Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-03-03673/USCOURTS-ca8-03-03673-0/pdf.json

Parties Involved:
Cisco Systems
Appellee
Storage Technology Corporation
Appellant

Document Text:

1

The Honorable Joan N. Ericksen, United States District Judge for the District

of Minnesota.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 03-3673

___________

Storage Technology Corporation, *

*

Plaintiff - Appellant, *

* Appeal from the United States

v. * District Court for the

* District of Minnesota.

Cisco Systems, Inc., *

*

Defendant - Appellee. *

___________

Submitted: June 16, 2004

Filed: January 26, 2005 

___________

Before LOKEN, Chief Judge, JOHN R. GIBSON, and BYE, Circuit Judges.

___________

JOHN R. GIBSON, Circuit Judge.

Storage Technology Corporation appeals the district court's1

 entry of summary

judgment against it on its various claims against Cisco Systems, Inc. arising out of the

hiring of a number of Storage Technology's employees by Cisco's predecessor,

NuSpeed Internet Systems, Inc. The district court held that Storage Technology's

claims for interference with contractual relations, inducing breach of contract,

conversion, and breach of fiduciary duties failed because Storage Technology did not

come forward with any evidence of recoverable damages. The district court held that

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Minnesota has not recognized a claim for “corporate raiding,” or hiring away another

firm's employees. The district court held that the remaining claim, for

misappropriation of trade secrets, was not supported by evidence that satisfied the

requirements of Fed. R. Civ. P. 56(e). We affirm the judgment of the district court.

In November 1999, Mark Cree and Clint Jurgens founded NuSpeed Internet

Systems, Inc., a new computer technology company. Cree and Jurgens's plan was to

develop a product to link computers at one location to data storage networks at other

locations through the Internet or other Wide Area Network using Internet Protocols.

On December 2, Cree and Jurgens offered employment to Mark Schrandt, an engineer

at Storage Technology, which was developing data storage networking products.

Schrandt accepted NuSpeed's offer and gave Storage Technology oral notice on or

about December 3 that he was leaving. He later gave a written resignation effective

at the end of December. Schrandt began work for NuSpeed in January 2000. In

December, while Schrandt was still at Storage Technology, he told four other Storage

Technology engineers, Mark Bakke, Ed Fiore, Tim Kuik, and Dave Thompson, that

he was going to work for NuSpeed, and they expressed interest in following Schrandt.

Schrandt met with them outside of work to discuss NuSpeed, and by mid-December,

these four Storage Technology employees had signed on with NuSpeed. Through

November 2000, NuSpeed hired twenty-two more engineers who were or had been

employed at Storage Technology, as NuSpeed grew to employ seventy-eight people.

 

In February 2000, a new open Internet protocol was published, called iSCSI

(for "Internet, Small Computer Systems Interface"). NuSpeed quickly began working

on incorporating iSCSI in its product, the SN 5420, which linked storage area

networks over the Internet. In April 2000, NuSpeed announced that it was

developing a device to transmit data using the iSCSI protocol. NuSpeed aspired to

be the first company to bring such a product to market. Cisco Systems, Inc. acquired

NuSpeed in September 2000 in a stock-for-stock transaction in which NuSpeed's

shareholders received $450 million in Cisco stock. Although the SN 5420 was

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indeed the first iSCSI device to market, Cisco never made a profit on NuSpeed, or the

"Storage Router Business Unit," as it was called after the acquisition; as of January

2003, Cisco's operating losses for the unit stood at $50 million. 

Storage Technology brought this suit against Cisco, alleging that NuSpeed had

engaged in “corporate raiding” by hiring Schrandt, Bakke, Fiore, Kuik and

Thompson, and the other former Storage Technology employees, alleging that the

employees had gained knowledge at Storage Technology of a device for joining

disparate and otherwise incompatible computer networks and NuSpeed had used that

knowledge to develop a product based on Storage Technology's device. Storage

Technology also alleged claims for interference with contractual relations for hiring

away persons with whom Storage Technology had employment contracts; for

inducing breach of contracts; for conversion of confidential information; for

encouraging breach of fiduciary duties by former Storage Technology employees; and

for misappropriation of trade secrets. 

Cisco moved for summary judgment. Cisco denied that NuSpeed

misappropriated any trade secret information or acted improperly in hiring Storage

Technology engineers. 

