DSC Comm Corp v. Next Level Comm ( 1997 )

REVISED
UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 96-40622
DSC COMMUNICATIONS CORPORATION; DSC TECHNOLOGIES CORPORATION,
Plaintiff-Appellants and Cross Appellees,
VERSUS
NEXT LEVEL COMMUNICATIONS; THOMAS R. EAMES; PETER W. KEELER,
Defendants-Appellees and Cross Appellants.
Appeal from the United States District Court
for the Eastern District of Texas
February 28, 1997
Before POLITZ, Chief Judge, SMITH and DUHÉ, Circuit Judges.
DUHÉ, Circuit Judge:
DSC Communications appeals the district court’s refusal to
aggregate damages awarded to it by a jury for diversion of
corporate opportunity and misappropriation of trade secrets, as
well as the district court’s denial of attorneys’ fees. Next Level
Communications cross appeals on numerous grounds, alleging that
DSC’s claims fail, that certain evidence was improperly admitted at
trial, and that damages were improperly awarded.
For the reasons assigned, we affirm in part and vacate and
remand in part.
Background
DSC Communications designs and manufactures telecommunications
equipment. Thomas Eames and Peter Keeler began working at DSC in
1990 after DSC acquired their original employer, Optilink
Corporation. At both Optilink and DSC, Eames worked as an engineer
designing new technology, while Keeler worked in marketing.
When DSC acquired Optilink, Eames and Keeler were both
involved with the “Litespan 2000" product, a digital loop carrier
that represented a significant advance in communications
technology. The Litespan combines many individual analog telephone
signals into one digital signal. The Litespan quickly became very
profitable for DSC, and the company began to consider developing a
more advanced version of the Litespan, known as a broadband access
product, that delivers television and computer services in addition
to telephone service.
Eames began working to develop a broadband access product in
1994, and identified two alternative designs for the product:
hybrid fiber coax (“HFC”) and switched digital video (“SDV”). HFC
design uses a system similar to that of existing cable television,
and broadcasts TV signals. SDV design instead makes private,
“point to point” connections to each household on the system.
In the early stages of broadband access development, it
appeared telephone companies preferred HFC design as a short term
option, but favored SDV as a long term design choice. DSC claimed
at trial it instructed Eames to focus on HFC as a short term
solution, but to continue developing SDV technology.
By 1994, Eames and Keeler were considering leaving DSC and
2
forming their own company. In May 1994, while still employed at
DSC, Eames drafted a document representing a business plan for a
new company. This document proposed the development of an SDV
architecture, and was marked with the name “Next Level
Communications.”
In early July, 1994, Eames and Keeler obtained $5 million in
financing to start Next Level. On July 8, 1994, Eames and Keeler
resigned from DSC. At least 6 other DSC employees followed Eames
and Keeler to Next Level. Next Level focused its efforts on
developing an SDV system.
By January 1995, Next Level was low on funds, and began to
seek investors so it could continue its product development.
Several companies discussed investing with Next Level, including
DSC. Ultimately General Instrument (“GI”), a larger company who
principally manufactures television delivery equipment, committed
to invest $6.5 million in Next Level in return for a 10% interest
in the company, plus an option to buy the remaining stock.
DSC filed this lawsuit in April, after GI first announced its
investment in Next Level, when it reviewed the files saved on
Eames’ computer at DSC and found three pages of Next Level’s May
business proposal. In September 1995, GI exercised its option to
purchase the remaining stock in Next Level and agreed to indemnify
Eames and Keeler from any liability or expenses incurred by them in
connection with this lawsuit.
After a three week trial, the jury found Eames, Keeler and
Next Level liable for breach of contract, diversion of corporate
3
opportunity, and misappropriation of trade secrets. The jury also
awarded DSC punitive damages. The total damages award against the
defendants was $369,200,000.
DSC moved for entry of judgment for all actual and punitive
damages, and asked the district court to grant a permanent
injunction prohibiting Defendants from disclosing the trade secrets
found to be misappropriated, plus requiring an assignment to DSC of
any SDV patents. DSC also sought attorneys’ fees, costs, and
interest.
