Alcatel USA v. DGI Technologies

Citation: Alcatel USA, Inc. v. DGI Techs., Inc., 166 F.3d 772 (5th Cir. 1999).

Factual Background
Alcatel USA, Inc. (formerly DSC Communications Corporation) designs, manufactures, and sells equipment comprising telephone switching systems. Its customers are long-distance telephone service providers, such as MCI and Sprint. A telephone switch routes long distance telephone calls to their destinations. Alcatel switches are controlled by its copyrighted operating system software. Alcatel regularly implements new features in its switches by upgrading its software, a process that costs DSC millions of dollars. DGI Technologies, Inc. (DGI), Alcatel’s competitor in the telecommunications equipment manufacturing industry, contends that it developed its cards by analyzing Alcatel’s unpatented products and then duplicating their functionality &mdash; a process referred to as “reverse engineering.” DGI initially obtained a used Alcatel switch containing a multitude of cards and set of switch owners manuals from an investor. Once DGI has determined the functionality of Alcatel’s products, it designed its own to perform these same functions using newer-generation electronics and adding additional features. DGI further insists that, from its inception, Alcatel repeatedly attempted to thrwat DGI’s entry into the market.

On the other hand, Alcatel contends that DGI did not engage in legitimate reverse engineering, but rather misappropriated Alcatel’s intellectual property by wrongfully obtaining schematics and manuals provided only to Alcatel customers on the express condition that there be no disclosure to third parties. Alcatel also notes that each manual contained a plainly visible copyright notice.

Trial Court Proceedings
Alcatel filed suit in 1994, alleging that DGI misappropriated its trade secrets, and engaged in unfair competition by taking advantage of the time, labor, skill, and money that Alcatel had invested in its switches and cards. DGI counterclaimed, asserting that Alcatel (1) violated the Sherman Act by monopolizing or attempting to monopolize the relevant product market for expansion products compatible with Alcatel telephone switches, (2) tortiously interfered with DGI’s contractual relations, and (3) engaged in unfair competition. In 1995, DSC filed a supplemental complaint, asserting direct and indirect copyright infringement claims. The trial court enjoined DGI from removing Alcatel’s operating system software from customer facilities.

The jury returned a mixed verdict, finding that Alcatel violated the Sherman Act, interfered with DGI’s contractual relations, and engaged in unfair competition, and that DGI infringed certain Alcatel copyright’s, engaged in unfair competition by misappropriating Alcatel’s time, labor, skill, and money, and misappropriated Alcatel’s trade secrets. The jury also determined that both parties has “unclean hands.” The trial court entered its final judgment and permanent injunction. It court awarded Alcatel $4.3 million in actual damages and $7 million in punitive damages, and awarded DGI $2 million in actual damages and $9 million in punitive damages, which resulted in a set-off judgment of $300,000.00 for Alcatel. The trial court dismissed DGI’s antitrust claim, stating that DGI had failed to prove the relevant product market and that its request for damages was flawed. Lastly, the trial court permanently enjoined DGI from developing any new microprocessor cards with the assistance of Alcatel’s operating system and from selling any other DGI microprocessor card designed to use Alcatel’s software. The court also ordered DGI to turn over all model DMP-2800 microprocessor cards to Alcatel for destruction, but the court stayed that order pending resolution of an appeal.

Appellate Court Proceedings
DGI timely appealed, and Alcatel timely cross-appealed. On appeal, the trial court’s grant of a judgment as a matter of law in favor of Alcatel, dismissing DGI’s antitrust claim was affirmed. The jury’s determination that damages were due to Alcatel on its claim of misappropriation of trade secrets, and the trial court’s injunction against DGI, based in part on this claim were also affirmed. However, the court reversed portions of the injunction tailored as relief from DGI’s copyright infringement because Alcatel misused its copyrights. Further, the trial court’s denial of a judgment as a matter of law in favor of DGI’s state law claim on unfair competition was vacated based on federal preemption. Lastly, the award of damages in favor of DGI on its claims for tortious interference and unfair competition was reversed for lack of sufficient evidence.