Trading Secrets : Trade Secrets Lawyers & Attorneys : Seyfarth Shaw Law Firm : Computer Fraud, Confidentiality Agreements, Corporate Espionage

A federal court in the Southern District of California recently burst the bubble on a plaintiff’s suit alleging that the defendant, the alleged creator of a novelty chewing gum product, had stolen the plaintiff’s idea for a NASCAR-themed bubble “chew” by granting the defendant’s motion for summary judgment.

The decision provides a reminder to companies that provide confidential and trade secret information to others under non-disclosure agreements that they need to follow the precise terms of those agreements, including properly designating all information that they seek to protect, otherwise they run the risk of their information being exposed and compromised.

In the colorful case, Hoffman v. Impact Confections, Inc., Case No. 06cv0489 BTM (NLS), 2008 WL 413751 (S.D. Cal.), the plaintiff alleged that together with a partner they established a bubble gum company named Ollie Pop Bubble Gum, Inc. (“Ollie Pop”). Plaintiff claimed that he came up with the concept of marketing novelty gum and candy “which was designed to combine the popularity of NASCAR and its drivers with the lure of the chew tobacco favored by many of NASCAR's fans by providing a gum or candy in an original new packaging intended to appeal to all ages.” First Am. Complaint 11.

Plaintiff alleged that he contemplated two different packaging options, both to be sold under the mark “Pit Crew Chew.” Id. at 12. The first packaging option was a pouch containing gum or candy and the second packaging option was a plastic container shaped like a tire and wheel that would also contain gum or candy. Id. Plaintiff’s idea purportedly was to have the products licensed by NASCAR and bear NASCAR's logos. Plaintiff also wanted to have the products endorsed by at least one NASCAR driver and display the driver's image and/or his car and/or associated number. Id.

According to the plaintiff, he designed both packages and began working with Motorsports Management to establish a relationship between Ollie Pop and NASCAR. Id. at 13. Plaintiff claimed he entered into discussions with Joe Gibbs Racing to have one of its drivers endorse the product and allegedly was able to obtain the promise of an endorsement from Tony Stewart. Id. at 15.

Plaintiff claimed that in 2003, he entered into negotiations with the defendant regarding the marketing and selling of “Pit Crew Chew” products. Id. at 16. The parties entered into a written non-disclosure agreement in May 2003.

As part of his discussions with the defendant, plaintiff contended that he disclosed confidential information and materials to defendant, including, but not limited to, “the idea/concept of marketing and selling a NASCAR and NASCAR driver endorsed bubble gum, the idea/concept of providing gum and/or candy in a package which would appeal to NASCAR fans' noted fondness for ‘chew,’ and the specific drawings of both the pouch and wheel to be marketed and sold.” Id. at 18. Plaintiff also claimed he introduced defendant’s employees to Motorsports employees.

According to plaintiff’s complaint, by July of 2003, defendant had submitted an application for a license to NASCAR seeking to market and sell “Pit Crew Chew” products with the NASCAR logos in place. Id. at 20. Following defendant’s submission of the licensing application to NASCAR, Motorsports allegedly informed defendant and Ollie Pop that NASCAR was indeed interested in licensing the “Pit Crew Chew” products. Id. at 21. Plaintiff alleged that by August 2003, Dale Earnhardt, Jr. was interested in endorsing “Pit Crew Chew” products. Id. at 22.

Then, around the beginning of September 2003, according to plaintiff, defendant abruptly ended its relationship with Ollie Pop and plaintiff. Id. at 24. With the failure to launch “Pit Crew Chew” products, Ollie Pop encountered financial difficulties and as a result plaintiff took a controlling interest in Ollie Pop. Id. Under the deal he allegedly struck with his former partner, plaintiff claimed that Ollie Pop granted him all right, title, and interest in and to and all intellectual property rights related to the “Pit Crew Chew” mark and products, all rights of Ollie Pop under the non-disclosure agreement, and all patent and copyright rights relating to the tire and wheel design and artwork. Id. at 26.

In 2005, plaintiff allegedly obtained copyright registrations for the two-dimensional artwork on Ollie Pop's candy wheel design. Plaintiff also claimed in 2005 he learned that defendant had launched its own product, “Champion Chew.” According to plaintiff, the product consisted of gum enclosed in a tire and wheel and was designed to bear a resemblance to “chew” tobacco. Id. at 27. Plaintiff alleged that “Champion Chew” was licensed by NASCAR and was endorsed by one of NASCAR's drivers. Id. at 28.