The district court declined to enter judgment as DSC
requested. It held the legal theories underlying the three torts
on which DSC recovered, breach of contract, diversion of corporate
opportunity, and misappropriation of trade secrets, were
duplicative, and refused to aggregate the damages. It ordered DSC
to elect between the damages awarded for those torts. Under
objection, DSC chose the damages for diversion of corporate
opportunity, and the court entered judgment for $126,532,000. The
court also entered judgment for DSC on the total $10,200,000
awarded in punitives, and granted DSC temporary injunctive relief
until the judgment was satisfied that prevented Next Level from
disclosing the technology at issue unless it did so in “the
ordinary course of business.” The court declined to award
attorneys’ fees.
Both parties appeal the judgment, DSC claiming it was
wrongfully forced to elect its damages and Next Level arguing the
evidence did not support verdicts of diversion of corporate
4
opportunity and misappropriation of trade secrets.
Discussion
I.
DSC first complains that the district court incorrectly
ordered it to elect between relief for diversion of corporate
opportunity and misappropriation of trade secrets.1 Since the
district court found the three legal theories advanced by DSC at
trial overlapped by alleging predicate facts that were nearly
identical, it only allowed recovery under one of the theories.
DSC argues that the torts of diversion of corporate
opportunity and misappropriation of trade secrets are distinct and
do not overlap. It contends, therefore, that it is entitled to
relief for both torts. Next Level responds that there is no need
to consider the propriety of the election requirement because DSC’s
legal theories both fail: the corporate opportunity claim fails as
a matter of law and was supported by insufficient evidence, while
the verdict for misappropriation of trade secrets is insupportable
as a matter of law, as well as a result of several evidentiary
errors made by the district court.
We agree with Next Level that the award for usurpation of
corporate opportunity cannot stand. On October 28, 1996, this
Court decided United Teachers Assoc. Ins. Co. v. MacKeen & Bailey,
Inc., 99 F.3d 645 (5th Cir. 1996), which controls the
1
DSC does not appeal the election order as to the breach of
contract award.
5
determination. In that case, an insurance company sued its actuary
for breach of fiduciary duty. We stated that while the actuary had
fiduciary status, and had breached his duties to the insurance
company, the district court erred in allowing recovery against him
under the usurpation of corporate opportunity doctrine:
We believe that under Texas law the usurpation of
corporate opportunity doctrine does not apply to all
corporate fiduciaries, but is limited to officers,
directors, and major shareholders who are fiduciaries.
While it is true that several Texas cases use the broader
term “corporate fiduciary” in discussing the doctrine, we
have found no Texas cases, nor has UTAIC cited us to any,
applying the corporate opportunity doctrine to any person
other than an officer, director, or major shareholder.
We certainly have found no Texas cases standing for the
proposition that this doctrine applies to all corporate
fiduciaries.
Id. at 651 (footnote omitted). United Teachers had not been
decided when briefs were filed or at the time of oral argument.
Next Level filed a supplemental brief with this court after oral
argument to call our attention to this clarification of existing
case law and its application to the facts of this case.2
2
Next Level did not originally argue to this Court that Eames
and Keeler could not be liable as they were not officers, directors
or major shareholders in their original brief. Next Level did,
however, raise the argument that Eames and Keeler were only high
level employees who did not occupy positions as officers, directors
or major shareholders in the district court. It did not originally
argue this theory on appeal as support for its allegation Next
Level did not divert a corporate opportunity because the issue has
not been definitively decided in Texas state court, and the only
federal case law specifically addressing this issue was the
district court holding in United Teachers overruled on appeal by
this Court’s holding.
While it is clear that a party who fails to raise an issue in its
initial brief waives the right to review of that issue, Webb v.
Investacorp, Inc., 89 F.3d 252, 257 n.2 (5th Cir. 1996), we have
yet to address our procedure when a party wishes to file a
supplemental brief on an issue because of an intervening change in
law. Other circuits have held both that parties may raise new
6
In light of the holding in United Teachers, Eames, Keeler and
Next Level were incorrectly found to be liable for diversion of
corporate opportunity under Texas law. United Teachers clearly
holds that, under Texas law, the usurpation of corporate
opportunity doctrine is inapplicable to any fiduciary who is not
also an officer, director, or major shareholder of a corporate
entity. None of the appellees ever were, or ever alleged to be,
officers, directors, or major shareholders in DSC. As a matter of
law in this circuit, Eames, Keeler and Next Level could not be held
responsible for diverting a corporate opportunity from DSC because
they did not hold any of these positions. For this reason, the
judgment in favor of DSC for diversion of corporate opportunity
must be vacated.
