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Steves and Sons, Inc. v. Jeld-Wen, Inc.

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

May 10, 2018

STEVES AND SONS, INC., Plaintiff,
v.
JELD-WEN, INC., Defendant.

          MEMORANDUM OPINION

          Robert E. Payne Senior United States District Judge.

         This matter is before the Court on PLAINTIFF STEVES AND SONS, INC.'S MOTION FOR SUMMARY JUDGMENT ON JELD-WEN COUNTERCLAIMS (ECF No. 885), to the extent that Steves and Sons, Inc. ("Steves") seeks summary judgment on JELD-WEN, Inc.'s ("JELD-WEN") federal and Texas trade secret misappropriation damages claims. The motion was denied as to those arguments made by Steves in its original briefing, but the Court ordered supplemental briefing as to Steves' request for summary judgment on the basis that JELD-WEN's damages expert failed to apportion damages between specific trade secrets. See ECF No. 1290. For the reasons set forth below, the motion was also denied on the grounds raised in the supplemental briefs. See ECF No. 1536.

         BACKGROUND

         The background underlying this dispute is described at length in the Court's recent opinion concerning summary judgment on other aspects of JELD-WEN's counterclaims. See Summary Judgment Op. (ECF No. 1424) at 2-16. However, some additional procedural details are relevant to this motion.

         JELD-WEN retained a damages expert, John Jarosz ("Jarosz"), in connection with its counterclaims. JELD-WEN served Jaros'z opening report ("the Jarosz Report") on November 3, 2017. See ECF No. 1124-2 (Under Seal). The Report's calculations were based on JELD-WEN's then-operative statement of trade secrets to be asserted at trial, id. at 62 n.310, which had been filed on November 2, Summary Judgment Op. at 12. On November 29, JELD-WEN filed an amended statement of trade secrets to be asserted at trial ("the Amended Trial Statement"), which added two rows of information. Id. at 12-13. On December 22, JELD-WEN served Jarosz's rebuttal report ("the Jarosz Rebuttal Report"), which responded to the opinions expressed by Steves' damages expert, Michael Wallace ("Wallace"). See Jarosz Rebuttal Report (ECF No. 1124-3) (Under Seal). The Rebuttal Report relied on the information contained in the Amended Trial Statement.[1] Id. ¶ 13 n.10. Jarosz was then deposed about the substance of his reports on January 12, 2018, while the Amended Trial Statement was still in effect. Jarosz Dep. (ECF No. 884-18) (Under Seal) at 1.

         On March 21, 2018, in response to the Court's order, JELD-WEN filed an updated statement of trade secrets to be asserted at trial ("the Second Amended Trial Statement"), which separated the rows of information from the Amended Trial Statement into sixty-seven individual trade secrets. Summary Judgment Op. at 15. A redlined version of the Second Amended Trial Statement, provided by JELD-WEN at the Court's request, showed that information constituting approximately sixteen trade secrets that were in the Amended Trial Statement had been removed in the Second Amended Trial Statement.[2] See ECF No. 1304-3 (Under Seal). As a result, the trade secrets for which JELD-WEN will seek damages at trial are different than those underlying Jarosz's reports and testimony.

         DISCUSSION

         I. Legal Standard

         Under Fed.R.Civ.P. 56, a court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). Rule 56 requires the entry of summary judgment "after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986) . For a court to enter summary judgment, "there can be no genuine issue as to any material fact, since a complete failure of proof concerning an. essential element of the nonmoving party's case renders all other facts immaterial." Id. at 323 (internal quotations omitted).

         When reviewing a motion for summary judgment, a court must interpret the facts and any inferences drawn therefrom in the light most favorable to the nonmoving party. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Lee v. Town of Seaboard, 863 F.3d 323, 327 (4th Cir. 2017). To successfully oppose a motion for summary judgment, the nonmoving party must demonstrate to the court that there are specific facts that would create a genuine issue for trial. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). However, "'[c]onclusory or speculative allegations do not suffice' to oppose a properly supported motion for summary judgment, 'nor does a mere scintilla of evidence.'" Matherly v. Andrews, 859 F.3d 264, 280 (4th Cir. 2017) (quoting Thompson v. Potomac Elec. Power Co., 312 F.3d 645, 649 (4th Cir. 2002)). "Where . . . the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, disposition by summary judgment is appropriate." United States v. Lee, 943 F.2d 366, 368 (4th Cir. 1991).

