Next Level Communications LP v. DSC Communications Corp.

• Decision Date: 21 June 1999
• Docket Number: No. 98-40682,98-40682
• Citation: 179 F.3d 244
• Parties: NEXT LEVEL COMMUNICATIONS LP; KK Manager LLC; General Instrument Corporation, formerly known as Next Level Systems Incorporated; Spencer Trask & Company Incorporated, Plaintiffs-Appellees, v. DSC COMMUNICATIONS CORPORATION; DSC Technologies Corporation, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 244

179 F.3d 244

NEXT LEVEL COMMUNICATIONS LP; KK Manager LLC; General Instrument Corporation, formerly known as Next Level Systems Incorporated; Spencer Trask & Company Incorporated Plaintiffs-Appellees, v. DSC COMMUNICATIONS CORPORATION; DSC Technologies Corporation, Defendants-Appellants.

No. 98-40682.

United States Court of Appeals Fifth Circuit.

June 21, 1999.

Tyler Alexander Baker, III, Jeffrey Scott Levinger, Carrington, Coleman, Solman & Blumenthal, Dallas, TX, Howard W. Goldstein, Fried Frank Harris Shriver & Jacobson, New York City, for Plaintiffs-Appellees.

Joseph D. Cheavens, Baker & Botts, Houston, TX, Larry D. Carlson, Dallas, TX, for Defendants-Appellants.

Appeal from the United States District Court for the Eastern District of Texas.

Before KING, Chief Judge, and REYNALDO G. GARZA and JOLLY, Circuit Judges.

KING, Chief Judge:

Defendants-appellants DSC Communications Corporation and DSC Technologies Corporation appeal from a May 14, 1998 order of the district court issuing a preliminary injunction that prevents them from pursuing an action filed in Delaware state court on March 5, 1998. Because we conclude that the district court's preliminary injunction is proper under the relitigation exception to the Anti-Injunction Act, 28 U.S.C. § 2283, we affirm.

I. FACTUAL AND PROCEDURAL HISTORY

Defendants-appellants DSC Communications Corporation and DSC Technologies Corporation (collectively, DSC) design and manufacture telecommunications equipment, including a broadband access product referred to as Switched Digital Video (SDV). Two of its former employees, Thomas Eames and Peter Keeler, were responsible for designing and marketing the SDV technology for DSC. In 1994, while still employed by DSC, Eames and Keeler created a company, Next Level Communications Corporation (Next Level I), to develop an SDV product to compete with DSC. In July 1994, they resigned from DSC, taking six DSC employees with them. In 1995, General Instrument Corporation (General Instrument I) acquired Next Level I.

In April 1995, DSC filed suit against Next Level I, Eames, and Keeler in Texas state court. The defendants removed the action to the United States District Court for the Eastern District of Texas (the First Federal Action). See DSC Communications Corp. v. Next Level Communications, No. 4:95cv96 (E.D. Tex. filed Apr. 1995). In March 1996, a three-week jury trial ensued.

The jury ultimately found that Eames and Keeler had breached their contractual obligations to DSC; that, as fiduciaries of DSC, they had diverted a corporate opportunity for the benefit of themselves and Next Level I; and that Eames, Keeler, and Next Level I had misappropriated DSC's trade secrets. DSC claimed damages based on its future lost profits. ¹ The jury awarded actual and punitive damages of $369,200,000.

Thereafter, in April 1996, DSC moved for entry of judgment for all actual and punitive damages awarded by the jury and requested a permanent injunction prohibiting Next Level I, Eames, and Keeler from further disclosing or transferring the stolen DSC trade secrets. Finding that the legal theories upon which the jury had awarded damages overlapped, the district court ordered DSC to choose between the damages for breach of contract, diversion of corporate opportunity, and misappropriation of trade secrets. DSC elected the actual and punitive damages associated with the diversion of corporate opportunity finding. In a June 11, 1996 order, the district court denied DSC's request for a permanent injunction, reasoning that DSC had already been compensated for the future harm DSC sought to enjoin. Accordingly, on June 11, 1996, the district court entered judgment for DSC in the amount of $136,732,000. ²

Dissatisfied with the district court's failure to include a permanent injunction as part of the judgment, DSC filed an expedited motion on June 13, 1996, seeking to modify the judgment to include a limited permanent injunction. The district court denied this motion the same day, again reasoning that an injunction would provide DSC with a duplicate recovery.

On July 3, 1996, DSC filed an "Emergency Motion for Injunction Pending Appeal," seeking an injunction to prohibit Next Level I from using, transferring, or disclosing DSC's trade secrets during the appeal. On July 9, 1996, the district court denied DSC's emergency motion, reasoning that DSC's claim that it was entitled to an injunction in addition to the monetary damages already awarded had a low probability of success on appeal.

