REXA, Inc. v. Chester, s. 20-2953

• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)
• Writing for the Court: Brennan, Circuit Judge.
• Citation: 42 F.4th 652
• Parties: REXA, INC., Plaintiff-Appellant, v. Mark V. CHESTER and MEA Inc., Defendants-Appellees.
• Docket Number: s. 20-2953,20-3213,& 21-2033
• Decision Date: 28 July 2022

42 F.4th 652

REXA, INC., Plaintiff-Appellant,
v.
Mark V. CHESTER and MEA Inc., Defendants-Appellees.

Nos. 20-2953
20-3213
& 21-2033

United States Court of Appeals, Seventh Circuit.

Argued February 15, 2022
Decided July 28, 2022

Michael Albert, Jason W. Balich, Attorneys, Wolf, Greenfield & Sacks, Boston, MA, for Plaintiff-Appellant.

Kevin P. McJessy, Attorney, McJessy, Ching & Thompson, Chicago, IL, for Defendant-Appellee.

Terrence Patrick Canade, Alyssa M. Gregory, James T. Peterka, Hugh S. Balsam, Attorneys, Locke Lord LLP, Chicago, IL, for Defendant-Appellee.

Before Wood, Hamilton, and Brennan, Circuit Judges.

Brennan, Circuit Judge.

Mark Chester, then an engineer for a company called Koso America, Inc., participated in a 2002 project aimed at creating a new valve for an actuator—a machine component that produces motion. If successful, the project would have eliminated the need for Koso to pay royalties to another firm. But the project failed to accomplish

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that goal. Instead, it yielded an experimental prototype of another actuator, which Koso shelved due to the improbability of commercial success. Chester left Koso the next year.

More than a decade after he worked on the 2002 project, Chester and his employer, MEA Inc., built a commercially successful actuator and filed a related patent application. Ultimately, the patent office allowed portions of their claims. But REXA, Inc., a company affiliated with Koso, sued Chester and MEA for misappropriation of trade secrets and breach of an implied contractual obligation to assign patent rights. REXA alleged that Chester and MEA's actuator incorporated and disclosed confidential designs contained within the prototype that Koso had developed and then abandoned. Following discovery, all parties moved for summary judgment. The district court granted summary judgment to the defendants, Chester and MEA, on all claims. REXA appealed.

We first consider whether the district court properly granted summary judgment to the defendants. Then, we analyze whether the court abused its discretion in awarding Chester and MEA approximately $2.357 million in attorneys' fees, which they requested as a sanction for REXA's litigation conduct.

I

A

An actuator is a part of a machine that converts energy, like electricity or water pressure, into linear or rotary movement. Examples include an electric motor or an automatic door closer. Hydraulic actuators, often used in the oil and gas industry, regulate the flow of working fluids such as oil.

In 1993, Koso America purchased the assets of Rexa Corporation, which made hydraulic actuators. Since the early 1990s, the Rexa/Koso entities have manufactured the Xpac actuator, a leading self-contained electro-hydraulic actuator. In 2014, Koso underwent a corporate reorganization, which created REXA, Inc. The purpose of the reorganization was to "transfer the Actuator Business to a separate corporation operated under a different name." As relevant here, Koso transferred "all of the assets comprising the Actuator Business" to REXA, including "[a]ll contracts ... and intellectual property reasonable or necessary to the conduct of the Actuator Business."

Chester's employment with Koso. Koso hired Chester as a Massachusetts-based project engineer in 1998, and he was later promoted to a management role. He primarily worked on existing Xpac actuators. Chester's business card and W-2 forms stated that he worked for Koso, though he never entered into a formal employment agreement.

In 2000, certain Koso employees, including Chester, received a Bonus Letter stating that they would be entitled to a bonus if the company was sold and their employment ended as a result of the sale. That letter was gratuitous; employees who received it were not required to give any consideration for this benefit, and Koso's board of directors had sole discretion to determine whether and when to pay bonuses. Some employees received a Severance Plan containing a document, titled "Confidentiality, Nonsolicitation, Non-Competition and Assignment Agreement." But REXA has not shown that Chester received the Confidentiality Agreement.