Next Level also appealed the award to DSC of $20 million for
conspiracy to usurp a corporate opportunity. Since it was legally
issues because of an intervening change in law, and that parties
waived their right to have issues addressed by not discussing them
in their original brief. See United States v. Sterner, 23 F.3d
250, 252 n.3 (9th Cir. 1994), overruled on other grounds by United
States v. Keys, 95 F.3d 874 (9th Cir. 1996)(allowing issue to be
raised for the first time in a 28(j) letter to prevent “substantial
injustice”); Louisiana-Pacific Corp. v. ASARCO, Inc., 24 F.3d 1565,
1582-83 (9th Cir. 1994), cert. denied, 115 S.Ct. 780 (1995)
(allowing plaintiffs to file a supplemental brief after a statutory
amendment); contra Bickel v. Korean Air Lines, 96 F.3d 151 (6th
Cir. 1996), cert. denied, No. 96-796, 1996 WL 693653, (U.S. Jan.
21, 1997), (declining to consider an argument raised by the
defendant in a supplemental brief even though a recent Supreme
Court case dealt with some of the issues in the appeal).
Refusing to allow the introduction of the holding in United
Teachers would result in this panel deciding an essential issue in
this appeal under incorrect law. United Teachers’ holding clearly
states the law, and we are bound to follow our own precedent. We
are unwilling to ignore this important clarification of the law,
and perpetuate incorrect law, merely because United Teachers was
decided after briefing and oral argument in this case.
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impossible for the Appellees to usurp a corporate opportunity, they
could not have conspired to do so. The damages award for
conspiracy to usurp a corporate opportunity also fails.
Since we hold the verdict for diversion of corporate
opportunity is incorrect as a matter of law, and the judgment
awarding damages for that tort must be vacated, the verdict for
misappropriation of trade secrets is no longer duplicative and may
be reinstated if upheld. Next Level attacks this verdict on two
grounds, first arguing that the misappropriation verdict was based
on defective special interrogatories that did not adequately
present the contested issues.
DSC alleged that Eames, Keeler, and Next Level misappropriated
six trade secrets. Next Level mounted a double defense to this
charge, arguing these trade secrets were not secret, then
contending they had not misappropriated any of the alleged secrets.
The trial judge submitted a single interrogatory to the jury asking
if DSC proved Next Level had misappropriated DSC’s trade secrets.
Next Level claims this single interrogatory permitted a
nonunanimous jury verdict, in that the jury did not specify which
of the alleged trade secrets Next Level used.
We review the district court’s use of special interrogatories
only for abuse of discretion. E.E.O.C. v. Manville Sales Corp., 27
F.3d 1089, 1096 (5th Cir. 1994), cert. denied, 115 S.Ct. 1252(1995). The district court has considerable leeway in deciding if
special interrogatories should be used, as well as in constructing
the form of the interrogatories. See Bryan v. Cargill, Inc., 723
8
F.2d 1202, 1204-6 (5th Cir. 1984).
Next Level argues that the damages model DSC presented
depended on a finding six trade secrets were misappropriated. If
the jury believed less than six secrets were wrongly used by Next
Level, the damages model collapses. However, there is no
indication that the jury found less than all six secrets were
misappropriated, or that the evidence presented at trial was
insufficient to support a finding of misappropriation on all six
secrets. We do not find any abuse of discretion by the district
court in its construction of the interrogatories.