Plaintiff filed suit and his first amended complaint asserted claims for: (1) misappropriation of trade secrets under California’s trade secret misappropriation statute (Cal. Civ. Code § 3426.1); (2) intentional interference with economic relationships; (3) negligent interference with economic relationships; (4) breach of contract; (5) breach of implied contract; (6) copyright infringement; (7) quantum merit; (8) unfair business practices in violation of Cal. Bus. & Prof.Code § 17200 and California common law; (9) constructive trust/accounting; and (10) injunctive relief.

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The critical importance of securing confidential information was brought home again yesterday when the intersection of trade secrets and spy games made the newspapers.

Four men, one a United States Department of Defense systems analyst and three Chinese natives, were arrested and charged with espionage in two separate cases. Aside from the political ramifications of ongoing Chinese espionage, which one top Justice Department official characterized as reaching “Cold War levels,” these two cases highlight the importance of confidential secrets not only as a protectionist principle for businesses, but also for national security.

One of the two cases concerned a civilian analyst’s sale of classified information concerning U.S. weapon sales to Taiwan; the other case concerned a long-time civilian contractor employed by Rockwell International and then Boeing Co., who was accused of providing China with classified military aerospace information. In giving a statement on the arrests and charges, U.S. Assistant Attorney General Kenneth Wainstein, noted that increased Chinese espionage is “a threat to our national security and to our economic position in the world, a threat that is posed by the relentless efforts of foreign intelligence services to penetrate our security systems and steal our most sensitive military technology and information.”

The case of the defense industry employee from Boeing is just as disturbing. Mr. Greg Chung, a 72-year old naturalized U.S. citizen, is reported to have given national defense trade secrets to the Chinese government out of “loyalty to the Motherland,” according to a U.S. Attorney, despite having been a Boeing contractor for over 30 years. Those trade secrets were reported to include information related to the space shuttle and other military airspace programs. That case grew out of an investigation into another Chinese-spying case, which was uncovered in 2006 and concerned espionage by Chinese agents of U.S. military technology related to U.S. Navy warships and submarines.

“Certain foreign governments are committed to obtaining the American trade secrets that can advance the development of their military capabilities,” the U.S. Attorneys’ office said in a statement laced with a cautionary principle for all companies engaged even remotely in defense contractor work. Indeed, the lesson for civilian companies, particularly those whose trade secrets portfolios include any sensitive or classified information, is that espionage is not limited to the corporate realm, and the ramifications of being involved in international espionage may have long-term damaging effects on national security, in addition to the negative impact on a company’s business and perception.

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Alliant Insurance Services, Inc. v. Gaddy, No. C055192, 2008 WL 331065 (Cal. App. 3 Dist., Feb. 07, 2008)

On February 7, 2008, the California Court of Appeals affirmed a preliminary injunction, enjoining defendant G. Scott Gaddy from competing against his former employer, Alliant Insurance Services, Inc., within the entire state of California. The appellate court also upheld a non-solicitation provision prohibiting Gaddy from contacting Alliant customers. Alliant acquired Gaddy’s insurance brokerage business in 2004. Prior to the acquisition, the brokerage competed directly with Alliant to provide insurance for construction companies. In the Stock Purchase Agreement, Gaddy agreed, for a period of 5 years from the date of acquisition, “to refrain from carrying on a business, directly or indirectly, which provides any [of Alliant’s] business” within the 58 counties of the State of California. Alliant employed Gaddy after the acquisition until it terminated his employment in October 2006. In both the Stock Purchase Agreement and in his employment agreement with Alliant, Gaddy agreed that, for a period of 3 years after termination of his employment with Alliant, he would not solicit clients of his former business or Alliant clients known to him by virtue of his employment with Alliant. After his termination, Gaddy started a business that provided insurance and surety consulting in the construction industry. In connection with that business, he contacted, and admitted to contacting, “[h]alf a dozen to a dozen” former clients. Alliant sued Gaddy and moved for preliminary injunctive relief.

The trial court’s tentative ruling was to deny injunctive relief, but after a hearing during which Gaddy testified, the court ultimately issued an order preliminarily enjoining Gaddy from:

(a) directly or indirectly using or willfully disclosing to any person (without [Alliant]’s permission or court approval) information about [Alliant]’s clients, as defined by the court; (b) directly or indirectly soliciting [Alliant]’s clients within the 58 counties of California; (c) carrying on business directly or indirectly which “provides any Company business” within the 58 counties of California; (d) directly or indirectly soliciting, hiring, retaining the services of plaintiffs’ employees or independent producers who were employees or independent producers of [Gaddy’s former business] or [Alliant]; (e) destroying or altering any information regarding the facts at issue in this case; and (f) directly or indirectly soliciting, hiring, assisting, or accepting assistance of any other person or entity in attempting to accomplish any of the acts prohibited by the preliminary injunction.

