Cartel Asset Mgmt. v. Ocwen Financial Corp.

FILED
United States Court of Appeals
Tenth Circuit
UNITED STATES CO URT O F APPEALS
September 18, 2007
TENTH CIRCUIT Elisabeth A. Shumaker
Clerk of Court
CARTEL ASSET M ANAGEM ENT, a
Colorado corporation,
Plaintiff - Appellant-
Cross-Appellee,
v. Nos. 04-1502 & 04-1517
D. Colo.
O CW E N FIN A N CIA L (D.C. No. 01-F-1644 (CBS))
CORPO RATION, a Florida
corporation; O CWE N TEC HN OLOGY
XCHANGE, a division of Ocwen
Financial Corporation; OC W EN
FEDERAL BANK FSB, a subsidiary
of Ocwen Financial Corporation,
Defendants - Appellees-
Cross-Appellants.
OR D ER AND JUDGM ENT *
Before M U RPH Y, A ND ER SO N, and O’BRIEN, Circuit Judges.
Cartel Asset M anagement (“Cartel”) filed suit against three Ocwen entities,
Ocwen Financial Corporation (“Ocwen Financial), Ocwen Federal Bank FSB (the
*
This order and judgment is not binding precedent except under the
doctrines of law of the case, res judicata, and collateral estoppel. It may be cited,
however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th
Cir. R. 32.1.
“Bank”), and Ocwen Technology Exchange, Inc. (“Ocwen Technology”). Cartel
alleged each entity misappropriated trade secrets and O cwen Technology also
fraudulently induced Cartel to enter into a contract and then breached the
contract. 1 After a seven-day trial, the jury returned a verdict for Cartel on the
misappropriation claim against the Bank and a verdict against Ocwen Technology
for breach of contract and fraudulent inducement. On the misappropriation of
trade secrets claim, the jury determined Cartel’s actual damages amounted to
$4,900,000 and aw arded punitive damages in the amount of $3,900,000. The jury
concluded Ocwen Technology owed Cartel only $1 in nominal damages for
breach of contract, but awarded actual damages of $260,000 and punitive damages
of $260,000 on Cartel’s fraudulent inducement claim.
Post-trial, the district court determined it should have stricken the
testimony of Cartel’s damages expert because the testimony was based on
speculation. As a result, the trial court ordered a new trial on the issue of
damages for all claims and ordered the parties to submit briefs, prior to a
scheduling conference, discussing any evidence that may support an alternative
damages award. Before the date of the scheduling conference, however, the trial
court issued an Order On Pending M otions. The court rejected post-trial motions
1
Cartel also claimed unjust enrichment but this claim was dismissed by the
district court at trial. The court determined the damages for unjust enrichment
were duplicative of the damages sought for misappropriation of trade secrets.
Cartel does not challenge the dismissal of its unjust enrichment claim on appeal.
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by the Bank and Ocwen Technology claiming a new trial should also include
liability issues. It further denied Cartel’s motion for reconsideration of the order
granting a new trial on damages. Instead, based on the alternative damages
theories and the evidence presented by the parties, the trial court reinstated the
breach of contract and fraudulent inducement damages but determined the
admissible evidence did not support the proposed damages theory for
misappropriation of trade secrets. As a result, the court, sua sponte, ordered
Cartel to receive only nominal actual damages of $1 and punitive damages of $1
on its misappropriation claim. Given these rulings, the trial court concluded there
was no basis for a new trial.
The court also ordered the Bank to pay Cartel’s costs and $170,000 in
attorneys’ fees on the misappropriation claim and ordered Ocwen Technology to
pay Cartel’s costs as to its breach of contract and fraudulent inducement claims.
However, the court ordered Cartel to pay Ocwen Financial’s costs in defending
Cartel’s unsuccessful claim of misappropriation of trade secrets. The court
entered a final amended judgment incorporating its determinations on November
4, 2004.
On appeal, Cartel challenges the district court’s reduction of the trade
secret misappropriation award. First, Cartel contends the absence of an
opportunity for a new trial on damages constitutes a forced remittitur in violation
of its Seventh Amendment right to a jury trial. Cartel also maintains the damages
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award for misappropriation of trade secrets was supported by substantial
evidence, including the testimony of its expert. The Bank and Ocwen Technology
filed a cross-appeal, challenging the trial court’s award of attorneys’ fees against
the Bank and the entry of judgment in favor of Cartel on its fraudulent
inducement claim.
I. BACKGROUND
A. The Parties
1. Cartel Asset M anagement
Cartel specializes in providing “broker price opinions” (BPO ) 2 and
appraisal valuations of real property, primarily residential, for lenders throughout
the country. A BPO is a property valuation performed by a real estate
professional, either a broker or an agent. The agent drives by the property,
photographs it, examines public record data, identifies values of comparable
residential property, and provides a written estimate of value for the subject
property.
Cartel was formed in 1993 in response to the sale of large “pools” or
portfolios of nonperforming 3 and foreclosed loans at auction, ranging from 6
2
A BPO is also known as a “comparative market analysis” (CM A). (R. Vol.
8 at 2873.)
3
A nonperforming loan is a loan that is delinquent in payment for ninety
days or more. The goal is to turn the loan into a performing loan. However, if
this effort is unsuccessful, the loan goes into foreclosure and becomes a “real
estate owned” (REO) loan. (R. Vol. 8 at 2872.) At that time, another BPO is
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loans to 700 loans in a pool. (R. Vol. 8 at 2620-21.) Because of the age of the
loans and changing local economic environments, the original loan values were
not necessarily related to the present value of the pool property. Potential bidders
required current property valuations to determine an appropriate cost for the loans
in the pool. Due to the short time period between the announcement of the sale
and the date of the loan pool auctions, potential bidders needed these current
valuations quickly. To meet this need, over the period of five or six years, Cartel
developed a national list of real estate agents and brokers willing to perform a
BPO within a stated amount of time for a certain fee. Potential bidders, such as
banks, would send Cartel the identities of the properties to be valuated. Cartel
would then contact a local broker in the area of each property to perform the
BPO. The realtor would return the BPO to Cartel, and after a review for quality,
Cartel would send the completed BPO to the potential bidder. According to
W alter Coats, the CEO and President of Cartel, Cartel paid the local agents
approximately $50 to provide the BPO and charged most of its clients $95 to $105
per B PO .
2. The Ocwen Entities
a. Ocwen Financial Corporation
Ocwen Financial Corporation is a holding company based in Florida. It is
required and the agent performing the REO property evaluation is likely to get the
listing on the property.
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the parent company to the two other defendants in this case, the Bank and Ocwen
Technology. The Ocwen entities are primarily operated by brothers W illiam and
John Erbey. W illiam Erbey was chief executive officer and chairman of the Bank
at all relevant times. The Bank’s valuation department purchased loan pools
requiring updated BPO s. The bulk of its BPO s were purchased through national
vendors, such as Cartel, from 1993 through 1999. In 1995, the Bank created a
computer system called Order Tracking, in which it kept names of its vendors and
follow ed the progress of its orders.
In mid-1999, the B ank created a new division, Ocw en Realty Advisors
(O cwen Advisors). Bill Krueger, formerly with the Bank’s valuation department,
was appointed the Director of Ocwen Advisors and was tasked with reorganizing
the department. The goal was to transition the valuation department from its
status as a historical cost center, providing support to its acquisition department,
to a division providing services to clients for a fee.
b. Ocwen Technology
Ocwen Technology was formed to develop and implement an e-commerce
platform, REALTrans, to allow seamless financial transactions between customers
and vendors. As explained by one national provider,
“REALTrans is like an electronic pipe. . . . [O ]n one side w ere
vendors like myself, BPO providers, many different types of vendors
in residential real estate services, flood companies, tax companies . .
. . On the other side of the pipe are all the banks, the lenders. . . .
REALTrans’s function was to help facilitate communications
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between banks w ho would send orders, and vendors w ho would
complete them. And REALTrans would take a fee for making that
transaction happen.”
(R. Vol. 7 at 2272.) REALTrans was announced to the Bank’s national vendors
in late 1998 and implemented in 1999. W illiam Erbey was chairman of the board
of O cw en Technology; John Erbey was the chief executive officer.
B. History of Business Dealings
W hen Cartel was formed in 1993, the national sale of BPOs was a fledgling
industry. Coats, along with two other national BPO providers, explained that the
development of a database of brokers and agents sufficient to provide a national
service was a time-consuming and expensive process. Prior to the advent of
extensive internet listings, a national agent list was generated through review of
telephone books and industry listings. Even with the available resources on the
internet in 2001 to 2003, finding the name of an agent or broker was only part of
the process. Further steps in the process required calls to the individual realty
professionals to determine their willingness to perform the service at a certain
price, eventual use of the individual realtor, and finally, a review and rating of the
timing and quality of the realtor’s work. If the agent was timely and accurate, the
agent was designated as “use.” If the agent’s work was not satisfactory, the
designation was “prevent use.” (R. Vol. 9 at 2984-85.) As described by one
national provider, once developed, the agent list “is the lifeblood of [the]
business.” (R. Vol. 7 at 2308.)
