Atlantic Inertial Systems Inc. v. Condor Pacific Industries of California, Inc. et al

Filing 432

MINUTES (IN CHAMBERS): ORDER RE: PLAINTIFF'S REQUEST FOR AWARD OF A REASONABLE ROYALTY by Judge Christina A. Snyder: Subsequent to the verdict, plaintiff filed a motion requesting, among other things, that Judge Nguyen award a reasonable royalty pursuant to Cal. Civ. Code Section 3426.3(b) 306 . AIS' request for a royalty pursuant to Section 3426.3(b) is hereby GRANTED. Defendants are ORDERED to pay AIS a royalty in the amount of $125,000.00. (Made JS-6. Case Terminated.) Court Reporter: Not Present. (gk)

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL

‘O’ JS-6

Case No.

2:08-cv-02947-CAS(PJWx)

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

Present: The Honorable

Date

June 18, 2015

CHRISTINA A. SNYDER

Catherine Jeang
Deputy Clerk

Not Present
Court Reporter / Recorder

N/A
Tape No.

Attorneys Present for Plaintiff:

Attorneys Present for Defendants:

Not Present

Not Present

I

Proceedings:

(IN CHAMBERS): ORDER RE: PLAINTIFF’S REQUEST FOR
AWARD OF A REASONABLE ROYALTY

In February and March of 2011, this trade secret case was tried to a jury by the
Court, the Hon. Judge Jacqueline H. Nguyen, United States District Judge, presiding.1
On March 4, 2014, the jury returned a complete defense verdict. Dkt. 300. Subsequent
to the verdict, plaintiff filed a motion requesting, among other things, that Judge Nguyen
award a reasonable royalty pursuant to Cal. Civ. Code § 3426.3(b). Dkt. 306. On August
25, 2011, Judge Nguyen denied plaintiff’s motion. Dkt. 345. Plaintiff appealed. On
October 30, 2013, the Ninth Circuit issued a memorandum disposition reversing Judge
Nguyen’s order declining to award plaintiff a reasonable royalty. The Ninth Circuit
remanded to this Court “to determine whether a royalty award is warranted and, if so, in
what amount.” Dkt. 372 at 3.
I.

BACKGROUND2
A.

The Original Action

In the 1960s, defendant Sidney Meltzner founded Condor Pacific Industries, Inc.
(“Condor I”) to manufacture gyroscopes. Condor I produced these gyroscopes for the

1

Judge Nguyen has since been elevated to serve on the United States Court of
Appeals for the Ninth Circuit.
2

These facts and procedural history are adopted substantially from Judge Nguyen’s
orders on plaintiff’s motion for terminating sanctions and motion for final adjudication.
Dkts. 162, 345.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’ JS-6

Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

U.S. military, which integrated them into aircraft as navigational devices. In 2002,
Meltzner sold Condor I, including all of its intellectual property, to BAE Systems Inertial
Products (“BAE”). Plaintiff Atlantic Inertial Systems Inc. (“AIS”) acquired BAE in
2007.
After expiration of the Condor I-BAE sale agreement’s non-compete provision,
Meltzner founded a new gyroscope-manufacturing corporation with the name Condor
Pacific Industries of California, Inc. (“Condor II”). Condor II hired Condor I’s former
employees, and began operating out of Condor I’s old plant in Westlake Village,
California.
On May 6, 2008, AIS filed suit against Meltzner and Condor II (“defendants”),
alleging that Condor II had misappropriated intellectual property that BAE owned by
virtue of Meltzner’s sale of Condor I. AIS accused Meltzner of resurrecting Condor I and
using the exact same gyroscopic drawings sold to AIS in order to sell nearly identical
gyroscopes to the U.S. government. AIS’ First Amended Complaint (“FAC”), the
operative pleading in this action, asserted claims for (1) false designation of origin, (2)
infringement of a common law mark, (3) common law unfair competition, (4)
misappropriation of trade secrets relating to pricing information, (5) misappropriation of
trade secrets related to drawing packages, (6) state law unfair competition and (7)
interference with prospective economic advantage. Dkt. 37.
In discovery, AIS sought to uncover evidence that Condor II’s gyroscopes were
based on Condor I designs. As part of this investigation, AIS served a subpoena duces
tecum on the Defense Supply Center Richmond (“DSCR”), a non-party government
agency. Condor II had applied to DSCR to become an approved supplier of gyroscopes
to the military, and AIS sought to discover the documentation that Condor II had
submitted in support of this application. DSCR, concerned about disclosing potentially
proprietary information, informed AIS that it would only provide the documents if it
received Condor II’s consent or a court order directing it to turn the documents over.
After substantial litigation over discovery issues, resulting in, among other things,
the imposition of monetary sanctions on defendants, DSCR turned over the documents to
AIS. These documents, which included a number of gyroscope blueprints, evidenced
direct copying from plaintiff’s trade secrets, vindicating AIS’s contention that Condor II
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
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Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

had retained Condor I gyroscope designs. Indeed, the documents were duplicates of AIS’
gyroscope drawings, with changes only to the company name, author, and date.
Moreover, defendants had never turned over the DSCR documents, or any documents
like them, during discovery, despite document production requests from AIS
encompassing the blueprints at issue. In subsequent deposition testimony, Meltzner
admitted that he did not disclose the DSCR documents even though he (1) had them in
his possession and (2) understood that he was legally obligated to produce them.
Defendants then argued, for the first time in the course of the litigation’s two-year
history, that AIS had “abandoned” the gyroscope blueprints when it moved operations
out of the production facility in Westlake Village, CA (“the Westlake Facility”), which
was later taken over by Condor II.
AIS moved for terminating sanctions. In an order issued on June 30, 2010, Judge
Nguyen granted plaintiff’s motion, finding that defendants’ failure to turn over the DSCR
documents had irreparably tainted the proceedings. Dkt. 162. Prior to the DSCR
revelations, defendants had consistently adhered to a “reverse-engineering” defense, an
assertion discredited by defendants’ possession of blueprints for the very gyroscopes they
claimed to have reverse-engineered. Moreover, Judge Nguyen found that the “manifest
insincerity” of defendants’ newly asserted “abandonment” theory demonstrated that
defendants’ misconduct had been willful, and suggested the potential for future litigation
misconduct. Accordingly, Judge Nguyen imposed terminating sanctions against Condor
II with respect to AIS’ third claim (common law unfair competition) and fifth claim
(misappropriation of trade secrets related to drawing packages).
The case subsequently proceeded to a jury trial on, among other issues, the
monetary damages portion of AIS’ third and fifth claims. At the end of the trial, the jury
was given a special verdict form that asked, in pertinent part:
8. Was plaintiff harmed by defendants’ misappropriation of plaintiff’s drawings
and associated technical performance data, and was defendants’
misappropriation a substantial factor in causing harm, if any, to plaintiff?
Dkt. 300 at 12 (special verdict form). The jury answered this question, which had two
subparts, in the negative.

