Sometimes it is all about the money. In Motorola v. Hytera, the Seventh Circuit Court of Appeals addressed “a large and blatant theft of trade secrets” from Motorola by its competitor Hytera. The damages awarded to Motorola, after a trial that lasted three and a half months, were also large. According to the defendant, the $407 million award affirmed by the Seventh Circuit is the “largest damages award on the books under the federal trade secrets act.”
The facts regarding infringement are juicy (Motorola engineers in Malaysia lured away to Hytera, stolen documents and computer code, criminal indictments, alleged CEO involvement, witnesses “singing a different tune” for a plea deal), but the case has been closely watched because of the size of the damages award and the basis for that award.
The damages award is notable because it included damages for sales originating outside of the United States at a time when the question of the “extraterritoriality” of damages awards has been under review, including by the U.S. Supreme Court, as we have written about here and here.
Globalization and market concentration have certainly contributed to larger damages awards when illicit activity in one country leads to harm arising from sales in other countries, particularly with respect to intellectual property that crosses boarders embedded in both tangible and intangible products, like software. The courts must grapple with the law in these situations, since globalization is increasingly important and infringers should not be allowed to use international borders to avoid liability for intentional acts. Similarly, courts must consider international comity so as not create undesirable conflict with the laws and sovereign interests of other nations.
The Hytera case also raises the issue of apportionment in damages awards: courts must account for the defendant’s own contributions to its profits, even when those profits were dependent upon theft of trade secrets and violation of IP rights. While facts like those in Hytera may tempt a judge or a jury to apply an “eye for an eye” mentality, it is the role of the courts to evaluate and apply the law even-handedly.
With this in mind, we turn to the decisions in the Hytera case. On February 14, 2020, a jury awarded Motorola $764.6 million in damages caused by Hytera’s illegal conduct in violation of the Defend Trade Secrets Act of 2016 (DTSA) and the Copyright Act, including damages arising from sales abroad. On January 8, 2021, the Northern District of Illinois reduced the jury’s award to $543.7 million in damages, still a mighty fine award. The court also denied Motorola’s request for a permanent injunction. Both parties filed appeals.
On July 2, 2024, the Seventh Circuit Court of Appeals remanded the case to the district court to recalculate the copyright damages, which it said would “need to be reduced substantially from the district court’s original award of $136.3 million.” On the DTSA damages, the Court of Appeals affirmed the district court award of $135.8 million in compensatory damages and $271.6 million in punitive damages -- $407.4 million in total -- and remanded for reconsideration of the denial of permanent injunctive relief.
Before digging into the Court of Appeals’ reasoning on the damages, the specific context for that reasoning is important. On appeal, Hytera did not contest liability. The Court found this “startling,” observing that Hytera accordingly concedes “the blatant theft of trade secrets and copying of proprietary computer code.” It is true that there is a page limit applied to appeal briefs, and Hytera’s August 6, 2024 petition for rehearing and rehearing en banc implied that Hytera’s rationale for not contesting liability was that courts caution against “raising too many issues on appeal.” Still, it must have been an uncomfortable choice not to challenge liability on appeal, even if one accepts that it was made in order to save space in the briefs to seek “a fair assessment of the value of the misappropriated technology … so that it can pay Motorola and move on.”
One more thing to keep in mind. The Court of Appeals made a point of noting that, over the course of the six years of litigation, Hytera “continued its gamesmanship and deception.” The Court asserted that Hytera had deleted stolen documents, presented fabricated evidence and witnesses who contradicted themselves in depositions and at trial, dragged its feet in paying the royalty ordered by the court, and noted that Hytera is still engaged in contempt proceedings at the district court regarding whether its new products continue the illicit use of Motorola’s trade secrets. Juicy indeed.
With this as background, here’s how the Court of Appeals analyzed the district court’s decision on damages.
Copyright Damages
The Court of Appeals held that, in view of the presumption against extraterritoriality that applies to federal statutes, Motorola had failed to present evidence supporting damages for sales outside the United States.
While the presumption can be rebutted, the Supreme Court has previously held that the Copyright Act does not provide the clear, affirmative statement which is required rebut the presumption against extraterritoriality.
Where the presumption against extraterritoriality is not rebutted, the court must determine whether the conduct relevant to the statute’s focus occurred in the United States or in a foreign country. The Court of Appeals noted that “[c]ircuit courts have developed the ‘predicate act doctrine’” to evaluate this question. Two conditions must be met: (1) an initial act of infringement in the United States and (2) the domestic infringement enabled or was otherwise “directly linked to” the foreign infringement for which recovery is sought.
In Hytera, Motorola alleged a “server theory” as a predicate act of infringement. Motorola was unable to prove that the code was downloaded from a server in the U.S. such as its main “ClearCase” server in Illinois, rather than a mirrored database on a server outside the U.S., say, in Malaysia. The Appeals Court analogized the situation to a publisher who could not publish a book in the U.S. and abroad and then claim a domestic act of infringement because a book illegally copied abroad had the same content as the book published in the U.S. Rather, the Court stated, if a copyright owner wants to obtain damages under U.S. copyright law based on the downloading of copyrighted material, the copyright owner must be prepared to prove that unauthorized download was made from a U.S. server and not a server located abroad. Thus, the Appeals Court said, Motorola is not entitled to damages for Hytera’s foreign sales of infringing products under the Copyright Act.
