On July 30, 2024, the Court of Appeals of Virginia overturned a two billion dollar (yes, billion with a ‘b’) jury verdict in the Appian v. Pegasystems trade secret lawsuit. Although the Court of Appeals upheld the verdict of misappropriation of trade secrets, it sent the case back to the trial court for a new trial on both liability and damages due to procedural errors identified by the Court of Appeals. The 60-page ruling is remarkable for how seemingly unremarkable it actually is. The trial court made clear errors of law, and the Court of Appeals reversed one of the largest judgments in Virginia history.

The $2 Billion Dollar Verdict

Appian and Pegasystems are competitors in the business process management (BPM) software space. In Pegasystems’ words, this type of software “enables companies to create customizable apps that automate business operations.” Appian accused Pegasystems of misappropriating a number of trade secrets associated with Appian’s BPM software by, among other things, hiring a “spy” with insider knowledge of Appian’s software and having its employees surreptitiously access demos of Appian’s software.

Pegasystems’ head of competitive intelligence, John Petronio, oversaw some of these efforts and later joined Appian, where he disclosed Pegasystems’ actions. Appian then sued Pegasystems in state court in Virginia in 2020. In the spring of 2022, after a seven-week trial, the jury returned a verdict in favor of Appian and awarded $2 billion in damages, which the trial court upheld.

Pegasystems appealed, challenging the jury’s finding that Appian has trade secrets and that any such trade secrets were misappropriated. It also challenged numerous evidentiary rulings and the unjust enrichment damages jury instruction. The appealed garnered four amicus briefs, three of which were directed to the damages jury instruction.

The filing of three amicus briefs on a state court intermediate appeal is surprising and indicates that the jury instruction on damages touched a nerve in the trade secret community. Two of the amicus briefs argued that the instruction was wrong because it improperly shifted the burden of proof on causation to Pegasystems, when the burden should have been on Appian. The third amicus brief on damages took the opposite view, but the author had an axe to grind because he wrote the portion of the Restatement (Third) of Unfair Competition on which the trial court relied to erroneously shift the burden of proof.

$2 Billion Award Reversed on Appeal

The Court of Appeals upheld the jury’s finding that Appian misappropriated trade secrets of Pegasystems, but reversed the damages award and remanded the case for a new trial on damages because of the trial court’ numerous procedural errors.

This is the damages instruction that the trial court read to the jury:

For unjust enrichment, Appian is entitled to recover Pegasystems’ net profits. Appian has the burden of establishing by a greater weight of the evidence Pegasystems’ sales; Pegasystems has the burden of establishing by greater weight of the evidence any portion of the sales not attributable to the trade secret or trade secrets and any expenses to be deducted in determining net profits.

This instruction relieved Appian of having to prove that Pegasystems’ profits resulted from the theft of trade secrets. The Court of Appeal’s reversal of the trial court on this point is not terribly surprising given the clear and contrary language of the Virginia Uniform Trade Secrets Act (“VUTSA”) and more generally applicable principles of law.

The Court of Appeals said:

While forty-eight other states have enacted the Uniform Trade Secrets Act (UTSA), the model uniform act does not speak in terms of the complainant “proving” damages. Virginia expressly codified this language clarifying that the burden to “prove” damages is on the complainant. Where a legislative body deviates from a model, uniform act to add language, we effectuate this “deliberate and intentional” choice.

The Court of Appeals went on to say that even if VUTSA did not clearly require the plaintiff to prove causation, which it does, Virginia law nevertheless requires a plaintiff to prove causation for damages. See Banks v. Mario Indus., 274 Va. 438, 455 (2007) (“the burden of proving with reasonable certainty the amount of damages and the cause from which they resulted” falls on the plaintiff). Therefore, whether under the language of VUTSA or common law, the jury instruction was wrong.