The district court granted summary judgment to Cisco. First, the district court

considered Storage Technology's claim for tortious interference with Storage

Technology's contracts with its employees. The court held that under Minnesota law,

the measure of damages for tortious interference with contract is the amount the

plaintiff could have recovered for breach of the underlying contract. Storage

Technology made no effort to prove the value of the employment contracts allegedly

breached, but pinned its entire case on a theory of unjust enrichment by which it

sought to recover the entire $450 million of value which the NuSpeed shareholders

received from Cisco in the form of Cisco stock. The district court held that the $450

million figure had no relation to the damages suffered by Storage Technology from

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the alleged breach of any of its contracts with the former employees. The tortiousinterference-with-contract claim therefore failed for lack of proof of the element of

damages. The claim for inducing breach of contract required proof of the same

elements as the tortious interference claim and therefore failed with that claim. The

conversion claim failed both because the type of property affected was trade secrets,

which are not covered by the tort of conversion, and because Storage Technology

failed to prove damages. Similarly, the district court held that Storage Technology's

claim for breach of fiduciary duties by Mark Schrandt in December 1999 failed for

lack of proof of damages. 

The district court next considered Storage Technology's claim for “corporate

raiding,” or the “systematic and massive program of hiring another company's

employees.” The court held that Minnesota had not recognized a cause of action for

corporate raiding and that Minnesota has disfavored any cause of action that would

inhibit employees' mobility in the workforce, as seen by the disfavor with which

Minnesota regards noncompetition clauses. Accordingly, the district court declined

to fashion a new tort under Minnesota law.

Finally, the district court held that Storage Technology had failed to come

forward with evidence of misappropriation of a trade secret sufficient to meet the

requirements of Fed. R. Civ. P. 56(e), since it relied on assertions by people who had

no personal knowledge of the subjects of their statements. Accordingly, the district

court entered judgment for Cisco on the misappropriation of trade secrets count. 

I.

We review the district court's entry of summary judgment de novo, using the

same standard as the district court. Winthrop Res. Corp. v. Eaton Hydraulics, Inc.,

361 F.3d 465, 468 (8th Cir. 2004). Summary judgment is appropriate where there are

no disputed issues of material fact and the moving party is entitled to judgment as a

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matter of law. Fed. R. Civ. P. 56(c). “Thus, where the moving party can point to the

absence of any evidence satisfying a necessary element of a claim, such as damages,

and the non-moving party fails to produce any such evidence, summary judgment is

properly entered.” Meterlogic, Inc. v. KLT, Inc., 368 F.3d 1017, 1018-19 (8th Cir.

2004). We review for abuse of discretion the district court's decision to exclude an

expert's testimony for purposes of determining whether there is an issue of material

fact. Id. at 1019.

II.

Under Minnesota law, the elements of tortious interference with contract are

(1) the existence of a contract, (2) the tortfeasor's knowledge of the contract, (3) the

tortfeasor's intentional causation of a breach of the contract, (4) a lack of justification

for the tortfeasor's action, and (5) damages resulting from the breach. Bouten v.

Richard Miller Homes, Inc., 321 N.W.2d 895, 900 (Minn. 1982). The tort of inducing

a breach of contract, which Storage Technology pleads in a separate count, requires

the same elements. Aslakson v. Home Sav. Ass'n, 416 N.W.2d 786, 788 (Minn. Ct.

App. 1987). 

We turn to the question of whether Storage Technology adduced any evidence

to prove its damages for the alleged tortious interference with its employment

contracts. 

A.

The district court focused on the nature of damages in a tortious interference

with contract case. Storage Technology has declined to prove damages to its own

business and instead only attempted to establish a right to restitution in the amount

of Cisco's alleged unjust enrichment. Cisco contends, and Storage Technology does

not deny, that Cisco lost money on the NuSpeed product. At the deposition of

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Timothy Schulte, Storage Technology's counsel expressly denied that Storage

Technology claims or has proven lost profits. Instead, Storage Technology contends

it is entitled to $450 million, which was the price Cisco paid for NuSpeed. The

district court held that "damages for interference with contract are limited to those

that might have been recovered for a breach of the contract itself." The court held

that because Storage Technology failed to prove what damages NuSpeed caused,

Storage Technology had not made a showing sufficient to resist summary judgment.

