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Epic Systems Corp. v. Tata Consultancy Services Ltd.

United States District Court, W.D. Wisconsin

April 14, 2016



WILLIAM M. CONLEY District Judge

With respect to plaintiff Epic’s proffer on evidence of compensatory damages in advance of the possible, next phase of trial, the court rules as follows:

I. Components of Epic’s Claim to Compensatory Damages

During yesterday’s proffer on damages, Epic indicated that it has two components to its claim of damages, both of which are based on a measurement of benefits unfairly obtained by TCS. The first is based on the claimed value of a service contract that TCS renewed with Kaiser for three years (though terminated after one), a component of damages which it appears Epic should have expressly disclosed by separate amount and description in response to an interrogatory in December of 2015, but did not. (Def.’s Notice (dkt. #846-1) at 4-6.) Moreover, it appears Epic had still not disclosed any amount, or even its method for arriving at an amount, for this component of its damage claim until well after the start of the actual trial of this case. (Pl.’s Resp. (dkt. #851).) If this is so, that component of damages would appear appropriately excluded.

In a proffer offered last night, Epic essentially concedes these facts of record, but asserts that since both sides took substantial discovery on the advantages gained by testers who had unrestricted and unlawful UserWeb access, as well as Epic’s experts repeated references to that advantage, a last-minute separate claim to damages in a specific amount should be no surprise and, in any event, TCS is not prejudiced from having to reply. The court will hear from TCS on both points, but as to the latter, accepts TCS’s representation that it has already sent some of the relevant witnesses home to India, and of course the most relevant witness would be Kaiser itself, since the claim is that the testers performance was a driver for Kaiser’s decision to renew its contract with TCS. Even if TCS were allowed to call some of its witnesses by video conferencing from India, Epic offers no indication that Kaiser was even asked about its reasons for renewal, and it would seem unlikely that someone from Kaiser would be available at the last minute to testify, even by video conferencing. If Epic could somehow clear these hurdles, however, the court would consider allowing it to claim damages for the value of the one year life of that contact in the next phase of trial.

The second component of the value is for Epic’s confidential information, including trade secrets.[1] Apparently because of an absence of other proof, Epic’s theory of recovery here does not distinguish between its claims in the context of breach of contract and the misappropriation of trade secrets (or its other common law tort claims, besides unjust enrichment), for which it might have made claim to the value of the product from Epic’s perspective, and in the context of unjust enrichment, for which it must claim the value of the product from TCS’s perspective.

The Wisconsin Supreme Court underscored the distinction between the damages available in a contract implied-in-fact or quantum merit claim and a contract-implied-on-law or unjust enrichment claim in Ramsey v. Ellis, 168 Wis.2d 779, 484 N.W.2d 331 (1992). See generally II Michael B. Apfeld et al., Contract Law in Wisconsin Ch. 14(C)(3)(a) (4th ed. 2014). Whereas a quantum merit claim assesses damages from the perspective of the market value of the plaintiff’s goods or services, an unjust enrichment claim focuses on value of the benefit obtained by the defendant. Id. Epic’s choice to limit its damages claim to the value of the benefit to TCS is understandable. Indeed, given that a quantum meruit or contract implied-in-fact theory is premised on proof “that the defendant requested the [plaintiff’s] services, ” Ramsey, 484 N.W.2d at 333, a claim that TCS stole (or at least wrongfully took) confidential information or trade secrets proves an ill fit, since Epic must show injury in order to seek the value to Epic of the confidential information, including trade secrets, TCS obtained by accessing and downloading documents from the UserWeb. See Sokol Crystal Products, Inc. v. DSC Commc’ns Corp., 15 F.3d 1427, 1433 (7th Cir. 1994) (explaining that any damages for misappropriation of trade secrets must be limited to plaintiff’s injury).

Absent evidence that Epic was somehow precluded from using the same confidential information -- which is obviously not the case -- or that TCS used the information in a way that placed it on equal footing with Epic -- something also not in evidence at least to this point -- Epic cannot prove injury. Stated another way, regardless of whether Epic pursued a damages claim based on the value of the benefit conferred on TCS or the value of the information from Epic’s perspective, Epic would need to show use.[2]

II. Proffer of Value to TCS

Unfortunately for Epic, there is also insufficient proof to permit an award of damages on the basis of unjust enrichment as well, leaving injunctive relief, and perhaps further discovery, as its remedy for any liability finding by the jury, unless Epic’s experts could propose a credible reduction in its cost “proxy” to reflect very limited evidence of any actual benefit to TCS. Absent use, the mere threat of use is better addressed through an injunction. See 3M v. Pribyl, 259 F.3d 587, 605 (7th Cir. 2001) (“[E]ven assuming that the defendants knew 3M’s customized resin formulations, 3M is sufficiently protected against the threat of disclosure by the district court’s injunction.”); see also FailSafe, L.L.C. v. A.O. Smith Corp., 744 F.Supp.2d 870 (E.D. Wis. 2010) (holding that hypothetical future profits is an inappropriate measure of unjust enrichment damages).

