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The preservation of appellate rights is critical to any trial
1/11/22
In a rare trade secret appeal involving two competitors in the alcohol sale software business, the United States Court of Appeals for the Eleventh Circuit provided a not-so-subtle reminder to all attorneys that correctly preserving appellate rights is a critical component of any trial. In the case, Financial Information Technologies, LLC (“Fintech”) succeeded in its lawsuit against iControl Systems, USA, LLC (“iControl”) alleging iControl misappropriated software Fintech developed to facilitate electronic payments between alcohol retailers and wholesale alcohol distributors. Fintech and iControl both appealed. The Eleventh Circuit decided three issues. The Court 1) affirmed the district court’s decision to deny iControl’s new-trial motion on liability; 2) overturned the district court’s decision to deny iControl’s motion for Judgment as a Matter of Law (“JMOL”) on damages; and 3) affirmed the district court’s decision to deny Fintech’s requested injunction. In its decision, the Eleventh Circuit made clear that iControl’s failure to move for JMOL regarding liability limited the Eleventh Circuit’s ability to overturn the jury’s liability finding thus providing an important lesson for other practitioners.
Background
Fintech is a technology company that develops and sells software to process alcohol sales invoices within 24 hours. Many states require retailers to pay cash on delivery for alcohol shipments and Fintech developed specialized technology that quickly processes electronic fund transfers between alcohol retailers and distributers to reduce the cumbersome regulatory burden imposed on alcohol businesses when processing payments. For years, Fintech had the market cornered on this product and demanded a high price for its software as a result.
In 2013, iControl, who was already in the business of processing invoices and facilitating electronic bank transfers for other products, entered the alcohol sales arena and began selling similar software to Fintech. As it entered the field, iControl hired away a few key employees from Fintech including their VP of Operations who had helped developed Fintech’s alcohol sales technology. iControl subsequently lured away a few customers from Fintech. After losing the customers to iControl, Fintech filed a lawsuit in the United States District Court for the Middle District of Florida alleging misappropriation of seven trade secrets and seeking both damages and injunctive relief under the Florida Uniform Trade Secrets Act (“FUTSA”).
District Court Verdict
The jury returned a verdict in favor of Fintech, finding that iControl misappropriated Fintech’s trade secrets and awarded $2.7 million in actual damages and $3 million in exemplary (punitive) damages. After the trial, iControl filed a motion for a new trial on liability and renewed its JMOL on damages. For its part, Fintech filed a post-trial motion to renew its request for a permanent injunction. The district court denied all three motions and both parties appealed.
Eleventh Circuit Opinion
The Eleventh Circuit first addressed iControl’s contention that the district court should have granted it a new trial on liability. In affirming the district court’s decision, the Eleventh Circuit emphasized that iControl faced an uphill battle on appeal because iControl did not move for JMOL on liability and therefore the Court could only overturn “if there is an absolute absence of evidence to support the verdict.” Even though Fintech alleged misappropriation of seven trade secrets, the jury rendered a general verdict and did not specify which of the seven trade secrets iControl misappropriated; as such, Fintech needed to show evidence that only one of the trade secrets was misappropriated.
After briefly explaining the technology at issue, the Eleventh Circuit explained that Fintech had shown that a reasonable jury could have found that at least one of Fintech’s trade secrets was not readily ascertainable. Fintech had presented to the jury e-mails and witness testimony showing that Fintech’s former VP of Operations assisted iControl in discovering Fintech’s internal process to aid with its software development. Fintech also submitted e-mails demonstrating that it had a specialized white-filter maintenance system that was not readily ascertainable to iControl without misappropriation. The Eleventh Circuit latched on to the jury’s general verdict and held that “Fintech’s trial evidence suggest[ed] that at least some of its seven alleged trade secrets were not readily ascertainable to iControl” and were improperly obtained through the former Fintech employees.
It was also reasonable for the jury to infer from the evidence presented at trial that iControl schemed to hire the key Fintech employees specifically to misappropriate Fintech’s software. Again, the Eleventh Circuit lamented that it was constrained by the standard of review for new trial motions as opposed to review of a motion for JMOL and it permitted the award of exemplary damages to stand.
The Eleventh Circuit next addressed the damages. The Eleventh Circuit noted that iControl filed a JMOL on damages and therefore the Eleventh Circuit would review the denial of that motion de novo, a more relaxed standard than the abuse of discretion standard used to review the jury’s verdict on liability. The key to damages was Fintech’s actual loss caused by the misappropriation. iControl argued that Fintech was only entitled to lost profits less Fintech’s fixed and marginal costs. The Eleventh Circuit reviewed the meanings of fixed and marginal costs and the fact-intensive revenue and profits figures of the business and determined that the jury was not required to deduct Fintech’s fixed costs from its revenues to arrive at a proper “actual loss”. The Eleventh Circuit, however, decided that there was no evidence by which the jury could have reasonably found that Fintech’s marginal costs were zero. Fintech had submitted evidence that its marginal costs were minimal, but it did not submit evidence that its marginal costs were zero. Fintech relied on the jury awarding it $2.7 million in actual damages when it had requested $2,721,925. The Eleventh Circuit dismissed this reduction because Fintech’s own lawyer stated to the jury during closing arguments that Fintech’s damages to date were $2.7 million in lost revenue. Fintech did not “provide any evidence from which a reasonable jury could conclude that its marginal costs were zero” and therefore the Eleventh Circuit remanded the matter to require an accounting of marginal costs for a proper lost-profits calculation.
Finally, the Eleventh Circuit affirmed the district court’s decision to deny Fintech’s requested injunction. The Eleventh Circuit held that Fintech’s requested injunction was overly broad and was an attempt to remove a competitor from the industry. FUTSA only “authorizes the injunction of specific, identifiable trade secrets [and] not blanket restraint of competition.” Fintech sought to enjoin iControl from not only using Fintech’s software but also iControl’s own software. And it wanted the injunction to last forever. The requested “blanket prohibition” and indefinite time period violated FUTSA’s plain terms and therefore the Eleventh Circuit upheld the district court’s decision to deny the injunction.
Lessons to be Learned
The Eleventh Circuit was not shy in noting their limitations in reviewing the liability verdict because of strategic decisions made by iControl. Indeed, the Eleventh Circuit noted often that overturning the liability finding was almost impossible because iControl permitted the jury to render a general verdict regarding the trade secrets rather than requiring the jury to decide individually on each of the seven alleged trade secret misappropriations.
More importantly, the Eleventh Circuit ruefully expressed that iControl did not move for JMOL on liability in the district court and therefore they were constrained in their review. Had iControl moved for JMOL on liability, the Eleventh Circuit could have reviewed the decision de novo; instead, “iControl [was] stuck with the more deferential abuse-of-discretion standard applicable to new-trial motions.” Obviously, it is impossible to predict how the Eleventh Circuit would have decided the liability portion of the appeal de novo but it is notable that the Eleventh Circuit reversed the district court’s denial of the JMOL with respect to damages when it reviewed it de novo. This shows that the preserving appellate rights is critical to handling any case.
For questions or inquiries, contact Patrick Cosgrove at patrick.cosgrove@fmglaw.com, or your FMG attorney.
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