In this episode, Tim and Chris dive into the recent reversal and remand of the Appian-Pegasystems case, a landmark trade secret case with a $2 billion damages award. The case initially gained widespread attention due to the massive damage figure and the systematic nature of the alleged theft. Appian accused Pegasystems of engaging in a prolonged effort to steal its trade secrets, a campaign that made the defendant’s actions appear particularly malicious. The damages award, however, was overturned on appeal due to issues with the evidence and causation, leading to a remand for a new trial.
Damages Calculation and Ongoing Trade Secret Litigation
The key issue in the appeals court’s decision was the damages calculation. The original trial used total sales revenue as the basis for the damages without fully establishing a direct link between the trade secrets and the entire revenue. The court found that not all of the revenue was tied to the stolen trade secrets, which led to the conclusion that the damages calculation was not accurate. With the case still in progress, an appeal of the appeal could potentially result in the reinstatement of the original damages award, or the case could be sent back to trial for a completely new round of litigation.
Insurance and Potential Refiling under DTSA
The episode also highlights the role of insurance in protecting against damages in trade secret cases. Appian had taken out a $500 million insurance policy to safeguard against potential losses, paying a hefty $57 million premium. This move adds an interesting layer of complexity to the case, especially as it involves multiple investors and a syndicate of insurers. Finally, the hosts explore the possibility of refiling the case under the federal Defend Trade Secrets Act (DTSA), raising questions about why it was originally filed under the Virginia Trade Secret Act and whether a shift to federal court could impact the outcome.
収穫：
- The Appian Pegasystems case, which involved a $2 billion damages award, was reversed and remanded due to issues with evidence and causation.
- The damages calculation did not accurately connect to the trade secrets, leading to the reversal of the award.
- The case is still ongoing, with an appeal of the appeal and the possibility of a new trial.
- Insurance policies can be used to protect against damages in trade secret cases.
- There is a potential for refiling the case under the DTSA.
Transcript:
Tim (00:01.336):
All right, Chris, we’re back, episode eight. I just had to check. I was like, is this number seven? We’re getting close to double digits, a couple more weeks. Good to see you. So today we’re talking about a big decision that came down on July 30th, which was a reversal in this Appian-Pegasystems case. And so,
Chris (00:07.185):
Time flies. That’s great.
Tim (00:30.702):
In our trade secret world, this was sort of the bombshell landmark case of the last few years, right? In 2022, Appian won a $2 billion decision against Pegasystems. These are both low-code platforms that build enterprise software platforms. Appian’s about a third the size of Pegasystems. I should say, Pegasystems has about three times the revenue of Appian, at least based on 2021 data—$370 million versus Pegasystems’ $1.2 billion. The original decision was in May of 2022. So before we jump into this reversal, let’s just understand a little bit more about the original case. So Chris, why don’t you just give us a little bit of color on what happened originally?
Chris (01:28.217):
Sure, Tim. And actually, it’s both a reversal and a remand, both. So reversal basically cancels the damage award, the $2 billion monster amount of cash, but then it also remands it. The appeals court is bouncing it back down to the trial court for a do-over. So they have to go through the whole trial again, which could be okay or it could be horrible. Basically, they’re starting over.
Tim (01:50.498):
Got it.
Chris (01:58.521):
Now, there’s going to be an appeal of the appeal decision also at the same time. So this is actually going to split out in two different directions at the same time. There’s an appeal of the appeal at the Supreme Court in Virginia, as well as the appeals court bouncing it back down to the trial court for a do-over. So this is going to be real fun to watch. But the original case, it got a lot of attention and kind of notoriety within the trade secret world for a few reasons. The obvious one is it’s a huge damage award. I mean, $2 billion is a lot of money to everyone. Now they actually were trying to get $3 billion. So in a way, they only got two-thirds of what they wanted, but it’s a massive amount of money. The other reason that it’s such an interesting case is the fact pattern. It was a campaign, a very long ongoing systematic theft or attempt to undermine the trade secrets of a competitor. So it’s not the usual one person leaving and taking 8,000 files with them. This was very systematic. They had fake logins. They had a person act as a spy on the other company, and then they even referred to the person as their spy in internal emails and meetings. It was such a campaign that it made the defendant look really bad in the litigation because this wasn’t a casual, accidental misappropriation. This was a very, very systematic program to get at the trade secrets of a competitor. We often talk about whether it’s people acting badly—this was very bad action over an extended amount of time. So it’s a great story as well as a massive damage award coming out of the trial court the first time.
Tim (04:00.59):
Very bad.
Tim (04:13.59):
Yeah, it certainly feels like of all of the cases that we review and think about, this one has as much Hollywood capability or potential as any.
Chris (04:28.783):
Yeah, I mean, this is one of the more colorful stories, probably along with the professor that sued the ex-students a couple of podcasts ago, in terms of the entertainment value or the intrigue involved in the trade secret theft. Like, these are definitely towards the top of the list for being optioned by Hollywood.
Tim (04:36.64):
Yeah.