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Cartel began doing business with the Bank’s valuation department shortly
after Cartel’s inception. As the purchaser of loan pools, the Bank eventually
ordered thousands of BPO s from Cartel and other national providers, supplying
the national vendors with its own forms for completion of the BPOs. The form
included a space identifying the realtor completing the B PO, the realtor’s
telephone number to be used in the event the Bank needed to clarify any
information on the form, and the realtor’s professional license number. Several
witnesses testified the understanding between Cartel and the Bank was that the
names of Cartel’s brokers and agents were Cartel’s proprietary information. 4
Upon the return of the BPOs to the Bank, the Bank’s team of review ers w ould
analyze the BPO s and other information to determine a value on the loan pool or
portfolio.
Commencing in 1995, the Bank’s Order Tracking system contained the
names of its national BPO vendors and its retail BPO providers used primarily for
Bank-owned REO properties. 5 By 1997, the Bank ordered approximately 94% of
its residential BPOs from national providers. These orders w ould be identified in
the Order Tracking system under the vendor’s name. At that point, Cartel
4
Throughout trial, however, the Bank witnesses contended the Bank
unconditionally purchased not only the BPO valuation, but the broker information
as w ell.
5
A “retail” BPO provider is an agent or broker contacted directly by the
Bank to perform a BPO as an initial service and to be the listing agent in the
event of a foreclosure sale.
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received the lion’s share of the Bank’s B PO business, approximately 35% of all
national BPO orders. 6 For example, in the fourth quarter of 1998, the Bank
ordered 16,285 BPO s. Only 417 were ordered from retail providers, while 15,868
were ordered from national providers. Cartel received 7,042 of the Bank’s BPO
orders in that quarter. (R. Vol. 10 at 3573, 3589.)
In late 1998, Ocwen Technology was preparing to debut its REALTrans
system. The product was the foundation for Ocwen’s overall corporate objective
to increase profits through the use of e-commerce. Prior to REALTrans, the Bank
communicated with its vendors by e-mail, telephone and fax. The plan was to
integrate the Bank’s Order Tracking system and O cwen Technology’s REALTrans
program, eventually allowing the Bank to create an order in Order Tracking,
assign a vendor and, with the press of a button, engage the REALTrans
capabilities. At the other end, the vendor would log on to REALTrans to receive
an assignment identifying the product, price and deadlines. Accordingly, in late
1998 and early 1999, the Bank and Ocwen Technology gathered the national
providers to explain the process and encourage their participation. Because
REALTrans was a desktop system (it later became a web application), the Bank
asked the national providers to have their agents sign up on the new product; they
would train the agents and the agents could send their BPOs directly to the Bank.
6
Due to the volume, Cartel’s pricing was on the low end of the range
through the year 2000. It charged the Bank $75 per BPO , while most national
vendors’ charge per BPO was between $75 and $100.
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Several of the national providers, including Cartel, expressed concern that
once their agent information was in the system, the Bank and other lenders w ould
have direct access to their realtor lists and put them out of business. At a
December 1998 meeting, W illiam Erbey assured one of the national BPO
providers that the Bank was not in the business of providing BPO s or competing
with the national providers. A t a January 1999 meeting, Krueger and his
assistant, Dave Babbitt, told Cartel and the other attending national BPO
providers that the Bank would not take the agent databases because they were not
getting into the BPO business.
Cartel was the only national provider willing to join Ocwen’s system. Due
to its concerns regarding its database, Cartel negotiated a confidentiality
agreement with Ocwen Technology to be included in the contract for the use of
REALTrans. During these negotiations, Coats and Babbitt worked out a system
whereby Cartel’s agents would work through a Cartel portal to REALTrans rather
than sign up directly on the Ocwen Technology system. Krueger also promised
Coats that if he signed on to REALTrans, he would eventually receive 100% of
the Bank’s national BPO provider business. The contract was executed in M arch
1999. As soon as the agreement was signed, Cartel began working with Ocwen
Tecnology to integrate their systems. Because of problems in the REALTrans
connections between Cartel and the Bank, Cartel spent approximately $260,000
on retooling the REALTrans program between 1999 and 2001.
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In the meantime, the Bank’s business strategy was undergoing a drastic
change. At least part of the impetus for the change was the overall corporate plan
to capitalize on the efficiencies inherent in the use of the internet and the
technology provided by Ocwen Technology. In addition, the loan acquisition
business was producing diminishing returns. During the negotiations with Cartel
to sign on to REALTrans, Krueger, then manager of the Bank’s property valuation
department, joined with Babbitt to present a plan to John and W illiam Erbey.
Krueger and Babbitt proposed the Bank develop an “in-house BPO shop,”
eventually eliminating the national providers. (R. Vol. at 3043.) The Erbeys
apparently liked the idea because during the first quarter of 1999, the Bank
decided to transition out of the loan acquisition business and become a loan
services provider. Eventually, in August 1999, the Bank replaced the valuation
department with a new division, Ocwen Realty Advisors, and placed Krueger at
its head.
Prior to the creation of Ocwen Advisors, in June 1999, Krueger spoke with
Ann Gilbert who had been working as one of the Bank’s commercial real estate
analysts (a loan pool reviewer) since 1998. Krueger discussed the possibility of
Gilbert moving to a different position because her current job would be
eliminated in the coming business transition. Gilbert became the “manager of
vendor management” for Ocwen Advisors. H er job involved vendor recruitment,
approving vendors for Ocw en Advisors’ use, and vendor file maintenance. In
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other words, Gilbert was charged with the development and growth of a national
retail vendor network to perform BPOs directly for the Bank — essentially
creating the same resource used by the national vendors — to bypass the costs of
the middleman. She began by reviewing the vendor list in the Bank’s Order
Tracking system. M ost of those were real estate brokers who performed detailed
property analysis for the REO department. She contacted many of these agents
but most indicated they were not interested in performing any services, such as an
initial BPO , which did not result in receiving a subsequent real estate listing.
Prior to her new position at Ocwen Advisors, Gilbert testified there had
been “some efforts” in the company to take agent names off BPOs in the Bank’s
possession and contact those agents directly, which practice continued through the
time she was with Ocwen Advisors. She testified in the early fall of 1999,
another national vendor, M arket Intelligence, was given a large order. After the
orders were received, Ocw en Advisors “started targeting M arket Intelligence’s
brokers.” (R. Vol. 7 at 2380-81.) In early November 1999, Gilbert hired a full-
time assistant, Kelie M atthew s, whose sole responsibility was to recruit vendors
to perform BPO s. By early 2000, M atthews reported she had exhausted all her
major avenues of recruitment, including the internet, without much success. 7
7
In January 2000, Gilbert began receiving her paychecks from Ocwen
Technology. Ocwen Technology was also intended to start paying the vendors at
that time, but the lack of synchronization between the Bank’s and Ocwen
Technology’s billing systems prevented payment from reaching the vendors.
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Gilbert worked with Coats as a national vendor and she understood Cartel
eventually would be Ocwen Advisors’ lead national vendor. In February 2000,
Gilbert approached Krueger to suggest the Bank purchase Cartel’s agent database.
Krueger agreed she should pursue the idea but instructed her not to tell Coats that
Ocwen Advisors was building its own retail agent database. Gilbert contacted
Coats who expressed interest in the proposition. Although there were several
subsequent meetings between Coats and Krueger, Krueger concluded the purchase
would be too expensive.
In M arch 2000, Kreuger called all the managers into his office to inform
them he w as going to initiate a contest for the staff. He planned to instruct the
staff to pull the BPO s provided by national vendors, including Cartel. The staff
were to copy the names and telephone numbers of the agents, create spreadsheets
and forward the spreadsheets to Gilbert or M atthews. Gilbert testified she lodged
an objection to Krueger because she knew most of the targeted BPOs belonged to
Cartel. She told Krueger she disapproved of copying the agents’ names w hile
Ocwen Advisors w ere currently in negotiations w ith Cartel for the purchase of its
database.
Despite Gilbert’s objection, Krueger issued an e-mail to everyone “on the
floor.” (R. Vol. 7 at 2371.) The e-mail promised a gift certificate for a free lunch
at a local restaurant for the employee with the largest list. After the spreadsheets
were sent to Gilbert and M atthews, M atthews eliminated duplicate names and
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divided the remainder among the members of Gilbert’s staff. The staff then
telephoned the agents to inquire whether the agent was interested in providing
direct BPO services for Ocwen Advisors. After receiving and approving the
resulting applications, the agents were sent a vendor identification and
information regarding fees. A copy of this information was sent to Ocwen
Technology. The vendors were also informed that the preferred mode of
comm unication would be REALTrans and they should expect a representative
from Ocwen Technology to contact them. Gilbert testified the staff continued to
pull names off Cartel’s BPO s until her employment with Ocwen Advisors was
terminated in November 2000.
