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Afilias PLC v. Architelos, Inc.

United States District Court, E.D. Virginia, Alexandria Division

March 23, 2016

AFILIAS PLC, Plaintiff,
v.
ARCHITELOS, INC., Defendant.

MEMORANDUM OPINION

LEONIE M. BRINKEMA UNITED STATES DISTRICT JUDGE

This Memorandum Opinion supplements the oral ruling from the bench and provides additional explanation for the Order issued on January 8, 2016, in which the Court denied the Plaintiffs Motion for a Status Quo Injunction Pending Entry of Judgment [Dkt. No. 281], Dec. 17, 2015, as moot and granted the defendant's Motion for Judgment as a Matter of Law Or, In the Alternative, For a New Trial or Remittitur [Dkt. No. 259], Sept. 8, 2015, only to the extent that a remitted judgment was entered in favor of the plaintiff in the amount of $2 million. Order [Dkt. No. 287] at 1, Jan. 8, 2016. The Court also declined to rule on the Plaintiffs Post-Trial Motion for a Permanent Injunction [Dkt. No. 255], Sept. 4, 2015, to allow the parties time to meet and confer as to the parameters of an appropriate injunction. Id. The parties attempted to resolve this issue but were unable to reach complete agreement and have tendered their proposed injunctions, requesting that the Court resolve the issue. See Joint Status Report on Parties' Efforts Regarding Proposed Language for Permanent Inj. [Dkt. No. 289], Jan. 22, 2016.

I. PROCEDURAL BACKGROUND

This civil action began on January 5, 2015, when plaintiff Afilias PLC ("plaintiff' or "Afilias") filed a ten-count civil action against defendants Architelos, Inc. ("Architelos") and its co-founder and Chief Executive Officer Alexa Raad ("Raad") (collectively, "defendants"), alleging respectively in Count One, Misappropriation of Trade Secrets; in Count Two, Conspiracy to Injure Another in Trade, Business, Reputation (violation of the Virginia Business Conspiracy Act); in Count Three, Tortious Interference with Contracts; in Count Four, Rights to Patent No. 8, 800, 044; in Count Five, Rights to Patent Application No. EP 20130158369; in Count Six, Rights to Patent Application EP 20120760627; in Count Seven, Rights to Patent Application CA 2866822; in Count Eight, Rights to Patent Application 13/416, 688; in Count Nine, Conversion; and in Count Ten, Civil Conspiracy. With respect to the patent rights, plaintiff sought declaratory judgments that the rights to each patent or application belonged to Afilias.

Defendants originally counterclaimed on various theories, including tortious interference with contract, but later voluntarily dismissed their first and second counterclaims. See Stipulation of Dismissal [Dkt. No. 148], July 9, 2015. Summary judgment was later granted to the plaintiff on the defendants' third and fourth counterclaims. See Order [Dkt. No. 164], July 24, 2015. Before trial, defendant Alexa Raad was voluntarily dismissed, as were Counts Four, Five, Six, and Seven of the Complaint and the defendants' fifth and last counterclaim. See Order [Dkt. No. 223], Aug. 14, 2015.

Plaintiffs remaining claims alleging trade secret misappropriation (Count One), violation of the Virginia Business Conspiracy Act (Count Two), tortious interference (Count Three), rights to the '688 patent application (which the parties refer to as the '801 patent) (Count Eight), conversion (Count Nine), and civil conspiracy (Count Ten) were tried to a jury during a trial that began on August 18, 2015. No counterclaims remained for trial.

During the trial, Afilias presented the expert testimony of Dr. Seth Nielsen ("Dr. Nielsen"), who concluded that the '801 patent held by Architelos "contained the proprietary information from the Afilias abuse tool from 2011" and that "the Afilias proprietary information is embodied in [Architelos'] NameSentry [product], " which is based on the '801 patent. Trial Tr. 377:6-8, 385:25-386:6. Architelos did not present any expert testimony on the issue of misappropriation but presented evidence and testimony that the allegedly proprietary information was generally known in the industry and was disclosed publicly by Afilias. See Id. 735:19-764:4.

On the issue of damages, Afilias presented the expert testimony of Dr. Brian Becker ("Dr. Becker"), who based his expert analysis in part on a 2011 or 2012 estimation made by Architelos to potential investors that sales of its anti-abuse products would total $332 million between 2012 and 2020. Id. 437:22-439:5. He then used the concept of a "hypothetical negotiation" to calculate a "reasonable royalty" rate of 29.9% that Architelos could have paid Afilias in order to use its information in the NameSentry product. See id 438:4-439:21. Dr. Becker testified that as an alternative, Architelos could have bought a "paid-up license" or made a lump sum payment of $48.8 million to Afilias for the information. Id. 470:6-471:8. Dr. Becker also discussed Architelos' actual profits from the NameSentry product, which totaled less than $300, 000 to date, and testified that application of the reasonable royalty rate to those profits yielded totals of $99, 000 with interest and $93, 500 without interest. Id. 441:5-442:21. Architelos did not present any expert testimony on the issue of damages.

