DSC Communications Corp. v. Next Level Communications

• Decision Date: 11 June 1996
• Docket Number: No. 4:95cv96.,4:95cv96.
• Citation: 929 F. Supp. 239
• Parties: DSC COMMUNICATIONS CORPORATION, and DSC Technologies Corporation, Plaintiffs, v. NEXT LEVEL COMMUNICATIONS, Thomas R. Eames, and Peter W. Keeler, Defendants.
• Court: U.S. District Court — Eastern District of Texas

929 F. Supp. 239

DSC COMMUNICATIONS CORPORATION, and DSC Technologies Corporation, Plaintiffs, v. NEXT LEVEL COMMUNICATIONS, Thomas R. Eames, and Peter W. Keeler, Defendants.

No. 4:95cv96.

United States District Court, E.D. Texas, Sherman Division.

June 11, 1996.

COPYRIGHT MATERIAL OMITTED

Joseph D. Cheavens, Baker & Botts, Houston, TX, for plaintiffs.

Paul A. Renne, Cooley, Godward, Castro, Huddleson & Tatum, San Francisco, CA, for defendants.

MEMORANDUM OPINION AND ORDER

PAUL N. BROWN, District Judge.

Introduction

This is a theft of trade secrets case. Plaintiffs, DSC Communications Corporation and DSC Technologies Corporation (collectively "DSC"), filed suit against two of their former employees, Thomas Eames ("Eames") and Peter Keeler ("Keeler"), and the company they founded, Next Level Communications ("Next Level"). In July of 1990, Eames and Keeler began working for DSC. They entered into Employee, Patent, Copyright, and Proprietary Information Agreements (the "EPCPI Agreements") with DSC on April 22, 1990 and November 26, 1990, respectively. The EPCPI Agreements prohibited Eames and Keeler from disclosing proprietary information which they "may receive or develop during the course of their employment...."

Eames and Keeler formed Next Level and thereafter resigned from DSC on July 8, 1994. Next Level immediately began developing a product that would compete with DSC's product. On April 10, 1995, DSC filed this suit against Eames, Keeler, and Next Level in state court.¹ The action was removed from state court to this Court on April 17, 1995. A few months after the lawsuit was filed, General Instrument Corporation ("GI") acquired Next Level. As part of the acquisition, GI provided an indemnity to Eames and Keeler which indemnified them against all expenses, judgments, penalties, fines and amounts paid in settlement of this case to the fullest extent permitted by public policy.

DSC claimed at trial, that Eames and Keeler breached their fiduciary duties to DSC, breached their EPCPI contracts with DSC, and misappropriated DSC's trade secrets in the formation of Next Level, that Next Level knowingly accepted the benefits of Eames' and Keeler's wrongful conduct, and is using these secrets in the development of its competing product. Eames and Keeler responded that they took only their generalized professional knowledge and information that was available in the public domain when they left DSC. After DSC received a favorable verdict from the jury, Defendants filed a motion for new trial, which is now pending before the Court.

The subject of this Order is to resolve whether DSC properly introduced at trial evidence of the indemnification agreements between GI and Eames and Keeler.² As part of their Motion for New Trial, Defendants claim the Court erred in allowing testimony on the subject of the indemnity agreements. The other grounds for a new trial raised by Defendants will be resolved in a separate order.

As discussed below, the Court finds that the indemnification agreements are admissible for several reasons. First, the indemnity agreements are not liability insurance which is prohibited by Federal Rule of Evidence 411 and the agreements are admissible under Federal Rule of Evidence 403. Second, even if the indemnity agreements were liability insurance, they are admissible as evidence of DSC's damages or as evidence of Eames and Keeler's lack of ownership of the alleged trade secrets. Third, even if the indemnity agreements were liability insurance and not otherwise admissible for any proper purpose, Defendants' counsel opened the door to the admission of the evidence. Finally, even if the admission of the indemnity agreements was error, it was not error sufficient to warrant a new trial.

Motion for New Trial Standards

Defendants' motion for new trial was timely filed. The Federal Rules of Civil Procedure allow a new trial to be:

granted to all or any of the parties and on all or part of the issues in an action in which there has been a trial by jury, for any of the reasons for which new trials have heretofore been granted in actions at law in the Courts of the United States....

FED.R.CIV.P. 59(a). The Fifth Circuit gives trial courts a great deal of discretion in determining whether a new trial should be granted. United States v. Lauga, 726 F.2d 1032, 1035 (5th Cir.1984). This discretion is particularly applicable when a party complains, as Defendants complain here, that the evidence admitted is "so highly prejudicial and inflammatory that it is entitled to a new trial on all issues." See Dixon v. International Harvester Co., 754 F.2d 573, 586 (5th Cir.1985) (In reviewing a district court's denial of a motion for new trial, the Fifth Circuit held that "the district court did not abuse its sound discretion in admitting only these two photographs.").