Gilbert created reports of the number of retail vendors added each month to
the Order Tracking system to keep Kreuger apprised of her progress. The reports
indicated Ocwen Advisors added fifty-four vendors in January 2000 and
approximately one hundred per month through June 2000. Nonetheless, Ocwen
Advisors’ database provided in pre-trial discovery reflected only zero to fourteen
vendors were added each of those months. Gilbert testified the data could be
skewed either because of the Bank’s common practice to “back fill” the names of
the new vendors to fill in numbers formerly assigned to vendors with which they
no longer did business or because the information had been improperly pulled
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from the database. 8 (R. Vol. 7 at 2359.)
In 2000, two circumstances began to affect Cartel’s ability to return BPO
orders in a timely fashion. The first involved the use of the REALTrans system.
Unfortunately, the synchronization between Cartel’s system and REALTrans did
not develop smoothly. Orders “were getting lost in cyberspace.” (R. Vol. 7 at
2363.) In addition, Cartel was not permitted to turn down any order issued
through REALTrans. Second, Ocwen Advisors w as in the process of building its
own retail vendor network. Because it was easier to find agents in highly
populated areas, Ocwen filled those orders with its own agents on REALTrans
while it sent Cartel fewer, more difficult orders. Gilbert discussed these issues
with Coats during weekly telephone meetings.
During the summer of 2000, Coats learned Ocwen Advisors may have taken
agents’ names from Cartel’s BPOs. He received a call from several of his agents
stating an Ocwen Advisors’ representative had telephoned and asked if they
would work directly for Ocwen. They asked if Coats had given Ocwen their
names. Indeed, Coats got a call personally from an O cwen A dvisors’
representative w ho asked if C oats wanted to be on Ocwen Advisors’ database. H e
replied he w as already listed as a national provider. Coats then contacted Gilbert
to inform her he believed Ocwen was building a retail vendor network and was
8
These statements were vigorously denied by the O cwen entities’
witnesses at trial.
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targeting his brokers. Gilbert relayed this information to Krueger who instructed
her: “Don’t tell them what we’re doing.” (R . Vol. 7 at 2380.) Gilbert, Babbitt
and Krueger all denied they were taking names off the broker database when
asked directly by Coats.
In August 2000, an Ocwen Technology employee sent Coats a copy of the
“contest” e-mail issued by Krueger in M arch 2000. Coats telephoned Gilbert to
protest and directed her attention to the confidentiality agreement with Ocwen
Technology. At that time, Gilbert informed Coats that Ocwen Advisors was
building its own database. 9 Coats also met with Rita Holland, an Ocwen
Technology supervisor, to protest the direct use of Cartel’s agents. In addition,
he spoke with Krueger and Babbitt. In September 2000, Krueger contacted Coats
to see if he would be interested in selling Cartel. Negotiations continued into
December 2000, at which time Ocwen Advisors decided not to purchase the
business. At that point, Coats sent a letter to each Erbey brother and Krueger
stating he believed the Ocwen entities had stolen Cartel’s agent names in breach
9
W illiam Erbey explained the difference between the Bank’s and Ocwen
Technology’s BPO business. He identified two kinds of BPOs. One type is a
“review” BPO where appraisers on staff evaluate the quality of the BPO . The
Bank has been in the business of selling review BPO s to W all Street firms since
mid-2000. As of 2004, the Bank would pay an agent or broker approximately $45
to $50 to do the B PO and sell the reviewed BPO for approximately $150. In
contrast, the other type of BPO is “unreviewed.” The unreviewed BPO is the
equivalent of the Cartel product and sells for approximately $70. At trial, Erbey
was asked if “any [Ocwen Technology] entity [had] been in the business of doing
BPOs.” Erbey responded “yes.” (R. Vol. 9 at 3203.)
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of the confidentiality agreement. By the end of the second quarter of 2001,
Ocwen Advisors completely ceased ordering BPOs from Cartel. 10
Cartel filed suit against the Ocwen entities on August 21, 2001. After
extensive pre-trial discovery and numerous pre-trial motions, the case went to
trial. At trial, Cartel introduced a comparison of Ocwen Advisors’ database,
provided in discovery, with its own. Ocwen’s database contained approximately
7,000 names of brokers entered after M arch 2000, the date of the contest. Of
those 7,000, approximately 3,900 names were marked “prevent use.” (R . Vol. 8
at 2695.) Of the remaining 3,100 names designated “use,” approximately 1,320
were identical to the Cartel database. (Id.) Cartel also introduced the testimony
of Christina Teahan as Cartel’s BPO expert and James TenBrook as its damages
expert. Before and during trial, the O cw en entities objected to the expert
testimony. As to Teahan, Ocwen claimed the jury was not allowed to hear her
testimony since the magistrate had ruled she was unqualified to offer such
opinions. Ocwen objected to TenBrook’s testimony alleging it was unreliable and
based solely on speculation. The district court overruled these objections.
As noted earlier, the jury returned a verdict for Cartel against the Bank and
Ocw en Technology. Following vigorous post-trial motions, the district court
10
In 1999, the Bank ordered an average of 3,766 BPO s from Cartel per
quarter. In the first quarter of 2000, the Bank ordered 3,365 BPO s. During the
remainder of 2000, the Bank ordered an average of 1,732 BPO s from Cartel per
quarter. In 2001, the Bank ordered 786 BPO s from Cartel in the first quarter and
six in the second quarter.
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ultimately determined it had incorrectly allowed TenBrook’s testimony and
reduced Cartel’s recovery based on the Bank’s misappropriation of trade secrets
to $1 in actual and $1 in punitive damages. Cartel’s timely appeal and the Ocwen
entities’ timely cross-appeal followed.
II. Cartel’s Direct Appeal — No. 04-1502
A. Damages
The Colorado Uniform Trade Secrets Act provides for damages for
misappropriation of a trade secret as follows: “Damages [for misappropriation of
trade secrets] may include both the actual loss caused by misappropriation and the
unjust enrichment caused by misappropriation that is not taken into account in
computing actual loss.” Col. Rev. Stat. § 7-74-104(a). “The Colorado Uniform
Trade Secrets Act permits plaintiff to recover for both compensatory damages and
the defendant’s profits from the misappropriation.” Sonoco Products Co. v.
Johnson, 23 P.3d 1287, 1289 (Colo. App. 2001). 11
11
Under the Act, “‘trade secret’ means the whole or any portion or phase of
any scientific or technical information, design, process, procedure, formula,
improvement, confidential business or financial information, listing of names,
addresses, or telephone numbers, or other information relating to any business or
profession which is secret and of value. To be a ‘trade secret’ the owner thereof
must have taken measures to prevent the secret from becoming available to
persons other than those selected by the owner to have access thereto for limited
purposes.”
Colo. Rev. Stat. § 7-74-102(2) defines misappropriation in relevant part as:
(b) Disclosure or use of a trade secret of another without express or
implied consent by a person who:
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Cartel attempted to show damages in the form of the Bank’s unjust
enrichment as a result of its misappropriation. On appeal, Cartel alleges it
showed the Bank benefitted from the misappropriation in two ways. First, by
misappropriating Cartel’s trade secrets, the Bank was able to side-step the lengthy
and time consuming process of locating brokers w ho would be willing and able to
provide BPO s, thereby giving the Bank a head start in competing in the national
BPO vendor market. Second, Cartel alleges the Bank was able to decrease its use
of national BPO vendors and increase its use of individual brokers.
Under Colorado law, “damages based on mere speculation and conjecture
are not allowed. . . . Damages are not recoverable for losses beyond an amount
that a plaintiff can establish with reasonable certainty by a preponderance of the
evidence. Thus, the plaintiff must submit substantial evidence, which together
with reasonable inferences to be drawn therefrom provides a reasonable basis for
computation of damages.” Sonoco Prod. Co., 23 P.3d at 1289 (quotations
(I) Used improper means to acquire knowledge of the trade
secret; or
(II) A t the time of disclosure or use, knew or had reason to
know that such person’s know ledge of the trade secret was:
(A) Derived from or through a person who had utilized
improper means to acquire it;
(B) Acquired under circumstances giving rise to a duty
to maintain its secrecy or limit its use; or
(C) Derived from or through a person who owed a duty
to the person seeking relief to maintain its secrecy or
limit its use . . . .
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omitted). A party “must establish with reasonable, but not necessarily
mathematical, certainty both the fact of the injury and the amount of the loss. . . .
