Pegasystems Inc. v. Appian Corp.

81 Va. App. 433

904 S.E.2d 247

PEGASYSTEMS INC.

v.APPIAN CORPORATION

Record No. 1399-22-4

Court of Appeals of Virginia, Leesburg.

July 30, 2024

FROM THE CIRCUIT COURT OF FAIRFAX COUNTY, Richard E. Gardiner, Judge

E. Joshua Rosenkranz (Christopher J. Cariello; Eric A. Shumsky; Jeremy Peterman; James A. Flynn; Jonas Wang; Monica T. Monday; Michael J. Finney; Orrick, Herrington & Sutcliffe LLP; Gentry Locke, on briefs), for appellant.

Adeel A. Mangi (Jeffrey S. Ginsberg; Muhammad U. Faridi; Clinton W. Morrison; Robert W. Loftin, Richmond; Jonathan Y. Ellis; Ellen D. Marcus; Sheila M. Costin; Patterson Belknap Webb & Tyler LLP; McGuireWoods LLP; Holmes Costin & Marcus PLLC, on brief), for appellee.

Amicus Curiae: Northern Virginia Chamber of Commerce (Vernon E. Inge, Jr., Richmond; Michael H. Brady, Richmond; Whiteford, Taylor & Preston L.L.P., on brief), for appellee.

Amicus Curiae: Professor Harvey S. Perlman (Juli M. Porto, Fairfax; Blankingship & Keith, P.C., on brief), for appellee.

Amicus Curiae: The American Intellectual Property Law Association (Richard T. Matthews, Virginia Beach; Williams Mullen, P.C., on brief), for neither party.

Amici Curiae: Professors Mark Gergen and Pamela Samuelson (William M. Jay, Alexandria; Rohiniyurie Tashima; Goodwin Procter LLP, on brief), for neither party.

Present: Judges Beales, Friedman and Callins

OPINION BY JUDGE FRANK K. FRIEDMAN

This case raises questions about trade secrets, corporate espionage, and the proper measure of unjust enrichment damages for such offenses under the Virginia Uniform Trade Secrets Act (VUTSA). The trial below resulted in the largest damages verdict in the history of the Commonwealth of Virginia—an award of over two billion dollars. A jury found Pegasystems, Inc. (Pega) used improper means to misappropriate trade secrets from Appian Corporation (Appian). On appeal, Pega asks this Court to reverse the jury verdict and enter judgment for Pega because it contends, as a matter of law, there was insufficient evidence that Pega misappropriated any trade secrets. In the alternative, Pega seeks a new trial, arguing the trial court erred in excluding certain evidence and in granting flawed jury instructions (particularly with respect to proximate cause). We reject Pega’s claim that it is entitled to judgment as a matter of law; however, we find that the trial court committed a series of errors that require us to reverse the judgment as to Appian’s trade secret claims.

BACKGROUND¹

I. The Business Process Management Industry

[1] This controversy involves companies engaged in the business process management (BPM) industry. Appian and Pega are competitors and "industry leaders" in the BPM field. Both companies offer platforms that enable third party business customers to build complex software applications using "low-code application development platforms." These customers purchase the BPM platform to generate programs or applications (apps) that automate processes, such as fulfilling orders or opening new customer accounts. A BPM customer might use its own employees to design a project or it might hire outside "developers" to do so.

At trial, Pega portrayed itself as having expertise in platforms catering to big, complex, and sophisticated problems with many permutations for "very large … companies." Pega’s platform put a premium on "scalability"—the ability to quickly and reliably create, customize, and modify apps used by large numbers of users. Thus, Pega suggested its BPM product was particularly useful for complex undertakings. Appian painted Pega’s product as overly complex, difficult to grasp, hyper-technical, and clunky. By contrast, Appian’s BPM product focused on ease-of-use, speed, and simplicity.

The gist of this dispute is that Appian contends that Pega misappropriated its trade secrets to copy and steal Appian’s user-friendly features to enhance Pega’s appeal with a broader base of potential customers. Appian further asserts that in the course of stealing its secrets, Pega illicitly obtained trade secrets regarding weaknesses in Appian’s BPM platform and Pega used this ill-gotten knowledge for its own advantage.

II. Pega Studies Appian’s Product

Pega acknowledges that "[l]ike most companies in a competitive market, … Pega stays abreast of its competitors." Appellant’s Br. at 8. The trade secret claims in this case primarily arose from activities that Pega’s then-head of competitive intelligence, John Petronio, managed from 2012 to 2014. Pega’s goal was to examine how Appian’s BPM platform performed from the perspective of a developer creating apps. In so doing, Pega hoped to improve its own platform and to learn of Appian’s weaknesses to better market its own platform. Pega did not have access to Appian’s platform because, as Appian witnesses confirmed, Appian "never made [its] software publicly available without license terms." Appian’s software, including its "internal workings," remained a mystery to Pega. Internally, Pega acknowledged that Appian was "guarded" with respect to its "technology."

