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Pegasystems’ $2 Billion Appian Loss Harder to Cut Than Epic Case

May 17, 2022, 9:20 AM

Pegasystems Inc.'s promised appeal of a $2.04 billion trade secrets award will aim for at least a massive reduction to that figure, similar to one recently secured by an electronic health records company. Their legal path, however, will have to be much different.

Appian Corp. convinced a Virginia jury last Tuesday that Pegasystems recruited a contractor they called “our spy” to pass along secrets gleaned from a free trial of its enterprise software, among other acts of subterfuge reaching the highest levels of the company.

The award more than doubled the verdict Epic Systems Corp. won against Tata Consultancy Services Ltd., which itself raised eyebrows. Tata later convinced a judge to slash Epic’s $940 million award to $420 million, and an appeals court slashed it further to $280 million. The US Supreme Court finalized that outcome in March, declining a petition to review the reduction.

The award fits into a trend, with juries increasingly willing to punish corporate espionage harshly. But the entire award being compensatory—while the bulk of Epic’s was punitive—limits Pegasystem’s options for having the number slashed.

Trade Secrets attorney Robert B. Milligan of Seyfarth Shaw LLP noted “bigger and bigger verdicts” in recent years. That trend has particular gravity for software licensing companies for whom trade secrets are often the basis for the company’s revenue and value—making compensating for their loss expensive, he said.

“The fact that it’s getting to this magnitude shows that trade secrets protections are gaining traction,” Milligan said. “And if a jury hears a narrative that’s compelling and has sufficient damages information, they’re not going to be shy in issuing a large award.”

Limited Reduction Options

The judge who slashed Epic’s award from Tata tied his new figure to a Wisconsin law imposing a 2-to-1 cap on the ratio of punitive to compensatory damages. The US Court of Appeals for the Seventh Circuit went further, finding that awarding more than a 1-to-1 ratio on such a large figure runs afoul of the due process clause of the constitution.

Virginia’s trade secret law caps punitive damages at $350,000, and Appian chose to seek only compensatory unjust enrichment damages. That blocks Pegasystems from following Tata’s lead because compensatory damages are tied to specific gains or losses resulting from illicit activity, not punishment or deterrence.

But the massive award “still would strike me as a huge outlier” with a strong possibility it gets trimmed, Bloomberg Intelligence analyst Tamlin Bason said.

At trial Pegasystems argued that the alleged trade secrets weren’t secrets. While acknowledging they had used fake identities to circumvent Appian’s measures to prevent Pegasystems from accessing free trials, it said anyone else could request one.

“The test is not if you keep it secret from one competitor. The test is far broader than that,” Pegasystems attorney Robert Frank Jr. of Choate Hall & Stewart LLP said at closing.

The jury disagreed, and their determination that Appian took reasonable measures to protect the secrets will be difficult to reverse on appeal, attorneys say. The standard isn’t a clear black-and-white question, intellectual property attorney Laurie Carr Mims of Keker, Van Nest & Peters LLP said.

“It’s a flexible and contextual standard so that” it works for different types of secrets, Mims said. “It’s very fact-intensive, and so the jury verdict on something like that is going to be hard to challenge.”

Juries evaluating such technical—yet flexible—questions may also be influenced by the broader context of the defendant’s conduct, intellectual property attorney Steven P. Ragland, also of Keker, said.

“Juries get offended by conduct that’s offensive,” Ragland said. “I think it shows the power of not buckling under the pressure of uncertainty of a jury verdict if you feel you have a righteous case.”

Appian attorney Adeel A. Mangi of Patterson Belknap Webb & Tyler LLP told Bloomberg Law that what set this case apart from other trade secrets cases, aside from the size of award, was “the active involvement of the senior leadership team of a publicly-traded company.”

“It’s pretty remarkable from that perspective.”

‘Our Spy’

Appian in 2020 sued Pegasystems and the alleged spy, Youyong Zou, in the Circuit Court of Fairfax County, a Virginia state court. Pegasystems found Zou by asking a recruiting agency to find someone with access to Appian software but no loyalty to the company.

Zou worked for a defense contractor and continued to use Appian while coordinating with Pegasystems. Executives labeled him in emails as “our spy” and said not to mention Zou’s name in emails that reached Pegasystems’ broader sales team.

Meanwhile Pegasystems employees—including CEO Alan Trefler—set up various fake identities to gain access to materials meant for prospective customers without Appian realizing their connection to Pegasystems.

At trial, Appian portrayed Pegasystems as a declining, increasingly obsolete legacy player in the companies’ cloud enterprise platform software field, needing to cheat to retain relevance. And Appian said Pegasystems incorporated critical features learned from Zou and other efforts into its programs.

“These are fundamental features and they were fundamental to this product not becoming Lotus 1-2-3,” Mangi said during closing arguments at trial, referencing a defunct 1980s spreadsheet program.

Frank in his closing argument called the allegations “a lot of character assassination, not a lot of substance.”

He said more than 80% of the sales claimed as unjust enrichment didn’t involve competition between the companies and ridiculed the idea that a two-page marketing document relying on secrets could sway prospective customers like Bank of America Corp., Amazon.com Inc., the US Air Force, or the US Census Bureau, as Appian argued.

The jury wasn’t swayed, awarding two-thirds of Appian’s damages experts’ top-end calculation.

Pegasystems’ spokeswoman Lisa Pintchman said in a statement that the claims and the verdict “are not supported by the facts of the case or the law and are the result of significant error.”

She promised an appeal, saying that process could take years, that “no judgment would be payable until this process has ended,” and that the verdict “has no impact on our products” or service.

A Shifted Burden

Despite the closed door to a constitutional challenge and limited chance of reversing a jury on the existence of trade secrets, Pegasystems may not be doomed to owe what amounts to nearly half its market cap. Other routes to challenge the basis of the award exist, attorneys said.

Bason pointed in particular to Pegasystems’ lament that it was asked to demonstrate which sales of those implicated in the alleged secret theft weren’t attributable to the theft, rather than Appian having to show which sales could be traced back to its stolen secrets. Virginia’s trade secrets law itself doesn’t address burden-shifting.

“This legal standard has not previously been adopted by the Virginia courts,” the company told investors in a quarterly filing during the trial.

That could be the basis of a closer look at the damages, with Appian required to provide the linkage, Bason said. Mims agreed.

“Typically the burden is on plaintiffs to prove damages that are not speculative with some amount of certainty,” Mims said. “It certainly sounds like an interesting legal argument, one that could be the basis of an appeal unless there is something really clear in the statute that requires burden shifting when the question is unjust enrichment.”

To contact the reporter on this story: Kyle Jahner in Washington at kjahner@bloomberglaw.com

To contact the editors responsible for this story: Adam M. Taylor at ataylor@bgov.com; Jay-Anne B. Casuga at jcasuga@bloomberglaw.com