$940-mn Fine Cloud on TCS

US jury slaps notice in trade secrets case; company denies intellectual property infringement charge

Two days before its results for the quarter ended March 2016, India’s largest information technology services provider Tata Consultancy Services (TCS) has been slapped with a fine notice of $940 million (Rs 6,204 crore) by a federal jury in the US in a trade secret lawsuit.

Though the trial court has not given its final verdict yet,TCS said it plans to defend its position. It also stated that the jury verdict will not have any impact on its Q4 and FY16 financial results.

If this fine is finally imposed, it would be nearly Rs 200 crore more than the company's net profit of Rs 6,083 crore in the third quarter of FY 16. Analysts have estimated the fourth quarter profit at Rs 6,277 crore, which would be just about enough to cover the fine.

The lawsuit was filed by Verona-based electronic medical records vendor Epic Systems in October 2014, and said TCS and its US subsidiary Tata America International Corp have taken confidential data from them.

The federal jury in the US State of Wisconsin ruled that TCS and Tata America International Corp must pay $240 million to Epic Systems for ripping off its software.

In addition, the Tatas have also been asked to pay $700 million in punitive damages.

In a statement, TCS said: “The company did not misuse or derive any benefit from downloaded documents from Epic System’s user-web portal. TCS plans to defend its position vigorously in appeals to higher courts. TCS appreciates the trial judge’s announcement from the bench that he is almost certain he will reduce the damages award.”

The company stated: “It is expected that the trial judgment will be entered in the case in the next six to eight weeks, following which the parties can file an appeal within 30 days after the judgment is filed. While TCS respects the legal process, the jury’s verdict on liability and damages was unexpected as the company believes they are unsupported by the evidence presented during the trial.”

According to the US-based publication Madison.com, Epic accused TCS, and its US subsidiary, Tata America International of “brazenly stealing the trade secrets, confidential information, documents and data” belonging to Epic.

It contended the theft occurred from about 2012 to 2014 when Tata employees worked as consultants to help Kaiser Permanente in Portland, Oregon. Kaiser uses Epic’s electronic health records software. The company also mentioned in its complaints that TCS employees accessed Epic’s documents and downloaded about 6,477 of them, containing information that could be used to benefit Tata’s own health care software, Med Mantra.

When contacted an Epic spokesperson could only say, "No comment at this point as portions of the case remain underway."

“Rather than compete lawfully with Epic, TCS has engaged in an apparently elaborate campaign of deception to steal documents, confidential information, trade secrets, and other information and data from Epic, for the purpose of realising technical expertise developed by Epic over years of hard work and investment,” the lawsuit said.

However, TCS denied this in its statement. “TCS did not misuse or benefit from any of the said information for development of its own hospital-management system Med Mantra, which was implemented for a large hospital chain in India in 2009.”

If the final verdict goes in favour of Epic, this would be the first case ever in the Indian IT services segment where a company has been sued in a trade secret case. So far, Indian IT services firms have been battling case regarding immigrations issue, visa misuse and wage disputes (see graphics).    

“Though this is a jury indictment and the final verdict is yet to come, it is a significant development and a very clear message that if you are going to use unauthorised access to someone else’s trade secret and confidential information you will have to pay a price,” said Pawan Duggal, a cyber law expert.

Duggal, who has dealt with such cases in India in the past, also said the punitive damages and the overall fine that TCS has to pay are among the highest so far.

“I also believe that companies by and large have documentation and process in place to not fall into such practices, and most of the time it’s an employee’s mistake,” he added. Manoj Kumar, the founder Hammurabi & Solomon — advocates  and corporate law advisors, shares Duggals view.

“The imposition of fine by the jury is likely to have a huge impact of the Indian IT MNCs operating in the US, such as TCS, Infosys, and Wipro. The legal regime regarding handling of critical issues of third party IPR/trade secrets is drastically different between India and the US in its implications and fall out. The US has a more dynamic compensatory legal regime,” said Kumar.

He also felt that the challenge for the Indian IT Sector companies operating in the US to adopt to stringent “internal governance/reasonable-steps” on the handling of third party trade secrets, still remains to addressed by them. “This also increases the risk perception of a plethora of such claims against these companies in times to come,” he said.

FOCUS: EPIC SYSTEMS Epic Systems Corporation, a US-based electronic health records software firm, claims to have 160 million patients in US

FOUNDED The privately-held firm, which reported revenues of $2.02 billion in 2015, was founded in 1979 by Judith R Faulkner, still its CEO. Faulkner started the firm with just around $6,000 million taken from her parents. She was recognised by Forbes as the “most powerful woman in health care”. In 2015, her net worth was estimated at around $2.6 billion. ORGANISATION Epic employs around 9,500 people and is owned by its workers. Nearly half of the expenses for the firm go towards research and development.   Epic’s software is used to schedule doctor and patient appointments, update insurers on bills and payments and in facilitating tele-medicine in rural communities. It has built-in modules to cover individual diseases and health care issues. It can also be integrated with third-party applications helping expand its user base . Epic, based in Wisconsin over 1,000 acres, has a community approach to engage with its users and employees. CONTROVERSIES In 2014, a major software deployment (around $300 million contract) in one of the hospitals in the UK reportedly developed technical snag causing severe financial hardship for it.

Reference - http://www.business-standard.com/article/companies/940-mn-fine-cloud-on-tcs-116041600432_1.html