Dismissed Charges One of Many Legal Challenges for Eaton Corp

Five engineers, former employees of the Cleveland, Ohio-based Eaton Corporation, were vindicated Wednesday when a federal judge dismissed all criminal counts accusing them of stealing trade secrets from the company. The dismissal was the latest of several setbacks for Eaton, which had sued the engineers civilly as well.

The power management company filed its civil suit in 2004 in Hinds County, Mississippi, where it has an aerospace subsidiary. The suit named Jeffrey Frisby, his company, and six former Eaton engineers.

Frisby’s family had started a competing aerospace business in North Carolina, and it had lured the Eaton engineers to join it.

Eaton’s suit claimed the engineers stole proprietary information when they left, worth an estimated $1 billion. The company also convinced the U.S. attorney’s office in 2006 to file criminal charges against five of the engineers in U.S. District Court in the Southern District of Mississippi.

On Wednesday, U.S. Attorney Gregory Davis agreed to dismiss the charges with prejudice. But by then, Eaton had already suffered other defeats.

In the civil litigation, the defendants accused Eaton and its lawyers of resorting to an array of dirty tricks that resulted in the suit’s being dismissed in December 2010 for “fraud on the court.”

The company had always denied any role in the wrongdoing. Eaton didn’t immediately return messages seeking comment.

Eaton’s alleged misconduct included paying off its star fact witness, lying about the payoff during discovery, and hiring a secret outside counsel to influence the judge in ex parte communications. The judge was later removed and replaced by county judge Swan Yerger.

Yerger stated in his 2010 dismissal:

Eaton and its counsel knew of the serious improprieties occurring on its behalf . . . and stood by ‘with blind eyes.’ In the opinion of this court, there is only one sanction that will sufficiently deter this type of unacceptable and unethical behavior that strikes at the very core of our judicial system: a dismissal of the plaintiffs’ claims with prejudice.

In addition, the court imposed $1.5 million in sanctions against Eaton. The company has appealed to the Mississippi Supreme Court.

Meanwhile, the defendants counter-claimed, and the judge refused Eaton’s request to dismiss their suit. So that suit continues in Hinds County.

In April, the defendants discovered new e-mails related to the judge-influencing scandal that Eaton had allegedly withheld during previous discovery. The defendants filed a motion for expanded discovery into how and why the e-mails, some of which went to in-house lawyers, were withheld.

In a related development, a group of shareholders filed a derivative suit in 2011 in Cuyahoga county court in Cleveland against Eaton and its officers—including general counsel Mark McGuire and several in-house lawyers involved in the civil suit.

The shareholders’ suit claims the legal misconduct in the case cost the company $1 billion in proprietary assets. That case continues.

On May 7, the shareholders filed a notice of new supporting materials, citing the new e-mails discovered in Mississippi. The materials, the notice says, “provide further evidence of knowledge and participation in illegal conduct by officers, management, and the board.”