The usual remedy provided by Minnesota law for interference with contract is

to compensate the victim for the damages that resulted from the loss of the contract.

The early case of Swaney v. Crawley, 157 N.W. 910, 911 (Minn. 1916), stated the

principle that the “injured party is limited, as a general rule, to such damages as might

have been recovered for a breach of the contract itself.” Potthoff v. Jefferson Lines,

Inc., 363 N.W.2d 771, 777 (Minn. Ct. App. 1985), modified this statement by

allowing the award of damages for emotional distress in an interference with contract

suit, whereas such damages would not be available in a suit on the contract itself.

Potthoff observed that the trial court had relied on the Restatement (Second) of Torts

§ 774A (1979), which allows loss of the benefits of contract, consequential losses,

and damages for emotional distress, all of which focus on loss to the aggrieved party.

See also Kallok v. Medtronic, Inc., 573 N.W.2d 356, 363-64 (Minn. 1998) (holding

recovery for tortious interference can include costs of litigation to enforce contract).

However, breach of some covenants and duties attendant on the employment

relation entitles the aggrieved employer to restitution. An employee who breaches

a noncompetition or nondisclosure covenant can be required to account for his profits.

Cherne Indus., Inc. v. Grounds & Assoc., Inc., 278 N.W.2d 81, 94-95 (Minn. 1979).

The remedy for breach of the fiduciary duty of loyalty is also restitutionary. See

Miller v. Miller, 222 N.W.2d 71, 78 (Minn. 1974) (remedy for breach of fiduciary

duty of loyalty is imposition of constructive trust). 

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Therefore, where the defendant has not merely enticed a competitor's

employees to leave their employment, but also induced them to breach a fiduciary

duty of loyalty or restrictive covenant, the remedy must reflect the underlying wrong.

When the underlying wrong would have supported a claim of restitution, so should

a claim for inducing that wrong. In Cherne, an employee of Cherne left and formed

a corporation, Grounds & Associates, which hired away two other employees. 278

N.W.2d at 87. All three former employees had signed non-competition and nondisclosure-of-confidential-information covenants, id. at 86, which they breached in

the service of the new corporation. Id. at 88-91. Grounds & Associates argued that

the proper remedy was award of Cherne's lost profits, rather than a restitutionary

award of Grounds's profits. The Minnesota Supreme Court held:

Although damages for breach of contract are traditionally measured by

the nonbreaching party's loss of expected benefits under the contract,

where an employee wrongfully profits from the use of information

obtained from his employer, the measure of damages may be the

employee's gain. Also, this court has specifically found that the violator

of a covenant not to compete may be required to account for his profits,

and such illegal profits may properly measure the damages.

Id. at 94-95 (internal citations omitted). Cherne did not expressly discuss the fact that

it was holding a third party liable for the employees' breach of the noncompetition

covenants, but in a later case the Minnesota Supreme Court referred to Cherne as

implicitly holding that "third-party interference with [a] noncompete agreement is a

tort." Kallok, 573 N.W.2d at 361. Thus, where the interference alleged is

inducement of breach of restrictive covenants or fiduciary duties, the remedy should

mirror the restitutionary remedy available for the breach of the covenant or fiduciary

duty. 

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Storage Technology's interference with contract theory is not clear from its

complaint. The complaint's "interference with contractual relations" count only

alleges that Storage Technology had employment contracts with its employees and

that NuSpeed hired the employees without justification, knowing that they would then

terminate their contracts with Storage Technology. It also alleges that NuSpeed

accomplished the hiring by using knowledge about Storage Technology's pay

structure, etc., but it does not pursue this theory before us. Thus, the count in the

complaint appears to allege only hiring of plaintiff's at-will employees. However,

Storage Technology pleads in separate counts that NuSpeed induced Schrandt, Fiore,

Kuik, and Bakke to breach fiduciary duties to Storage Technology by disclosing

confidential information and soliciting Storage Technology employees to leave

Storage Technology. In its brief, it contends that Schrandt breached his duty of

loyalty by recruiting Storage Technology employees for NuSpeed while still in

Storage Technology's employ. In its reply brief, Storage Technology contends that

it had a noncompetition agreement with Schrandt, which he violated. Storage

Technology therefore appears to be pursuing a theory that NuSpeed induced Storage

Technology's employees to breach noncompetition and nondisclosure covenants and

to breach their fiduciary duty of loyalty to Storage Technology.