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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’ JS-6

Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

After the end of the trial, AIS moved for final adjudication. Among other things,
AIS requested that Judge Nguyen award it a reasonable royalty, pursuant to Cal. Civ.
Code § 3426.3, a provision of the California Uniform Trade Secrets Act (“CUTSA”).
Subsection 3426.3(b) provides that: “If neither damages nor unjust enrichment caused by
misappropriation are provable, the court may order payment of a reasonable royalty for
no longer than the period of time the use could have been prohibited.” Judge Nguyen
denied the request, as follows:
To prevail in a CUTSA claim, a plaintiff must establish harm. See CytoDyn of
New Mexico, Inc. v. Amerimmune Pharmaceuticals, Inc., 160 Cal. App. 4th
288, 297 (Cal. App. 2d Dist. 2008) (“Under the UTSA, a prima facie claim for
misappropriation of trade secrets requires the plaintiff to demonstrate: (1) the
plaintiff owned a trade secret, (2) the defendant acquired, disclosed, or used the
plaintiff’s trade secret through improper means, and (3) the defendant’s
actions damaged the plaintiff.”) (internal quotations omitted) (emphasis
added) . . . . Here, while the terminating sanctions established the first two
elements, the jury found that Defendants’ actions have not harmed Plaintiff.
Therefore, the third element is not met and as a result AIS is not entitled to any
form of relief under CUTSA.
Dkt. 345 at 7-8.
AIS appealed Judge Nguyen’s order. The Ninth Circuit affirmed in part and
reversed in part. While affirming the majority of the order, the Ninth Circuit reversed
Judge Nguyen’s denial of a reasonable royalty:
The district court erred in ruling, at the damages stage, that the jury’s finding
of no harm precluded a reasonable royalty. The statute provides for a
reasonable royalty “[i]f neither damages nor unjust enrichment caused by
misappropriation are provable.” Cal. Civ. Code § 2426.3(b). That requirement
may be met by either a lack of sufficient evidence, or an adverse jury finding
with respect to those forms of relief. Ajaxo Inc.v. E*Trade Fin. Corp., 115 Cal.
Rptr. 3d 168, 172-73 (Ct. App. 2010). The jury’s finding that Defendants did
not proximately cause harm to Plaintiff is therefore consistent with the
availability of a royalty under the statute.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’ JS-6

Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

Dkt. 372 at 2-3. The Ninth Circuit remanded the case to this Court “to determine whether
a royalty award is warranted, and, if so, in what amount.” Id. at 3. On remand, this case
was reassigned to the undersigned judge of this Court. Dkt. 373.
B.

Proceedings on Remand

On March 19, 2014, plaintiff and defendants filed Opening Briefs with this Court.
Dkts. 384, 386. The parties subsequently filed responses. Dkts. 401, 404. On June 23,
2014, the Court requested additional briefing regarding the standard to be employed in
determining whether or not to grant a royalty pursuant to the CUTSA. Dkt. 407. The
parties submitted the relevant briefing on July 7, 2014. Dkt. 409, 411.
The parties disagree as to both the standard to be employed in determining whether
or not to grant a royalty, as well as the method by which to calculate the royalty rate
should the Court determine that a royalty is warranted. Plaintiff has proposed a royalty of
$1.55 million, relying largely on the expert analysis of Neil J. Beaton. Dkt. 384. In turn,
Beaton’s analysis relies on a gyroscope licensing agreement between AIS and non-party
Instrument Tech (“the Instrument Tech Agreement”). On July 7, 2014, defendants filed a
Motion to Strike the Instrument Tech Agreement and to exclude any evidence based
thereon, asserting that plaintiff should have disclosed this contract several years earlier in
response to defendants’ discovery requests. By order dated August 18, 2014, the Court
denied defendants’ motion to strike. Dkt. 428.
The parties subsequently conducted limited written discovery into the Instrument
Tech Agreement. On November 21, 2014, the parties submitted a joint status report, in
which they requested additional guidance from the Court before conducting further
discovery. Dkt. 430. In response, the Court determined that further discovery was
unnecessary, and advised the parties that the Court would render a decision on the merits
of the royalty determination. Dkt. 431.
II.

DISCUSSION

The Court is charged by the Ninth Circuit’s mandate with “determin[ing] whether a
royalty award is warranted and, if so, in what amount.” Dkt. 372 at 3.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Case No.

2:08-cv-02947-CAS(PJWx)

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.
A.

