Clearone Communications Inc. v. Biamp Sys.

• Decision Date: 08 August 2011
• Docket Number: Nos. 09–4097,10–4168.,10–4090,s. 09–4097
• Citation: 99 U.S.P.Q.2d 1809,653 F.3d 1163,80 Fed.R.Serv.3d 39
• Parties: CLEARONE COMMUNICATIONS, INC., a Utah corporation, Plaintiff–Appellee,v.BIAMP SYSTEMS, an Oregon corporation, Defendant–Appellant,andAndrew Chiang, an individual; Jun Yang, an individual; Lonny Bowers; WideBand Solutions, Inc., a Massachusetts corporation; Versatile DSP, a Massachusetts corporation, Defendants.
• Court: U.S. Court of Appeals — Tenth Circuit

653 F.3d 1163

80 Fed.R.Serv.3d 39

99 U.S.P.Q.2d 1809

CLEARONE COMMUNICATIONS, INC., a Utah corporation, Plaintiff–Appellee,

v.BIAMP SYSTEMS, an Oregon corporation, Defendant–Appellant,andAndrew Chiang, an individual; Jun Yang, an individual; Lonny Bowers; WideBand Solutions, Inc., a Massachusetts corporation; Versatile DSP, a Massachusetts corporation, Defendants.

Nos. 09–4097

10–4090

10–4168.

United States Court of Appeals, Tenth Circuit.

Aug. 8, 2011.

LaMar F. Jost, (Marsha M. Piccone and Christopher P. Montville, with him on the briefs) of Wheeler Trigg O'Donnell LLP, Denver, CO, for Defendant–Appellant Biamp Systems.James E. Magleby, (Christine T. Greenwood, Christopher M. Von Maack, and Jennifer Fraser Parrish, with him on the briefs), of Magleby & Greenwood, P.C., Salt Lake City, UT, for Plaintiff–Appellee.Before BRISCOE, Chief Judge, HOLLOWAY and HOLMES, Circuit Judges.BRISCOE, Chief Judge.

Plaintiff ClearOne Communications, Inc. (ClearOne) filed suit against defendant Biamp Systems (Biamp) alleging that Biamp misappropriated ClearOne's trade secrets by licensing from another company, WideBand Solutions, Inc. (WideBand), products that illegally incorporated those trade secrets. After a jury trial, the jury found in ClearOne's favor on all of its claims against Biamp. The district court, in accordance with the jury's findings, assessed damages for lost profits and unjust enrichment, awarded ClearOne exemplary damages, and also ordered Biamp to pay ClearOne's attorneys' fees and nontaxable expenses. Biamp now appeals. Exercising jurisdiction pursuant to 28 U.S.C. § 1291, we affirm all aspects of the district court's judgment except for the lost profits and exemplary damages awards. As to those portions of the judgment, we reverse and remand with directions to enter judgment against Biamp for $956,000 in lost profits jointly and severally with the other defendants, and $853,334 in exemplary damages individually.

I

A. Factual background

ClearOne's purchase and ownership of the Honeybee Code

ClearOne is a Utah corporation with its principal offices in Utah. At the time of its inception in the early 1980's, ClearOne, which was then known as Gentner Communications Corporation (Gentner), manufactured and sold equipment exclusively for the radio broadcasting market. In the early 1990's, Gentner sought to expand its product offerings by entering the audio teleconferencing equipment market. Gentner determined that, in order to enter this market successfully, it had to first develop a method of dealing with acoustic echo, which occurs when sound from a loudspeaker is picked up by a microphone in the same room. Accordingly, in 1991, Gentner assigned a team of its engineers to develop an acoustic echo cancellation (AEC) process using a special computer chip called a digital signal processor (DSP). The team first created an algorithm to accomplish the task of AEC. The team then programmed the algorithm into the DSP chips. That process involved translating the algorithm into “high-level” computer programming language called source code, which is readable by humans. The source code was then converted into a “lower-level” programming language called assembly code, and finally into object code, which is a sequence of binary number instructions.

Gentner's engineering team produced its first AEC product approximately two years later. That product, however, did not perform well in the market. The engineering team thus continued to work on AEC technology and in 1997 completed the Gentner Distributed Echo Cancellation (DEC) algorithm that was subsequently utilized in a line of AEC products called Audio Perfect. The Audio Perfect line of products helped Gentner capture the largest market share in the commercial audio market.

In the spring of 2000, Gentner began investigating the possibility of purchasing the assets, including the intellectual property, of a company called ClearOne, Inc. (Old ClearOne). Gentner was interested in obtaining a videoconferencing computer program, nicknamed Killerbee, that Old ClearOne was developing. Gentner was also wanting to expand into the tabletop teleconferencing market and was aware that Old ClearOne had developed and was close to marketing a portable tabletop teleconferencing phone, the Old ClearOne speakerphone. The Old ClearOne speakerphone utilized an internally developed AEC algorithm nicknamed the Honeybee Code. By purchasing the Honeybee Code, Gentner would gain immediate entry into the tabletop market and would not have to wait for its engineering team to develop a unique AEC product for the tabletop market.