The damages awarded must be traceable to and [must be] the direct result of the
wrong to be redressed.” Life Care Ctrs. of Am., Inc. v. East Hampden Assoc’s
Ltd. P’ship., 903 P.2d 1180, 1186 (Colo. App. 1995) (quotation omitted). In
other words, Cartel must show the Bank benefitted from the misappropriation of
Cartel’s information and also establish the amount of the benefit to a reasonable
certainty. The district court determined Cartel failed to prove both factors.
1. Benefitting from M isappropriation
In its post-trial discussion regarding the admissibility of Cartel’s expert
witness on damages, the district court identified a “fatal flaw” in Cartel’s case.
(R. Vol. 3 at 1080.) The trial court observed:
Cartel simply failed to show that the Bank used any identifying
broker information, i.e. a broker’s name and telephone number
contained in any single BPO supplied by Cartel, by, for example,
bypassing Cartel by contacting that broker and obtaining a BPO from
him or her and selling it to a third party, thereby benefitting the Bank
through that use of that particular trade secret. Neither Cartel’s
expert nor any other witness made a connection between any
information gleaned from a Cartel BPO to a subsequent contact with
a broker by the Bank or a subsequent purchase of a BPO from any
such broker by the Bank.
(Id.) The district court continued:
[I]t does not follow (as a matter of law ) that Cartel can claim
generally any percentage of the Bank’s B PO business or profits
untethered to the misuse of identifiable broker information provided
to defendants by Cartel. While the number of brokers appearing in
both Cartel’s and the Bank’s databases appears to be as many as
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1356 (and Cartel’s counsel intimated there was more), such overlap
would have been the starting point for discerning any legitimate basis
for damages. The contention that the taking of those trade secrets
was somehow instrumental in the formation of the Bank’s new BPO
database consisting of 62,000 names justifying damages to Cartel of
all benefits derived from that database lacks a proper tie between
trade secrets misappropriated and benefits derived therefrom.
(Id. at 1080-81.)
In its post-trial brief responding to the district court’s discussion, Cartel
pointed out that Ann Gilbert specifically testified names were taken from the
Cartel database and placed into the Ocwen Advisors’ database. Coats testified he
was personally contacted and several of the brokers appearing on both databases
no longer performed work through Cartel for the Bank after the contest. Finally,
Cartel addressed the district court’s misapprehension that the Bank’s database
contained 62,000 names, correctly citing the amount at 7,000. It asserted the
overlap between the Bank’s “use” brokers, (3,000 names), and those identical to
Cartel’s list, (1,320 names), was a significant misappropriation. Cartel argued
this evidence, together, was sufficient for the jury to infer the Bank used Cartel’s
information to purchase BPOs for a profit.
The district court rejected these argument in its Final Order, stating it did
“not deem any lay witness testimony or exhibit to be significant or credible
enough to justify further reconsideration as to that claim.” (R. Vol. 6 at 1993.)
Although the court’s post-trial discussion analyzed TenBrook’s testimony
pursuant to gatekeeper role under Daubert v. M errell Dow Pharm aceuticals, 509
-21-
U.S. 579 (1993), the district court’s ultimate ruling constitutes an entry of
judgment as a matter of law that Cartel failed to provide sufficient evidence the
Bank received any gain from its misappropriation. Thus, this aspect of the court’s
ruling addressed the traceability of damages (causation), not the whether the
amount w as reasonably established by expert testimony.
W e review de novo the trial court’s determination Cartel’s misappropriation
damages failed as a matter of law. See Reeves v. Sanderson Plum bing Prod’s.
Inc., 530 U.S. 133, 150 (2000). Our review encompasses all of the evidence in
the record, drawing all reasonable inferences in favor of the nonmoving party,
without making credibility determinations or w eighing the evidence. Id.“[A]lthough the court should review the record as a whole, it must disregard all
evidence favorable to the moving party that the jury is not required to believe.”
Id. “In diversity cases, the substantive law of the forum state governs the analysis
of the underlying claims, including specification of the applicable standards of
proof, but federal law controls the ultimate, procedural question whether
judgment as a matter of law is appropriate.” Haberman v. The H artford Ins.
Group, 443 F.3d 1257, 1264 (10th Cir. 2006). Accordingly, the substantive law
of Colorado applies and governs as w e review the issues raised on appeal.
Cartel’s theory of damages, unjust enrichment, is specifically authorized by
statute. Colo. Rev. Stat. § 7-74-104. The question before us is whether Cartel
presented sufficient evidence for the jury to conclude the Bank was unjustly
-22-
enriched by its misappropriation of names from Cartel’s list. W e must keep in
mind, “a directed verdict . . . should be granted only in the clearest of cases.”
Park Rise Hom eowners Ass’n, Inc. v. Res. Constr., 155 P.3d 427, 431 (Colo. App.
2006), cert. denied, . denied, 2007 W L 93091 (2007).
The district court determined Cartel’s damages claim failed because it had
shown no direct evidence of the Bank’s use of any name on Cartel’s list to
purchase and resell a BPO. However, direct evidence is not necessary. A
conclusion concerning causation may result from a fact-finder’s “reasonable
inferences from the circumstantial evidence presented.” Ackerm an v. Hilton’s
M ech. M en, Inc., 914 P.2d 524, 527 (Colo. App. 1996). M oreover, contrary to the
trial court’s post-trial assessment of the significance and credibility of the trial
testimony and exhibits, it is the fact-finder who “must resolve conflicts in the
evidence and determine the credibility of witnesses and the probative value of the
evidence.” Id. If the jury’s conclusion is supported by probative evidence which
warrants a reasonable belief in the existence of facts supporting a particular
finding, the jury’s conclusion is binding on review. Id.; see also M orales v.
Golston, 141 P.3d 901, 906 (Colo. App. 2005), cert. denied, 2006 W L 2467851
(2006).
The district court erred in concluding the jury did not have sufficient
evidence to reasonably infer the Bank used the names it took from Cartel to
purchase BPO s and resell them for a profit. Kreuger testified the Bank did not
-23-
have a direct retail vendor list as of Labor Day 1999. Several witnesses testified
it w ould take a significant amount of time to create a profitable national database.
Gilbert testified Ocwen Advisors’ routine efforts to build a database, including
use of the internet, were tapped out by January 2000. She further testified the
names taken during the M arch contest were from Cartel BPOs and were
apportioned between staff members w ho then called to ask the real estate
professional to work directly for Ocwen Advisors/the Bank. She stated the
company received applications, approved them and added the names to the
system. This practice continued through at least November 2000. At the time the
Bank’s vendor list was provided to Cartel, over one third of the Bank’s “use”
realtors matched Cartel’s list. M oreover, by mid-2000 the Bank’s orders to
national vendors decreased drastically and orders to Cartel stopped entirely by
2001. Thus, the jury could reasonably infer the Bank used the misappropriated
names to contact the agents, purchase BPOs directly, and resell the BPOs.
The district court also determined Cartel had not shown the Bank was
“enriched” from the sale of BPOs, i.e. no profit was shown. However, Krueger
testified he proposed the change in the Bank’s business plan to make the division
a profit center rather than a cost center and to save money. He testified the Bank
was ordering 50,000 to 60,000 BPO s from the national vendors per year and the
gross savings/profits from the direct order and resale of 60,000 BPO s would be
approximately $2,700,000.00 if the Bank paid $50.00 directly to the vendor and
-24-
resold the BPO for $95.00 to a third party. W illiam Erbey stated, as of 2004, the
Bank would pay an agent or broker approximately $45 to $50 to provide a BPO
and then sell the BPO for a profit. A reviewed BPO would be sold for
approximately $150 and an unreviewed BPO for approximately $70. In any case,
the evidence was sufficient for the jury to reasonably infer the Bank’s use of the
names on Cartel’s list generated either a savings or a profit for the Bank,
establishing the traceability of the damages.
2. The Amount of the Benefit
W e next consider whether there was sufficient evidence for the jury to
determine the amount of damages. The primary witness on this issue was
TenBrook, Cartel’s damages expert. Thus, we must first address the trial court’s
decision that TenBrook’s testimony was unreliable and therefore inadmissible.
The admission at trial of expert testimony is governed by Rule 702 of the
Federal Rules of Evidence. 12 Champagne M etals v. Ken-M ac M etals, Inc., 458
F.3d 1073, 1078 (10th Cir. 2006). The rule requires a district court to exercise its
12
Rule 702 provides:
If scientific, technical, or other specialized knowledge will assist the
trier of fact to understand the evidence or determine a fact in issue, a
witness qualified as an expert by knowledge, skill, experience,
training, or education may testify thereto in the form of opinion or
otherwise, if (1) the testimony is based upon sufficient facts or data,
(2) the testimony is the product of reliable principles and m ethods,
and (3) the witness has applied the principles and methods reliably to
the facts of the case.