Date

‘O’ JS-6

June 18, 2015

Whether a Royalty Should be Awarded

“A reasonable royalty is a court-determined fee imposed upon a defendant for his
or her use of a misappropriated trade secret.” Ajaxo, 187 Cal. App. 4th at 1308. The
CUTSA permits an award of a reasonable royalty in two situations. As is relevant here,
“[w]hen calculating a monetary remedy for the past use of a misappropriated trade secret,
a court ‘may order’ reasonable royalties ‘[i]f neither damages [for actual loss] nor unjust
enrichment caused by misappropriation are provable.’ ” Id. (quoting § 3426.3(b))
(alteration in original).3 “In that situation a reasonable royalty is an attempt ‘to measure a
hypothetically agreed value of what the defendant wrongfully obtained from the plaintiff.
By means of a ‘suppositious meeting’ between the parties, the court calculates what the
parties would have agreed to as a fair licensing price at the time that the misappropriation
occurred.’ ” Id. (quoting Vermont Microsystems, Inc. v. Autodesk, Inc., 138 F.3d 449,
451 (2nd Cir. 1998) and citing University Computing Co. v. Lykes-Youngstown Corp.,
504 F.2d 518, 538 (5th Cir. 1974)).
The Court begins by observing that Ajaxo, the case relied on by the Ninth Circuit
in reversing Judge Nguyen’s determination that a royalty was unavailable, does not
provide much direction about what factors should inform a trial court’s exercise of its
discretion to award such a royalty. Instead, Ajaxo limited itself to determining “whether
unjust enrichment is ‘provable’ within the meaning of section 3426.3, subdivision (b),
where the evidence of unjust enrichment is sufficient as a matter of law but the jury
rejects it as a matter of fact.” 187 Cal. App. 4th at 1310. The Ajaxo court answered this
question in the negative, concluding that the trial court has discretion to award a
reasonable royalty even where the victim of the misappropriation is unable to convince a
jury that the misappropriating defendant profited from its actions. Id. at 1310-13.

3

AIS appears to assert that, where unjust enrichment and damages are unprovable,
Ajaxo mandates an award of a reasonable royalty. See AIS Open’g Br. at 10-11.
However, both the plain language of the CUTSA, and Ajaxo itself, demonstrate that such
an award is discretionary, not mandatory. Ajaxo, 187 Cal. App. 4th at 1301 (“[R]ecovery
of a royalty is not guaranteed even where actual losses and unjust enrichment are not
provable. [The CUTSA] provides only that the court ‘may’ award reasonable royalties in
that situation.”).
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’ JS-6

Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

Accordingly, the court remanded the matter “to allow the trial court to exercise its
discretion,” id. at 1315, without proffering express standards to govern that exercise.
The parties’ supplemental briefing sheds some light on the subject. Defendants,
relying on Ajaxo and Altavion, Inc. v. Konica Minolta Sys. Lab. Inc., 226 Cal. App. 4th
26, 42 (2014), review denied, (Aug. 20, 2014), contend that “a plaintiff seeking a royalty
must show (1) that at a ‘suppositious meeting’ between the parties at the time the
misappropriation occurred, the parties would have agreed to a licensing price greater than
zero, and (2) that the defendant has actually gained some intangible or incalculable
benefit from the trade secrets.” Defs.’ Br. Standard at 1. Defendants argue that AIS has
not made this showing.
AIS also relies on Ajaxo and Altavion, emphasizing public policy concerns raised
by the Court of Appeal and asserting that both cases “affirm a clear presumption in favor
of the trial court’s award of a reasonable royalty.” Pl.’s Br. Standard at 4. AIS agrees
that the defendant must have benefitted from the misappropriation, “if not directly, in a
non-pecuniary way,” in order to justify a royalty award, but contends that this condition
is satisfied since Condor II indisputably used AIS’ trade secrets “to manufacture and sell
gyroscopes [to the U.S. government] that directly competed with AIS’ gyroscopes.” Id.
at 4-5. AIS contends that, under Altavion, the following factors inform the exercise of
the Court’s discretion to award a royalty: (1) whether defendants used the
misappropriated trade secrets; (2) whether the trade secrets were obtained improperly; (3)
whether costs were incurred in developing the trade secret in the first instance; and (4)
whether the parties had previously considered a licensing agreement. Id. at 6-7.
According to AIS, all of these factors weight in favor of awarding a royalty.
Both Ajaxo and Altavion lend some support to the parties’ respective positions. In
Ajaxo, the plaintiff, a technology company specializing in wireless stock-trading
software, entered into negotiations to license that software to E*Trade, an internet-based
stock broker. 187 Cal. App. 4th 1295, 1300 (2010). The negotiations, which were
subject to a non-disclosure agreement, fell apart, and E*Trade subsequently partnered
with Everypath, another vendor of wireless stock-trading software. Suspecting that
Everypath had developed its software with the aid of Ajaxo trade secrets acquired by
E*Trade during the prior negotiations, Ajaxo sued E*Trade and Everypath for
misappropriation of trade secrets. Id. at 1301. A jury found E*Trade liable for the
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
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Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

misappropriation, but concluded that E*Trade had suffered a net loss, since its wireless
trading business had failed despite the misappropriation. Id. at 1303. Ajaxo
subsequently moved for a reasonable royalty under § 3426.3(b), which the trial court
denied on the basis that unjust enrichment was “provable,” it simply had not been
proven. Id.
The Court of Appeal reversed, concluding that section 3426.3(b) permits a royalty
award even where a defendant was not found as a matter of fact to have profited from his
misappropriation. Guided by considerations of public policy, the court reasoned that
allowing misappropriators to gamble with other people’s trade secrets would undermine
“important standards of commercial ethics.” Id. at 1312. Moreover, even if a defendant
does not profit from a misappropriated trade secret, he may nonetheless achieve nonpecuniary benefits from the secret. Id. Ultimately, the Court of Appeal declined to
“place the risk of loss on the wronged plaintiff, thereby discouraging innovation and
potentially encouraging corporate thievery where anticipated profits might be minimal
but other valuable but nonmeasureable benefits could accrue.” Id. at 1313.
In Altavion, the plaintiff, Altavion, sued Konica Monolta Systems Laboratory, Inc.
(“KMSL”) for misappropriation of trade secrets related to digital stamping technology
developed by Altavion and disclosed to KMSL during failed negotiations regarding a
cooperative measure. 226 Cal. App. 4th 26, 42 (2014). Relying on Ajaxo and other
unidentified cases, the trial court determined that Altavion could prove neither actual
damages nor unjust enrichment, and awarded Altavion a $1 million royalty. Id. at 67.
The Court of Appeal affirmed the award, noting that the trial court had considered the
following factors in awarding the royalty: (1) KMSL had not used the trade secrets in any
product and, despite expending resources to accomplish that purpose, it lacked the
present ability to do so; (2) KMSL acted unscrupulously, attempting to create its own
technology by “piggy-backing” upon Altavion’s technology when negotiations fell apart;
(3) Altavion invested significant time and money developing the trade secrets; and (4) the
parties had discussed a potential licensing agreement. Id. at 68.
In discussing the equitable origins of the reasonable royalty standard and the
purpose of its application, both the Ajaxo and Altavion courts relied on University
Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518 (5th Cir. 1974). Ajaxo, 187
Cal. App. 4th at 1313; Altavion, 226 Cal. App. 4th at 68-72. In University Computing,
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
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Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

