Monday, December 18, 2006, 12/18/2006 07:19:00 AM

Trade Secrets and Model Trains

From the Sixth Circuit, an interesting and potentially important trade secrets case, Mike's Train House, Inc. v. Lionel, LLC, 2006 WL 3627197 (6th Cir. Dec. 14, 2006). The two parties are both distributors of O-gauge model trains. Both contract with third parties for the manufacture of their trains, which, at least according to the court, are extraordinarily intricate.

Plaintiff, MTH, contended that defendant, Lionel, used drawings containing its trade secrets created by a Korean subcontractor for MTH. A jury trial resulted in a damages verdict in favor of MTH for over $40 million.

On appeal, Lionel contested the trial court's refusal to grant it judgment as a matter of law, as well as a new trial motion based on the trial court's refusal to exclude certain expert testimony and a claim that certain damages were double-counting.

The court affirmed the refusal to grant Lionel judgment as a matter of law. Lionel's argument on that aspect of its appeal was that MTH failed to specify which portions of the alleged misappropriated information were trade secrets and which were in the public domain. The court refused to bite on that issue holding that the engineering drawings at issue could contain a mixture of secret information and non-secret information, and, so long they contained a unique mixture of both protected and unprotected material, "a plaintiff should not be obligated to identify which components of the protected material is secret."

Plaintiff fared less well with respect to the testimony of its expert witness. MTH offered a professor of mechanical engineering who offered his opinion that a substantial number of the Lionel drawings were copied from MTH drawings. To do this, he created a 21-criteria scoring test for determining whether a drawing was copied. The problem here was that under Daubert this test had not been peer reviewed and was created with a degree of arbitrariness. Moreover, the experts lack of knowledge regarding the particular industry for Korean engineering drawings created an "obvious flaw" in his methodology.

On the issue of damages, the court found double-counting between lost profits awarded to MTH and unjust enrichment to Lionel ordered to be disgorged.

For those reasons, the court of appeals ordered a new trial.

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