Discussion of Defendants' Motion for New Trial

I. Federal Rule of Evidence 411

Federal Rule of Evidence 411 provides that:

Evidence that a person was or was not insured against liability is not admissible upon the issue whether the person acted negligently or otherwise wrongfully. This rule does not require the exclusion of evidence of insurance against liability when offered for another purpose, such as proof of agency, ownership, or control, or bias or prejudice of a witness.

FED.R.EVID. 411. Rule 411 was adopted in 1972 to fulfill two purposes. First, the drafters believed that "the inference of fault from the fact of insurance coverage is a tenuous one, as is its converse." Notes of Advisory Committee on 1972 Proposed Rules. As Judge Weinstein explains:

In the average automobile case the evidential hypothesis prohibited by Rule 411 would be: "an insured person is more apt to be careless, reckless or do an intentional harm than an uninsured person because some one else will pay for any damages caused by his activity." The probative force of this line of proof is almost nil.... The driver knows that accidents result in higher premium rates for his future policies, so that there is an economic incentive not to be involved in accidents.

JACK B. WEINSTEIN ET AL., WEINSTEIN'S EVIDENCE ¶ 41102 (1995) ("WEINSTEIN'S EVIDENCE").

The second policy underlying Rule 411 is the advisory committee believed "knowledge of the presence or absence of liability insurance would induce juries to decide cases on improper grounds." Notes of Advisory Committee on 1972 Proposed Rules. Specifically, the "improper grounds" referred to by the Advisory Committee is the belief that the jury might feel that "some rich insurance company will pay, so we might as well decide for this plaintiff without respect to the law and facts." WEINSTEIN'S EVIDENCE, ¶ 41102 (1995).

II. Rule 411 is Inapplicable in this Case since the Indemnity Agreements are not Liability Insurance

A. Legal Characteristics of Liability Insurance

Rule 411 applies only to liability insurance. The indemnity agreements in this case are not liability insurance.³ While the phrase "liability insurance" is difficult to define, liability insurance does bear certain characteristics:

1) The insurer is paid to take the risk in question;

2) the insurer is well able to pay;

3) the insurer has agreed to indemnify the insured from liability to third persons as contrasted with coverage from losses sustained by the insured;

4) the insurer will spread the loss among its policy holders;

5) the insured will be disinclined to take an action which might cause the insurer to pay on a liability claim since the insured's premiums will rise; and

6) the insured is insuring a future risk.

Larez v. Holcomb, 16 F.3d 1513, 1524 (9th Cir.1994) (concurring in part and dissenting in part) (characteristics 1, 2, & 4); Mazzaferro v. RLI Ins. Co., 50 F.3d 137, 139 (2nd Cir.1995) (characteristic 3) McNeilab, Inc. v. North River Ins. Co., 645 F.Supp. 525, 538 (D.N.J.1986) (characteristic 3), aff'd, 831 F.2d 287 (3rd Cir.1987) (unpublished disposition); WEINSTEIN'S EVIDENCE ¶ 41102 (1995) (implies that characteristic 5 is present since an insured "knows that accidents result in higher premium rates for his future policies, so that there is an economic motive not to be involved in accidents."); Notes of Advisory Committee on 1972 Proposed Rules (Characteristic 6 is implied by the Advisory Committee's finding that Rule 411 is needed since "the inference of fault from the fact of insurance coverage is a tenuous one, as is its converse."); see also FED.R.CIV.PROC. 26(a)(1)(D) (implying characteristics 1, 2 and 4 since initial disclosures are only mandated for indemnity or insurance agreements when "any person carrying on a insurance business may be liable to satisfy part or all of a judgment....") (emphasis added); WEBSTER'S THIRD NEW INT'L DICTIONARY p. 1173 (1986) (implying characteristics 1 and 4 by defining insurance as "a device for the elimination of or reduction of an economic risk common to all members of a large group and employing a system of equitable contributions out of which losses are paid") (emphasis added); United Svcs. Auto. Ass'n v. Perry, 886 F.Supp. 596, 601 (W.D.Tex.1995) (implying characteristic 4 by stating that liability insurance "has traditionally been defined as third-party coverage that indemnifies the insured from liability to others.").

B. Application of the Legal Characteristics of Liability Insurance to the Indemnity Agreements

As the Court explained in its March 5th, 1996, Order:

Under the economic realities of the transaction, GI has been "paid to assume risks." In other words, part of the consideration GI paid to Eames and Keeler during the NLC acquisition was to assume a potential liability.

Therefore, these indemnity agreements possess the first characteristic of liability insurance. The second characteristic of liability insurance is met since GI is able to pay the judgment in this case. Also, the third characteristic of indemnity insurance is met since GI has agreed to indemnify Eames and Keeler...