         II. Damages Claims for Trade Secret Misappropriation

         Steves seeks summary judgment on JELD-WEN's damages claims under the federal Defend Trade Secrets Act ("DTSA") and the Texas Uniform Trade Secrets Act ("TUTSA") for two primary reasons. First, Steves asserts that Jarosz's damages scenarios are speculative and inconsistent with JELD-WEN's allegations and Steves' conduct. Second, Steves contends that the removal of numerous trade secrets in the Second Amended Trial Statement makes Jarosz's calculations unreliable because he valued damages collectively instead of allocating them between specific trade secrets.[3]

         A. Legal Standard and Background

         Damages are available under both the DTSA and the TUTSA. The DTSA permits a plaintiff to seek damages: (1) "for actual loss caused by the misappropriation, " and (2) "for any unjust enrichment caused by the misappropriation . . . that is not addressed in computing damages for actual loss"; or (3) "in lieu of damages measured by [those] methods, the damages . . . measured by imposition of liability for a reasonable royalty for the misappropriator's unauthorized disclosure or use of the trade secret." 18 U.S.C. § 1836(b)(3)(B). The same damages are recoverable under the TUTSA. Tex. Civ. Prac. & Rem. Code § l34A.OO4(a).

         As discussed, JELD-WEN initially sought damages for actual loss and/or unjust enrichment, and alternatively sought damages reflecting a reasonable royalty based on Steves' past use of the misappropriated trade secrets. However, Jarosz testified that, although JELD-WEN had suffered some actual loss, he did not have enough information to calculate those losses with a reasonable degree of certainty. Jarosz Dep. at 44:19-45:5. Accordingly, JELD-WEN now seeks damages only for Steves' unjust enrichment or, alternatively, a reasonable royalty based on Steves' use of JELD-WEN's trade secrets.

         Because statutes adopting the Uniform Trade Secrets Act ("UTSA") (as the DTSA and the TUTSA do) allow for multiple types of damages that are based on different calculations, "[c]omputing damages in a trade secrets case is not cut and dry." Am. Sales Corp. v. Adventure Travel, Inc., 8 62 F.Supp. 1476, 1479 (E.D. Va. 1994). The Fourth Circuit has said little about damages in trade secrets cases, noting only that

[t]here are two basic methods for assessing damages for misappropriation of trade secrets: one, the damages sustained by the victim (the traditional common law remedy), and the other, the profits earned by the wrongdoer by the use of the misappropriated material (an equitable remedy which treats the wrongdoer as trustee ex maleficio for the victim of the wrongdoer's gains from his wrongdoing).

Sperry Rand Corp. v. A-T-O, Inc., 447 F.2d 1387, 1392 (4th Cir. 1971) . However, Sperry Rand has been supplanted by the more elastic approach called for by the UTSA, which permits recovery of several types of damages. See Am. Sales, 862 F.Supp. at 1479; Sw. Energy Prod. Co. v. Berry-Helfand, 491 S.W.3d 699, 710-11 (Tex. 2016) . This flexibility is not unlimited; one of the leading cases on damages for trade secret misappropriation, University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518 (5th Cir. 1974), recognizes that "[t]he law governing protection of trade secrets essentially is designed to regulate unfair business competition, and is not a substitute for criminal laws against theft or other civil remedies for conversion." Id. at 539. However, University Computing also "stressed that 'each case is controlled by its own peculiar facts and circumstances, ' and that courts should remain 'flexible and imaginative'" when determining proper damages. Am. Sales, 862 F.Supp. At 1479 (quoting Univ. Computing, 504 F.2d at 539). For that reason, even where "damages are uncertain, . . . that uncertainty should [not] preclude recovery; the plaintiff should be afforded every opportunity to prove damages once misappropriation is shown"- assuming, of course, that the plaintiff "introduces evidence by which the jury can value the rights the defendant has obtained." Univ. Computing, 504 F.2d at 539, 545.

         Consistent with this framework, Jarosz computed damages under three different scenarios. First, Jarosz calculated Steves' gains in the event that it uses the trade secrets to build a doorskin manufacturing plant ("Scenario One"). In that case, Jarosz theorizes, Steves' misappropriation would allow it to "to increase the plant's profitability through a reduction in its per skin costs." See Jarosz Report ¶ 157. This increased profit would result from Steves' possession of trade secrets about important manufacturing components like wood thickness, resin, and primer, which would allow Steves to spend less on each element than it would otherwise. To realize these cost savings without the misappropriation, Steves would need to devote years of research and development to doorskin manufacturing, as JELD-WEN has. See id. ¶¶ 159-65. Using this misappropriated information, a "hypothetical Steves plant" would save about $0.58 per doorskin, leading to between $11.8 million and $13.3 million in increased profits, depending on how quickly such a plant reaches target productivity. See id. ¶¶ 166-71.

         Second, Jarosz calculated the benefits that have accrued, and will continue to accrue, to Steves as a result of the misappropriation even if it never builds a plant ("Scenario Two") . Id. ¶ 172. For instance, Steves' actions allowed it "to avoid the expenditures necessary to learn of the feasibility of building a door skin plant" because it had a "comprehensive blueprint" to the doorskin industry, including information about factors like the profitability of certain doorskin sizes and configurations, viable and non-viable activities, input costs by location, and potential vendors. Id. ¶ 173. Similarly, Steves' acquisition of "plant-level cost information [and] plant capacity information" through Pierce may help Steves negotiate lower doorskin prices than it could have based solely on the information it was entitled to under its long-term doorskin supply agreement with JELD-WEN ("the Supply Agreement"). Id. ¶¶ 174-76. This price reduction would allow Steves to save between $10.8 million and $12.7 million over the next ten years, depending on its annual doorskin consumption. See id. ¶¶ 177-78.