-25-
“gatekeeper function to ‘ensure that any and all scientific testimony or evidence
admitted is not only relevant, but reliable.’” United States v. Gabaldon, 389 F.3d
1090, 1098 (10th Cir. 2004) (quoting Daubert, 509 U.S. at 589). The district
court must “assess the reasoning and methodology underlying the expert’s
opinion, and determine whether it is both scientifically valid and applicable to a
particular set of facts.” Dodge v. Cotter Corp., 328 F.3d 1212, 1221 (10th Cir.
2003).
W hether the district court applied the proper legal test in admitting an
expert’s testimony is reviewed de novo. Id. at 1223. However, the ultimate
decision to admit or exclude expert testimony under Daubert is reviewed for
abuse of discretion. Champagne M etals, 458 F.3d at 1079. The district court’s
decision will be overturned only if “it is arbitrary, capricious, whimsical or
manifestly unreasonable or when we are convinced that the district court made a
clear error of judgment or exceeded the bounds of permissible choice in the
circumstances.” Id. (quotations omitted).
Our review of TenBrook’s testimony is controlled by Daubert v. M errell
Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) and Kumho Tire Co., Ltd. v.
Carm ichael, 526 U.S. 137 (1999). A s mentioned above, Daubert requires a trial
judge to “ensure that any and all scientific testimony or evidence admitted is not
only relevant, but reliable.” 509 U.S. at 589. Kumho instructs that the
“gatekeeping” requirement set forth in Daubert “applies not only to testimony
-26-
based on ‘scientific’ knowledge, but also to testimony based on ‘technical’ and
‘other specialized’ knowledge.” 526 U.S. at 141 (citation omitted). The court’s
purpose “is to make certain that an expert, whether basing testimony upon
professional studies or personal experience, employs in the courtroom the same
level of intellectual rigor that characterizes the practice of an expert in the
relevant field.” Id. at 152. As an example of a useful factor in a situation where
the witness’ expertise is based purely on experience, the Supreme Court suggested
inquiring “whether [the expert’s] preparation is of a kind that others in the field
would recognize as acceptable.” Id. at 151. Here, there is no doubt the district
court employed the correct legal test. Consequently, the only question is whether
the trial court abused its discretion in discarding TenBrook’s testimony after trial.
Cartel proceeded to trial with TenBrook’s third expert report in which he
based his damages calculation on a theory of unjust enrichment, also described as
disgorgement or ill-gotten gains. He calculated 94% of the total number of BPO s
purchased by the Bank for each year from 2001 through 2004 reflected the
number which would have been purchased from all national vendors during that
time. The four-year term was based on Coats’ estimate of the time period
necessary for the Bank to develop a usable national BPO database. TenBrook
then testified that 35% of the total national vendor BPOs w as attributable to
Cartel but for the misappropriated trade secrets. However, in reaching his
estimate of Cartel’s damages, TenBrook failed to apply the 35% reduction
-27-
attributable to Cartel. Instead, he multiplied the total number of national vendor
B PO s by $95.00 — the amount he assumed represented the value of the BPOs
sold by the Bank to third party institutions. For his final calculation, TenBrook
multiplied the resulting amount by the net profit margin of Ocwen Advisors as
reported in the SEC filings of Ocwen Financial Corporation. He concluded the
Bank benefitted by $7,487,000.
In its Order granting a new trial on damages, the district court recognized
TenBrook’s failure to apply the 35% reduction could be easily recalculated, and
therefore was not fatal to his testimony. However, the district court determined
TenBrook’s testimony contained a number of speculative premises and invalid
assumptions. Primarily, it found fault with (a) TenBrook’s reliance on Ocwen
Advisors’ net profit percentage reported for the totality of all Ocwen A dvisors’
product lines, as opposed to the net profitability of the BPO line alone, and (b)
TenBrook’s use of a four-year term for replicating a viable national BPO
database.
a. Apportionment of the Bank’s Profit
The district court found TenBrook’s reliance on Ocwen Advisors’ general
net profit percentage, as opposed to the profitability of its BPO line, was
improper. Cartel contends the consolidated net profit percentage was the best
evidence available because Ocwen Advisors asserted it did not retain records
allocating the profits within its product lines. Therefore, according to Cartel, it
-28-
could rely on the consolidated information in Ocwen Advisors’ SEC filings and
the burden of proof apportioning any profit not attributable to misappropriation
was Ocwen’s. 13
In W ynn Oil Company v. American W ay Service Corporation, the Sixth
Circuit held the district court abused its discretion when it refused to aw ard
damages in a trademark action because the plaintiff could not prove defendant’s
profits with sufficient certainty. 943 F.2d 595, 607 (6th Cir. 1991). The
plaintiff’s efforts to ascertain the defendant’s profits were frustrated by the
defendant’s insistence that its profits from the infringement were commingled
with other sales and flow-through money and therefore could not be provided in
discovery. Based on “common sense” as w ell as statutory language, the court
held the burden of apportioning profits should be placed on the defendants once
the plaintiff has proved gains to the defendant from the infringement. Id. at 606.
The same premise has been applied in copyright actions. Data Gen. Corp.
v. Grumman Sys. Support Corp., 36 F.3d 1147, 1173 (1st Cir. 1994). In Data
13
The district court further determined Cartel did not establish profits
could be made from the sale of BPOs because it did not present evidence of the
profitability of other national vendors and Cartel, itself, lost money from 1999
through 2002. However, the damages theory was not the loss to Cartel, but the
benefit to the Bank. The testimony of W illiam Erbey established the Bank bought
BPOs for approximately $50.00 and sold them to third parties for anywhere
between $90 and $125. (R. Vol. 9 at 3204-05.) He also affirmed the creation of a
retail vendor database was a key part of the strategy to turn the new division into
a profit center. (Id. at 3201-02.) Based on this testimony, the jury could
reasonably infer the Bank made a net profit on the sale of B POs to third parties.
-29-
General, the First Circuit stated:
In the context of [a copyright] infringer’s profits, the plaintiff must
meet only a minimal burden of proof in order to trigger a rebuttable
presumption that the defendant’s revenues are entirely attributable to
the infringement; the burden then shifts to the defendant to
demonstrate what portion of its revenues represent profits, and what
portion of its profits are not traceable to the infringement.
36 F.3d at 1173; see also Bucklew v. Hawkins, 329 F.3d 923, 932 (7th Cir. 2003).
Data General also recognized this principle has been applied in trade secrets
actions:
Citing 17 U.S.C. § 504(b) as persuasive authority, the M assachusetts
Supreme Judicial Court has set forth the following rule for
apportionment in trade secrets cases: Once a plaintiff demonstrates
that a defendant made a profit from the sale of products produced by
improper use of a trade secret, the burden shifts to the defendant to
demonstrate those costs properly to be offset against its profit and
the portion of its profit attributable to factors other than the trade
secret. USM Corp. v. M arson Fastener Corp., 392 M ass. 334, 467
N.E.2d 1271, 1276 (1984). See also Jet Spray Cooler, Inc. v.
Crampton, 377 M ass. 159, 385 N.E.2d 1349, 1358-59 n.14 (1979)
(citing, inter alia, Sheldon v. M etro-G oldwyn Pictures Corp., 106
F.2d 45, 48 (2d Cir.1939), aff'd, 309 U.S. 390, 60 S.Ct. 681, 84 L.Ed.
825 (1940)).
36 F.3d at 1174, n.48. Comment (f) to the Restatement (Third) of Unfair
Competition § 45 (1995) sets forth a similar burden of proof:
The traditional form of restitutionary relief in an action for the
appropriation of a trade secret is an accounting of the defendant's
profits on sales attributable to the use of the trade secret. The general
rules governing accountings of profits are applicable in trade secret
actions. The plaintiff is entitled to recover the defendant’s net
profits. The plaintiff has the burden of establishing the defendant's
sales; the defendant has the burden of establishing any portion of the
sales not attributable to the trade secret and any expenses to be
deducted in determining net profits.
-30-
Ocwen Advisors does not refute that the burden of proof may shift. Rather, it
argues the burden never shifted because Cartel did not present sufficient evidence
of the fact a sale was made from the misappropriated information. As discussed
above, the jury was given sufficient evidence to reasonably infer such profit and
the parties do not dispute the fact that the Ocwen Advisors division reported net
profits. Therefore, the district court erred in placing the onus on Cartel to provide
specific net profits from the sale of BPOs. Ocwen Advisors is in the best position
to rationally apportion its net profits between its product streams and the costs
associated with its BPO business. Because the absence of evidence is directly
attributable to Ocwen’s failure to provide the data, it was not unreasonable for
TenBrook to apply the same profit ratio for all product lines to one product. See
Electro-M iniature Corp. v. W endon Co., 771 F.2d 23, 27 (2d Cir. 1985) (“W here,
as here, there is a clear showing of injury that is not susceptible to exact
measurement because of the defendant’s conduct, the jury has some latitude to
‘make a just and reasonable estimate of damages based on relevant data.’”