Gentner's vice president of technology, Tracy Bathurst, was assigned to perform due diligence on Old ClearOne's products prior to Gentner entering into a purchase agreement with Old ClearOne. Bathurst traveled to Old ClearOne's offices in May 2000, met with each of Old ClearOne's engineers, including defendant Yang, and reviewed the source code for both the Killerbee and Honeybee products.

In July 2000, Gentner entered into an asset purchase agreement with Old ClearOne, pursuant to which Gentner, in exchange for approximately $3,758,000, purchased most of Old ClearOne's assets, including its intellectual property and its corporate name. As part of the asset purchase, Gentner kept Old ClearOne's Massachusetts office open and employed some of Old ClearOne's engineers, including Yang, to continue work on the Honeybee and Killerbee projects. In order to protect the confidentiality of the Honeybee and Killerbee source codes, Gentner required Yang and the other Old ClearOne employees to sign confidentiality and noncompetition and invention assignment agreements.

Gentner, which changed its name to ClearOne following completion of the asset purchase agreement, subsequently attempted to market the Old ClearOne speakerphone. Sales, however, were disappointing. Consequently, in the summer of 2002, ClearOne removed the speakerphone from the market and destroyed its remaining speakerphone inventory. ClearOne in turn placed the Honeybee Code into its archive where it was available to its engineers for future use.

Biamp and Echonology

Biamp is a small, Oregon-based company that designs, manufactures, and sells commercial audio equipment, and thus competes directly with ClearOne in the commercial audio market. Prior to 2002, Biamp had licensed AEC technology from another company for use in its Voice Crafter acoustic echo canceller. By the spring of 2002, however, sales of the Voice Crafter were fading. Because Biamp did not own the rights to, and thus could not modify, the AEC technology used in the Voice Crafter, and because it had not been able to develop internally its own AEC technology, Biamp began looking for other entities who could license AEC technology to Biamp.

In June 2002, Biamp was approached by defendant Lonny Bowers, who alleged that he represented a company called Echonology, L.L.C. (Echonology).¹ Lonny Bowers stated that Echonology was comprised of himself, Yang (who left his employment with ClearOne in the spring of 2001), and defendant Chiang, the former president and a shareholder of Old ClearOne. Lonny Bowers informed Biamp that Echonology was interested in providing Biamp with AEC technology.

The president of Biamp, Ralph Lockhart, subsequently exchanged e-mail messages with Chiang. Chiang informed Lockhart that Echonology's technologies concentrated in the areas of AEC and line echo cancellation. Lockhart in turn asked Chiang to submit to him any materials that could provide Biamp with a better insight into Echonology and the work its shareholders had previously performed at ClearOne or Old ClearOne. Chiang provided Lockhart with a resume that indicated that Chiang, while at Old ClearOne, had successfully developed an award-winning audio conferencing phone (the Old ClearOne speakerphone). Chiang further provided Lockhart with a resume for Yang indicating that Yang had experience with AEC and line echo cancellation algorithm development.

In July 2002, Lonny Bowers, Chiang and Yang traveled to Oregon and met with Lockhart and Matthew Czyzewski, Biamp's vice president of engineering. The two Biamp representatives informed Lonny Bowers, Chiang and Yang that Biamp was wanting to obtain AEC technology. Chiang and Yang in turn discussed their involvement with Old ClearOne's AEC technology.

Biamp subsequently prepared and submitted to Lonny Bowers, Chiang and Yang a specification outlining the criteria it wanted an AEC algorithm to meet. In response, Lonny Bowers, Chiang and Yang provided Biamp with a proposal for developing an AEC algorithm that would meet Biamp's specifications. The proposal provided that programming of the algorithm would take approximately four months. The proposal outlined two alternative pricing options: a price of $400,000 for the object code alone; or a price of $650,000 for both the object and source code. Biamp ultimately rejected the proposal, primarily due to cost concerns.

ClearOne's license agreement with Biamp

After rejecting the proposal submitted by Lonny Bowers, Chiang and Yang, Biamp continued to look elsewhere for AEC technology. Ultimately, in late 2002, Biamp agreed to license from ClearOne the Gentner DEC algorithm. As part of the license agreement, ClearOne modified the Gentner DEC algorithm so that it would function on the computer chip utilized in Biamp's hardware. ClearOne did not provide Biamp with the source code for the modified algorithm. Instead, ClearOne gave Biamp only a disk containing the object code for the modified algorithm.

WideBand

In 2003, Lonny Bowers, Chiang and Yang formed WideBand, a Massachusetts corporation. Lonny Bowers served as president of the company, Chiang was vice president, and Yang served as treasurer and chief technology officer. Lonny Bowers raised capital for WideBand by telling potential investors that Yang played a significant role in the development of Old ClearOne's and...