Peat, Inc. v. Vanguard Research, Inc.

• Citation: 378 F.3d 1154
• Decision Date: 21 July 2004
• Docket Number: No. 03-11565.,03-11565.
• Parties: PEAT, INC., an Alabama corporation, Plaintiff-Counter Defendant-Appellee, v. VANGUARD RESEARCH, INCORPORATED, a Virginia corporation, Defendant-Counter-Claimant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

378 F.3d 1154

PEAT, INC., an Alabama corporation, Plaintiff-Counter Defendant-Appellee, v. VANGUARD RESEARCH, INCORPORATED, a Virginia corporation, Defendant-Counter-Claimant-Appellant.

No. 03-11565.

United States Court of Appeals, Eleventh Circuit.

July 21, 2004.

Appeal from the United States District Court for the Northern District of Alabama, No. 99-02553-CV-BE-NE, Karon O. Bowdre, J Scott B. Smith, Gary C. Huckaby, Bradley, Arant, Rose & White, LLP, Huntsville, AL, for Vanguard Research.

Mark Englehart, Rhon E. Jones, Beasley, Wilson, Allen, Main & Crow, P.C., Montgomery, AL, for PEAT, Inc.

Before CARNES and WILSON, Circuit Judges, and JORDAN^*, District Judge.

JORDAN, District Judge:

Following a two-week trial, a jury found that Vanguard Research, Inc. breached its contract with PEAT, Inc. and appropriated PEAT's trade secrets in violation of the Alabama Trade Secrets Act, Ala.Code § 8-27-1 et seq. The jury awarded PEAT $325,981.01 in compensatory damages on the breach of contract claim, as well as $1,819,334,00 in compensatory damages and $8,890,000 in punitive damages on the trade secrets claim. The district court denied Vanguard's motions for judgment as a matter of law and for new trial, but reduced the punitive damages award to $78,000 and entered judgment accordingly.

Vanguard now appeals the adverse judgment on the trade secrets claim, but not the jury verdict or award on the breach of contract claim. Vanguard argues that there is insufficient evidence to support the verdict on the trade secrets claim, that it is entitled to a new trial due to the improper admission of a Rule 1006 summary exhibit purporting to list PEAT's trade secrets, that the award of compensatory damages is excessive, and that the evidence does not support an award of punitive damages. As explained below, we reject all of Vanguard's arguments concerning the sufficiency of the evidence, conclude that a new trial is required due to the erroneous and prejudicial admission of the summary exhibit, and do not reach the challenges to the damages awarded by the jury.¹

I

Like most commercial litigation, this action was complicated, and had many twists and turns, both procedural and substantive. We summarize the proceedings and facts only insofar as necessary to provide context for our decision.

A

The dispute between PEAT and Vanguard arose out of a marketing and license agreement between the two entities to create plasma energy systems, which use extreme temperatures generated by plasma energy to treat hazardous waste without leaving behind harmful byproducts. PEAT referred to this plasma energy technology as "Thermal Destruction and Recovery" (TDR), while Vanguard called it "Plasma Energy Pyrolosis System" (PEPS).

Vanguard started doing business with PEAT's prior parent company, Mason & Hanger, in the early 1990s through a series of non-exclusive marketing agreements. Vanguard essentially provided marketing and expertise in the area of government contracting, while Mason & Hanger provided technology for use in plasma energy systems through a subsidiary, Plasma Engineering Applied Technology, Inc. (old PEAT).

In 1994, Dr. Marlin Springer and other old PEAT engineers applied for a patent for a process to treat waste using plasma energy. The patent was issued in 1996 to Dr. Springer as U.S. Patent No. 5,534,659, and became an asset of old PEAT.

Two years later, in 1996, several investors, including Dr. Springer, bought from Mason & Hanger the assets of old PEAT, including the '659 patent. The new company retained the PEAT name. Vanguard, which tried unsuccessfully to purchase old PEAT or be included as part of the purchasing group, continued to work with PEAT after it became a separate company.

PEAT and Vanguard entered into a "teaming agreement" in late 1996 to pursue a contract with the Tennessee Valley Authority. In August of 1997, PEAT granted Vanguard an exclusive license for its technology (described as "the system known as PEPS") for the program involving the TVA and for "all follow-on programs and systems to this initial program." Shortly thereafter, the parties submitted a proposal to the TVA for a Phase I project to develop a plasma energy system.