Next Level also argues the misappropriation judgment must be
overturned because the trial court erred in excluding important
evidence. The trial court told the parties before trial it would
not allow into evidence any documents that were not produced to
opposing counsel in a timely manner. During trial, it refused to
allow Next Level to cross examine the DSC expert with a short
article written by George Hawley, a vice president at DSC,
published in a trade journal in 1991. The article purportedly
disclosed the elements of one of the six alleged trade secrets,
contradicting the expert’s testimony that the trade secret was not
in the public domain. Next Level had not disclosed the article to
DSC or listed the article on its pretrial exhibit list, claiming it
was unaware of the article’s existence because DSC withheld the
article from them.3
3
It is difficult to see how an article published in a trade
journal could have been “withheld”.
9
“The district court has broad discretion in deciding whether
to admit into evidence exhibits not listed in the pre-trial order.”
Gilber v. Tulane Univ., 909 F.2d 124, 127 (5th Cir. 1990). As
well, the district court has no obligation to consider evidence not
listed in the pre-trial order unless “necessary to prevent manifest
injustice.” Goodman v. Lee, 78 F.3d 1007, 1011 (5th Cir. 1996),
cert. denied, 117 S.Ct. 166 (1996). The district court made it
clear evidence not disclosed to the opposing party would not be
admitted at trial. The article may have been helpful to Next
Level, but was not essential to its case. The trial court acted
within its discretion.
For these reasons, we find there was no reversible error in
the verdict for misappropriation of trade secrets. It therefore
stands, and upon remand should be substituted for the judgment
entered on usurpation of corporate opportunity.
II.
DSC contends it is entitled to permanent injunctive relief4
for misappropriation of trade secrets; either a limited injunction
in combination with monetary damages or a total injunction
prohibiting Next Level from using the trade secrets the jury found
it misappropriated. DSC believes it should be allowed to choose
between these forms of relief, after it sees what sort of permanent
4
The district court issued a temporary injunction against Next
Level directing that the trade secret technology may not be
transferred or disclosed, but allows disclosure “in the ordinary
course of business.” The temporary injunction is only in place
until the judgment for DSC is satisfied.
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injunction the district court would fashion.
Since “the basis for injunctive relief in the federal courts
has always been irreparable injury and the inadequacy of legal
remedies,” Weinburger v. Romero-Barcelo, 102 S.Ct. 1798, 1803
(1982), it is clear injunctions are an extraordinary remedy, to be
granted only when a party is threatened with injury for which he
cannot obtain a sufficient legal remedy. Wright, Miller & Kane,
Federal Practice and Procedure: Civil 2d § 2942 at 43-44 (1995).
We review the district court’s denial of permanent injunctive
relief for abuse of discretion. North Alamo Water Supply Corp. v.
City of San Juan, Tex., 90 F.3d 910, 916 (5th Cir. 1996), cert.
denied, 117 S.Ct. 586 (1996); Peaches Entertainment Corp. v.
Entertainment Repertoire Assoc., 62 F.3d 690, 693 (5th Cir. 1995).
“The district court abuses its discretion if it (1) relies on
clearly erroneous factual findings when deciding to grant or deny
the permanent injunction (2) relies on erroneous conclusions of law
when deciding to grant or deny the permanent injunction, or (3)
misapplies the factual or legal conclusions when fashioning its
injunctive relief.” Peaches Entertainment Corp., 62 F.3d at 693.
The district court did not abuse its discretion in deciding
DSC was not entitled to permanent injunctive relief. It did not
rely on clearly erroneous factual findings or an erroneous
conclusion of law. The jury awarded DSC damages for lost sales on
SDV products. DSC thus premised its damages claim on Next Level
developing an SDV system that competed with DSC’s system. As the
district court noted, the money damages DSC recovered sufficiently
11
compensated it for that injury, and the drastic solution of a
permanent injunction is unnecessary. No irreparable harm was
suffered.
III.
Next Level contends the district court erred in reversing an
earlier order and admitting, on the last day of testimony, evidence
that GI had agreed to indemnify Next Level, Eames, and Keeler
against any judgment for DSC. The court originally ruled evidence
of the indemnification agreement was inadmissible, but changed its
ruling near the end of trial. It rejected Next Level’s argument
that its agreement was equivalent to liability insurance, and was
inadmissible under Fed.R.Evid. 411. It stated that even had the
agreement been insurance, it was admissible under the exceptions in
Rule 411 to show Eames and Keeler’s lack of ownership of the trade
secrets. It then noted that Next Level opened the door to
admission of the agreement in voir dire, when its counsel told the
jurors the case was “a question of life or death to Mr. Eames and
Mr. Keeler.” Finally, it found that even if admission of the
agreement was improper, the error was not sufficient to warrant a
new trial.