Under the theory Epic opted to pursue, its principal damages expert, Thomas Britven, purports to derive the value of TCS’s unjust enrichment or unfair taking by using Epic’s cost of researching and developing the confidential information, including trade secrets, as a “proxy” for TCS’s avoided research and development costs. (Britven Suppl. Rept. (dkt. #673-4) ¶¶ 36-47.) As a starting point, Wisconsin courts typically reject plaintiff’s costs as a basis for awarding unjust enrichment damages. See Lindquist Ford, Inc. v. Middleton Motors, Inc., 557 F.3d 469, 477 (7th Cir. 2009), as amended (Mar. 18, 2009) (“The measure of damages under unjust enrichment is limited to the value of the benefit conferred on the defendant; any costs the plaintiff may have incurred are generally irrelevant.”) (citing Mgmt. Computer Servs., Inc. v. Hawkins, 206 Wis.2d 158, 557 N.W.2d 67, 79-80 (1996)). Still, the court credits Epic’s argument that a misappropriation of trade secrets and related tort claims call for a flexible approach to damages, particularly when the defendants are to blame for much of its inability to provide concrete evidence. See Wellogix, Inc. v. Accenture, L.L.P., 716 F.3d 867, 879 (5th Cir. 2013) (describing various approaches under flexible approach). Still, the complete lack of evidence tying the costs of Epic’s research and development efforts to any commensurate benefit to TCS dooms its methodology.

In conducting his analysis, Britven began with the total “man hours” expended by Epic in research and development (“R&D”) of its EHR solution from 2005 through 2014, and then converted that number into a dollar amount based on hourly rates. (Id. at ¶¶ 36-37.) Britven divided those research and development costs into approximately 50 of Epic’s software modules. (Id. at ¶ 38.) Then, relying solely on input from Epic’s Senior Vice President, Stirling Martin, Britven accepts all but two of the software modules as implicated by TCS’s downloading of documents and adopts Martin’s approximation of the percentage of each module’s total confidential information not appropriated by TCS, for which he removes 4.8 million man hours (the so-called “X” Analysis). (Id. at ¶¶ 38-42; see also id., Suppl. Attachment 5.0 (dkt. #673-4) 98.) From all of this, Britven then determines the cost of research and development for the misappropriated confidential information, including trade secrets. (Id. at ¶ 43.)

In his preliminary report, Britven indicated that he also would need to discount this number further after another of Epic’s experts, Wes Rishel, a software developer, determines the “corresponding technical areas of TCS EHR product enhanced by Epic’s trade secrets and confidential information.” (Britven Prelim. Rept. (dkt. #380-7) ¶ 119.) However, because Rishel proved unable to do that for various reasons -- including TCS’s failure both to preserve certain evidence and to produce other evidence timely -- Britven ultimately concluded that the benefit conferred on TCS need not be limited to TCS’s use of Epic’s confidential information in a “technical fashion in Med Mantra and related [HIS] products.” (Britven Suppl. Rept. (dkt. #673-4) ¶ 50.) Rather, he opines that since the information taken includes the value of “what not to do, ” and the value of what to do now permeates all parts of TCS, the benefits “surpass the finite values associated with what was technically incorporated into its product.” (Id.) Britven also points to TCS’s possession of confidential knowledge of most of Epic’s modules, as evidenced by the existence of a comparative analysis (Trial Ex. 39) and apparent discussions between TCS’s Kaiser “tester” team and members of its Med Mantra team (Tr. Ex. 423), as well as allowing the wholly unexplained access to Epic’s UserWeb to at least one member of that latter team, allows the jury to infer TCS’s use of this information in preparing to compete in the United States market for EHR software to grow their business for such software internationally. (Id. at ¶ 51.)

Britven then claims to have somehow accounted for the complete lack of proof of any specific use of Epic’s confidential information in the development or improvement of TCS’s software (even with respect to one of the 50 modules involved), as well as recognizing that whatever it is that TCS did get, it got zero source code (and uses an entirely different software language than Epic in any event), by reducing his costs calculation by 4.2 million additional man hours, with Rishel’s input. Finally, Britven purports to discount his cost figure by approximately 50% to reflect a four-year “half-life” of the downloaded information in recognition that as ...

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