Federal Circuit Issues Mixed Ruling on Trade Secret Misappropriation of Blood Analyzer

The U.S. Court of Appeals for the Federal Circuit (CAFC), on June 11, 2024, affirmed-in-part and reversed-in-part a U.S. district court ruling surrounding an alleged trade secret misappropriation.

In 2014, Alifax, a company that specialized in producing clinical instruments, filed a lawsuit against Alcor Scientific (“Alcor”), which operated in the same general area of clinical development, alleging trade secret misappropriation under the Rhode Island Uniform Trade Secrets Act (RIUTSA). For years, Alifax produced automated machines that determined the erythrocyte sedimentation rate (ESR) of human blood samples. Prior to the suit, an employee of an Alifax subsidiary left the company and began working for Alcor. Within a year of his employment, Alcor began offering a new ESR instrument which presented similar analytical capabilities to the Alifax machines.

Prior to trial, the trade secret misappropriation claim was bifurcated into two separate phases – the liability phase and the damages phase. There were two trade secrets that Alifax presented in its case:

1. A conversion algorithm trade secret, which comprised “portions of computer program source code concerning the conversion of photometric measurements, including source code containing four specific conversion constants.”
2. An alleged signal acquisition trade secret, which involved “the process by which Alifax’s devices gathered ESR-related raw data through signal acquisition.”

At the charge conference, the court removed “acquisition” from the second trade secret, citing that there was no record evidence of a trade secret in this apparatus, “other than with respect to the conversion algorithm.” Over Alifax’s objection, this effectively removed the second trade secret claim. The jury found that Alifax sufficiently proved the existence of a trade secret in relation to the conversion algorithm, and that Alcor had misappropriated that trade secret. As such, it awarded $6.5 million in damages to Alifax.

In response, Alcor raised multiple issues with the court. Prior to the damages phase of the trial, the court excluded Alifax’s expert witness from opining on misappropriation damages, instead limiting him to act as a summary fact witness based upon Alcor’s revenues and costs. Soon after, the court granted Alcor a new trial on both the liability and damages phases, reasoning that the jury’s verdict was against the clear weight of the evidence and that the expert witness had acted outside the scope of a summary fact witness and unfairly prejudiced Alcor, respectively. In its order, the court stipulated that no new evidence or witnesses would be permitted at the new trial, the original theory based on an alleged signal acquisition would be excluded, and Alcor was not entitled to attorney’s fees regarding its patent and copyright infringement claims, which were ultimately dropped or excluded from the case. Finally, the court precluded Alifax from seeking compensatory damages. After a dismissal of the trade secret claim and final judgment on all other claims, Alifax appealed multiple issues.

CAFC Weighs In

In an opinion authored by Circuit Judge Cunningham, the CAFC first held that the district court did not err by excluding the alleged signal acquisition trade secret from the jury in the liability phase. In affirming the district court’s decision, it reasoned that Alifax had failed to meet the burden of proof necessary to show the existence and scope of the alleged trade secret under RIUTSA. Citing IDX System Corp v. Epic System Corp., the Federal Circuit opinion explained: “[A] plaintiff must do more than just identify a kind of technology and then invite the court to hunt through the details in search of items meeting the statutory definition.”

Thus, Alifax failed to provide “sufficient detail” to establish each statutory element of the claim – its argument that the trade secret was “how to acquire photometric signals from a blood sample” only showed purpose, not detail. Consequently, the scope of the trade secret remained too vague for the CAFC, which reasoned that “a jury would not be able to distinguish which aspects are known to the trade from those which are not.”

Next, the CAFC held that the district court abused its discretion in granting a new trial on liability as to the conversion algorithm trade secret. The district court had originally ruled that the conversion algorithm was not capable of producing accurate results in a non-Alifax device, therefore no economic value was derived from maintaining the trade secret. This, the appellate court opined, was an incorrect reading of RIUTSA. RIUTSA did not require use only – if the trade secret was acquired through improper means, then the other prong was met, satisfying the requirements. Since the district court did not consider whether the trade secret was acquired through improper means in its interpretation of RIUTSA, it had abused its discretion in granting a new trial.

The district court’s rulings on the damages phase, as well as the exclusion of the alleged signal acquisition at the new trial, were both affirmed by the appellate court. The CAFC agreed that Alifax’s expert witness went beyond the scope of a summary witness and testified in such a prejudicial way that “reflected the application of his financial and accounting expertise.” It also agreed that the district court “properly and conclusively resolved” the issue surrounding whether the alleged signal acquisition was a viable claim under RIUTSA.

Finally, the CAFC opinion held that the district court erred in precluding Alifax from seeking compensatory damages. The original decision was based on the district court’s assumption that Alifax’s expert witness testimony (found to be violative of Rule 1006) was essential in calculating compensatory damages. However, Alifax clarified this, stating that it would present a separate person to act as a summary witness in presenting the same evidence. Since this new person would not act as an expert, there would be no violation of the rule. Therefore, the district court abused its discretion in precluding Alifax from seeking damages.

Ultimately, the CAFC  reversed the district court’s grant of a new trial regarding liability of the conversion algorithm trade secret and ordered the court to reinstate the jury verdict on this point; reversed the  decision to preclude Alifax from presenting evidence and witnesses on compensatory damages and remanded for a new trial on damages; but affirmed the district court decision in all other aspects.

Image Source: Deposit Photos
Author: iqoncept
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