In a footnote, the Appeals Court noted that “even if Motorola had offered evidence that Hytera’s thieves in Malaysia had downloaded the source code from Motorola’s server in Illinois, at least two circuits (one in a precedential opinion) have refused to extend the predicate-act doctrine to reach foreign infringement where the only predicate act alleged was the download of content from a server located in the United States to a computer located abroad.” (Citing IMAPizza v. At Pizza, 965 F.3d 871 (D.C. Cir. 2020) and Superama Corp. v. Tokyo Broadcasting System, 830 F. App’x 821 (9th Cir. 2020)).
With respect to compensatory damages, the Court of Appeals held that the district court had improperly applied the DTSA. The Court of Appeals said that the DTSA’s statutory remedial scheme required the district court to awarded Motorola “the sum of its own lost profits and Hytera’s avoided R&D … as soon as it became clear that this total was greater than the amount of Hytera’s profits recoverable through unjust enrichment.” That is, under the statute, the court was required to award the larger of the two bases for the award. Nevertheless, the Court of Appeals concluded that Hytera had “forfeited” on appeal its arguments relating to Motorola’s lost profits by failing to challenge it in its opening brief to the court.
Finally, with respect to the application of the three-year statute of limitations under the Copyright Act, the Court of Appeals concluded that it would decline Hytera’s invitation to overrule the “discovery rule” (which we recently wrote about here) and held that “Motorola is entitled to damages for all copyright violations in discovered in the three years before it added its copyright claims.”
Trade Secret Damages
The Court of Appeals reached a different conclusion with respect to damages for foreign sales under the DTSA. The Court noted that the district court had looked at the Economic Espionage Act of 1996, which made the theft of trade secrets a federal crime and contained the explicit statement that it applied to conduct outside the U.S. if an act “in furtherance of the offence” was committed in the U.S. The DTSA amended chapter 90 of that act, creating a private right of action, and did not change the language regarding acts outside the United States. Thus, the district court found that “Congress was concerned with actions taking place outside of the United States” when it passed the DTSA and the DTSA rebutted the presumption against extraterritoriality. The Court of Appeals agreed with the district court.
The Court of Appeals explained that – unlike under the Copyright Act where the presumption of extraterritoriality is not rebutted and where a different standard of causation is required – under the DTSA, the question is whether there is conduct in the United States that is “in furtherance” of the infringing sales abroad.
The Appeals Court said that the “district court found that ‘use’ of the alleged trade secrets had occurred in the United States because Hytera had advertised, promoted, and marketed products embodying the stolen trade secrets at numerous trade shows in the United States.” This US-based conduct, the Court of Appeals said, justified the district court’s award of relief based on worldwide sales of products that the court held were “furthered by” that misappropriation, “regardless of where in the world the remainder of Hytera’s illegal conduct occurred.”
While this was all good news for Motorola, the Court of Appeals did agree that the district court had “erred in closing off to Hytera” an argument to support possible apportionment of the DTSA damages. However, in a potentially even more controversial move, the Court of Appeals concluded that the error in failing to apportion the $135.8 million in compensatory damages under the DTSA was “harmless error” such that it would nevertheless uphold the award.
With respect to compensatory damages, the Court of Appeals held that the district court had improperly applied the DTSA. The Court of Appeals said that the DTSA’s statutory remedial scheme required the district court to awarded Motorola the sum of its own lost profits and Hytera’s avoided R&D … as soon as it became clear that this total was greater than the amount of Hytera’s profits recoverable through unjust enrichment, that is, under the statute, the court was required to award the larger of the two bases for the award. Nevertheless, the Court of Appeals concluded that Hytera had “forfeited” on appeal its arguments relating to Motorola’s lost profits by failing to challenge it in its opening brief to the court.
Hytera’s petition for rehearing filed on August 6, 2024, focused heavily on this issue, arguing that it was unfair to preclude Hytera from arguing against an “alternative” grounds for a damages award that was advanced on appeal when the district court previously had said it was not relying upon those alternative grounds in making the award, apparently leading Hytera to believe that it would not be an issue on appeal. Hytera argued that the Court of Appeals decision “turns waiver into a ‘gotcha’ game where the district court leads a party to believe it is not making certain findings supporting an alternative award and then the appellate court finds waiver for failing to challenge in the opening brief those very findings.” Whether Hytera can make any traction on this issue remains to be seen, but it seems unlikely that the Court of Appeals will change its views on this.
Finally, after reviewing the “particularly harmful nature” of Hytera’s conduct to the value of Motorola’s trade secrets and the “reprehensibility” of Hytera’s actions “to an extreme degree,” the Court of Appeals concluded that the punitive damages award under the DTSA did not violate due process.
This case covers a lot of ground, and we have only covered those issues that we believe are of the greatest interest here. As noted, Hytera’s petition for reahearing and rehearing en banc is pending, and we have not seen Motorola’s response. If the Court of Appeals does not take up Hytera’s request to revisit its decision, given the hundreds of millions of dollars at stake, Hytera may petition the Supreme Court for relief, providing the Supreme Court yet another opportunity to address the issue of damages in high stakes IP litigation, this time in the context of the (relatively new) DTSA.