Tim (04:48.756):
Yeah. You know, quick sidebar—Tangibly does have one Hollywood producer as one of our early investors. And it’s funny when I met him, this was a little sideshow of a conversation. But certainly, some of this stuff, yeah, you can’t script. In this case, you maybe could script. I was reading that how they considered or called the person the spy, right? And then the other thing I found great was that they gave it a project name, right? Let’s give this thing an identity and call it, in this case, Project Crush. It’s like, here’s this company that’s got a third of our revenue. Let’s go crush them. I just thought, man, it’s too funny. Okay, so one of the things—and $2 billion is certainly starting to be in that realm of really big patent cases, right? Back in the patent litigation heyday, those were $4, $5, $6 billion cases. And so to start seeing a trade secret case at $2 billion, this basically put trade secrets on the map in 2022. So everybody saw this decision and registered it as “wow.” One of the things that continues to fascinate me about the $2 billion number is that when you look at Appian’s market cap, let’s say post-decision—so this $2 billion was like priced into the stock. The stock was trading at $4 billion, right? Essentially, and again, this is very rough math, yeah, it was these trade secrets, and this wasn’t the entirety of the company’s trade secrets, certainly, but these were super important ones. It was valued by the market at half the value of the company, right? I just think we don’t often see something this kind of pure play.
Chris (07:01.659):
Yeah, right.
Tim (07:10.478):
Get priced into a stock as it did. And actually, it’s quite interesting now with the reversal remand, you’re starting to see the stock come down. It’s back to where it was sort of pre-decision 2022, and you see Pegasystems kind of getting some bump.
Chris (07:34.405):
Well, and the $2 billion, I mean, it was kind of a high watermark, but since then, you’re routinely seeing trade secret damages in the tens of millions and even sometimes over $100 million. So it’s still a big number. I mean, no one’s come close to $2 billion since then, but it’s inching up. And now like $100 million damages for trade secrets doesn’t surprise people anymore. So it’s really changing.
Tim (07:52.995):
Yeah.
Tim (07:56.258):
Yeah, you know, I totally have that same reaction. We had this decision out of Italy this week or last, and it was like a $100 million decision. And I think three or four years ago, you and I would have been like, wow, that’s on our list right now. Right? And now it’s like, yeah, $100 million, whatever.
Chris (08:13.393):
That’s right. Yep. Another one. Another $100 million. But it’s great because trade secrets are now in the realm of patent damages. And it used to be that you’d always go after patent damages because that’s where the big money was. And now trade secrets are in the same ballpark.
Tim (08:25.048):
For sure.
Tim (08:33.966):
Yeah. So let’s walk through what happened in this July 30th, 2024 decision. The Virginia Court of Appeals reversed the damages award, remanded back to the lower court for a new trial. Talk about that decision. Why did they do that?
Chris (08:57.605):
So there were really two different parts. One has to do with evidence, and one has to do with causation. The causation had to do with a jury instruction. The idea is you should get damages that connect with the action. The problem was they used the total sales revenue as the basis for calculating damages, but didn’t connect.
Yeah, it could be that all of your revenue ties back to the trade secret, which is okay. But it might be that only a portion of your revenue ties back to the trade secret if it isn’t core to everything you’re doing. So that calculation was not presented to the jury with the argument that the damages were too high. And then the other one had to do—good, sure.
Tim (09:51.09):
So, can I jump in with it? So effectively, the damages—they were able to show the damages calculation was not, you know, not accurate.
Chris (10:02.981):
Well, either not accurate or not fully considered. There again, there should be a link or causation between the trade secrets and the calculated damages. And yeah, it could be 100%. So if a trade secret is so core to your business that all of your revenue ties back to that trade secret, then all of the revenue is fair game for calculating damages.
Tim (10:11.064):
Together.
Tim (10:29.848):
Dave.
Chris (10:31.569):
But on the other hand, if it’s only one product out of 10, for example, maybe it’s less than your total revenue because you have other products not incorporating that trade secret or not involving that trade secret. So the jury should be able to consider that in calculating their damages. And the appeals court is saying, yeah, that calculation wasn’t considered.
Tim (10:50.914):
Yep.
Tim (10:56.654):
So that $2 billion number comes from many years of revenue, then, yeah?
Chris (11:03.351):
Correct. And also its total revenue is over several years. So they’re saying that calculation wasn’t presented to the jury, or the jury didn’t consider the possibility that not all of the revenue connected back to the trade secret.
Tim (11:06.828):
Yeah, total revenue over seven years or something. Yeah, okay.
Tim (11:25.176):
Can I ask a question on that? Why would that have not come up in the damages argument part of the case?
Chris (11:26.566):
Mm.
Chris (11:34.703):
Well, it had to do with the jury instruction. So, the document that the jury fills out as they’re deliberating. So it probably did come up in trial, but then for whatever reason, didn’t end up in the jury instruction. So that was one. And then the other one is kind of a good thing for trade secrets, or at least reinforces a basic idea, which is there was evidence that was…
Tim (11:42.253):
I see.
Tim (11:48.664):
Got it. Got it. Cool.