the defendant misappropriated a computerized inventory system from plaintiff, intending
to sell the system to its own customers. 504 F.2d at 527-530. Despite marketing efforts,
defendant had not actually sold the system before the misappropriation was discovered.
Id. On appeal, the court affirmed the jury’s verdict for plaintiffs on the misappropriation
claim, and extensively examined the caselaw concerning the appropriate remedy for such
claims. Addressing the propriety of application of the reasonable royalty measure, the
court explained that “[c]ertain standards do emerge from the cases.” Id. at 539.
Specifically, in order to apply the measure, “[t]he defendant must have actually put the
trade secret to some commercial use . . . [since] [t]he law governing protection of trade
secrets essentially is designed to regulate unfair business competition, and is not a
substitute for criminal laws against theft or other civil remedies for conversion.” Id.
Taken together, the foregoing cases suggest that the following principles should
inform the exercise of the Court’s discretion to determine whether to award a royalty,
and, if so, in what amount: (1) whether the defendant put the trade secret to commercial
use; (2) whether some benefit, pecuniary or otherwise, accrued to the misappropriating
defendant; (3) whether plaintiff incurred costs in developing the trade secret; and (4)
whether the parties discussed a licensing agreement. Finally, the entire analysis must be
informed by the role played by the law of trade secrets in maintaining “important
standards of commercial ethics.” Ajaxo, 187 Cal. App. 4th at 1312.
Applying these principles to the instant case, the Court concludes that an award of
a royalty to AIS is appropriate. First and foremost, it is undisputed that defendants
submitted gyroscopic drawings—which were direct copies of drawings sold by Condor I
to BAE—to the U.S. government in order to obtain approval as a supplier of gyroscopes
to the military. Defendants contend that the government representative who approved
Condor II as a supplier “testified that he did not rely on the drawings in making his
decision to approve Condor . . . and that ‘[t]he most important information [was] [Condor
II’s] desire to become an approved supplier.’ ” Defs.’ Standard Br. at 6 (citing deposition
testimony of Lieutenant Jacob English at 38:15-16). That the drawings were not the
“most important” consideration does not mean that they were not considered. Indeed,
Lieutenant English testified that he also relied on the documents submitted in support of
Condor II’s application, English Depo. at 338:4-9, which included the gyroscopic
drawings, in addition to Condor II’s representations that the company was “able to
reproduce the gyroscopes and develop them per the drawing package and the [existing]
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
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Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

requirements [of] the Air Force,” id. at 44:11-13 (emphasis added). Thus, defendants’
commercial use of AIS’ trade secrets to obtain government approval as a suppler of
gyroscopes supports a royalty award.
Further, defendants plainly obtained a benefit from their use of plaintiff’s trade
secrets: a government contract to produce and repair gyroscopes. Defendants resist this
conclusion, likewise on the basis that the government’s approval of Condor II as a
supplier was premised primarily on Condor II’s willingness to become a supplier.
Defendants effectively contend that the submission of the gyroscopic drawings was not
the proximate cause of the government’s approval decision. The Court finds no support
in defendants’ briefing or otherwise for the proposition that the benefit accrued by a
defendant through the use of a misappropriated trade secret must accrue from the use of
the trade secret in isolation. To the contrary, as the University Computing court
explained, the reasonable royalty standard historically was used “to deal with the
situation where the misappropriated idea is used either to improve the defendant’s
manufacturing process, or is used as part of a larger manufactured product.” 504 F.2d at
536.
However, the third factor, the cost incurred by plaintiff in developing the trade
secret, weighs against awarding a royalty. The instant action diverges significantly from
the typical fact pattern in a trade secret case, where a defendant misappropriates a trade
secret from the party who created the trade secret in the first instance. Here in contrast,
any costs incurred to develop the instant trade secrets were incurred by defendant
Meltzner and his original company, Condor I. Although it is beyond dispute, as AIS
argues, that BAE paid valuable consideration to acquire defendants’ trade secrets, the
caselaw contemplates the cost of innovation, not of acquisition. See, e.g., Ajaxo, 187
Cal. App. 4th at 1312 (“[S]tolen secrets might reveal that a particular avenue of inquiry
would be unsuccessful, thereby saving the defendant significant research and
development efforts.”); Altavion, 226 Cal. App. 4th at 42 (“[T]rade secret law . . . permits
the individual inventor to reap the rewards of his labor by contracting with a company
large enough to develop and exploit it.” (quoting DVD Copy Control Ass’n, Inc. v.
Bunner, 31 Cal. 4th 864, 871 (2003), as modified (Oct. 15, 2003)).
The fourth factor also weighs against granting a royalty, if only slightly. Although
AIS contemplated selling the 12000 series gyroscope line to Condor II in 2005, as
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
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Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

discussed in greater detail infra, the parties did not actually engage in negotiations
concerning such a sale.
Nonetheless, that trade secret law is intended to buttress “important standards of
commercial ethics,” weighs in favor of granting a royalty. As the California Supreme
Court has explained, “by sanctioning the acquisition, use, and disclosure of another’s
valuable, proprietary information by improper means, trade secret law minimizes ‘the
inevitable cost to the basic decency of society when one . . . steals from another.’ [].
[And] [i]n doing so, it recognizes that ‘good faith and honest, fair dealing, is the very life
and spirit of the commercial world.’ ” DVD Copy Control Ass'n, Inc., 31 Cal. 4th at 881
(quoting Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 481-82, 487 (1974)).
Defendants’ actions evince little respect for such values. Although defendant Meltzner
and AIS’ predecessor, BAE, bargained for the sale and transfer of all of Condor I’s
intellectual property rights to BAE, Meltzner did not uphold his end of the bargain.
Instead, he directly copied portions of his bargained-away intellectual property, and when
confronted with evidence of this direct copying, he “shirk[ed] responsibility and
fabricate[d] excuses.” Term. Sanct. Order at 8. While such conduct may not discourage
innovation, it fosters mistrust and cynicism in commercial dealings.
In short, when one company sells its trade secrets to another company, but
nonetheless proceeds to put those very secrets to commercial use, commercial integrity
suffers. Accordingly, it is appropriate for defendants to pay AIS a reasonable royalty for
defendants’ acts of misappropriation.
B.

