American Airlines, Inc. v. KLM Royal Dutch Airlines, Inc., 96-2172

• Decision Date: 16 May 1997
• Docket Number: No. 96-2172,96-2172
• Citation: 114 F.3d 108
• Parties: AMERICAN AIRLINES, INC., Plaintiff-Appellant, v. KLM ROYAL DUTCH AIRLINES, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 108

114 F.3d 108

42 U.S.P.Q.2d 1723

AMERICAN AIRLINES, INC., Plaintiff-Appellant, v. KLM ROYAL DUTCH AIRLINES, INC., Defendant-Appellee.

No. 96-2172.

United States Court of Appeals Eighth Circuit.

Submitted Dec. 13, 1996.

Decided May 16, 1997.

James W. Quinn, New York City, argued (Richard A. Kaplan, Madge S. Thorsen, Donald E. Herrmann, on the brief), for appellant.

Karna A. Berg, St. Paul, MN, argued (David C. Forsberg, on the brief), for appellee.

Before McMILLIAN and MAGILL, Circuit Judges, and WEBBER, ¹ District Judge.

WEBBER, District Judge.

American Airlines, Inc. (American), appeals from the order of the United States District Court ² granting summary judgment in favor of KLM Royal Dutch Airlines, Inc. (KLM). This court has jurisdiction under 28 U.S.C. § 1291. We affirm.

I.

Prior to "deregulation" of the airline industry in 1978, airlines offered few fare classes to patrons and all airlines charged very similar rates for flights between the same origins and destinations. Resulting competition arising after 1978, among airlines invited imaginative approaches to enhance revenues, including expanding class fares and rates. A concept known as "yield management," in the parlance of the industry, evolved. Airlines developed yield management models, which sought to balance airline passenger capacity with demand for service in such a fashion that the most profitable fare class utilization can be maximized.

These yield management models are highly sophisticated and are quite expensive to develop. The models involve analyzing and applying financial, logistical, and market data in an effort to maximize revenue, or yield, from a flight. The models utilize computer systems and elaborate mathematical equations, algorithms, and constants to simulate and forecast supply and demand. There are many mathematical "elements" in the airline industry which are widely used and recognized in the public domain as significant factors in development of an effective yield management system. A company that can most effectively match demand with the most profitable class fares through its yield management system is assured a competitive advantage.

American, over a period of several years, dedicated substantial resources in the development of a unique yield management system known as DINAMO, an acronym for Dynamic Inventory and Maintenance Optimizer. DINAMO contains five specific individual elements. ³ American maintains that its yield management system is unique and is entitled to protection as a trade secret.

Northwest Airlines Inc. (Northwest), a competitor of plaintiff, is aligned with KLM's respective business operations. Disputes arising from employment of American personnel by Northwest resulted in a lawsuit originally initiated by Northwest against American. The suit drew a counterclaim by American alleging, in part, that Northwest unlawfully misappropriated American's trade secrets relative to its yield management model. That suit has been delayed pending resolution of the issues in this case. In a similar fashion as in the Northwest litigation, American asserts that KLM has also misappropriated American's trade secrets by KLM's alleged receipt of American's trade secrets from Northwest.

In a deposition on August 2, 1993, Barry C. Smith, Vice President of American Airlines Decision Technologies, a division of American with primary responsibility for American's yield management system, testified as an expert witness for American. Smith testified that the five "elements" (also referred to as concepts and factors) used by American, when combined in specific algorithms and formulae, comprise its yield management system DINAMO. He testified that these five elements, while known at the conceptual level in the airline industry and in the public domain, have not been successfully mixed with algorithms and formulae except by American, and it is the combination and implementation of these elements by American in DINAMO that comprises a unique model which is not publicly available, and that therefore, American's unique model is a proprietary business trade secret entitled to protection under the Minnesota Uniform Trade Secrets Act (MUTSA), Minn.Stat. §§ 325C.01-325C.08.

American alleges that Northwest gained this proprietary material after Northwest hired many former American employees. As to the defendant in this case, KLM, American alleges that, as a result of the close business ties between Northwest and KLM, this proprietary material was then passed from Northwest to KLM. However, there is no allegation, nor any evidence, that documents outlining algorithms and formulae of American passed to KLM, nor that more than four of the five "elements" in DINAMO passed to KLM.

On November 19, 1993, American filed suit against KLM claiming misappropriations of trade secrets in violation of MUTSA. American alleged that KLM had received from Northwest trade secrets which had previously been unlawfully obtained from American. After American deposed KLM officials, KLM requested dismissal from the suit with prejudice. American, willing to dismiss the suit against KLM without prejudice, conceded, among other things, that KLM did not receive the detailed demand forecasting algorithms contained in the American documents which were allegedly misappropriated by Northwest; that, based on information allegedly received from Northwest, KLM could not develop a yield management system similar to American's; that KLM had no knowledge of how American's system worked and had not received from Northwest any documents describing the details of American's system; and that KLM changed its demand forecasting system in mid-1994, to one based upon a Boeing model. KLM would not agree to American's offer of dismissal without prejudice.

On May 5, 1995, KLM filed a motion for summary judgment. Before the motion for summary judgment was filed, Barry C. Smith had testified by deposition as an expert for American in the American-Northwest litigation. Smith testified that American's trade secret was defined as the unique combination of the five "elements" and their implementation into algorithms, formulae and equations. After the motion for summary judgment was filed by KLM and it was known that KLM, at most, had only four of the five elements without knowledge of the algorithms or formulae, Smith, at a subsequent deposition, testified, "In my opinion, four elements, not including a specific alpha value, would constitute a trade secret."

In moving for summary judgment, KLM maintained that no genuine issue of material fact existed because American had manufactured the appearance of a dispute after the filing of KLM's motion for summary judgment by changing its testimony regarding the content of its alleged trade secret. KLM urged the district court to ignore Smith's later testimony because of the "sham exception" to the usual standards for summary judgment. The...