(quoting Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 264 (1946))).
b. Time Needed to Create National Database
Cartel also claims the district court abused its discretion in excluding
TenBrook’s testimony based on his assumption that it would take four years to
develop a sufficient database. W e disagree.
TenBrook testified he used the four-year span because it was his
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assumption “that it would be roughly four years to come up w ith . . . a minimal
database to do what [O cw en Advisors] wanted to do.” (R. Vol. 7 at 2580.)
TenBrook stated he based this assumption on his discussions with Coats, which
was further substantiated by Gilbert’s testimony regarding initial attempts to build
Ocwen A dvisors’ database in 1999 through 2000. Thereafter, the follow ing cross-
examination took place:
Q. To put this in context, . . . is it not true you didn’t conduct any
independent investigation to test the information you received
from M r. Coats that it would have taken the Ocwen defendants
four years to produce [a] minimal broker database.
A. Y es, that’s true. I did not conduct an independent review.
Q. So you did take the information he gave you at face value?
A. Yes. Again, with the substantiating things I talked about.
Q. But the information he gave you was the only basis for your
inclusion of a four-year period in your calculations, right?
A. Yes.
Q. You have no independent knowledge, correct, as to how long it
takes to develop a minimal broker database?
A. No.
(R . Vol. 7 at 2583.)
TenBrook further conceded he did not know how many names it takes to
create a minimum database, nor did he know how long it took Cartel to develop a
minimum database. He did not ask Coats, who had started doing business with
Ocwen shortly after opening Cartel’s doors, how he managed to do business prior
-32-
to the four years he suggested it w ould take to build a minimal broker list.
Consequently, TenBrook had no basis for believing a four-year period was an
appropriate span for his damage calculations.
Cartel argues it presented other evidence to support this time-frame via the
testimony of three national vendors (including Cartel) stating the building of a
network “takes years.” (R. Vol. 7 at 2262-63, 2303-06, 2308.) Cartel also points
to Gilbert’s testimony regarding the difficulty Ocwen Advisors had in its initial
efforts. W hile this testimony may establish the difficulty of building a network, it
does not provide any information regarding what is necessary for a minimal
national database or the time it would have taken a company in 1999 to develop
such a database.
Cartel’s final justification is the fact TenBrook’s analysis was compiled on
a yearly basis for four years and, therefore, the jury was free to determine
whether one year w as an appropriate time span and award damages accordingly.
Instead, the jury determined, as a factual matter, four years w as an appropriate
time frame for damages. This argument misses the point. Assuming the jury
could parse the damages from one to four years, it had no information with which
it could ascertain whether one or four years was appropriate. The four-year time
frame was merely Coats’ unsubstantiated suggestion contained and endorsed in
TenBrook’s calculations. This is insufficient. See Champagne M etals, 458 F.3d
at 1080, n.4 (“[I]t [is] not ‘manifestly unreasonable’ for the district court to
-33-
conclude that [the expert’s] opinions lacked foundation because they were based
on ‘the self-serving statements of an interested party.’”). Consequently, we find
no abuse of discretion in the district court’s determination that TenBrook’s
testimony was speculative and inadmissible. Removing TenBrook’s testimony
leaves Cartel without evidentiary support for the jury’s award of $4,900,000 in
actual damages and in turn, eliminates a basis for the proper amount of punitive
damages. See Colo. Rev. Stat. Ann. § 7-74-104(2) (exemplary damages awarded
only after actual damages ascertained)
3. Remittitur
This brings us to Cartel’s claim the district court’s decision vacating the
misappropriation damages constituted a forced remittitur of damages in violation
of the Seventh Amendment right to a jury trial. “A remittitur is a substitution of
the court’s judgment for that of the jury regarding the appropriate award of
damages.” Johansen v. Combustion Eng’g, 170 F.3d 1320, 1331 (11th Cir. 1999).
“In the usual remittitur situation, a trial judge reviews the jury’s verdict in order
to determine if substantial evidence at trial supported the amount awarded. If the
court finds that insufficient evidence exists, or finds the amount of the verdict a
product of jury passion or prejudice, the court then may determine a reasonable
amount as plaintiff’s damages and allow plaintiff to remit the excess over such
amount.” O’Gilvie v. Int’l Playtex, Inc., 821 F.2d 1438, 1448 (10th Cir. 1987).
The plaintiff, however, must be given the option of a new trial in lieu of
-34-
remitting a portion of the jury’s award. Id. The United States Constitution
Seventh Amendment provides, “the right of trial by jury shall be preserved, and
no fact tried by a jury, shall be otherwise reexamined in any Court of the United
States, than according to the rules of the common law.” Thus, “[n]o judgment for
a remittitur may be entered without the plaintiff’s consent because the Seventh
Amendment prohibits the court from substituting its judgment for that of the
jury’s regarding any issue of fact.” Sloan v. State Farm M ut. Auto. Ins. Co., 360
F.3d 1220, 1225 (10th Cir. 2004). “[I]f the plaintiff does not consent to the
remittitur, the district court has no alternative but to order a new trial on
damages.” Id.Cartel argues the district court erred in ordering a new trial on damages but
then sua sponte, without affording Cartel a new trial, entering a judgment in an
amount less than that awarded by the jury based on its weighing of the evidence.
It claims the court’s decision amounted to a remittitur in violation of the Seventh
Amendment. The Bank counters that because the reduction in damages was
necessitated by legal error (a failure to prove causation), the reduction is not a
remittitur and a new trial is not required. It relies on the rulings of our sister
circuits holding the Seventh A mendment is not implicated w hen a damages award
is reduced as a matter of law. See Corpus v. Bennett, 430 F.3d 912, 917 (8th Cir.
2005) (allowing a reduction of nominal damages as a matter of law from $75,000
to $1 without a new trial); Tronzo v. Biomet, 236 F.3d 1342, 1352 (Fed. Cir.
-35-
2001) (affirming reduction of compensatory damages from $7,134,000 to $520
because there was no legally competent evidence supporting a larger award);
Johansen, 170 F.3d at 1330-31 (allow ing reduction of punitive damages as a
matter of law ).
The critical question is w hether the district court “substitute[d] its own
evaluation of the evidence regarding damages for the jury’s factual findings” or
whether the reduction of damages was based on a “determination that the law
does not permit the award.” Corpus, 430 F.3d at 917. Here, the district court’s
reduction of damages to $1 in nominal damages rested primarily on its conclusion
that Cartel had demonstrated misappropriation, but had presented no evidence
linking the misappropriation to a benefit for the Bank. As discussed above, we
reach a different conclusion. The trial court also determined, even if Cartel had
shown such a link, the testimony of Cartel’s expert was unreliable and therefore
inadmissible. W hile TenBrook’s reliance on the Bank’s reported general net
profit for its Ocwen Advisors division was reasonable in the absence of any
apportionment by the Bank, his reliance on the four-year time frame w as
unsupported by any reliable source, leaving the jury to speculate on the extent of
damages. As a result, we cannot accommodate Cartel’s request to reinstate the
jury’s award of compensatory and punitive damages.
Nonetheless, we decline to find, as a matter of law , that Cartel would fail to
present any evidence of damages should this case be retried. W e are informed by
-36-
M orrison-Knudsen v. Fireman’s Fund Insurance Com pany, 175 F.3d 1221 (10th
Cir. 1999). On appeal from a jury verdict on a contract claim, we concluded the
plaintiff offered no admissible evidence “to support its claim of roughly $1.35
million for attorney’s fees,” and insufficient evidence “to support its claims for
roughly $3 million in equitable adjustments to the contract” or “the roughly $3.7
million in damages it claimed on behalf of its sub[contractors].” Id. at 1242. W e
recognized that on remand we could direct an entry of judgment as to those
damages and foreclose the plaintiff from again claiming those items. Id. at 1259.
W e also conceded a failure to do so would allow plaintiff “a second bite at the
apple.” Id. Nonetheless, equitable concerns compelled us to allow these issues to
proceed on remand. Our decision was based on the timing of the notice to
plaintiff that its proof was deficient.
At trial, the defendant twice moved for judgment as a matter of law
(JM OL) pursuant to Rule 50 of the Federal Rules of Civil Procedure. The district
court denied the motions without taking the matter under advisement. W e have
stated:
In these circumstances, [plaintiff] had little occasion to try to remedy
the defects in its proof. Had the court not promptly orally denied
[defendant’s motions], [plaintiff] could have moved for leave to
reopen its case to provide additional evidence. Giving a party a
chance to correct defects in proof is a primary purpose of the
preverdict motion for JM OL under Rule 50(a), and in particular of
the requirement that the motion specify the grounds for granting
judgment.
