Addressing the admissibility of expert testimony in trade secrets cases, the U.S. Court of Appeals for the Sixth Circuit ordered a new trial after finding that the district court had "abandoned" its gate-keeping function under F.R.E. Rule 702. Mike’s Train House, Inc. v. Lionel, L.L.C., Case No. 05-1095, 2006 U.S. App. LEXIS 30628 (6th Cir., Dec. 14, 2006) (Coole, C.J.).

Mike’s Train House (MTH) claimed that model trains manufactured in Korea for Lionel were based upon trade-secret designs for MTH trains that had been misappropriated by employees of a Korean firm both parties had used. The employees received criminal convictions in Korean court. MTH then sued Lionel and the Korean parties in the United States for misappropriation of trade secrets and unjust enrichment. A jury found for MTH and awarded damages of nearly $26 million for past and future lost profits. The district court refused Lionel’s motions for a new trial and for judgment as a matter of law. Lionel appealed.

Lionel argued that the district court should not have admitted the testimony of MTH’s expert witness, who compared the drawings for Lionel’s trains to those of MTH’s and testified that many showed evidence of copying. The Court agreed that the testimony should have been excluded as unreliable under F.R.E. 702. It said the district court had failed to make any findings regarding the reliability of the expert’s methodology for determining whether the Lionel drawings were copied from MTH’s. The Court noted that the expert had devised the methodology specifically for the litigation, and that it did not meet any of the Daubert criteria for reliability, such as being peer-reviewed or a having a known error rate. The Court also found that the expert’s analysis demonstrated a lack of understanding of the Korean design industry. In addition, the expert spent a significant portion of his testimony comparing the results of his own analysis with those of the expert in the Korean criminal case. Lionel argued, and the Court agreed, that this testimony was hearsay and was inadmissible under F.R.E. 703, because the Korean expert’s findings were not admitted as evidence in the U.S. trial. The Sixth Circuit said F.R.E. 703 does not permit an expert to testify about the conclusions of other experts not in evidence and that admitting the expert’s testimony was not harmless error, because it was the only evidence the jury heard on the degree of copying between the drawings.

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