Court overturns Appian’s $2bn trade secrets award against Pegasystems

Software company Pegasystems has persuaded a court to throw out a decision by a jury to award rival Appian $2bn in damages following a legal battle over allegations that Pegasystems stole Appian’s trade secrets.

The Court of Appeals of Virginia overturned the damages award against Pega –  described as the largest damages verdict in Virginia’s history –  after finding that the trial court made a series of errors in a decision.

The appeals court overturned a decision by a jury in May 2022 to order Pegasystems to pay Appian $2.04 billion in damages for misappropriating trade secrets following a 7-week trial. Judge Frank K Friedman said in an opinion published yesterday that the matter should be decided by a new trial.

Pegasystems said in a statement that the damages award against it was never rational and was the result of a flawed trial. Appian said it would appeal the decision in the Supreme Court of Virginia.

Pega accused of hiring ‘spy’

Appian, a software company based in Maclean, Virginia, claims that Pega misappropriated its trade secrets, copied Appian’s user friendly features to enhance its own software and illicitly obtained trade secrets about weaknesses in Appian’s Business Process Management (BPM) platform.

Pegasystems had instructed a recruitment company to hire someone who was not “loyal” to Appian, to provide information about Appian’s product, according to a 61 page opinion published on 30 August.

Pega hired a consultant from a government contractor with access to Appian’s platform in 2012. The consultant – described by one Pega executive as “Pega’s spy” – supplied over 100 videos demonstrating the strengths and weaknesses of Appian’s products which were “cascaded” through Pega’s product management team.

The consultant also attended an all-day meeting with Pega’s senior management team at the company’s headquarters in Boston Massachusetts, including its head of product development, according to evidence heard in the case.

Pega is alleged to have made further attempts to improperly access Appian’s trade secrets after the consultant stopped working for Pega, including in 2017, when Pega employees used aliases to log onto Appian’s platform for free trials of the software.

Appian took legal action against Pega and the consultant in 2020 after learning about the operation from Pega’s former head of competitive intelligence who had joined Appian.

The company alleged that Pega had misappropriated trade secrets through its dealings with the consultant and brought further claims under the Virginia Computer Crimes Act.

Appian also claimed that Pega had updated its marketing material to reflect its competitor’s shortcomings based on information the consultant provided.

Pega’s  “Project Crush” analysed Appian’s strengths and weaknesses and created or updated marketing materials attacking Appian, it was claimed.

Trial problems

Judge Frank K Friedman rejected Pega’s claim that Appian failed to establish misappropriation of trade secrets as a matter of law.

But his opinion agreed with Pega’s claims that a series of evidential errors and missteps in instructions given to the jury required a re-trial.

The appeals court found that the trial court had wrongly relieved Appian of its “proper burden to prove causation” between the alleged misappropriation and the damages it was seeking.

The court also improperly prevented Pega from demonstrating to the jury that many of Pega’s total sales were in areas in which Appian did not compete with Pega.

Chief executive officer, Alan Trefler had intended to testify that more than 50% of Pega’s income was from products that did not compete with Appian, and that Pega’s software offers features unrelated to Appian’s trade secrets.

Pega had also intended to argue that Appian’s damages should be significantly reduced to account for sales driven by Pega’s own products and innovations in products that were not sold by Appian.

The result was a presumption that all of Pega’s sales – including product lines that did not use any information associated with Appian’s claimed trade secrets – were made as a result of Pega’s alleged misappropriation of information from Appian.

The burden wrongly shifted to Pega to prove what proportion of sales were not attributable to Appian’s trade secrets, the judge found.

Instead Appian should have been required to prove that the misappropriation of trade secrets caused the damages it was seeking.

The trial court’s ruling to exclude some of Pega’s evidence was “particularly consequential” and it could not be said that it constitutes “harmless error” given the type of evidence excluded and the ultimate award against Pega in excess of two billion dollars, the judge said.

The Virginia Court of Appeals also found that the trial court abused its discretion by excluding Pega from demonstrating its software -described by Pega “probably the most important exhibit in the case” – at the trial.

As a result Pega was deprived of giving evidence that could show the functions it was accused of stealing pre-dated its use of the consultant or were different from Appian.

The court of appeals also found that the trial court wrongly instructed the jury that the number of people with access to Appian’s platform was not relevant as to whether Appian had properly protected its trade secrets.

Pega had offered evidence that demonstrated that thousands of people had access to the alleged trade secrets under agreements that it claimed did not identify or put users on notice of trade secrets.

Skyscraper of cards

Pega said in a statement that it was pleased that the appeals court had thrown out the $2bn award which it said it never believed was rational.

“This ruling supports our view that the verdict was a result of a flawed trial on many fronts, including that we were prevented from showing that our software never adopted any Appian supposed trade secrets,” it said.

“As we’ve said from the beginning, the overturned judgment had the structural integrity of a skyscraper of cards, so it is no surprise it has collapsed. We applaud the court for seeing through Appian’s tactics to prevent the jury from hearing critical facts in this case,” it added.

Appian to appeal

Appian said in a statement that it would appeal against the verdict announced yesterday by the Virginia appeals court and would seek to “reinstate its judgement of malicious trade secret misappropriation against Pegasystems”.

Despite Pega’s claims that there were no “trade secrets” in the case, the Court of Appeals expressly held that Appian presented sufficient evidence to the jury of its trade secrets and that Appian had used reasonable measures to protect those trade secrets, the company stated.

The Virginia jury also found Pegasystems violated the Virginia Computer Crimes Act, but Pegasystems declined to appeal that ruling, meaning that the Virginia Computer Crimes Act violation by Pegasystems is confirmed and final, it said.

Christopher Winters, General Counsel of Appian said, ” we will appeal the ruling to the Supreme Court of Virginia and will seek to reinstate the verdict, and remain confident that the evidence of misappropriation and our right to corresponding damages will be properly addressed by Virginia courts”.