IP Law Daily, TRADE SECRETS—3d Cir.: Jury verdict in trade secret case upheld amid evidence that trade secrets not used to build new business, (Jun 6, 2024)

By Robert B. Barnett Jr., J.D.

The Third Circuit has affirmed a jury verdict that found that a former trading company co-founder did not use trade secrets to build his new trading company.

In a case in which a financial trading company sued its former co-founder for trade secret misappropriation and violations of his non-disclosure agreement after he formed a new trading company, the Third Circuit in a non-precedential opinion has affirmed jury verdicts in the former co-founder’s favor on both counts, agreeing with the lower court that the jury had ample evidence to conclude that the former co-founder’s new company was developed from a combination of general knowledge and his own experience and that the information that the former co-founder disclosed to others was commonly known in the industry. The appellate court also affirmed the lower court’s denial of attorney fees to the former co-founder because sufficient evidence existed that the misappropriation claim was not brought in bad faith (Elmagin Capital, LLC v. Chen, Nos. 22-2739, 22-2889, and 23-3104 (3d Cir. March 21, 2024)).

Background. In 2014, Richard Gates, Kevin Gates, and Chao Chen formed Elmagin Capital, LLC. The new company traded in financial transmission rights in wholesale electricity markets. Chen developed trading strategies that were called “Breck” and “Faber.”

In 2018, Chen left Elmagin, at which point he signed a non-disclosure and non-competition agreement. The agreement prevented Chen from ever disclosing Elmagin’s trading strategies to anyone else. In 2019, Chen formed Entergrid, LLC and Entergrid Fund 1, LLC, to trade in financial transmission rights in wholesale electricity markets. To that end, he developed trading strategies that he called “Hydra” and “Gryphon.” Chen hired Karl Petty, who had been a data analysis consultant for Elmagin, and Chen taught Petty the basics of the power markets.

Elmagin then sued Chen, Petty, and Entergrid in Pennsylvania federal court, asserting that (1) they violated the Defend Trade Secrets Act because “Hydra” and “Gryphon” were really just the trade secrets of “Breck” and “Fabor” under different names and (2) Chen breached his non-disclosure agreement by disclosing information about Elmagin to Perry.

The case went to the jury, which found for Chen, Petty, and Entergrid on both counts. The jury agreed with Elmagin that “Breck” and “Fabor” were trade secrets, but it ruled that Chen did not use them to develop “Hydra” and “Gryphon.” Chen had also accused Elmagin of bringing the suit in bad faith and sought attorneys’ fees. The jury found bad faith, but the court considered the ruling advisory-only, and it refused to award attorney fees.

Elmagin appealed the trial court’s post-trial motions for judgment as a matter of law and a new trial to the Third Circuit in Philadelphia. Chen cross-appealed the refusal to grant attorney fees.

Misappropriation. At trial, Elmagin had argued that “Hydra” copied aspects of “Beck” and that “Gryphon” had copied aspects of “Faber.” The jury was instructed to assess whether the whole strategy, rather than the individual steps, warranted trade secret protection. The jury was also instructed to find misappropriation if Chen had access to the strategies and if the strategies were “similar enough.” The jury then returned a verdict that concluded that Chen, Perry, and Entergrid did not misappropriate the trade secrets.

Elmagin made two arguments for reversal: (1) the jury verdict was unreasonable and (2) the court’s decision to allow expert testimony was an abuse of discretion. The appellate court rejected both theories.

As for the unreasonableness of the jury verdict, the Third Circuit concluded that the jury had ample evidence to conclude that Chen developed his new strategies “around Elmagin’s proprietary information,” using a combination of general trade knowledge and his own special knowledge. The jury found that Elmagin failed to prove that Chen did not independently develop “Hydra,” which the appellate court ruled was supported by the evidence.

Elmagin also contended on appeal that the implementation details were irrelevant and that the jury should not have considered them. As the Third Circuit noted, however, Elmagin identified for the jury the information that it claimed as a trade secret, including implementation details. Thus, Elmagin made those implementation details relevant when it presented them to the jury.

Turning to the expert witness testimony, Elmagin argued that Chen’s expert provided irrelevant and prejudicial testimony by comparing the code for the two strategies. Elmagin contended this was error because Elmagin’s theory of the case concerned the strategies themselves, rather than the coding details. The Third Circuit concluded, however, that the trial court did not abuse its discretion when it denied Elmagin’s motion in limine on that issue and ruled that cross-examination of the expert would be sufficient for Elmagin to make its point. In any event, the appellate court added, Elmagin did “intimate” that the code was relevant to its theory by addressing the issue in closing arguments.

Breach of contract. Moving to the breach of contract claim, Elmagin had asserted that Chen violated his non-disclosure agreement by disclosing Elmagin confidential information to Perry. The jury, however, concluded that Chen only disclosed public information to Perry. While Elmagin argued that Chen disclosed tactics that Elmagin used to Perry, Chen told the jury that he was merely telling Perry some of the things that Elmagin did. The Third Circuit ruled that “a jury could have reasonably found that [the disclosed] methods were so obvious that anyone in the power trading world would know Elmagin used them.” Thus, the jury could have reasonably concluded that no confidential information was revealed and that no breach of the agreement occurred.

Attorney fees. Chen argued that the trial court erred when it refused to award him attorney fees, citing the jury’s conclusion that bad faith existed. When the trial court denied Chen’s request for attorney fees because “Elmagin had some evidence for its misappropriation claim,” the trial court did not commit clear error, the Third Circuit concluded. The lower court had the right to deny the fees based on its conclusion that the misappropriation claim was not pursued in bad faith.

Elmagin also argued that it had the right to have the issue decided by a jury rather than by the trial court. Since the 1700s, the Third Circuit noted, attorney fee claims have been decided by the judge. “That concludes the matter,” it ruled.

The Third Circuit, therefore, affirmed the district court’s judgment in full.

The Case is Nos. 22-2739, 22-2813, and 23-3104.

Judge: Jordan, A.

Attorneys: Julie S. Goldemberg (Morgan, Lewis & Bockius LLP) for Elmagin Capital, LLC. Andrew J. Costa (ND Galli Law) for Chao Chen.

Companies: Elmagin Capital, LLC

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