Scope of the Misappropriation

Having determined that an award of a reasonable royalty is warranted, the Court
turns to the scope of the misappropriation for which a royalty be awarded. AIS asserts
that it is entitled to a royalty based upon defendants’ alleged misappropriation of all of
the gyroscope drawing packages acquired by BAE (now AIS) in its 2002 purchase of
Condor I. Defendants, however, contend that AIS is only entitled to a royalty based upon
defendants’ misappropriation of drawings related to the 12000 series gyroscopes.
Because AIS is only entitled to a royalty for those trade secrets that defendants have been
found liable for misappropriating, see Cal. Civ. Code § 3426.3(b) (permitting award of

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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’ JS-6

Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

reasonable royalty in lieu of damages or unjust enrichment “caused by
misappropriation”), the Court looks first to the Terminating Sanctions Order (“TSO”)
issued by Judge Nguyen to determine the scope of defendants’ established
misappropriation.
As is relevant here, the TSO imposed terminating sanctions on count five of
plaintiff’s first amended complaint for “misappropriation of trade secrets related to
drawing packages.” TSO at 2. In granting these sanctions, Judge Nguyen concluded that
defendants had “misappropriated Plaintiff’s trade secrets when they misrepresented to the
DSCR that the BAE drawings were their own.” Id. at 7, n.2. Although the TSO does not
expressly state that the BAE drawings were limited to the 12000 series gyroscope, AIS’
motion for terminating sanctions was specifically premised upon defendants’ failure to
produce the 12000 series drawings submitted to DSCR. Pl.’s Mot. Sanctions at 13. In its
motion, moreover, plaintiff argued that defendants’ failure to produce the 12000 series
drawings merited sanctions since that failure unnecessarily required plaintiff to litigate
defendants’ claim that they “reverse engineered” the 12000 series drawings. Id. at 21-22.
Indeed, the TSO itself underscores that sanctions are warranted because the documents
withheld by defendants “defeat any reverse-engineering defense.” TSO at 7. It is also
telling that before this defense was debunked, plaintiff retained an expert witness to—in
plaintiff’s own words—“evaluate and analyze, and form an opinion as to whether or not
the document set [the Condor II drawing packages for the 12000 series gyro] that was
provided to [him] by Condor II could have been generated . . . as the result of reverse
engineering.” Dkt 92 at 5 (Pl.’s Consol. Opp’n to Defs.’s Mot. In Limine Nos. 4 & 5)
(alterations in original).
The language of the parties’ joint Statement of the Case and the Final Pretrial
Conference Order further indicates that the TSO only established defendants’ liability for
misappropriation of the 12000 series gyroscope drawings. The Statement of the Case
provides that the “Court has determined that defendants did misappropriate certain of
AIS’ trade secret drawings.” Dkt. 247 at 1-2 (emphasis added). The inclusion of the
word “certain” suggests that the parties themselves understood that the TSO applied to
some—but not all—of the gyroscope drawings at issue in the case. Moreover, the Final
Pretrial Conference Order expressly references the 12000 series gyroscopes. See Dkt.
259 at 3-5. For example, the order sets forth as an admitted fact that “[n]either BAE, nor

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UNITED STATES DISTRICT COURT
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CIVIL MINUTES - GENERAL
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‘O’ JS-6

Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

its successors in interest AIS and/or Goodrich, have manufactured the 12000 series
gyroscope since they closed the Westlake Village facility in early 2006.” Id. at 5. If the
TSO applied to the entirety of the intellectual property at issue in this lawsuit,
presumably the Final Pretrial Conference Order would have stated as much instead of
calling attention to the 12000 series gyroscope.
Finally, the Court’s order denying plaintiff’s motion for, inter alia, an award of
royalty and a permanent injunction also indicates that the TSO only applied to the 12000
series gyroscope drawings. Tellingly, the Court found that the public interest would not
be served by permanently enjoining defendants from misusing plaintiff’s trade secrets,
since testimony at trial demonstrated that AIS “has stopped producing the subject 12000
series gyro,” and thus declined to grant “an injunction precluding the only supplier of the
gyros and parts at issue . . . .” Dkt. 345 at 10. It follows that, in granting the TSO, the
Court found defendants liable solely for misappropriating the 12000 series gyroscope
drawings.
AIS resists this conclusion, asserting that the TSO constituted a “sweeping ruling”
with respect to Condor’s liability, finding defendants liable for misappropriating “all of
AIS’ intellectual property,” as alleged in the first amended complaint. Pl.’s Response to
Defs.’ Opening Br. at 2. Although there is some support for this position in the Final
Pretrial Conference Order, see dkt. 259 at 7 (stating that “Claim 5: Misappropriation of
Trade Secrets (Drawing Packages)” has been adjudicated with respect to liability), the
TSO is premised almost entirely upon the Court’s view that the 12000 series drawings
were a “smoking gun” as to misappropriation—but they were only a “smoking gun” as to
misappropriation of the 12000 series gyroscope. AIS further asserts that, in light of the
Final Pretrial Conference Order, it “would have been precluded[] from producing further
proof as to liability” at trial for the other allegedly misappropriated parts. Pl.’s Response
to Defs.’ Opening Br. at 2. If AIS had any concerns regarding the scope of the Final
Pretrial Conference Order, it should have raised such concerns long ago. See Pierce
Cnty. Hotel Employees & Rest. Employees Health Trust v. Elks Lodge, B.P.O.E. No.
1450, 827 F.2d 1324, 1329 (9th Cir. 1987) (“Issues not preserved in the pretrial order are
eliminated from the action.”); see also Southern Cal. Retail Clerks Union & Food
Employers Joint Pension Trust Fund v. Bjorklund, 728 F.2d 1262, 1264 (9th Cir. 1984)

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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’ JS-6

Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

(failure to include issue in pretrial order constituted waiver, even though raised earlier in
the proceeding).
Accordingly, the Court concludes that the reasonable royalty must be based upon
defendants’ misappropriation of the 12000 series gyroscope drawings submitted by
Condor II to the U.S. government.
C.