On appeal, Gaddy focused only on whether the non-competition and non-solicitation of customers covenants were enforceable. The court of appeal held that substantial evidence supported the enforceability of these provisions.

Although California has a strong public policy of prohibiting non-competition provisions in the employment context (Bus. & Prof. Code § 16600), an exception exists for a non-competition covenants in connection with the sale of a business (Bus. & Prof. Code § 16601). Section 16601 provides, in part: “Any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity . . . may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold . . . has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.” Id. (emphasis added). In this case, the geographic area encompassed by the non-competition agreement was the entire state of California. Defendant Gaddy argued that the acquired business’s clients were in Northern California. Plaintiff’s supplemental declaration in support of its request for an injunction stated that, although its construction company clients were in Northern California, it procured insurance products from insurance companies located throughout the 58 counties of California. Thus, the court of appeal found that substantial evidence showed that the acquired business “carried on” its business in every county in California. As for the non-solicitation agreement, the trial court found that Alliant’s client information constituted trade secrets and that Gaddy had used trade secret information. The court of appeal rejected Gaddy’s effort to challenge the trade secret ruling on appeal because it was raised for the first time in his reply brief. The court, deciding that the non-solicitation provision was a valid restraint to protect trade secrets, found the non-solicitation provision enforceable.

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Al Minor & Associates, Inc. v. Martin, Slip Opinion No. 2008-Ohio-292.

The Supreme Court of Ohio ruled yesterday in a case in which it was asked to decide whether a former employee, having taken no confidential documents from the plaintiff employer but instead memorizing client lists, could be held liable for a statutory trade secret violation.

The plaintiff, Al Minor & Associates, Inc. (“AMA”), is an actuarial firm that serves approximately 500 clients. In 1998, AMA hired the defendant, Robert Martin, but did not require him to sign a non-compete agreement or an employment contract. While still employed with AMA, Martin took steps to form his own company which would provide essentially the same services as AMA. He resigned in 2003, and did not take any confidential documents with him. He later successfully solicited 15 AMA clients, using client information that he had memorized.

AMA filed suit, alleging that Martin had violated Ohio’s Uniform Trade Secrets Act (UTSA), and a magistrate found for AMA. The magistrate recommended that the trial court award AMA over $25,000 in fees that AMA would have earned from the clients which Martin solicited. The court of appeals affirmed, and Martin appealed to the Supreme Court of Ohio, contending that a client list memorized by a former employee cannot be the basis of a trade secret violation, and that the trial court’s decision unduly restricted his right to compete with AMA. AMA maintained that public policy favored the protection of trade secrets regardless of whether they were written or memorized.

The Court analyzed a 1902 case which defined trade secrets, as well as the UTSA, which was adopted in 1994. The Court noted that a 1997 Ohio case had established a six-factor test to determine the existence of a trade secret: 1) the extent to which the information is known outside the business; 2) the extent to which it is known to those in the business; 3) precautions taken to guard the secrecy of the trade secret; 4) the value of the secret to the holder; 5) the amount of money or effort expended in developing the information; and 6) the amount of time and expense needed for others to acquire and duplicate the information.

After looking at these sources, the Court determined that nothing in any of them indicated that the determination of whether or not a client list is a trade secret hinges on its form (e.g., written or memorized). The Court also noted that the legislature could have excluded memorized information from the definition of a trade secret in enacting the UTSA, but it failed to do so. The Court further mentioned that the majority position in the other states is that memorized information can be the basis of a trade secret violation. The Court also recognized the numerous treatises on the issue which supported this view (quoting one for the proposition that “the form of the information and the manner in which it is obtained are unimportant; the nature of the relationship and the defendant’s conduct should be the determinative factors”).

The Court noted that the protection of trade secrets requires a balancing of employers’ rights in their trade secrets and the former employee’s right to use his talents. However, the Court declared, by adopting the UTSA, the Ohio legislature clearly determined that Ohio public policy favors the protection of the employer’s trade secrets. The Court thus affirmed the judgment of the court of appeals.

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Although issued in an antitrust case, In re Urethane Antitrust Litigation, 2008 WL 110896 (D. Kan. Jan. 8, 2008), an opinion by Magistrate Judge Waxse may be relevant to Rule 34 document requests in trade secrets and other litigation wherever filed. In brief, he held that use of the terms “relating to,” “pertaining to,” or “concerning” in such a request can render it objectionable. Do you use those terms in your discovery requests? Don’t we all?