On July 15, 1996, DSC filed a motion for injunction pending appeal in this court, seeking an order enjoining Next Level I from using, transferring, or disclosing the trade secrets it had wrongfully obtained. On July 24, 1996, we denied DSC's motion for an injunction pending appeal, but expedited the appeal sua sponte.

On appeal, DSC asked this court to affirm the judgment for usurpation of corporate opportunity, requested an additional $101 million in damages for trade secret misappropriation, and requested an injunction prohibiting the transfer or disclosure of DSC's trade secrets. On February 28, 1997, we ruled that the district court had not relied on clearly erroneous factual findings or erroneous conclusions of law in denying DSC's injunction request and thus had not abused its discretion in refusing to grant a permanent injunction. See DSC Communications Corp. v. Next Level Communications, 107 F.3d 322, 328 (5th Cir.1997). We also determined that the award for usurpation of corporate opportunity could not stand, and remanded the case for entry of judgment on the claim for misappropriation of trade secrets. See id. at 326, 331.

In July 1997, before the district court had entered final judgment after the appeal, General Instrument I, the parent corporation of Next Level I, divided its business into three separate publicly-held corporations. Next Level I was acquired by one of these three corporations, Next Level Systems, Inc. (Systems). On July 15, 1997, DSC filed a "Motion for Show Cause Order" in the district court, arguing that the transaction violated the limited temporary injunction, contained in the district court's June 11, 1996 final judgment, that prohibited a disclosure or transfer of DSC's trade secrets, other than in the ordinary course of business, until the judgment was satisfied. Next Level I filed a response, arguing that the trade secrets were still owned by the same corporate entity, Next Level I, and that the only difference was that Next Level I had become a subsidiary of a different company, Systems. The district court concluded, in an order dated July 22, 1997, that the spin-off transaction did not violate the injunction.

On October 28, 1997, the district court entered a new final judgment in the total amount of $137,732,000 for the actual and punitive damages associated with the jury finding of misappropriation of trade secrets. The October 28, 1997 final judgment, like the June 11, 1996 final judgment, contained an interim injunction that was to remain in effect until the judgment had been fully satisfied. Next Level I satisfied the judgment on November 6, 1997 by paying $140,691,717.81. A satisfaction of the judgment was filed with the court on November 7, 1997, and the interim injunction was dissolved.

In January 1998, Systems decided to spin-off the entire business of its wholly-owned subsidiary, Next Level I. Systems transferred the business as a whole, including its technology, management, and workforce, to Next Level Communications, L.P. (Next Level II), one of four plaintiffs-appellees in this action, in exchange for an eighty-nine percent limited partnership interest in Next Level II. Another plaintiff-appellee, Spencer Trask & Co. (Trask), created plaintiff-appellee KK Manager L.L.C. (KK Manager). KK Manager acquired the other eleven percent ownership interest in Next Level II in exchange for an investment of $10,000,000, and became operating general partner of Next Level II. Systems then changed its name back to General Instrument (General Instrument II). General Instrument II is the final plaintiff-appellee in this action.

On March 5, 1998, DSC filed a complaint in the Superior Court of the State of Delaware naming as defendants Next Level II, KK Manager, General Instrument II, and Trask, ³ and asserting claims based on misappropriation of trade secrets (the Delaware Action). Specifically, DSC alleged that General Instrument II (formerly Systems) improperly disclosed trade secrets when it conveyed the SDV technology from Next Level I to Next Level II, that Next Level II and KK Manager misappropriated DSC's trade secrets, and that Trask conspired to misappropriate DSC's trade secrets. As to Next Level II and KK Manager, DSC requested an award of unjust enrichment damages. As to General Instrument II, DSC sought the imposition of a constructive trust and an order requiring the disgorgement to DSC of the consideration General Instrument II received for its alleged improper transfer of DSC's trade secrets to Next Level II and KK Manager. Finally, through its civil conspiracy claim, DSC sought to make Trask jointly and severally liable for any unjust enrichment and disgorgement damages owed by the other defendants.

On April 2, 1998, the Delaware defendants returned as plaintiffs to the district court below, the same court that had presided over the First Federal Action, to request a preliminary and permanent injunction to prevent DSC from prosecuting the Delaware Action. Jurisdiction was premised on the All Writs Act, 28 U.S.C. § 1651(a), and the relitigation exception to the Anti-Injunction Act, 28 U.S.C. § 2283.

On May 8, 1998, the district court conducted a hearing on the application for a preliminary injunction. The court signed an order granting the preliminary injunction on May 14, 1998. In its order, the district court concluded that the "Delaware Lawsuit is based on an alleged transfer of DSC's...