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

It is generally accepted that that compilations of public information can constitute a trade secret provided that the compilation has unique value, but will that protection extend to watching Michael Jackson's This Is It in an IMAX theater? A New York State court may soon be answering that question in Imax Corporation, v. Cinemark USA, Inc., NY Sup. Ct., NY Co., Ind. No. 09603441.

In its lawsuit, IMAX claims that for five decades it “has specialized in the design and manufacture of highly propriety, premium quality, large-format, immersive theatre systems.” Since 1997, Cinemark-one of the largest movie exhibitors in the world-has been a valued customer of IMAX. Separate and apart from the actual technological components of IMAX's theatre systems, IMAX claims that since its inception in 1967 dedicated significant time and resources, including hundreds of millions of dollars, to the extensive research and development, marketing and promotion of a highly proprietary, immersive theatre experience that is unique to IMAX. Beginning in 1997, IMAX and Cinemark allegedly entered into a series of contracts that provided for the installation, maintenance and operation of IMAX theaters at Cinemark locations, and the marketing and commercial promotion of IMAX by Cinemark.

IMAX claims that it recently discovered that, contrary to representations Cinemark made to IMAX, the parties' business relationship has been blatantly used by Cinemark to attempt to reproduce the entire, trademarked "IMAX Experience®" in the form of a product that Cinemark unveiled earlier this year and that Cinemark refers to as "Extreme Digital Cinema" and "Cinemark XD," or simply, "XD." Whereas for years IMAX theatres have been widely marketed and promoted as having "screen[s] that typically span from wall to wall and floor to ceiling... and loudspeaker technology that ensures every theatre seat is in a good listening position," Cinemark has marketed and promoted its XD as a cinema with "huge wall-to-wall screens, wrap around sound [to] ensure that every seat is an intense sensory experience." Adding fuel to the fire, IMAX claims that Cinemark has touted its XD as being "just like" and in some instances, "better than" IMAX.

Thus, IMAX seeks redress for Cinemark's willful breach of contract, fraud, tortious interference with existing and prospective economic relations, breach of the implied warranty of good faith and fair dealing, unjust enrichment and deliberate acts of bad faith, as well as misappropriation of trade secrets.

The ruling of this case could have interesting implications in light of the United State’s Supreme Courts recent grant of certiorari (argued on November 9^th) on what has been called the "business method patent" case, Bilski v. Kappos, where the Court appears poised to rule that the business method claim at issue is not the valid subject of a patent. Whether the Court will provide further guidance as to what is and what is not a patentable "process" is uncertain. A ruling that sides with the Patent Office could bar patents on processes and methods of doing business, such as online shopping techniques, medical diagnostic tests and procedures for executing trades on Wall Street. But, such a ruling also may lend support for making your IMAX experience a trade secret.

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Because the laws of various states regarding non-compete clauses differ significantly, cases involving these provisions often entail fights at the outset as to the proper venue. The Eastern District of Pennsylvania recently faced just such an issue in CertainTeed Corp. v. Nichiha USA, Inc., Civil Case No. 09-CV-3932-LS, 2009 WL 3540796 (E.D. Pa. Oct. 29, 2009). In that matter, CertainTeed contested with Bruno Demey, its former Director of Manufacturing and Technology, and Nichiha, Demey’s new employer, over whether litigation between the parties should go forward in Pennsylvania or Georgia.

CertainTeed’s headquarters are located in Valley Forge, Pennsylvania, and it has manufacturing plants in Indiana, North Carolina, and Oregon. Its confidential information, trade secrets, and computer servers are located in Valley Forge. CertainTeed hired Demey in March 2003. Demey executed a non-compete agreement with CertainTeed in September 2004. During his employment with CertainTeed, Demey resided in South Carolina and made numerous trips to Valley Forge for meetings.

The timeline of events relevant to the litigation are as follows: 

1.         Demey resigned from CertainTeed on August 20, 2009.

2.         Demey filed a complaint and motion for a preliminary injunction in the Superior Court of Fulton County, Georgia on August 24, 2009. Demey stated that he intended to move to Georgia to work for Nichiha and therefore sought injunctive relief against CertainTeed setting forth: (a) that the non-compete and non-disclosure terms of the non-compete agreement are unenforceable under Georgia law; and (b) that CertainTeed could not take action to enforce the covenants against Demey or otherwise preclude Demey from working for Nichiha.