Judge Waxse denied a motion to compel certain parties to produce “[e]ach document concerning your costs of producing, transporting and selling” specified goods. First Request No. 17 (emphasis added). Those parties had objected on the grounds that, in the judge's words, the request was “overly broad and unduly burdensome on its face because it uses the omnibus phrase ‘each document concerning’ in reference to an extremely broad group of documents.” He held “that a discovery request is overly broad and unduly burdensome on its face if it uses omnibus terms such as ‘relating to,’ ‘pertaining to,’ or ‘concerning’ to modify a general category or broad range of documents or information.” Id. (footnote omitted).

Judge Waxse continued: “[D]espite a valid objection that a request is facially overbroad or unduly burdensome, the responding party still has a duty to respond to the extent the request is not objectionable. Before the Court will require an objecting party to answer, however, the Court must receive some guidance – from either the parties or some other source – as to what portion of the request is reasonably answerable.” Id.(footnote omitted). He concluded that, in the lawsuit before him, “inadequate guidance exists to determine the proper scope of First Request No. 17. The Court therefore sustains [the] facial overbreadth and facial undue burden objections.”

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After granting summary judgment for plaintiff in late November 2007, Judge Susan Illston of the U.S. District Court for the Northern District of California recently awarded plaintiff $6.6 million in damages, the majority of which related to future lost profits due to breach of contract and misappropriation of trade secrets. Although the motion for summary judgment was uncontested, the court's ruling and damages award highlights the importance non-disclosure and confidentiality agreements can play in trade secret disputes.

Plaintiff Oculus Innovative Sciences Inc. entered into non-disclosure and purchase agreements with Nofil Corp. related Oculus' MicrocynTM disinfectant, antiseptic and sterilization technology. Under the agreements, Nofil agreed to manufacture certain machines for the production of MicrocynTM and to not disclose confidential information obtained from Oculus.

After ruling that Nofil had breached the agreements, the court held that Nofil had misappropriated Oculus' trade secrets. The court first held that Oculus had established the existence of a trade secret through reference to language in the non-disclosure and purchase agreements ("while the Court does not find this evidence to be overwhelming, it will assume for present purposes that Oculus can establish the presence of some trade secrets that fall within the scope of the [non-disclosure agreement]").

The court then determined that Nofil had misappropriated such trade secrets through its manufacture and sale to a competitor in Mexico of two machines covered by the agreements between the parties . Specifically, the court found persuasive PMC, Inc. v. Kadisha, 78 Cal. App. 4th 1368 (2000), which held that "[e]mploying … confidential information in manufacturing, production, research or development, marketing goods that embody the trade secret, or soliciting customers through the use of the trade secret information, all constitute use."

In a January 23, 2008 Order, the Court awarded Oculus $916,206 for lost profits for 2006 through part of 2008. The Court awarded future lost profits of $5,727,829 for a period of 5 ½ years discounted to present value.

The case is Oculus Innovative Sciences, Inc. v. Nofil Corporation, et al., Case No. 06-1686, N.D. Cal. 2006.

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Trujillo v. Great Southern Equipment Sales, LLC, No. A08A0245, 2008 WL 269606 (Ga. Ct. App. Feb. 1, 2008).

Reviewing the “Confidentiality and Restrictive Covenant Agreement” signed by Sarah Alexandra Trujillo while employed by Great Southern Equipment Sales, LLC, the Georgia Court of Appeals reversed the part of the trial court’s judgment that enjoined Ms. Trujillo from competing with Great Southern and soliciting its customers.

Ms. Trujillo had worked as a salesperson for Great Southern, a company primarily engaged in the business of selling transportation equipment, for over two years at the time of her resignation and departure for a competitor. In the early months of Ms. Trujillo’s employment, Great Southern’s president gave her on-the-job training; provided her with lists of Great Southern’s customers; and introduced her to many of the company’s customers and suppliers. After nine months of service, she was asked to sign the “Confidentiality and Restrictive Covenant Agreement.” At issue on appeal were the agreement’s non-solicitation and non-competition clauses.

Under Georgia law, restrictive covenants found in an employment contract must be strictly limited as to time, territorial effect, capacity in which the employee is prohibited from competing, and as to overall reasonableness. Moreover, unless a non-solicitation covenant pertains only to those clients with whom the employee had a business relationship during the term of the agreement, the covenant must contain a territorial restriction. Here, the court looked to the language of the non-solicitation provision in finding that it applied to a broad class of customers:

“The non-solicitation restriction set forth in this Section 2 is specifically limited to Customers of Employer with whom Employee had contact (whether personally, telephonically, or through written or electronic correspondence) during the three (3) year period immediately preceding the Separation Date or about whom Employee had confidential or proprietary information because of his/her position with Employer.”