We conclude that Minnesota courts would allow a restitutionary remedy in a

case in which the interference alleged was inducing an employee's breach of

noncompetition and nondisclosure covenants and fiduciary duties. We further

conclude that Storage Technology is alleging NuSpeed induced such breaches by

Storage Technology's employees. We therefore must ascertain whether Storage

Technology has made a sufficient showing of unjust enrichment to survive summary

judgment.

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B.

Storage Technology's entire evidentiary basis for a restitutionary remedy

consisted of the report of its expert, George Norton, that "Cisco's valuation of

NuSpeed (basically, its key people and storage technology expertise) was $450

million and represents a proper valuation of the damages to Storage Technology and

due to it for the trade secret appropriation, corporate raiding, and breach of contract

and fiduciary responsibilities promulgated." The district court rejected Norton's

opinion as "rank speculation." 

The first and most apparent problem with Norton's testimony is that he

attributed the entire value of the NuSpeed acquisition to employees and trade secrets

wrongfully appropriated from Storage Technology, even though NuSpeed had other

assets and employees. Norton did not attempt to value the people or the technology

supposedly belonging to Storage Technology by any means other than by ascertaining

what price Cisco paid for NuSpeed. The undisputed evidence shows that a crucial

aspect of the acquisition was Cisco's desire to obtain NuSpeed's product incorporating

the iSCSI protocol, which had nothing to do with Storage Technology. 

Norton opined, "The value inherent in the price Cisco paid for NuSpeed was

in the key employees of NuSpeed who embodied the storage expertise technology

Cisco sought." But Norton testified at his deposition that he did not know what the

technology was. Norton later contended that the value of NuSpeed to Cisco was in

the fifteen key employees named in the acquisition documents. Of these, five are

listed as having come from firms other than Storage Technology. Norton did not

know what percentage of NuSpeed's total employees were from Storage Technology

at the time Cisco acquired the company. He did not know if the deal would have

gone forward if the people listed had not agreed to go to Cisco. Norton testified that

he did not take into account the terms of the employees' contracts with Storage

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Technology. See Nordling v. N. States Power Co., 478 N.W.2d 498, 505 (Minn.

1991)(“The fact that the contract is terminable at will . . . is to be taken into account

in determining the damages that the plaintiff has suffered by reason of its breach.”)

(quoting Restatement (Second) of Torts § 766, comment g (1979)). 

Norton was unwilling or unable to answer questions exploring what proportion

of the acquisition price was attributable to what NuSpeed assets. His deposition was

singularly uninformative:

Q: [D]o you believe that StorageTek could include within its damages

the amount that Cisco paid for tangible assets acquired?

A: I don't understand how StorageTek includes things in its damages. 

. . . .

Q: And you didn't attempt yourself to value any of those assets that

Cisco was acquiring, whether tangible or intangible yourself, right?

A: I think we had this discussion this morning. Cisco was in the best

position to make that valuation and they did.

Q: And you did not?

A: And they wrote the check.

Q: And you did not, correct?

A: I did not, what?

Q: You did not do an evaluation of the worth of the tangible or the

intangible assets, correct?

A: Yes, I did, that's $450 million. It says right here on page six, the

$450 million price is the best representation of fair-market value for the

tangible and intangible assets represented by all the stock of NuSpeed.

Q: But you did not attempt to determine a worth for the tangible assets,

correct?

A. As I've said, one quick glance at the balance sheet will show that it

is minutiae compared to the price paid for the people and the

technology.

Q: And the price paid because it did exceed the value of the tangible

assets was paying for goodwill then, right? . . .

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"SAN" stands for Storage Area Network.

-11-

A: If you say so. . . . I don't know what the current definition of goodwill

is in the accounting so I can understand it, but again, if you say that's

what it is, I see no reason to argue with you on it. . . .

Moreover, there is crucial evidence, which Norton does not take into account,

that the reason Cisco was interested in NuSpeed was that NuSpeed had begun work

on using iSCSI to access stored data. The Cisco executive who worked on the

acquisition testified:

Q. What made NuSpeed attractive to Cisco?

A: So NuSpeed was the first implementation that we saw of the iSCSI

standard; iSCSI standard was originally proposed by Cisco and IBM,

and we saw that as a[n] early, first-to-market opportunity to enable

storage over [internet protocol].