Amount of the Royalty Award

As explained by the California Court of Appeal, to determine the measure of a
reasonable royalty, a “court calculates what the parties would have agreed to as a fair
licensing price at the time that the misappropriation occurred.” Ajaxo, 187 Cal. App. 4th
at 1308. The parties assert that this analysis should be guided by the factors set forth in
Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970)
modified sub nom. Georgia-Pacific Corp. v. U.S. Plywood-Champion Papers, Inc., 446
F.2d 295 (2d Cir. 1971). See Telemac Corp. v. US/Intelicom, Inc., 185 F. Supp. 2d 1084,
1100 (N.D. Cal. 2001) (“Georgia–Pacific sets forth fifteen factors the courts generally
consider in a reasonable-royalty analysis.”). These factors, first applied in the context of
patent infringement litigation, are as follows:
1. The royalties received by the patentee for the licensing of the patent in
suit, proving or tending to prove an established royalty.
2. The rates paid by the licensee for the use of other patents comparable to
the patent in suit.
3. The nature and scope of the license, as exclusive or non-exclusive; or as
restricted or non-restricted in terms of territory or with respect to whom the
manufactured product may be sold.
4. The licensor’s established policy and marketing program to maintain his
patent monopoly by not licensing others to use the invention or by granting
licenses under special conditions designed to preserve that monopoly.

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UNITED STATES DISTRICT COURT
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CIVIL MINUTES - GENERAL
Date

‘O’ JS-6

Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.
5. The commercial relationship between the licensor and licensee, such as,
whether they are competitors in the same territory in the same line of
business; or whether they are inventor and promoter.
6. The effect of selling the patented specialty in promoting sales of other
products of the licensee; that existing value of the invention to the licensor
as a generator of sales of his non-patented items; and the extent of such
derivative or convoyed sales.
7. The duration of the patent and the term of the license.
8. The established profitability of the product made under the patent; its
commercial success; and its current popularity.
9. The utility and advantages of the patent property over the old modes or
devices, if any, that had been used for working out similar results.
10. The nature of the patented invention; the character of the commercial
embodiment of it as owned and produced by the licensor; and the benefits to
those who have used the invention.
11. The extent to which the infringer has made use of the invention; and any
evidence probative of the value of that use.
12. The portion of the profit or of the selling price that may be customary in
the particular business or in comparable businesses to allow for the use of
the invention or analogous inventions.
13. The portion of the realizable profit that should be credited to the
invention as distinguished from non-patented elements, the manufacturing
process, business risks, or significant features or improvements added by the
infringer.
14. The opinion testimony of qualified experts.

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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’ JS-6

Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

15. The amount that a licensor (such as the patentee) and a licensee (such as
the infringer) would have agreed upon (at the time the infringement began)
if both had been reasonably and voluntarily trying to reach an agreement;
that is, the amount which a prudent licensee—who desired, as a business
proposition, to obtain a license to manufacture and sell a particular article
embodying the patented invention—would have been willing to pay as a
royalty and yet be able to make a reasonable profit and which amount would
have been acceptable by a prudent patentee who was willing to grant a license.
Georgia-Pacific., 318 F. Supp. at 1120.
These factors, however, are neither exclusive nor necessarily pertinent to every
reasonable royalty analysis. Id. (describing the enumerated considerations as “some of
the factors mutatis mutandis seemingly more pertinent to the issue [at hand].”); Altavion,
226 Cal. App. 4th at 67 (considering “a number of circumstances,” including the extent of
the misappropriating party’s use of the trade secret, the market for the secret, and the
parties’ pre-misappropriation negotiations concerning the secret, without reference to
Georgia-Pacific factors); see also Faulkner v. Gibbs, 199 F.2d 635, 639 (9th Cir. 1952)
(“There is no mathematical formula for the determination of a reasonable royalty. . . .
[E]ach case must be controlled by those [facts] peculiar to it and, except in rare instances,
the [royalty] can only be determined by reasonable approximation.”). Indeed, in
University Computing, the Fifth Circuit described the inquiry as follows:
In calculating what a fair licensing price would have been had the parties
agreed, the trier of fact should consider such factors as [1] the resulting and
foreseeable changes in the parties’ competitive posture; [2] what prices past
purchasers or licensees may have paid; [3] the total value of the secret to the
plaintiff, including the plaintiff’s development costs and the importance of
the secret to the plaintiff's business; [4] the nature and extent of the use the
defendant intended for the secret; and [5] finally whatever other unique

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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’ JS-6

Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.
factors in the particular case which might have affected the parties’
agreement, such as the ready availability of alternative processes.

504 F.2d at 539.
Under any analysis, the Court’s ultimate task is to “declare[] the equitable terms
of[] a supposititious license,” Altavion, 226 Cal. App. 4th at 68, based upon the
“hypothetical negotiations” of the parties at the time the misappropriation occurred,
Georgia-Pacific, 318 F. Supp. at 1122. See id. at 1136 (accounting for the “relative
bargaining positions of the parties and the economic realities of th[e] particular
situation.”). “The drawing of proper conclusions from conflicting evidence concerning
the amount of a reasonable royalty has been said to call ‘for the exercise of judicial
discretion by the District Court.’ ” Georgia-Pacific, 318 F. Supp. at 1120. With these
guiding principles in mind, the Court proceeds to discuss the evidentiary factors pertinent
to the instant case.
1.