The latter category of customers was not, as Great Southern argued, merely a reiteration of the separate confidentiality clause found in the agreement. Instead, the court said it was “an effort to impermissibly broaden the class of customers whom Trujillo could not solicit.” Because the non-solicitation clause at issue purported to apply to an expansive class of customers, but failed to include a geographical restriction, the court held that the provision was overbroad and unenforceable. Further, Georgia does not employ the “blue pencil” doctrine of severability, so the non-competition clause of the agreement was also unenforceable.

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House v. Commonwealth of Kentucky, No. 2007-CA-000417-DG, 2008 WL 162212 (Ky. Ct. App. Jan. 18, 2008).

The Kentucky Court of Appeals recently allowed a criminal defendant access to the source code for the breathalyzer device used to develop probable cause for his arrest for operating a motor vehicle under the influence of alcohol with the aggravating factor of a level over 0.18. The lower court quashed the subpoena on motion by the Commonwealth of Kentucky and CMI, Inc. The criminal defendant, Lennie House, appealed, and the Circuit Court had affirmed.

At a hearing on the Commonwealth’s and CMI’s motion to quash the subpoena, House produced a computer software engineering expert who testified that if he had the source code for the device, he could examine the code for any bugs or flaws that might have produced an incorrect blood alcohol reading. However, the district court granted the motions to quash and the circuit court affirmed.

But the Kentucky Court of Appeals reversed, finding that the lower courts erred because the Commonwealth and CMI failed to make the required showing under the Kentucky Rules of Criminal Procedure that the subpoena was unreasonable or oppressive. The court noted that the request is not unreasonable because its purpose is to challenge the validity of the readings produced by the Intoxilyzer 5000, which is anticipated will be used at trial by the Commonwealth to prove the drunk driving charge and the aggravating factor. In addition, the court found that the request for the source code is not oppressive because the code can be produced on a CD-ROM with minimal expense.

The Court of Appeals rejected the argument asserted by the Commonwealth and CMI that the computer code is a protected trade secret and that this should weigh against disclosure. In reaching this conclusion, the court noted that House had indicated his willingness that he, his attorney, and his expert witness would enter into a protective order barring sharing of the code or its contents with any non-party. Moreover, the court observed that the protective order may also include language requiring that any copies or work product generated by House’s expert be returned to CMI upon completion of his review of the code. Finally, the court noted that the possibility of civil and/or criminal penalties for violating the protective order “should obviate any concern CMI may have with respect to protection of its source code.”

This is not the first court decision to reach the conclusion that a criminal defendant has a right to inspect the source code for a breathalyzer device. For example, in a similar case in 2007 the Minnesota Supreme Court ordered production of the source code for the Intoxilyzer device, relying in large part on the existence of a contract between the state and CMI specifying that the state owned the source code for the device and on the express language of the RFP in which CMI agreed to provide to attorneys representing individuals charged with crimes using evidence from the device any information necessary to comply with a court order. See Underdahl v. Commissioner of Public Safety, 735 N.W.2d 706, 712-13 (Minn. 2007). Arguing that the source code is confidential, copyrighted and proprietary, the state had asked for a “writ of prohibition” barring the source code from being released. But the court rejected that request on the basis that “[a] writ of prohibition is an extraordinary remedy and is only used in extraordinary cases,” and the facts here did not merit such a remedy. See id. at 710.

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Trade secrets discovery in a suit for misappropriation, breach of contract, breach of fiduciary duty, etc., can give rise to a number of dilemmas. A recent Northern District of Georgia ruling, DeRubeis v. Witten Technologies, Inc., 244 F.R.D. 676, involves one of those dilemmas. The company asked for identification of the trade secrets the defendants were using in their competing business. The defendants objected, claiming that the company might use the response to “mold its cause of action around the discovery it receives.” On the one hand, the court emphasized, the defendants are entitled to know the nature of the company’s claim and to limit the company’s discovery accordingly. On the other, the company does not necessarily know exactly what trade secret information the defendants allegedly stole and are using.

In DeRubeis, the court required the company to “identify with ‘reasonable particularity’ those trade secrets it believes to be at issue.” The phrase “reasonable particularity” was defined as a sufficient description so that the defendants are “put on notice of the nature of” the claims and “can discern the relevancy of any requested discovery” propounded by the company. “Once [the company] has fulfilled its obligation, it will be entitled to discovery on [the defendants’] trade secrets, provided that what it seeks is relevant.”

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