We examine the admission of challenged evidence by asking two
questions: did the district court abuse its discretion in admitting
the evidence, and, if so, did its error affect the substantial
rights of the affected party? Munn v. Algee, 924 F.2d 568, 571
(5th Cir. 1991), cert. denied, 502 U.S. 900 (1991). The district
12
court did not abuse its discretion in admitting evidence of the
indemnity agreement. The agreement was an integral part of the
relationship between the parties in this litigation. Evidence
showed the price GI paid for Next Level was far below its actual
worth. To explain this apparent incongruity, the jury needed to
understand the parties’ full relationship. It also cast doubt on
counsel’s characterization of the effect of the case on Eames and
Keeler. While the timing of the district court’s decision to allow
this evidence was admittedly awkward, it was not an abuse of
discretion.
IV.
Next Level argues that the damage award for lost profits
cannot stand because DSC’s damage model was speculative: DSC has
yet to sell its SDV product, and no market has been established for
DSC’s SDV system. It then attacks the methodology used by DSC’s
damage expert, Ray Sears, claiming the assumptions Sears relied on
were based on conjecture not fact. Next Level’s main objections to
Sears’ analysis are that Sears had no basis to assume a large
number of households would gain access to SDV technology, and Sears
assigned market shares to DSC and Next Level without solid evidence
to support these numbers. Sears testified DSC would have assumed
a forty percent market share in SDV sales had Next Level not been
formed. With Next Level in the market, that company would acquire
twenty percent of the SDV market, and later “take away” eight
percent of DSC’s market share. Finally, Next Level argues DSC did
13
not allocate any portion of the damage figure Sears proposed to
specific acts by Next Level. The jury, however, found that two of
the acts included in the damages analysis were not wrongful.
Next Level also argues that as the damages award should be
reversed, the punitives award should not be allowed to stand.
A. Were the damages speculative?
We examine the challenge that damages for lost profits are
speculative to determine whether a reasonable person could find the
profits were established with reasonable certainty, considering all
evidence in the light most favorable to the plaintiffs. Thompson
and Wallace v. Falconwood Corp., 100 F.3d 429, 435 (5th Cir. 1996).
Under Texas law, “evidence to establish profits must not be
uncertain or speculative.” Texas Instruments, Inc. v. Teletron
Energy Management, Inc., 877 S.W.2d 276, 279 (Tex. 1994), (quoting
Southwest Battery Corp. v. Owen, 131 Tex. 423, 426; 115 S.W.2d
1097, 1098 (Tex. 1938)). However, the requirement that damages be
based on more than speculation “is intended to be flexible enough
to accommodate the myriad circumstances in which claims for lost
profits arise.” Texas Instruments, 877 S.W.2d at 279. “[I]t is
not necessary that recovery for future profits should be
established by exact calculation, as it is enough to have data from
which these profits may be ascertained with a reasonable degree of
certainty and exactness.” Fiberlok, Inc. v. LMS Enter., Inc., 976
F.2d 958, 962 (5th Cir. 1992) (citing Copenhaver v. Berryman, 602
S.W.2d 540, 544 (Tex.Civ.App. 1980)).
While SDV technology represents a new product the intensive
14
market research DSC presented at trial, coupled with the known
history of the telecommunications industry and the success of the
Lightspan product, established with sufficient certainty that SDV
technology is likely to generate significant profits. Even if a
product is not yet fully developed, a plaintiff is not prevented
from recovering future lost profits if it was hindered in
developing that product, and the evidence shows the eventual
completion and success of that product is probable. As well, DSC
has traditionally been a leader in producing technology used in
telecommunications. Its history of strong performance is
indicative of the likely success of this revolutionary new product.
B. Was Sears’ methodology based on conjecture?
While “damages may not be determined by mere speculation or
guess, it will be enough if the evidence show[s] the extent of the
damages as a matter of just and reasonable inference, although the
result be only approximate.” Terrell v. Household Goods Carriers’
Bureau, 494 F.2d 16, 24 (5th Cir. 1974), cert. dismissed, 419 U.S.
