Blanket Exclusion Of Trade Secret Evidence Results In Reversal Of $920 Million Jury Verdict

In reversing a $920 million trade secret jury verdict, the Fourth Circuit concludes that the trial court imposed "too stringent" of a standard in requiring the defendant to show that trade secrets from prior litigation were publicly available; the jury was entitled to consider the evidence based on a "plausible showing"; circuit concludes "that the blanket exclusion of such evidence seriously prejudiced Kolon’s ability to present its case to the jury," E.I. DuPont De Nemours & Co. v. Kolon Industries Inc., _ Fed.Appx _ (4th Cir. Apr. 3, 2014) (No. 12-1260) (Per Curiam) (Unpublished)

A recent Fourth Circuit cases demonstrates the standard to admit probative evidence under FRE 401 and exclude evidence that is substantially outweighed by the danger of confusion of the issues or misleading the jury under FRE 403. The circuit concludes that the trial court abused its discretion in depriving the jury from considering trade secret evidence from prior litigation.

Trial Court Proceedings: Excluding Evidence Of Public Availability Of Trade Secret Information

In the diversity action, E.I. DuPont De Nemours & Co. (DuPont) sued Kolon Industries, Inc. (Kolon), for misappropriation of its Kevlar trade secrets under the Virginia Uniform Trade Secrets Act. The case involved five former DuPont employees which Kolon, a South Korean company, hired as consultants. DuPont alleged that Kolon obtained numerous trade secrets and confidential information from the employees concerning DuPont’s Kevlar (“a high-strength para-aramid fiber that is five times stronger than steel”).

Kolon filed counterclaims against DuPont alleging antitrust violations. The district court dismissed the counterclaims under Fed. R. Civ. P. 12(b)(6), which the Fourth Circuit reversed. E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435 (4th Cir. 2011). The trade secret claims were presented separately in a jury trial.

As part of its defense, Kolon planned to introduce evidence that a number of the alleged trade secrets were publicly available:

Specifically, Kolon theorized that DuPont itself had disclosed or otherwise failed to keep confidential such information in the course of intellectual property litigation in which it was engaged during the 1980s with its then primary competitor, AkzoNobel. One such case had been litigated in the Eastern District of Virginia (“the Akzo litigation”); DuPont was represented by the same law firm representing it in this case.

DuPont, _ Fed.Appx at _. DuPont moved to exclude evidence concerning the Akzo Litigations as irrelevant and causing confusion and delay. The trial court granted the motion to exclude, noting that “Kolon ha[d] produced no evidence that any particular trade secret, much less a trade secret that is at issue in this litigation, was disclosed in the litigation between [DuPont] and Akzo, N.V.” After seven weeks in trial, the jury returned a verdict for DuPont on the trade secret claims, awarding $919.9 million in damages. See Final Judgment. The trial court granted the motion for a preliminary injunction. See Preliminary Injunction Order (Aug. 30, 2012). The Fourth Circuit stayed the injunction pending consideration of the appeal on the merits. Kolon appealed the judgment, raising a host of issues, including the exclusion of the evidence. In particular, Kolon argued that "[a]t least 42 of the trade secrets DuPont has asserted . . . involve information that was wholly or partially disclosed during the [prior] litigation," and the exclusion deprived it from presenting a meaningful defense. See Kolon Opening Appeal Brief (redacted); see also Kolon Reply Brief (redacted). In contrast, DuPont argued that Kolon failed to show public disclosure of any of the trade secrets. See DuPont Appellee Brief (redacted).

Fourth Circuit Review: Reversing Jury Verdict Based On Blanket Exclusion Of Evidence

The Fourth Circuit concluded that the trial court abused its discretion in excluding the Akzo litigation evidence. The trial court applied "too stringent a standard for admissibility." The circuit concluded that two charts presented to the trial court identified "substantial similarities" and "overlap" between the trade secrets in the Akzo litigation and the alleged trade secrets presented at trial. As the circuit explained:

We hold that Kolon was not required to establish, as the district court seemingly demanded, that evidence derived from the Akzo litigation amounted to an actual trade secret at issue in this case. Rather, to show the relevance of the evidence, Kolon simply needed to make a plausible showing that, either directly or circumstantially, one or more elements of DuPont’s misappropriation claims, e.g., the reasonableness of its efforts to maintain confidentiality, was less likely true. Equivalently, Kolon simply needed to make a plausible showing that, either directly or circumstantially, one or more elements of its defenses, either to liability or to the quantum of damages, e.g., the reasonableness of its asserted belief that its consultants were not disclosing trade secrets, was more likely true than not true.
...
With reluctance, we hold that the district court abused its discretion and acted arbitrarily in excluding, on the wholesale basis that it did, as irrelevant or insufficiently probative, evidence derived from the Akzo litigation. The usefulness of pre-trial in limine motions in streamlining trial generally and in fostering the orderliness of evidentiary presentations of complicated issues cannot be doubted. On the other hand, a court is often wise to await the unfolding of evidence before the jury before undertaking to make definitive rulings on the likely probative value of disputed evidence. Kolon has demonstrated on appeal that evidence from the prior litigation over DuPont’s Kevlar program was not irrelevant as a matter of law and that the probative value of that potential evidence exceeded the bare minimum the district court seemed to ascribe to it.
...
To be sure, there is little doubt as to the possibility of juror confusion and perhaps delay arising from attention to other litigation in a trial having the complexity this one surely did. Nevertheless, under Federal Rule of Evidence 403, exclusion on that basis is only proper when the probative value of the evidence is substantially outweighed by the danger of confusion of the issues or misleading the jury. That standard is not satisfied on this record. At bottom, the potential for confusion and delay does not outweigh, much less substantially outweigh, the probative value (as to both liability and damages) of the excluded evidence. When a district court conducts a Rule 403 balancing exercise, ordinarily it should “give the evidence its maximum reasonable probative force and its minimum reasonable prejudicial value.” Deters v. Equifax Credit Info. Servs., Inc., 202 F.3d 1262, 1274 (10th Cir. 2000) (citations omitted).
...
We hasten to add that we are not to be understood to suggest that anything Kolon labels as derived from the Akzo litigation must be admitted on the retrial. We are persuaded, however, that the blanket exclusion of such evidence seriously prejudiced Kolon’s ability to present its case to the jury. The district court is free on remand to determine in a more nuanced and particularized manner what evidence offered by Kolon or DuPont should be admitted.

DuPont , _ Fed.Appx at _ (emphasis in original).

Related Proceedings

Separately, the Fourth Circuit affirmed the district court's dismissal of the antitrust counterclaims for DuPont. Kolon Industries Inc. v. E.I. DuPont de Nemours & Co., _ F.3d _, 2014 WL 1317695 (4th Cir. Apr. 3, 2014) (No. 12-1587). The circuit decided against considering Kolon's motion to disqualify the trial judge based on allegations that the judge had previously participated in the Akzo litigation. However, the circuit directed that "all further proceedings on remand be conducted before a different district judge" based on its supervisory powers under 28 U.S.C. § 2106. See DuPont , _ Fed.Appx at _.

There is also a criminal case pending as Kolon Industries Inc. and five individuals were indicted on trade secret theft charges in the Eastern District of Virginia in August 2010. See Indictment; DOJ Press release. Following the transfer of the civil case to another judge by the circuit, the senior district judge also issued an order transferring the criminal case to another judge. See Transfer Order (April 4, 2014).

Conclusion

The DuPont case highlights the risks of obtaining a "blanket exclusion" of evidence under FRE 401 and FRE 403. The trial court applied too high of a standard in barring probative evidence. Only a "plausible showing" was required not proof of "an actual trade secret at issue." The jury could ultimately determine the weight of the evidence. Further, the total exclusion was inappropriate. Under the circumstances, the trial court could have deferred ruling until hearing "the unfolding of evidence before the jury" instead of making pretrial "definitive rulings." The trial court also misapplied the "substantially outweighed" standard under FRE 403.

Sometimes what may appear to be a positive ruling at trial, may loom larger, and be more consequential, on appeal. As a result of prevailing on its motion to exclude all of the evidence, DuPont will now have to retry the case.

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Photo Description: Fourth Circuit, Lewis F Powell, Jr. United States Courthouse in Richmond, VA. Learn more about the courthouse.

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