Expert Opinion

Both parties proffer expert testimony concerning the amount of a reasonable
royalty. AIS profferes the expert opinion of Neil Beaton, the Partner in Charge of
Valuation Services at Grant Thornton LLP, a public accounting and business advisory
firm, who specializes in business valuations, mergers and acquisition analysis, litigation
support and economic analysis. Newhouse Decl., Ex. R at 3 (report of Neil Beaton).
Defendants offer the expert opinion of David Drews, a principal with IPmetrics LLC, an
intellectual property consulting firm, who has over twenty-five years’ experience as a
financial analyst primarily concentrated in valuing intellectual property such as
trademarks, copyrights, trade secrets, and know-how. Drews Decl., Ex A at App’x A
(report of David Drews). Both experts apply the Georgia-Pacific factors to their
reasonable royalty analysis but reach divergent results. Beaton concludes that AIS is
entitled to a $1.55 million dollar royalty, Beaton Report at 20, whereas Drews concludes
that, if AIS is entitled to any royalty, it should be “1.0% of the royalty base,” or
$4,837.00, Drews Report at 3.

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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’ JS-6

Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

Neither conclusion is determinative. Beaton’s analysis is fundamentally flawed
because it is based on the assumption that AIS is entitled to a reasonable royalty for
defendants’ misappropriation of both the 11000 series and the 12000 series gyroscopes.
See generally Beaton Report. In light of the Court’s conclusion that the Terminating
Sanctions Order only applied to the 12000 series, Beaton’s proposed royalty is
significantly overestimated. On the other hand, Drews confines his analysis to the 12000
series, proposing a royalty baseline of $483,710—defendants’ gross sales of 12000 series
products during the 30-weeks4 following defendants’ acquisition of the 12000 series
drawings in 2007. Drews Report at 3-5. In turn, Drews’ conclusion that the royalty rate
should be 1.0% of $483,710 is based upon a 1.0 % to 7.0 % “range of royalty rates in []
four comparable agreements.” Id. at 8. Drews, however, neglects to explain how these
agreements are “comparable” to the suppositious license the Court must construct. See
Georgia-Pacific, 318 F. Supp. at 1137 (rejecting evidence of prior licensing arrangement
between plaintiff and third party where the “circumstances . . . were basically different
from those that would have been applicable to the negotiations of a reasonable royalty
between two keen competitors.”). Instead, Drews appears to assume that these
agreements are necessarily comparable because they involved the aerospace industry.
In sum, although both expert reports address evidentiary considerations relevant to
the instant analysis, discussed infra, the royalty amounts ultimately endorsed are
untethered to the fundamental inquiry: In 2007, what license would the parties have
agreed to for production of the 12000 series gyrosscopes given their respective
bargaining positions and then-existing economic realties?
2.

Royalties Received by AIS for Licensing the 12000 Series
Gyroscopes

AIS contends that a September 24, 2010 licensing agreement between AIS and
non-party Instrument Tech Corporation (the “Instrument Tech Agreement”) is probative

4

This 30-week period is, in turn, premised on defendants’ contention that any
royalty should be limited to the time it would haven taken Condor II to reverse engineer
the 12000 series drawings.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’ JS-6

Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

of the instant royalty calculation.5 This agreement permitted Instrument Tech to use AIS’
drawings and part numbers to procure and/or manufacture certain AIS gyroscope parts
for the purpose of repairing the 11000 series gyroscopes. Beaton Report at 7. Under the
terms of the Instrument Tech Agreement, Instrument Tech was required to pay AIS
$1,600 per gyroscope repaired. Id. Beaton divided this $1,600 per unit rate by the price
AIS charged for repairing gyroscopes, and calculated a royalty rate of 26% for the value
of AIS’s intellectual property. Id.
The Court concludes that the Instrument Tech Agreement is not directly analogous
to the instant analysis. As discussed above, AIS is only entitled to an award of royalties
for defendants’ misappropriation of designs for the 12000 series gyroscope. The Court
agrees with defendants that a licensing agreement that (1) concerns the repair, rather than
manufacturer of gyroscopes, and (2) involves the11000 series, rather than 12000 series
gyroscopes, is of little relevance to the determination of a hypothetical licensing
agreement to manufacture the 12000 Series gyroscope. See Georgia-Pacific, 318 F.
Supp. at 1140 (“[D]ata as to a royalty rate and cursory information as to the nature of a
particular license transaction are gravely deficient in probative value.”).
3.

Duration of Trade Secrets and the Term of the License.

Defendants correctly point out that the duration of a hypothetical license for use of
the 12000 series drawings is informed by limitations delineated in the CUTSA. Under
the CUTSA, the relevant time period for calculating a royalty award must be “no longer
than the period of time the use [of the trade secret] could have been prohibited.” Cal.
Civ. Code § 3426.3(b); see also Univ. Computing Co., 504 F.2d at 534 (“Unlike a patent
which is totally protected for the period of time for which it is granted, the protection
afforded a trade secret is limited—for it is protected only so long as competitors fail to
duplicate it by legitimate, independent research.”). Further, reverse engineering or
independent derivation of a trade secret does not constitute misappropriation within the
meaning of the CUTSA. Cal. Civ. Code § 3426.1(a).

5

AIS’ expert, Beaton, relies extensively on the Instrument Tech Agreement in
reaching the conclusion that a $1.55 million royalty award is appropriate.
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UNITED STATES DISTRICT COURT
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CIVIL MINUTES - GENERAL
Date

‘O’ JS-6

Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

Here, the testimony of one of AIS’ own experts, Dr. Joel Hanse, indicates that
defendants could have reverse engineered the 12000 series drawings in approximately
eight months. Defs.’ Reply Br. at 14 (citing report of Joel Hanse at 22-23). It follows, if
Dr. Hanse’s opinion is well-founded, that AIS only could have prohibited defendants
from using the 12000 series drawings for a period of eight months following the 2007
misappropriation. This time frame further undermines the $1.55 million royalty amount
advocated by AIS, which AIS’ expert assumed “would cover the damage period
beginning in 2007 and extend[ing] through the assumed injunction date in early 2011.”
Beaton Report at 11.
4.