Id. at 1259-60 (citing Fed. R. Civ. P. 50(a)(2), advisory committee’s note (1991
-37-
amend.) (stating the purpose of a requirement for preverdict motion for JM OL “is
to assure the responding party an opportunity to cure any deficiency in that party's
proof that may have been overlooked.”)). W e also noted, “Courts of appeal have
often ordered new trials rather than JM OL when a plaintiff could likely remedy
its deficient evidence in a new trial.” Id at 1260.
In this case, as in M orrison-Knudsen, the trial was complex and the district
court rejected the Bank’s pre-verdict motions for JM OL. Given our conclusions
that Cartel proved the B ank benefitted from the misappropriation and TenBrook’s
reliance on multi-product profits was not an unreasonable assumption, the
interests of justice require Cartel have a chance to correct its evidentiary
shortcomings before reducing the jury’s award to only $1 nominal damages.
Accordingly, we remand this case for a new trial on misappropriation and
punitive damages. Our remand does not, however, disturb the discretion of the
district court to determine the extent it would be appropriate to re-open the record
or to consider motions for summary judgment. See Cleveland v. Piper Aircraft
Corp., 985 F.2d 1438, 1450 (10th Cir. 1993) (“The trial court is much more
familiar with the conduct of the original trial, the needs for judicial management
and the requirements of basic fairness to the parties in a new trial. . . . [I]f a party
makes a timely motion to produce new and material evidence which was not
otherwise readily accessible or known, the court should, within the exercise of
discretion, consider whether denial of the new evidence w ould create a manifest
-38-
injustice. . . . [C]ommon sense should control.”).
II. O cwen Entities’ Cross-Appeal — No. 04-1517
On cross-appeal, Ocwen Technology maintains the district court erred when
it failed to grant JM OL on Cartel’s claim that it fraudulently induced Cartel into
entering a contract. For its part, the Bank asserts the district court erred in
awarding Cartel attorney fees and costs for its Pyrrhic victory on the
misappropriation claim. The Bank also argues that, if we remand for a new trial,
the new trial should encompass both liability and damages.
A. Fraud in the Inducement
Ocwen Technology claims the district court erred when it denied its motion
for a JM OL on Cartel’s fraud in the inducement claim. It maintains Cartel did not
prove that Ocwen Technology misappropriated Cartel’s trade secrets and
therefore, the claim must fail as a matter of law. In Colorado, the elements of a
fraud in the inducement claim are:
(1) A false representation of a material existing fact, or a
representation as to a material existing fact made w ith a reckless
disregard of its truth or falsity; or a concealment of a material
existing fact, that in equity and good conscience should be disclosed;
(2) knowledge on the part of the one making the representation that it
is false; or utter indifference to its truth or falsity; or knowledge that
he is concealing a material fact that in equity and good conscience he
should disclose; (3) ignorance on the part of the one to whom
representations are made or from whom such fact is concealed, of the
falsity of the representation or of the existence of the fact concealed;
(4) the representation or concealment is made or practiced with the
intention that it shall be acted upon; and (5) action on the
representation or concealment resulting in damage.
-39-
Trimble v. City & County of Denver, 697 P.2d 716, 724 (Colo. 1985) (en banc).
Ocwen Technology claims Cartel’s pleadings rested its fraud in the
inducement claim on Ocwen Technology’s intentional misappropriation of trade
secrets. Because the jury found Ocwen Technology had not misappropriated
Cartel’s trade secrets, and Cartel must be “held strictly to the pleadings,” the
fraud in the inducement claim fails as a matter of law. (Cross-Appellant’s Br. at
56.) W e disagree.
The jury instructions on the fraud in the inducement claim did not require
the jury to find O cwen Technology misappropriated Cartel’s trade secrets as a
prerequisite to finding Ocwen Technology fraudulently induced Cartel into
entering into the REALTrans agreement. 14 Ocwen Technology did not object to
this instruction at trial nor does it now claim that the instructions are an erroneous
statement of the law. Therefore, this is the law relevant to the fraud claim and the
jury’s verdict is supported by the evidence.
Ocwen Technology also asserts there was no evidence of any
misrepresentation by an Ocwen Technology employee. Rather, it maintains
14
The jury instructions stated that to find Ocwen Technology liable for
fraud in the inducement, the jury had to find (1) Ocwen Technology made a false
representation of a past or present fact to induce Cartel to enter into the M arch
19, 1999 contract with an intent not to comply; (2) the fact was material; (3)
Ocw en Technology made the representation knowing it to be false or while aware
that it did not know whether the statement was true or false; (3) Ocwen
Technology made the representation with the intent that Cartel would rely upon it;
(4) Cartel justifiably relied upon the representation; and (5) the reliance caused
damages.
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Cartel demonstrated only that it relied on the representations of the Bank’s
employees and, therefore, this claim must fail as a matter of law. However, the
instructions to the jury combined w ith evidence adduced at trial makes this a
distinction without a difference.
At the close of Cartel’s case, Ocwen Technology moved for JM OL on the
fraud in the inducement claim. In response, Cartel’s attorney stated:
Remember, also, that the evidence is . . . [Ocwen Advisors] was
established in connection with an E-Commerce platform known as
REALTrans. And that the E-Commerce platform was being
sponsored, if you will, by [Ocwen Technology.] The evidence is that
[Ocwen Advisors] was acting hand in glove for the benefit of, and
for the promotion of, [Ocwen Technology] and as an agent.
(R. Vol. 8 at 2932.)
The jury was instructed as follow s:
Instruction No. 12
Before one corporation may be held liable for the acts of
another corporation, there must be such a close
relationship between the two companies that one is, in
essence, an instrumentality of the other.
(Supp. Vol. 2 at 693.) Instruction No. 13 further instructed on the factors to
determine whether a subsidiary of a corporation is an instrumentality of the parent
corporation. No party requested an instruction on factors regarding
instrumentality in the context of sister corporations nor did any party request an
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instruction regarding an agency theory. 15 The parties do not complain about the
instructions on appeal and no one claims the instructions were inadequate. Given
the apparent willingness of the parties to stand on the evidence of the entities’
interrelationships in the context of these instructions, the jury’s decision stands.
The evidence demonstrated John and W illiam Erbey were known to be very
active in both the Bank’s and Ocwen Technology’s business ventures. Both were
present when Krueger made his pitch to transform the BPO department and it
appears both men gave K rueger the blessing to go forward. The two entities w ere
substantially interrelated in promoting the implementation of Ocwen
Technology’s REALTrans. Indeed, Krueger testified he believed he was an
15
It is well-settled that a third party may accept the representations of one
who appears to be authorized to act for another. Daniels v. Woodmont, Inc., 274
F.2d 132, 138 (10th Cir. 1959). A person need not be an employee to be an agent
authorized to act for a principal. Grease M onkey Int’l. v. M ontoya, 904 P.2d 468,
473-74 (C olo. 1995) (en banc).
An agent may have actual or apparent authority to act for his principal.
Am. Soc’y of M ech. Eng., Inc. (AM SE) v. Hydrolevel Corp., 456 U.S. 556, 566
(1982). “Apparent authority is the power to affect the legal relations of another
person by transactions with third persons, professedly as agent for the other,
arising from and in accordance with the other’s manifestations to such third
persons.” Id. at 566 n.5 (quoting Restatement (Second) of Agency § 8 (1957)).
The existence of such authority is a question of fact. Grease M onkey, 904 P.2d at
476.
"Under an apparent authority theory, liability is based upon the fact that the
agent's position facilitates the consummation of the fraud, in that from the point
of view of the third person the transaction seems regular on its face and the agent
appears to be acting in the ordinary course of the business confided to him."
AM SE, 456 U.S. at 566 (quotation omitted). "[A] plaintiff must establish that the
. . . agent was put in a position which enabled the agent to comm it fraud, the
agent acted w ithin his apparent authority, and the agent committed fraud."
Grease M onkey, 904 P.2d at 475.
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employee of Ocwen Technology from early 2000 through July or A ugust of 2000.
Krueger also testified the integration between Ocwen Technology’s REALTrans
and the Bank’s Order Tracking was fundamental to his plan to reorganize the
Bank’s BPO operations. W hen Ocwen Technology’s REALTrans was introduced,
it was Krueger and Bennett who gathered the national vendors to explain the
benefits of the Bank’s new way of doing business through technology. Taken
together, this evidence allowed the jury to reasonably conclude that the Bank was
acting as an instrumentality of Ocwen Technology and that Krueger was
authorized to act for both entities, especially regarding the purpose and benefits
of REALTrans. Consequently, the district court did not err in denying Ocwen
Technology’s motion for JM OL on this claim.
