SACRAMENTO CN) – Patriot Rail Co. will have to pay $13.1 million in punitive damages for willfully misappropriating Sierra Railroad Co.’s trade secrets during unsuccessful merger negotiations, a federal judge ruled.
Sierra, which owns and operates freight and tourist railroads in Northern California, was awarded $22.2 million in compensatory damages on the misappropriation claim in March after a jury found that Patriot, a large national railroad holding company, had breached a nondisclosure agreement.
The dispute arose from negotiations in 2007 for Patriot to buy the freight business portion of Sierra, because Sierra needed financial backing for its renegotiations for a long-term short rail freight contract with McClellan Business Park.
The companies entered into a nondisclosure agreement under which Patriot was to use Sierra’s confidential information only to help negotiate the acquisition. After obtaining Sierra’s financial information, Patriot offered only $7.2 million for all of Sierra’s rail business, less than half of what the companies had been discussing for the freight business alone.
“Throughout the trial, Patriot never provided a plausible explanation as to why the offer changed so drastically. This conduct alone clearly demonstrates Patriot’s awareness of Sierra’s financial vulnerability,” U.S. District Court Judge Troy Nunley wrote in his Oct. 23 ruling.
The exploitation of Sierra’s financial vulnerability did not stop there, Nunley said.
Patriot used Sierra’s information – including Sierra’s contract proposal to McClellan – to devise a proposal to outbid Sierra for the McClellan contract, all the while misleading Sierra.
“[N]ot only did Patriot secretly bid using Sierra’s confidential information, it also tricked Sierra into bidding less,” Nunley found.
Patriot suggested that Sierra cut its $1 million capital investment offer in half to $500,000. Sierra did so and then Patriot offered McClellan the full $1 million.
“Patriot’s actions were done purposely, which was evidenced by Patriot’s own witness and vice president in charge of business development, Paul McCarthy, who testified that Patriot viewed Sierra as a ‘threat’ and Patriot’s target was now McClellan,” Nunley wrote.
The jury awarded Sierra $22.2 million after finding that Patriot’s conduct was willful and malicious. Sierra sought $44 million in exemplary damages for Patriot’s misappropriation of its trade secrets under the California Uniform Trade Secrets Act.
Nunley disagreed with Patriot’s argument that the conduct Sierra seeks to punish under the trade secrets claim has already been punished by the jury’s exemplary damage award of $16.2 million for intentional interference. The elements for the two claims were based on different facts and legal elements, Nunley said, even if there was some overlap as to the harm done.
Saying that California courts have found that an exemplary damage award of 17.4 percent of a company’s value is sufficient to punish extremely reprehensible conduct, Nunley used this percentage to determine an initial punitive damage award of $29.3 million based on Patriot’s equity of $167.6 million.
However, Nunley found it appropriate to deduct the $16.2 million in punitive damages already awarded by the jury on the intentional interference claim, putting the total additional punitive damages at $13.1 million.
“The court finds that his reward reflects the willful and malicious nature of Patriot’s conduct, that it is appropriate in relation to the compensatory damages awarded, and that it suffices to punish Patriot without financially destroying it,” Nunley said.
Sierra CEO Michael Hart said: “We believe the court has sent a clear signal to companies such as Patriot that fraud and the theft of trade secrets will not go unpunished.”
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