Copyright 1998 Mealey Publications, Inc.
Mealey's Litigation Reports:
Intellectual Property
April 1, 1998

SECTION: TRADE SECRETS; Vol. 6; No. 13

LENGTH: 1140 words

HEADLINE: 'Reasonable Royalty' Award Appropriate, But Amount Was Error, 2nd Cir. Rules

DATELINE: NEW YORK

BODY: A federal judge correctly applied the doctrine of "reasonable royalty" in determining damages for trade secret misappropriation, but erred in enhancing the award to deter additional infringement, the Second Circuit U.S. Court of Appeals ruled Feb. 20 (Vermont Microsystems Inc. v. Autodesk Inc., Nos. 97-7255 and 97-7293, 2nd Cir.; See 7/15/96, Page 11).

The court affirmed in part and reversed in part a judgment in favor of Vermont Microsystems Inc. (VMI) in a suit against Autodesk Inc.

(Text of Opinion in Section B. Mealey's Document #16-980401-103.)

Autodesk's AutoCAD software occupies nearly 80 percent of the computer aided design (CAD) software market in the United States. VMI initially created hardware accessories, such as graphics boards, for use with AutoCAD to increase its functionality. However, in 1989, VMI began concentrating on software accessories to be used directly with the AutoCAD program.

During the transition from hardware to software design, defendant Otto G. Berkes began working for VMI, first as an intern, then as a full-time software programmer in 1989. Berkes signed an Invention and Nondisclosure Agreement acknowledging that all trade secrets developed in the course of his employment belonged to VMI and promising not to disclose such trade secrets to third parties.

Trade Secrets Implicated

In the fall of 1991, Berkes left VMI for Autodesk. In the fall of 1992, VMI discovered that Berkes' work for Autodesk implicated VMI trade secrets. VMI sued in the U.S. District Court for the District of Vermont, asserting causes of action for copyright infringement and misappropriation of trade secrets. Berkes counterclaimed against VMI, alleging libel and seeking a declaratory judgment of his right to use the Berkes-Pilcher Shading (BPS) algorithm, named for Berkes and VMI employee Steven Pilcher.

After VMI abandoned its copyright infringement claim, U.S. Magistrate Judge Jerome J. Neidermeier found for VMI on the trade secret claim, awarding $25.5 million in damages, and rejected both of Berkes' counterclaims. Berkes and Autodesk appealed.

Affirming on liability, the Second Circuit found misappropriation of two primary trade secrets the architecture of VMI's display list driver and VMI's triangle shading algorithm.

VMI's display list driver, called AutoMate, was first developed in an MS-DOS format; however, in April 1992, VMI released a Windows version called "Release 11 AutoCAD Extension for Windows," or R11 AEW. In response to consumer demand, VMI offered a companion display list driver for R11 AEW the following month. At the same time, Autodesk was developing a stand alone Windows version of AutoCAD called "Release 12 Windows." At Berkes' insistence, R12 Windows contained a display list driver, RCVESA3D, developed by Berkes.

VMI's triangle shading algorithm is a variation of a common technique for coloring three-dimensional objects displayed on a computer screen. Shortly after Berkes left VMI, he authored a version of the algorithm, which was included in the MS-DOS version of AutoCAD.

Technology 'Virtually The Same'

Regarding the display list driver, the Second Circuit panel found substantial evidence to support Magistrate Judge Neidermeier's finding of misappropriation. Specifically, the panel said, the lower court found that the technology of AutoMate and R12 Windows is "virtually the same" and the "overall architecture" of the programs is "similar and in some cases identical," with the same "structures and parameters found in both."

In addition, the panel said, Berkes was the chief architect of the AutoMate display list driver, and the display list driver for Autodesk's R12 Windows "performed the same function and even had the same tools . . . as AutoMate." The panel also noted that several features of the VMI program were not known outside of VMI.

Regarding the triangle shading algorithm, the panel concentrated on Autodesk's contention that the algorithm does not qualify as a trade secret under California law because it is a variation of the well-known Gouraud Shading technique and therefore had no independent economic value.

Rejecting that argument, the panel said, "The economic value of VMI's triangle shading algorithm is readily apparent. The inclusion of this algorithm in AutoMate contributed, if only in small part to its commercial attractiveness. One witness indicated that acquisition of this algorithm 'would save any developer a great deal of time and would provide them with an efficient, polished, and proven fill algorithm.' That is exactly what occurred here when, within weeks of signing on with Autodesk, Berkes created a nearly identical triangle shading algorithm for inclusion in AutoCAD Release 12 for MS-DOS. While alternative triangle shading algorithms might have been acceptable to Autodesk, it nonetheless received value from Berkes' infringement of VMI's version. Simply because other developers might independently create their own version of a triangle shading routine does not deprive VMI's version of its trade secret status."

The panel remanded for recalculation of damages, finding that the lower court erred in concluding that "the amount VMI would have charged for the technology is a reasonable measure of damages."

Reasonable Royalty Approach

On remand, Magistrate Judge Neidermeier held that the doctrine of reasonable royalty should be applied because the evidence was too imprecise to allow him to determine unjust enrichment. He applied a royalty of $20 per unit a total of $6,470,380 for the R12 Windows units and added $1,283,030 as a reasonable royalty for misappropriation of the triangle shading technology.

VMI moved to amend the award to increase the display driver award to $20,359,017 to create a deterrent effect. The magistrate agreed to increase the award to $12,926,360, stating that the reasonable royalty should be $40 per unit "to reflect the cost of infringement . . . and to deter Autodesk from electing to risk infringement." The parties filed cross-appeals.

Partially affirming, the Second Circuit agreed with the reasonable royalty approach, but held that the use of a punitive deterrent award does not fall within the description of "actual loss caused by misappropriation" under Section 3426.3(a) of the Uniform Trade Secrets Act.

The court found it unnecessary to remand for recalculation of the award, holding that the original $7,753,410 award was appropriate. However, the court ordered the lower court to re-compute post-judgment award running from the date of the original award.

Autodesk is represented by Ronald S. Rauchberg of Proskauer Rose Goetz & Mendelsohn in New York. VMI is represented by Robert D. Rachlin, Walter E. Judge Jr. and Carol L. Shea of Downs, Rachlin & Martin in Burlington, Vt.

LANGUAGE: ENGLISH

LOAD-DATE: April 20, 1998


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