The Court of Appeals also explained how the trial court incorrectly relied on both the Restatement (Third) of Unfair Competition, § 45 cmt. f and one case from Washington State. With respect to the Restatement, the trial court relied solely on the statement in comment f that the “plaintiff has the burden of establishing the defendant’s sales” but failed to consider the prior clause stating that damages are measured from “sales attributable to the use of the trade secret.” The Court of Appeals explained that, by referring to “sales attributable to the use of the trade secret.”, the draftsmen were requiring proof that the sales were the result of the theft of trade secrets.

The Court of Appeals then soundly rejected the trial court’s reliance on Petters v. Williamson & Assocs., Inc., 210 P.3d 1048 (Wash. Ct. App. 2009), which itself relied on § 45, cmt f of the Restatement. Contrary to the trial court’s analysis, the Petters case “did not absolve plaintiff of the initial burden of proving sales causation” and the Washington Court of Appeals later “clarified and emphasized that Petters should not be read to relieve a plaintiff of its burden of proving proximate cause.” In fact, that later case, ADA Motors, rejected an instruction nearly identical to the one that the trial court gave in favor of Appian because it would have allowed the plaintiff to prove damages in the absence of proximate cause. See ADA Motors, Inc. v. Butler, 432 P.3d 445, 449-51 (Wash. Ct. App. 2018).

Compounding the trial court’s erroneous burden shifting, it then precluded Pegasystems from introducing evidence necessary to satisfy the (erroneous) burden that the trial court placed on Pegasystems. The trial court should have permitted Pegasystems to present evidence to the jury demonstrating that the revenues from its product were unrelated to Appian’s trade secrets. This was the only way that Pegasystems could have satisfied the burden imposed on it, but the trial court refused to let it do so.

Errors Requiring A New Trial On Liability

In addition to the errors requiring a new trial on damages, the trial court committed errors requiring a new trial on liability. In a case focused on software, one would think that the competing software products would be the first exhibits introduced. Pegasystems certainly tried to introduce its software into evidence, but the trial court did not allow it for dubious technical reasons that the Court of Appeals rejected.

The trial court’s exclusion of Pegasystems’ software from evidence was particularly unfair to Pegasystems because Appian then argued to the jury in closing arguments that Pegasystems failed to provide any evidence (i.e. Pegasystems’ software) that it did not steal software testimony beyond the say-so of its witnesses. Appian was thus allowed to punch away at a defenseless defendant.

The trial court also excluded evidence related to the number of people with access to Appian’s purported trade secrets and issued a jury instruction that such evidence was “irrelevant.” Although the number of people access to the trade secrets is not dispositive of the issue of whether Appian took reasonable measure to protect its trade secrets, it is unquestionably a relevant consideration.

According to the Court of Appeals, “who is given access to such information, and in what numbers, are among the most important factors in assessing both whether the information was generally available and the reasonableness of efforts to maintain its secrecy.” During a new trial, Pegasystems will be able to present evidence to the jury about the numbers of individuals with access to the trade secrets and the nature of their access. If Pegasystems is able to show that many people had access to Appian’s software without expectations of confidentiality, they may be able to defeat the trade secret claim.

Final Thoughts And What’s Next

The Court of Appeal’s decision appears to be the right outcome. The decision does not make any sweeping changes to Virginia’s trade secret law. On the issue of damages, the decision confirms what most trade secret lawyers already knew: plaintiffs have the burden to prove damages caused by the misappropriation. This burden is not unique to trade secret law and exists across the IP world. For example, copyright plaintiffs have the burden to prove damages caused by the infringement, at which point the burden then shifts to the infringer to prove deductions and apportionment. That is the same process codified by VUTSA, and trade secret laws across the country.

We will have to wait to see if Appian appeals this decision to the Supreme Court of Virginia or accepts the ruling and heads back to the trial court. Of note, in September 2023, Appian announced that it secured a $500 million dollar judgment preservation policy, guaranteeing that it receives at least $500 million dollars if, after all appeals, it recovers less than that amount. The policy does not cover settlement, so Appian will have no choice but to continue to fight in court to reach a final resolution on the merits.

We will continue to monitor this case and report on future developments.