987 (1974) (quoting Story Parchment Co. v. Paterson Parchment Paper
Co., 282 U.S. 555, 563 (1931). We do not agree that Sears’
methodology was based on conjecture. The assumptions Sears made
about the availability of SDV access and the respective market
percentages of DSC and Next Level are adequately supported.
It is true these predictions are not guaranteed. No one can
definitively say what the future holds for SDV technology, or DSC
and Next Level in particular. However, uncertainty surrounding
15
precisely how the industry will evolve does not reduce all analysis
about future developments to mere speculation. Sears based his
predictions on data obtained from respected sources in the
telecommunications market. The jury chose to believe his
estimation of damages. There was sufficient evidence presented to
support the jury’s verdict.
C. Was the unitary damages figure impermissible?
The damage model Sears presented showed the total damages
allocated to Next Level’s alleged wrongful conduct. The jury then
allocated damages to each different cause of action. DSC was not
obligated to precisely apportion damages for each instance of
wrongful conduct it alleged, as unitary damages models are
permissible under Texas law. Bildon Farms, Inc. v Ward County
Improvement Dist. No. 2, 415 S.W.2d 890, 896 (Tex. 1967).
The fact the jury found Eames and Keeler were not liable for
soliciting key employees of DSC is irrelevant to our inquiry.
First, the jury found Eames and Keeler were not liable for these
acts in the context of the breach of contract claim. Damages for
breach of contract were not included in the judgment entered by the
district court, and are not appealed to this Court. Second, even
if the jury’s finding was relevant to the misappropriation of trade
secrets damages, we may safely assume the jury did not award
damages to DSC for conduct for which Eames and Keeler were not
liable.
D. Should the punitive damages award be reversed?
Next Level argues that the punitive damage award must be
16
vacated since DSC’s compensatory damage award cannot stand. As we
uphold the compensatory damage award, this argument fails.
V.
DSC appeals the district court’s denial of attorneys’ fees.
It argues that attorneys’ fees are recoverable incident to punitive
damages, and that under our precedent, the district court erred in
refusing to enter this award.
As DSC does not claim it is entitled to attorneys’ fees
because of a statute or contract, the court’s authority to award
fees is based on its inherent power to sanction behavior by a
litigant. Tacon Mechanical Contractors, Inc. v. Aetna Casualty &
Sur. Co., 65 F.3d 486, 489 (5th Cir. 1995). We review for abuse of
discretion. Id.While we agree that attorneys’ fees are allowed in connection
with an award of punitive damages, an award of punitive damages
does not automatically compel an award of attorneys’ fees.
Attorneys’ fees not compelled by statute or contract are awarded at
the discretion of the district court. The district court issued a
well-reasoned, thorough opinion detailing the reasons for its
refusal of DSC’s request for attorneys’ fees. We find no basis for
reversing its holding.
DSC claims that Bauman v. Centex Corp., 611 F.2d 1115 (5th
Cir. 1980), is authority for the proposition DSC is entitled to its
fees. We agree with the district court that Bauman does not
control. In Bauman, the district court awarded attorneys’ fees,
17
where the parties had stipulated beforehand the court would decide
this matter instead of the jury. The parties also agreed on the
amount of attorneys’ fees that would be proper. Id. at 1121.
Contrary to DSC’s apparent belief, Bauman does not direct that
a court must award attorneys’ fees in a particular case. It only
upheld an award made by the district court. As well, the challenge
in Bauman focused on the amount of the award, when the parties
submitted no evidence of fees but had previously stipulated to a
reasonable amount. We merely found the stipulation was sufficient
to support the amount of the award.
CONCLUSION
We reverse the award to DSC for usurpation of corporate
opportunity and conspiracy to usurp a corporate opportunity. As
the award for misappropriation of trade secrets stands, judgment on
that claim should be entered. No other errors merit reversal or a
new trial. DSC is not entitled to an award of attorneys’ fees. We
therefore AFFIRM IN PART, and VACATE IN PART and REMAND to the
district court for entry of judgment consistent with this opinion.
18