Nobody contends that Storage Technology had anything to do with the idea of using

software incorporating the iSCSI standard for storage networking. Storage

Technology admitted that no software was ever written for the "SAN Appliance"2

--

which it contends was the idea for a storage networking product that NuSpeed stole

from Storage Technology. In fact, iSCSI did not even exist until February 2000, after

Schrandt, Bakke, Thompson, Kuik and Fiore had already left Storage Technology. 

Norton did not take into account any value that may have resulted from the

incorporation of the iSCSI standard in the SN 5420:

Q: It [the acquisition price] also included the development work on

NuSpeed's product, the SN 5420, correct?

A: Again, I'd have to go back to the agreement and go through it line by

line to find out exactly what was spelled out in terms of what that

company represented at that point in time. . . .

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Q: And there are some things that NuSpeed employees developed which

did not include any trade secrets or anything else of StorageTek,

correct?

A: I don't know.

In Alcatel USA, Inc. v. Cisco Sys., Inc., 239 F. Supp. 2d 660, 667-73 (E.D.

Tex. 2002), the court entered summary judgment disposing of a trade secret suit in

which the plaintiff asked to be awarded the acquisition price of the company allegedly

in possession of trade secrets. The court listed the "dubious and tenuous inferences"

that would be required to conclude that certain information was the crucial ingredient

on which hung the whole value of the acquired company, id. at 668, and concluded

that the theory and supporting evidence were too speculative to submit to a jury: 

Alcatel fails to apportion the value of its alleged trade secrets from the

approximately $550 million price for which Monterey was purchased by

Cisco. Instead, Alcatel essentially attempts to attribute every penny of

Monterey's purchase price and every penny of the Wavelength Router

technology to the value of its alleged trade secrets. This maneuver,

however, reeks of incongruity and underscores the speculative nature of

Alcatel's alleged damages.

Id. at 671. Storage Technology has done no better a job than Alcatel in establishing

that the purchase price of the acquired company was due entirely, or at all, to the

presence of Storage Technology engineers and knowledge, or in helping the jury

apportion the acquisition price between assets attributable to Storage Technology and

assets having no relation to Storage Technology. 

We review for abuse of discretion the district court's decision that expert

opinion is too speculative to be admissible. Group Health Plan, Inc. v. Phillip Morris

USA, Inc., 344 F.3d 753, 760 (8th Cir. 2003). An expert's opinion must be based on

"sufficient facts or data." Fed. R. Evid. 702. The district court should exclude expert

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testimony if it is so fundamentally unsupported that it can offer no assistance to the

jury. Children's Broad. Corp. v. Walt Disney Co., 357 F.3d 860, 865 (8th Cir. 2004).

The district court was well within its discretion in deciding that Norton's testimony

was so uninformed and baseless that it could not assist the jury in the task of fixing

damages. 

Storage Technology contends that the fact of damage is certain and only the

amount is uncertain. Under Minnesota law, damages may not be speculative, remote,

or conjectural. Children's Broad. Corp. v. Walt Disney Co., 245 F.3d 1008, 1016 (8th

Cir. 2001). However, once the fact of damages is proved with certainty, the extent

of the damages need only be shown to have a reasonable basis in the evidence. N.

States Power Co. v. Lyon Food Prods., Inc., 229 N.W.2d 521, 525 (Minn. 1975).

Storage Technology points to nothing in the record besides Norton's testimony that

would allow a jury to calculate damages. Cf. Children's Broad., 245 F.3d at 1016-17

(jury could "sort through" evidence of revenues, losses, valuations, and actual and

potential sales to arrive at figure for damages). "When the record contains no proof

beyond speculation to support the verdict," the defendant is entitled to judgment as

a matter of law or summary judgment. Sip-Top, Inc. v. Ekco Group, Inc., 86 F.3d

827, 830 (8th Cir. 1996); see Fed. R. Civ. P. 56(c) (summary judgment appropriate

when moving party would be entitled to judgment as a matter of law). 

Storage Technology's failure to produce evidence substantiating any amount

of damages or restitution is fatal to its claim for tortious interference with contractual

relations, as well as to each of its other claims. 

We affirm the judgment of the district court.

________________

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