A. Pega Hires a Consultant, Zou, to Gain Access to Appian’s Platform

Through a staffing agency, Petronio sought a source to demonstrate how developers used Appian’s platform. In seeking out a consultant, Petronio informed the recruitment company that, "[a]cess to the Appian BPM tool is a must" and "make sure they aren’t ‘loyal’ to Appian because [Pega] doesn’t want it getting back to Appian that Pega is doing this work." This search culminated in Pega hiring Youyong Zou to provide consulting services for Pega about Appian’s BPM platform. Zou’s consulting work for Pega was a side-job; he worked for Serco, a company that implemented government contracts. Zou had access to Appian’s platform through his employment with Serco, which licensed Appian’s platform.

As part of his consulting services, Zou provided presentations to Pega in which he demonstrated Appian’s platform, illustrating strengths and weaknesses. Petronio described Zou as Pega’s "spy." Appian characterized Zou as Pega’s "Trojan horse." Pega took measures to hide Zou’s identity by giving him an alias and blurring his username on screenshots. Over a two-and-a-half-year period, Zou spent approximately 200 hours consulting for Pega and received $23,608 in compensation.

Pega’s executives observed some of Zou’s demonstrations, which were recorded for training purposes. Pega recorded nearly 100 videos of Zou using Appian’s platform, in which Zou would explain strengths and weaknesses of various features on Appian’s BPM system. See, e.g., Pl. Ex. 853-910 (training videos). Zou also demonstrated building apps with Appian’s software. At trial, Appian established Pega’s widespread use of Zou’s tutorials. Several of the videos "cascaded" through Pega’s product management team. Zou even came to Pega’s Massachusetts headquarters for an all-day meeting with Pega’s senior leadership. Pega’s engineers participated in meetings with Zou, including Kerim Akgonul, Pega’s Head of Product Management—the group responsible for making improvements to Pega’s platform. Petronio encouraged Akgonul to meet with Zou to "see something in [t]here that [Akgonul] might like for our product." Pl. Ex. 853 at 01:00-01:15. Appian’s expert opined that following Zou’s demonstrations, Pega made changes to its platform that had "striking similarities" to Appian’s product. Moreover, Pega used the information gathered by Zou to improve its own platform and also to identify and attack Appian’s weaknesses.

B. Pega Employees Access Appian’s Platform Independent of Zou’s Efforts

After Zou stopped consulting for Pega, Pega continued its attempts to access Appian’s trade secrets via improper means.

For example, in 2017, three years after Zou stopped consulting for Pega, Pega employees accessed Appian’s platform using aliases to discreetly view Appian’s free trials.

III. Appian Learns of Pega’s "Research" and Files this Action

In 2015, Petronio and Pega parted ways. Appian hired Petronio the following year as a consultant. He later became Appian’s Senior Director of Market Intelligence and Strategy. Eventually, in 2020, Petronio informed Appian about Zou and his consulting work on behalf of Pega. Appian responded by suing Pega and Zou.

Appian brought claims against Pega under the Virginia Uniform Trade Secrets Act, Code § 59.1-336 et seq., based on Pega’s alleged misappropriation of trade secrets through its dealings with Zou, and under the Virginia Computer Crimes Act, Code § 18.2-152.1, et seq., relating to Pega’s efforts to obtain improper access to Appian materials.

IV. What Secrets Did Pega Allegedly Receive?

The trade secrets that Appian contends were misappropriated by Pega basically fell into three categories: (1) functions of Appian’s platform that Appian accused Pega of copying; (2) knowledge relating to weaknesses of Appian’s platform which Pega used to its own advantage; and (3) access to Appian’s confidential documentation such as its user manual which assisted Pega in copying Appian’s strengths and exploiting its weaknesses.

A. The Copied Functions that Improved Pega’s Platform

Appian identified five functions related to "the architecture and design underlying specific features of Appian’s platform" that Pega copied to improve its platform based on Zou’s demonstrations. Appellee’s Br. at 8. Dr. Marshall, Appian’s expert witness, provided extensive testimony over the course of multiple days. He testified that it appeared Pega made improvements to its platform based on trade secrets it ob- tained from Appian. Marshall testified that Pega misappropriated the following features of Appian’s platform, which constituted trade secrets: (1) Smart Services, (2) Custom Data Types, (3) Ease-of-Editing Functionality, (4) Out-of-the-Box Ability to Deploy Applications to Mobile, and (5) Out-of-the-Box Integrated Social View of Worklist and Tasks. These features can be briefly summarized as follows:

1. smart services: this tool enables a...