During closing arguments, plaintiffs counsel submitted to the jury that it could either measure damages according to the research and development costs Afilias had invested in its semi-automated anti-abuse tool, which the plaintiff calculated to be $1.2 to $1.5 million and described as "the minimum that [Afilias] would be entitled to, " or could calculate damages according to Dr. Becker's reasonable royalty rate as applied to the projected revenues Architelos had presented to potential investors, for a total of $31 million. Id. 926:8-928:17.With regards to the latter measurement, plaintiffs counsel argued that the jury was entitled to discount Architelos' projected revenues, concluded that a 70 percent discount would be reasonable, and estimated that such a discount would result in a total of $9.4 million in damages. Id. 928:20-929:15. Based on this reasoning, plaintiffs counsel argued that $10 million would be "an appropriate number for the value of this tool." Id. 929:20-22.

Before the conclusion of the trial, the Court ruled against Afilias on its claim to the '801 patent and declined to grant a declaratory judgment as to that patent. Id. 890:20-891:2. The jury awarded plaintiff a total of $10 million ($5 million for the trade secret claim, $2.5 million for the conversion claim, and $2.5 million for the civil conspiracy claim), but found against the plaintiff on the business conspiracy and tortious interference claims. Verdict Form [Dkt. No. 240] at 1-3, Aug. 24, 2015.

II. FACTUAL BACKGROUND

Afilias, an Irish corporation headquartered in Dublin, Ireland, wholly owns subsidiaries in Canada ("Afilias Canada") and the United States ("Afilias USA"), and is a domain registrar managing the world's second largest domain registry, including the registry for the .info top-level domain ("TLD").[1] Compl. [Dkt. No. 1] ¶ 2, Jan. 5, 2015; Mem. of P&A in Support of PL's Post-Trial Mot. for a Permanent Inj. [Dkt. No. 256] at 2, Sept. 4, 2015 ("Inj. Br.").

Defendant Architelos, which also works in the domain industry and manages "new and existing internet domains, " is incorporated in Delaware and headquartered in Leesburg, Virginia. Compl. ¶ 3. Architelos has three full-time employees and employs approximately six independent contractors. Answer [Dkt. No. 35] ¶117, Mar. 13, 2015. Co-defendant Raad co-founded Architelos in 2001 and serves as the company's Chief Executive Officer. Answer ¶117; Compl.¶ 4.

Although Afilias named only Architelos and Raad as defendants in this action, Afilias' Complaint also alleged that several of Afilias' former employees and contractors functioned as co-conspirators with Architelos and Raad. Compl. ¶¶ 5-9. Specifically, the Complaint named Michael Young ("Young"), who served as the Vice President of Technology at Afilias Canada until he left in February 2011 to join Architelos, id ¶ 5; Stephen Van Egmond ("Van Egmond"), who as a director and officer of Canadian corporation Tiny Planet Consulting, Inc. ("Tiny Planet") had worked as a software development contractor for Afilias Canada until March 2011, Id. ¶¶ 6-7; and Greg Aaron ("Aaron"), the president of Illumintel, Inc. ("Illumintel"), a Pennsylvania corporation, who had worked as an employee for Afilias until June 30, 2011, at which time he left but continued to consult for Afilias through Illumintel. Id. ¶¶ 8-9; Trial Tr. 116:24-117:1, 140:21-141:4.

As to these co-conspirators, the Complaint alleged that each had signed agreements in which they agreed that they would not disclose any of Afilias' proprietary or confidential information, remove it from Afilias' premises, or use Afilias' proprietary information for their own benefit. Compl. ¶¶ 13-15. These agreements defined proprietary and confidential information very broadly.

The evidence at trial showed that Afilias began experiencing abuse problems with the .info TLD. Specifically, in 2007 the Internet security company McAfee released a report listing "the world's riskiest top level domains" in which it described plaintiffs .info TLD as the riskiest TLD in the world. Trial Tr. 63:6-12. Afilias determined that the report's findings were accurate in that the .info TLD faced "a real problem" with "domain name abuse, " id 65:18-22, which includes spamming and other situations "when people with bad intentions take a domain name or a set of domain names and... they use it for malicious purposes, they try to grab your information, they try to steal information from your computer, they try to take away your identity, or they use it for illegal purposes [such as]... child abuse or child pornography or other things like that." Id. 47:25-49:2. ...


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