Parties’ Commercial Relationship and the Value of 12000 Series
Drawings to AIS

It is undisputed that AIS and defendants are direct competitors of one another,
selling much of the same product line to the same customers. That the parties are
competitors weighs in favor of a higher royalty rate. See Georgia-Pacific, 318 F. Supp. at
1124 (“[T]he granting of a license by USP to GP would place GP in direct and active
competition with USP in the United States. . . . Obviously, only an adequate royalty
would make this proposition palatable to USP.”).
As defendants assert, however, it is also undisputed that AIS stopped
manufacturing the 12000 series gyroscopes in 2006. According to defendants, this
demonstrates that the 12000 series drawings were of little to no value to AIS. Defs.’
Open’g Br. at 9-11. Defendants, however, undermine their own contention by
acknowledging that AIS’ business strategy was “focused on pushing sales of newer,
costlier, higher volume technology,” such as the 11000 series gyroscope, “while
discouraging demand for older, lower cost, low volume technology,” such as the 12000
series. Id. at 11; Beaton Depo. at 51:24-52:19 (“Q. So your understanding was that AIS’s
strategy was to migrate the government to, not in these words but in effect, better parts
that may be more expensive? A. Yeah. . . . [H]istorically the U.S. government tried to buy
parts that would obsolesce in two years, three years, maybe even four years so that they
continued to keep their budgets going and buy product over time. AIS’s strategy was to
kind of wean them from that . . . onto a product that would last ten years . . .”) (citing
Beaton Depo. at 51:24-52:19). Licensing the 12000 series drawings to defendants would

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UNITED STATES DISTRICT COURT
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CIVIL MINUTES - GENERAL
Date

‘O’ JS-6

Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

not serve AIS’ strategy of weaning the government onto newer, more expensive products.
This consideration would have informed AIS’ bargaining position in negotiating a license
with defendants, and weighs in favor of a higher royalty.
However, perhaps the most probative evidence of the value AIS placed on the
12000 series drawings is found in documents related to an internal AIS task force known
as “Project Raven.” As AIS explains, in 2005, Project Raven was tasked with
“determining a sales price for the 12000 series to Meltzner.” Pl.’s Reply at 14.6 The
Project Raven memoranda cited by defendants stated: “Based on the above, we expect to
negotiate a price between [$] 0 and [$] 400,000. Negotiation will be difficult, as Mr.
Meltzner is well aware of the challenges [AIS] would face in moving such a product
line.” Project Raven ultimately concluded that a sale to Meltzner “did not look like an
attractive business deal” because it would have resulted in a loss after accounting for
transactional costs. Leader Decl. Ex N. 27:14-26:22. Although AIS attempts to
minimize the Project Raven evidence as “internal speculation” that is “wholly irrelevant,”
Pl.’s Reply at 9, the Project Raven evidence most closely approximates AIS’ own
perception of its bargaining position in hypothetical licensing negotiations with
defendants.
5.

The Nature and Extent of the Use Defendants Intended for the
12000 Series Drawings

The nature and extent of defendants’ use of the 12000 series drawings counsels in
favor of a higher royalty. Although defendants contend that the drawings had little value,
since Condor II employees could assemble 12000 series gyroscopes from memory,
defendants’ position is belied by, in their own words, the government’s “dire need of
[the] 12000 Series” at the time defendants submitted a bid to produce them in 2007.
Defs.’ Opening Br. at 16. Defendants fulfilled that dire need and became an approved

6

At the time, AIS was planning to shut down the Westlake Village Facility, where
the 12000 series gyroscopes had been manufactured since the founding of Condor I, and
was deciding whether to transition production to a larger facility in Cheshire,
Connecticut, or to cease production of the 12000 series all together.
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UNITED STATES DISTRICT COURT
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Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

supplier—by submitting direct copies of the 12000 series drawings sold by Condor I to
BAE.
6.

Summary

Applying the pertinent Georgia-Pacific factors to the instant case, the Court
concludes that AIS is entitled to a royalty award that is limited to the eight month period
in which Condor II could have reverse engineered the 12000 series gyroscopes. See
Georgia-Pacific, 318 F. Supp. at 1120 (considering “duration of the patent.”). The
nature and extent of defendants’ use of the drawings, and the parties’ commercial status
as competitors, are particularly relevant to this conclusion. See id. (considering “the
extent to which the infringer has made use of the invention.”). Here, defendants not only
used the misappropriated drawings, they used them to gain access to government
contracts for which the parties compete. See id. (considering “[t]he commercial
relationship between the licensor and licensee, such as, whether they are competitors . . .
.”). This use fulfilled the government’s “dire need” for the 12000 series gyroscopes and
generated $483,710 in revenue for defendants during the relevant eight month period.
See id. (considering the “licensor’s established policy and marketing program to maintain
his patent monopoly” along with “the benefits to those who have used the invention”).
Plainly, Condor II valued the drawings and likely would have been willing to pay AIS a
significant royalty rate in order to lawfully submit them to the government.
AIS, however, is not entitled to all of the revenue generated by defendants’
misappropriation. As indicated by the Project Raven evidence, AIS valued the entire
12000 series at no more than $400,000. See id. (considering evidence of “[t]he amount
that a licensor (such as the patentee) and a licensee (such as the infringer) would have
agreed upon . . . .”).
Further, while the Instrument Tech Agreement is not an ideal approximation of the
suppositious agreement between the instant parties, that AIS commanded a 26% royalty
rate for repair of the 11000 series is nonetheless relevant to the analysis. See id.
(considering “[t]he opinion testimony of qualified experts” and other “royalties received
by the patentee” ). Indeed, AIS’ proffered royalty rate is tethered to a gyroscope
licensing agreement, whereas defendants’ proffered 1.0% royalty rate is not.

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UNITED STATES DISTRICT COURT
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CIVIL MINUTES - GENERAL
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‘O’ JS-6

Case No.

2:08-cv-02947-CAS(PJWx)

June 18, 2015

Title

ATLANTIC INERTIAL SYSTEMS INC. V. CONDOR PACIFIC
INDUSTRIES OF CALIFORNIA, INC. ET AL.

In sum, adopting the 26% rate and applying it to the $483,710.00 generated by
defendants’ sales of the 12000 series over an eight month period, would yield a royalty of
$125.764.60. In light of all the factors and evidence adduced by the parties, the Court
awards AIS a royalty of $125,000.
III.

CONCLUSION

In accordance with the foregoing, AIS’ request for a royalty pursuant to §
3426.3(b) is hereby GRANTED. Defendants are ORDERED to pay AIS a royalty in the
amount of $125,000.00.
IT IS SO ORDERED.
00
Initials of Preparer

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