PEAT and Vanguard executed a new marketing and license agreement in December of 1997. This agreement did not grant Vanguard a license to make, use, or develop a plasma energy system. Instead, the agreement provided that a separate license would be negotiated for each subsequent contract, that Vanguard would use PEAT as the sole source for manufacturing all plasma energy systems, and that PEAT retained exclusive rights, title, and interest in all of its intellectual property (including technical and proprietary information). The agreement also contained a merger clause. At trial, PEAT asserted that this merger clause superseded the 1997 license it granted to Vanguard, while Vanguard maintained that the merger clause did not affect the 1997 license, which was separately provided for the TVA Phase I project and for all "follow-on programs and systems."

The prime contract for PhaseI — which called for a fixed plasma energy system — was executed in February of 1998, and PEAT and Vanguard entered into a subcontract around that time for their work on Phase I. PEAT designed the system for Phase I in Alabama and assembled it at Vanguard's facility in Virginia during 1998. Throughout Phase I, Vanguard criticized various aspects of PEAT's work. Not surprisingly, at trial the parties presented very different versions of PEAT's performance, as well as what problems existed, how significant those problems were, and who was responsible for them.

In June of 1998, Vanguard made a proposal for Phase II of the project — which called for a mobile plasma energy system — and identified PEAT as a subcontractor. PEAT received a letter subcontract for certain tasks in Phase II from the government's prime contractor the following month, and thereafter began working with Vanguard on Phase II conceptual issues. Vanguard executed its Phase II contract with the prime contractor in November of 1998. Though the parties traded various proposals for the scope of work on Phase II, Vanguard and PEAT never executed a subcontract between themselves for Phase II.

Some of the work on Phase II was performed simultaneously with the work on Phase I. PEAT claimed that during its work on Phase II it shared much sensitive propriety information with Vanguard (though it also claimed that it had given Vanguard such information throughout the work on Phase I). Vanguard, for its part, denied that PEAT had passed on or divulged any trade secrets.

While undergoing Phase I testing in January of 1999, the plasma energy system designed by PEAT experienced an explosion which blew an 80-pound door off the incinerator. Again, the parties disagreed as to the causes of, and responsibility for, the explosion. Vanguard blamed PEAT's poor design — which it claimed was unsafe — for the explosion, while PEAT generally said the explosion was caused by the failure of various safety components and insufficient time to develop one of the relevant processes.

The following month, Vanguard ordered PEAT to stop work on Phase I and Phase II. According to Vanguard, it became clear after the explosion that PEAT could not do the job. PEAT, on the other hand, asserted that Vanguard used the explosion as a pretext for replacing PEAT as the provider of the plasma energy system. PEAT claimed that, following its termination, Vanguard misappropriated its trade secrets and used them to modify the Phase I system and subsequently build the Phase II system.

B

Whether or not information constitutes a trade secret is generally a question of fact under Alabama law. See, e.g., The Soap Co. v. Ecolab, Inc., 646 So.2d 1366, 1372 (Ala.1994). To qualify as a trade secret under the Alabama Trade Secrets Act, information must (1) be used or intended for use in a trade or business; (2) be included or embodied in a formula, pattern, compilation, computer software, drawing, device, method, technique, or process; (3) not be publicly known and not generally known in the trade or business; (4) not be readily ascertained or derived from publicly available information; (5) be the subject of reasonable efforts to maintain its secrecy; and (6) have significant economic value. See Ala.Code § 8-27-2(1). Cf. Ex Parte Miltope Corp., 823 So.2d 640, 643-45 (Ala.2001) (granting petition for writ of mandamus and setting aside trial court's discovery ruling which required disclosure of customer orders received by corporation and of minutes of meetings of corporation's board of directors, as such information constituted trade secrets under § 8-27-2(1)). As the plaintiff, PEAT had the burden of establishing each of these statutory elements as to each claimed trade secret, see Public Systems, Inc. v. Towry, 587 So.2d 969, 971 (Ala.1991), and a hotly contested issue at trial was whether PEAT satisfied this burden.

C

Before the presentation of evidence, Vanguard filed a motion in limine objecting to PEAT Exhibit 145, a compilation of documents purporting to list PEAT's trade secrets.² In its motion, Vanguard argued that Exhibit 145 was not admissible as a business record under Rule 803(6) because Dr. Springer had said in his deposition that it was prepared for PEAT's counsel after the litigation began. R. 10:200. During argument on the motion, PEAT conceded that Exhibit 145 had been prepared by PEAT personnel, at the request of PEAT's counsel, in response to Vanguard's discovery request that PEAT identify what trade secrets were allegedly misappropriated. R. 16:1 at 17.

Although Vanguard reiterated its position that Rule 803(6) did not allow the introduction of Exhibit 145 because it was not prepared in the ordinary course of business, R. 16:1 at 18-19, PEAT nevertheless argued that Exhibit 145 was analogous to a discovery response. Alternatively, PEAT asserted that Exhibit...