3.         On August 26, 2009, CertainTeed removed the state court action to the United States District Court for the Northern District of Georgia. 

4.         CertainTeed filed an action against Demey and Nichiha in the Eastern District of Pennsylvania on August 28, 2009. CertainTeed alleged a breach of contract claim and breach of fiduciary duty claim against Demey, a tortious interference with contractual relations claim and an unfair competition claim against Nichiha, and violations of the Pennsylvania, South Carolina, North Carolina, Indiana, and Oregon trade secrets acts, as well as a civil conspiracy claim, against Demey and Nichiha.

5.         On August 31, 2009, CertainTeed requested a preliminary injunction and temporary restraining order.

6.         On September 2, 2009, the Georgia district court granted Demey’s motion for a temporary restraining order and enjoined CertainTeed from enforcing the non-competition covenant in Georgia. On that same date, Nichiha filed a motion to dismiss, transfer or stay the Pennsylvania action.

7.         On September 3, 2009, CertainTeed filed a first amended complaint in the Pennsylvania action, removing any claim to enforce the non-compete covenant in Georgia.

The Pennsylvania district court ultimately decided to deny Nichiha’s motion to dismiss, stay, or transfer and therefore let CertainTeed proceed with its claims in Pennsylvania. In its order, the Pennsylvania court addressed three issues. First, it rejected Nichiha’s claim that the first-filed rule required that the matter progress exclusively in Georgia. The court found that the Pennsylvania action was not “truly duplicative” of the Georgia action because the former included a number of claims that were not present in the latter. The court rejected Nichiha’s assertion that the claims asserted by CertainTeed were mandatory counterclaims in the Georgia action, instead finding that the trade secret claims were not so related to the non-compete claims that separate trials would lead to “substantial duplication of efforts.”

The district court next addressed the issue of venue. It decided that a substantial portion of the events at issue took place in Pennsylvania. Specifically, it cited CertainTeed’s allegations that: (a) Demey and Nichiha would be sharing and utilizing confidential information and trade secrets that originated, and are stored, in Valley Forge, Pennsylvania; and (b) Nichiha and Demey conducted negotiations while Demey was in Pennsylvania.

Finally, the district court answered the question of whether it should transfer the case to Georgia in the negative. After recognizing that a plaintiff’s choice of forum is a “paramount consideration,” the court remarked that CertainTeed’s key witnesses and documents are maintained on servers located in Valley Forge. The court also decided that the Eastern District of Pennsylvania is as convenient as the Northern District of Georgia for non-party witnesses. Thus, for the time being, the case between CertainTeed, Demey, and Nichiha will proceed on two fronts.

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Competitive intelligence is a business function that many large companies utilize for the purpose of gathering and analyzing useful information about competitors in an ethical manner. Two Seyfarth Shaw LLP trade secret lawyers recently had an article published about this important business function and some of the trade secret issues involved.

Michael Wexler and Robert Milligan's article, "Keep On the Right Side of the Line: A Trade Secret Law Perspective," was published in the September-December 2009 issue of Competitive Intelligence Magazine, which is a publication of the Society of Competitive Intelligence Professionals (“SCIP”), www.scip.org. The article discusses the pitfalls a company encounters when it does not do enough to protect its key information. The authors also address some best practices for competitive intelligence (CI) professionals to gather useful information in an ethical manner while simultaneously protecting their own companies from disclosing sensitive information. They note that

Companies must continuously and aggressively seek new and effective ways to protect their proprietary and trade secret information. If a trade secret is leaked, its value to the company may be severely compromised and lost forever. Likewise, to avoid the often detrimental and serious repercussions that accompany improper intelligence gathering, companies must be extremely vigilant to ensure that they use only ethical means to acquire information about their competitors.

According to Michael and Robert, "A CI professional should gather intelligence by examining published information sources, conducting interviews, and using other ethical information gathering methods." They also point out that companies' needs for creative trade secret protections has increased due to advances in technology and telecommunications. The authors conclude, "Competitive intelligence is an important aid to a company in the marketplace if it is gathered properly. However, if the information is gathered improperly, the information ceases to constitute competitive intelligence at all, and can result in detrimental and serious consequences for the CI professionals involved and their company."