B. Attorney Fees
The Bank argues the district court erred in awarding Cartel attorneys fees
on its misappropriation of trade secrets claim. W e review the district court’s
award of attorney fees for an abuse of discretion. Homeward Bound, Inc. v.
Hissom M em’l Ctr., 963 F.2d 1352, 1355 (10th Cir. 1992). Underlying factual
findings will only be set aside if clearly erroneous. Id. A district court’s
statutory interpretation or legal analysis which provides the basis for the fee
award is reviewed de novo. Id.The Colorado Uniform Trade Secrets Act (CUTSA) provides:
If a claim of misappropriation is made in bad faith, a motion to
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terminate an injunction is made or resisted in bad faith, or willful and
malicious misappropriation exists, the court may award reasonable
attorney fees to the prevailing party.
Colo. Rev. Stat. § 7-74-105. Here, the jury concluded the Bank acted in a
malicious or willful and wanton manner in connection with its misappropriation
of Cartel’s trade secrets. 16 Therefore, the Bank concedes the trial court had the
discretion under CUTSA to award reasonable attorney fees.
The district court relied in part on our decision in Nephew v. City of
Aurora, 830 F.2d 1547 (10th Cir. 1987) (attorney fees under 42 U.S.C. § 1988).
W hile Nephew was not expressly overruled, Farrar v. Hobby, 506 U.S. 103(1992) (attorney fees under 42 U.S.C. § 1988) and Phelps v. Hamilton, 120 F.3d
1126 (10th Cir. 1997) (same), have changed the legal landscape. W hether this is
significant is debatable. It is less than clear whether Colorado embraces federal
law regarding attorney fees other than in cases involving federally derived rights.
Dennis I. Spencer Contractor, Inc. v. City of Aurora, 884 P.2d 326, 330 (Colo.
1994) (concluding the Colorado Court of Appeals erred in applying standard for
awarding fees under 42 U.S.C. § 1988 to a non-civil rights action). Because the
parties cite only federal law on the issue we express no opinion. Since we
16
CUTSA provides punitive damages “[i]f the misappropriation is attended
by circumstances of fraud, malice, or a willful and wanton disregard of the
injured party’s right and feelings.” Colo. Rev. Stat. § 7-74-105. The jury
awarded punitive damages against Ocwen Bank on the misappropriation of trade
secrets claim. The district court adopted this finding for purposes of concluding
that the Act’s attorneys fee provision allowed fees in this case.
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remand this case to the district court for a new trial on damages, the district court
m ust reassess the question of attorneys fees under Colorado law.
C. New Trial
The Bank maintains a new trial, if ordered, should encompass both liability
and damages because the district court erroneously allowed improper opinion
testimony which tainted the liability verdict. “The district court is accorded
broad discretion in its decision whether to admit expert testimony, which we may
reverse only for an abuse of such discretion.” Quinton v. Farmland Indus., Inc.,
928 F.2d 335, 336 (10th Cir. 1991). The Bank maintains Christina Teahan,
Cartel’s expert regarding the BPO industry, was allowed to testify beyond her
expertise. The Bank also contends the district court improperly allowed lay
witnesses Anne Gilbert, Christine Carlso and Rita Holland, to give opinions
regarding custom and practice in the BPO industry.
1. Expert Testimony Beyond Expertise
Teahan had worked as a BPO processor for the Bank. She left the Bank to
work for another national provider, National Properties Acquisition Consultants
(NPA C), managing the BPO process. Eventually, Teahan bought the business and
continued to be NPA C’s owner at the time of her testimony. Prior to trial, the
Bank and Ocw en Technology challenged Teahan’s expertise under Daubert. A
hearing was held before the magistrate judge. At the conclusion of the hearing,
the magistrate judge ruled Teahan could testify as an expert regarding the
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practices of BPO sellers, such as Cartel, but was not qualified to offer opinions on
the practices of BPO purchasers, such as the Bank. Nonetheless, during trial
Teahan was asked about practices that occurred while she was working at Ocwen.
Specifically, she was asked if she had “an opinion as to whether it was
appropriate [for the Bank] to contact the agents w ho did [Cartel’s] BPOs to
perform [a] new BPO.” (R. Vol. 7 at 2316.) She answered it was not the Bank’s
“customary practice” to do that. (Id.) The Bank objected on the basis of the
magistrate judge’s ruling, but the district court overruled the objection. Teahan
continued to explain her experience at the Bank during the time the company was
considering changing due to the increasing interest in e-commerce. She related a
conversation with Bill Krueger where she stated it would be inappropriate to take
the names off BPOs because a BPO “was not bought for the agent’s names.” (Id.
at 2318.)
W e agree the form of the question asking her “opinion” regarding what
inform ation a B PO purchaser believes he is buying went beyond Teahan’s
expertise as a BPO provider. However, much of her testimony related to her
personal experiences at the Bank. This testimony was properly admitted as a
background for her actions, such as her conversation with Krueger. In any event,
we are convinced the testimony did not taint the liability verdict. The Bank had
an opportunity to fully cross-examine Teahan on the limits of her expertise and
there was plentiful testimony from other witnesses regarding the confidentiality
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expectations of BPO purchasers and providers.
2. Lay Opinion Testimony
The Bank further argues the trial court allowed lay witnesses to opine as
experts in violation of Rules 701 and 702 of the Federal Rules of Evidence. In
essence, the testimony came from the Bank’s and Ocwen Technology’s employees
who objected to copying names from the national providers’ BPOs. Gilbert
testified she believed the copying of names was inappropriate and told Krueger
her opinion. Christine Carlton, a BPO processor for the Bank who went to work
for Cartel after her employment was terminated, testified she believed the
confidentiality agreement she signed when she was hired at the Bank required her
to protect the confidentiality of the broker names on the BPO s. She testified she
“blacked out” agent information when a BPO was sent out of her department. (R.
Vol. 7 at 2452.) The deposition testimony of Rita Holland, a former Ocwen
Technology employee who had been in charge of vendor relations, was read to the
jury. The Bank claims it contained inflammatory and improper lay opinion, but
again, the testimony stated H olland’s belief the information on the Cartel BPO s
was confidential and described her conversation with Krueger relating that belief.
Contrary to the Bank’s assertions, these witnesses did not testify regarding
industry standards.
Rule 701 [permits a lay witness] to offer opinion testimony only when it is:
(a) rationally based on the perception of the witness, (b) helpful to a
clear understanding of the witness’ testimony or the determination of
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a fact in issue, and (c) not based on scientific, technical, or other
specialized knowledge within the scope of Rule 702.
Thus, Rule 701 permits the admission of lay opinion testimony
provided that it meets two criteria: a rational basis in perception and
helpfulness. “The perception requirement stems from F.R.E. 602
which requires a lay witness to have first-hand knowledge of the
events he is testifying about so as to present only the most accurate
information to the finder of fact.” United States v. Hoffner, 777 F.2d
1423, 1425 (10th Cir. 1985).
Grace United M ethodist Church v. City of Cheyenne, 451 F.3d 643, 667 n.12
(10th Cir. 2006). Here, the testimony of these witnesses, like Teahan’s lay
testimony, was based on personal experience and personal belief as related to
personal actions. In Carlton’s case, she believed the employee confidentiality
agreement required her to black out vendor names before allowing a BPO to go
outside her department. Gilbert’s and Holland’s beliefs led directly to discussions
with Krueger regarding the propriety of copying vendor names from BPO s. The
testimony informs the jury as to Krueger’s knowledge that several employees
disagreed with his position that the agent information on a BPO was not
confidential. See Gossett v. Oklahoma Bd. of Regents for Langston Univ., 245
F.3d 1172, 1179 (10th Cir. 2001) (“Courts generally hold admissible under Rule
701 evidence in the form of lay opinion testimony in discrimination cases when
given by a person whose position with the defendant entity provides the
opportunity to personally observe and experience the defendant's policies and
practices.”).
In summary, to the extent Teahan’s testimony was outside her expertise, its
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admission was harmless and did not taint the liability verdict. The remainder of
the testimony identified by the Bank was properly admitted. W e see no reason to
order a new trial to determine liability.
IV. Conclusion
W e REVERSE the district court’s determination Cartel failed to show the
Bank received a benefit from misappropriating Cartel’s trade secrets. W e
AFFIRM the district court’s exclusion of TenBrook’s expert testimony. W e
AFFIRM the entry of judgment in favor of Cartel and against the Bank on the
issue of liability. W e R EM A N D for a new trial on damages consistent with this
Order and Judgment. Appellees/Cross-Appellants’ M otion for Substitution of
Party is DENIED. Any adjustment in party status is best determined by the
district court on remand.
FOR TH E CO UR T:
Terrence L. O’Brien
United States Circuit Judge
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