Chris (12:02.819):
Not presented or not allowed to present from Pegasystems saying that they didn’t steal the trade secret or that the trade secrets weren’t trade secrets at all. So in their appeal, they’re saying, look, we weren’t allowed to present all of the evidence that we didn’t steal or that the trade secrets were not properly protected and therefore did not qualify for trade secret protection.
And to me, in the litigation or in any dispute, you need to be able to say something qualifies as a trade secret or not. And that your actions, you know, were either misappropriation or not misappropriation. These are kind of basic tenants of enforcing trade secret rights that here, the defendant, was able to convince the appeals court that they didn’t get a fair bite at the apple.
Tim (13:05.024):
So, well, is this an example where you would say, well, they kind of got the benefit of the doubt in this original decision because boy, Pegasystems kind of behaved so badly?
Chris (13:19.577):
Mm-hmm.
Chris (13:24.493):
It feels that way. But yeah, in Appian’s part of the appeal, they said, look, this was not a quick trial. Like, this went on for a long time. There was tons of evidence, tons of witnesses. So their feeling is that the appeals court actually got it wrong and that there was tons of opportunity to present information and present evidence, and they lost.
Tim (13:26.551):
Yeah.
Tim (13:39.021):
Yeah.
Chris (13:53.915):
So it’ll be interesting to watch what happens next because they’re appealing the appeal. So the appeal could get overturned at the Supreme Court, in which case the $2 billion might be reinstated, which Appian would be happy if that happened. And then it could get bounced down to the trial court. They go through the whole painful trial again, and maybe they get $2 billion again, or maybe $3 billion, which is what they originally asked for. So this isn’t lethal by any means, it’s still very much in play. And it’ll be kind of interesting to watch where this shakes out.
Tim (14:39.311):
Yeah, so now the kicker here is—and so they announced this, you know, after, this was like a 2023 announcement from Appian that they insured judgment preservation insurance policy. So they took out a $500 million policy to ensure that they were going to get something, right? And they paid a 9.8% premium, which kind of came out to $57 million. So Appian wrote a $57 million check to get $500 million of insurance, to ensure that $2 billion up to $500 million.
So I think it’s got the added intrigue now that you’ve roped probably multiple investors into this, because you go back to the press release from 2023 where they talk about this insurance policy. It’s a large syndicate of highly rated insurers. So my guess is, depending on what’s going to happen next, we’ll be hearing a lot more about this by virtue of the insurers getting involved.
Chris (16:06.137):
Yeah, totally. And it almost functions like a put option on the damages. And this whole notion of insurance coming into play with trade secrets is still relatively new, but it’s exciting and it kind of validates that trade secrets are real and valuable and an investable asset. So it’s great to see more activity in the insurance space.
Tim (16:11.107):
Yeah.
Tim (16:33.74):
Got one more question for you. And so this was a case that was filed in state court, right? So it’s Virginia State Court and it didn’t have a DTSA claim, I think. And so, is there a world in which this could be refiled under DTSA?
Chris (16:40.497):
Mm-hmm, Virginia.
Chris (16:45.115):
Correct. Correct.
Chris (16:56.593):
So, I tried to figure out, because I was wondering the same thing, why this was done under the VUTSA, the Virginia Trade Secret Act, instead of DTSA. And I couldn’t easily figure out why. It seems like they could have chosen DTSA originally. But again, for some reason, they were more comfortable or had some reason for sticking with Virginia.
You wouldn’t normally retry because it has gone through the Virginia court system and it’s still active in the appeal and the remand going on in Virginia. It’s not like if you’re unhappy at state level, you can just bounce to federal or vice versa. But it is an interesting question that, again, I haven’t easily figured out—why did they choose Virginia? Because it is a recent case.
Tim (17:34.936):
Yeah.
Tim (17:51.426):
Right.
Chris (17:53.582):
We’ve seen some old ones that were filed before DTSA existed and that makes total sense.
Tim (18:01.844):
And I’d say it feels like maybe the average today is to file both the state and federal case.
Chris (18:12.005):
Well, or just jump straight to federal. Like a lot of people are just using DTSA regardless as the plan A.
Tim (18:17.794):
Yeah, yeah, yeah. All right, man. Good episode. Thank you. What’s next? Hold on a second. Let’s do the Italian one next, because we made reference to it. And we’ve got some customers in Italy, and there’s stuff happening in Italy, right? There’s a lot of activity there, yeah?
Chris (18:23.344):
Hmm.
Chris (18:30.928):
Mm-hmm.
Chris (18:41.221):
Yeah, Italy is amazing. I went to a trade secret conference and someone from Europe was presenting on trade secret litigation filings, where the activity is. And Italy is by far the most active venue in Europe. And it’s an interesting question of why, but yeah, this will be a great case to talk about next time.
Tim (19:05.634):
Well, with a $100 million decision, if these people are seeing the money, it’s like the Delaware of the EU or something. All right, good stuff, Chris. Take it easy. Thank you. Later. Bye.
Chris (19:16.568):
It is. It’ll be good. Awesome. You later.
