly awarded in this case, the Second Circuit described the relevant question as: did Syntel’s misappropriation injure TriZetto beyond its actual loss of $8.5 million in lost profits?

While there was no dispute that Syntel unjustly benefitted from misappropriating TriZetto’s trade secrets to service UHG—i.e., earning $27 million in revenue, corresponding to $823,899 in profits—those profits were the only enrichment Syntel unjustly gained at TriZetto’s expense, and they were addressed in computing TriZetto’s actual damages—$8.5 million in lost profits, the Second Circuit observed. Beyond its lost profits, however, TriZetto suffered no compensable harm supporting an unjust enrichment award of avoided costs. The district court’s permanent injunction ended Syntel’s use of TriZetto’s trade secrets, and, therefore, its ability to profit from any avoided costs, the appeals court observed. Further, TriZetto retained the profitable use of its trade secrets. Accordingly, the court concluded that TriZetto was not entitled to avoided costs as a form of unjust enrichment damages in this specific case.

The Second Circuit vacated the district court’s DTSA damages judgment and remanded the case for the district court to address the propriety of the two jury awards based on TriZetto’s damages theory of awarding a reasonable royalty: (1) the $142,427,596 New York trade secret misappropriation award and (2) the $59,100,000 copyright infringement award. The jury did not factor these costs into their total compensatory damages award, instead relying exclusively on the $284,855,192 damages in avoided costs for the DTSA claim. The appellate court clarified that it was not remanding for the district court to determine if TriZetto was entitled to $8.5 million in lost profit damages under the DTSA. At trial, TriZetto took the view that awarding lost profits and avoided costs would constitute “double counting” under the DTSA, and the district court accepted that view. Because TriZetto did not argue on appeal that it was entitled to its lost profits if the avoided costs award was vacated, the court declined to instruct the district court to consider the issue on remand.

The Case is No. 21-1370.

Attorneys: Kannon K. Shanmugam (Paul, Weiss, Rifkind, Wharton & Garrison LLP) for Syntel Sterling Best Shores Mauritius Ltd. and Syntel, Inc. John C. Quinn (Kirkland & Ellis LLP) for TriZetto Group, Inc. and Cognizant Technology Solutions Corp.

Companies: Syntel Sterling Best Shores Mauritius Ltd.; Syntel, Inc.; TriZetto Group, Inc.; Cognizant Technology Solutions Corp.

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