The 2002 project (RFD 02-122). Beginning in July 2002, Chester participated in a project—detailed in Request for Design ("RFD") 02-122—that investigated potential alternate valves for the Xpac actuator.

42 F.4th 660

The RFD stated: "The existing flow matching valve still has three years remaining on the patents and thus the royalty. A new design would eliminate the payment and provide a new patent valve that is owned by [Koso]." Chester's supervisor approved the project, which anticipated a design and manufacturing cost of $100 per unit.

Ken Enos, Koso's Director of Engineering, reported to Chester on project-related matters. For several weeks, Chester and Enos sought to create a replacement flow matching valve, as contemplated by the RFD, but they did not succeed. In time though, Chester and Enos created a prototype of an actuator. The prototype modified the existing Xpac actuator by replacing the flow matching valve with two solenoid, or electrically operated, valves. The fully assembled prototype also required modifications to the Xpac actuator's manifold, tubing, circuit board, and coding.

At Enos's request, a Koso engineer modified existing computer code to add instructions for opening and closing the solenoid valves. Koso employees neither presented nor discussed that code with Chester, and he never saw it. Additionally, Enos created only one (unofficial) sketch of the prototype, and it did not have a "confidential" label before this litigation commenced. REXA has not identified evidence that Chester ever saw it.

By mid-August 2002, Koso formally terminated the RFD 02-122 project, and the actuator prototype was disassembled. No information concerning the project was used in any later REXA commercial product or strategic plan. Chester was never instructed that Koso viewed the shelved RFD 02-122 project as a trade secret. And REXA has not presented evidence that any Koso employees were told that they had any confidentiality obligations for that project.

The Hawk actuator and the patent application. Chester resigned from Koso in July 2003. Over the next several years, he worked on designing actuators for several of Koso's competitors. In 2012, Chester joined Illinois-based MEA Inc. as a senior engineer. At that time, MEA was manufacturing and selling self-contained electro-hydraulic actuators that used solenoid valves to hold the position of the actuator in place under load.

Chester began working on a new actuator prototype, later known as the Hawk. Like many of MEA's products, the Hawk uses solenoid valves to hold the actuator in position under load. Over several months in 2013, Chester and other MEA employees developed a working prototype of the Hawk actuator, including by writing the software that would run it. Chester and MEA then filed a patent application, which was based on the specific components and performance of the Hawk, with the United States Patent and Trademark Office ("PTO") in October 2014.

In January 2017, the PTO largely rejected the claims asserted in the patent application. According to the PTO, the use of solenoid valves to hold an actuator piston in a specific position was already disclosed in prior art. MEA then amended its application to require a motor that can "accelerate from zero to maximum revolutions per minute (RPM) under full load."

In March 2018 (while this litigation was pending) the PTO issued a notice of allowance in connection with the amended patent application. That notice explained that the invention's improvement "comprises a hydraulic actuator system with a motor driven pump, wherein the motor can accelerate from zero to a maximum revolutions per minute under load for the purpose of

42 F.4th 661

preventing no momentary backwards movement of the actuator."

B

REXA sued Chester and MEA in the United States District Court for the Northern District of Illinois, alleging misappropriation of trade secrets against both defendants (Count I) and breach of an implied-in-fact contract against Chester (Count IV).¹ During contentious discovery, the defendants accused REXA of improper conduct by (1) combining the 2000 Bonus Letter with a Confidentiality Agreement labeled as Appendix B to that letter and questioning Chester about those documents at his deposition; and (2) using "REXA" in pleadings and discovery responses as a purported shorthand for "Koso."

First, Chester and MEA alleged that REXA manipulated the Bonus Letter (which Chester received) by producing it attached to the Severance Plan and Appendix B Confidentiality Agreement (which he did not receive). Appendix A to the Severance Plan, which listed Koso employees who were offered the Plan, was not included. Chester was not among those employees listed on Appendix A. After examining the evidence, the district court agreed with Chester and MEA that by "separating Appendix A from the Severance Plan and producing it elsewhere among the discovery documents, REXA attempted to...