         Finally, Jarosz determined an appropriate reasonable royalty based on a number of factors applied in the course of a hypothetical negotiation between JELD-WEN and Steves at the time the misappropriation first occurred, in or around March 2015 ("Scenario Three"). See id. ¶¶ 179-89. Scenario Three considered two possible quantitative methods for calculating the royalty. The first, the incremental benefits approach, determined a royalty based on the benefits to Steves from the misappropriation, whether it builds a doorskin manufacturing plant or not. The benefits were the same gains that Steve would make or has already made under Scenarios One and Two-reduced doorskin manufacturing costs and the ability to more easily assess the feasibility of building a plant or more effectively negotiate with doorskin suppliers, respectively. Valuing those benefits at between $0.12 and $0.58 per doorskin, this first approach leads to a royalty rate of between 2.8% and 13.4% per skin. See id. ¶¶ 191-201. The second, the licensing comparables approach, considered "the terms of actual . . . licenses[] involving similar technology." Id. ¶ 202. Jarosz identified only three comparable licensing agreements in the doorskin context, and several more in other manufacturing settings, all of which were based on future sales or uses of the licensed technology. See id. ¶¶ 203-22. The doorskin licenses suggested a royalty rate of up to 2% net sales, and the other licenses suggested a rate of between 2.5% and 10% of net or gross sales. Id. ¶¶ 223-26. Then, after applying a number of qualitative factors detailed in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F.Supp. 1116 (S.D.N.Y. 1970), [4] Jarosz settled on a royalty rate of 3%. Applying that rate to Steves' "likely future revenues for 10 years from the start of production [at a hypothetical doorskin manufacturing plant], discounted back to March 2015, amounts to $9.9 million" in reasonable royalty damages, assuming the plant would reach a certain capacity. See Jarosz Report ¶¶ 228-65.

         Steves makes several arguments as to JELD-WEN's damages claims. First, it contends that all of Jarosz's scenarios are flawed because they improperly calculate damages based on Steves' future use of the misappropriated trade secrets, instead of Steves' actual, past use of the trade secrets to assess the feasibility of building a doorskin manufacturing plant. Indeed, Steves says, Jarosz and JELD-WEN consciously avoided damages based solely on Steves' actual use because that harm was minimal. Second, Steves claims that JELD-WEN's unjust enrichment damages do not rely on Steves' actual benefits, as those damages must, but instead on gains that Steves might make if it takes certain steps in the future. Third, given the need for speculation, Steves believes that Jarosz could not have applied either quantitative method to calculate a royalty rate with reasonable certainty. Fourth, Steves argues that JELD-WEN's current position effectively makes its damages claims duplicative of the injunctive relief that JELD-WEN is also seeking. Finally, its supplemental briefs, Steves contends that it is impossible to determine the amount of damages that JELD-WEN actually suffered because Jarosz's calculations are based on the misappropriation of some information that JELD-WEN no longer claims as trade secrets.

         B. Nature of Use Underlying Damages Scenarios

         Steves' argument about the basis of Jarosz's damages calculations centers on an apparent inconsistency between Steves' use of the misappropriated trade secrets as alleged in the Counterclaims and the use that supports the damages figures proposed by Jarosz. JELD-WEN stated in the Counterclaims that:

Steves has planned to use, and will continue to use, JELD-WEN's trade secrets and confidential information to assess whether it is feasible for the company to develop a door skin manufacturing operation in direct competition with JELD-WEN. . . . Steves either has used or may use this information to develop such an operation, and/or to determine whether it wants to make the investment necessary to build a door skin plant itself, or partner with another firm to do so.

         Counterclaims (ECF No. 252) (Under Seal) ¶ 39 (emphasis added). Consistent with these allegations, JELD-WEN sought relief for its actual loss and unjust enrichment, which would necessarily be based on Steves' actual misuse of the trade secrets, and a reasonable royalty for Steves' past use of that information. See id. at 47.

         Steves reads these statements to indicate that Steves' only possible actual use of the misappropriated trade secrets was to conduct the Feasibility Study[5] at a cheaper cost than it could have without the trade secrets. Indeed, as Jarosz stated in his Report, one of Steves' gains from the trade secret misappropriation was "avoid[ing] the expenditures necessary to learn of the feasibility of building a door skin plant." Jarosz Report ¶ 68. Steves contends, however, that Jarosz's damages scenarios "flow entirely from projected future activity of Steves, i.e., uses that have not yet even occurred"-such as building a doorskin manufacturing plant or negotiating with doorskin suppliers for lower doorskin prices in reliance on JELD-WEN's trade secrets. Steves Br. (ECF No. 884) (Under Seal) at 26. In fact, Jarosz confirmed that his damages figures were not based on costs saved by Steves in the Feasibility Study. See Jarosz Dep. at 68:22-69:4 ("I haven't separately quantified ...


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