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We are pleased to announce that the Trade Secrets, Computer Fraud, and Non-Competes Group's first webinar on November 5, 2009 entitled Monitoring the Revolving Door: Protecting Your Trade Secrets in Today's Economy was a tremendous success.

There were over 550 registered attendees in various legal and business positions, including business leaders, general and associate in-house counsel, human resource professionals, franchise professionals, competitive intelligence professionals, and outside counsel, from numerous domestic and international locations.

The first webinar covered best practices for protecting your company’s trade secrets and managing risk from trade secret claims. Rarely does a day go by without a news report of another high profile theft of important data from a company or the loss of key employees to competitors. Employer downsizing and competitive pressures have increased the need for companies to ensure that they have adequate protections in place to safeguard company assets.

Topics discussed in the first series of informative discussions included:

• Identifying trade secrets
• Adequately protecting trade secrets
• Conducting trade secret "audits"
• Implementing effective trade secrets policies and procedures
   

As discussed during the presentation, seeking trade secret counseling and a secret audit can assist clients to determine best practices to help protect their most important assets.

For those interested professionals who were not able to attend the first webinar and would like to listen to the recorded audio webinar or would like a copy of the presentation materials, please submit your request to sguigliano@seyfarth.com

Coming up on December 9th, we will host the second in our series, Trade Secret Triage and Restrictive Covenant Relief.  Please register (link to website registration) to join us to discuss what to do when you fear that someone has misappropriated your trade secrets.

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Amy E. Bivins recently published another article in the Daily Labor Report addressing the effects of the Ninth Circuit's Brekka decision, which we have posted about previously.  Ms. Bivins quotes Seyfarth attorney Carolyn Sieve on the issue.  Carolyn reminded employers that they "should not rely solely on a potential CFAA claim to protect their proprietary information."  Indeed, employers will need to consider what access to computer systems is "authorized." 

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In Coleman v. Retina Consultants, P.C., the Georgia Supreme Court reversed a trial court’s decision to enjoin a former employee based on his non-compete provision, but it upheld the injunction to the extent that it prevented the employee from using his former employer’s trade secrets. The case is especially interesting from a factual perspective, as it covers the increasingly common situation of an employee and employer disputing ownership of software developed over the course of employment. The relevant facts as follows:

Retina Consultants is a medical practice specializing in retina surgery. Retina Consultants hired Brendan Coleman as a software engineer in 2000. When Coleman joined Retina Consultants, he already had written and marketed a medical billing program called Clinex.  While employed by Retina Consultants, Coleman, with the assistance of the doctors who worked for Retina Consultants, modified his Clinex program to suit Retina Consultants’s specific business needs. Coleman integrated Retina Consultants’s trade secrets and confidential information into the new program, which was named Clinex-RE. Clinex-RE integrated electronic medical records, image storage, and a billing software component. Clinex and Clinex-RE are different programs, but Clinex-RE only works in conjunction with Clinex.

In 2003, Coleman and Retina Consultants entered into a Software Agreement that set forth that Retina Consultants owned Clinex-RE, Coleman owned Clinex, and that Retina Consultants had a non-exclusive license to use and sell Clinex. The Software Agreement also contained a non-compete provision stating that “Coleman will not distribute, vend or license to any ophthalmologist or optometrist the Clinex software or any computer application competitive with the Clinex-RE software without the written consent of Retina Consultants.”

Shortly before resigning on November 24, 2008, Coleman removed all applicable encryption keys and source and access codes for Clinex, along with any manual/installation instructions. After his resignation, Coleman attempted to license Clinex and Clinex-RE to other ophthalmologists; refused to disclose to Retina Consultants the passwords required to use Clinex and Clinex-RE software; refused to provide copies to Retina Consultants of all documentation in his possession and control relating to the programming and use of the software; refused to return to Retina Consultants copies of the Clinex-RE software; used Retina Consultants’s trade secrets; and took funds from a bank account belonging to a business set up jointly by Retina Consultants and Coleman. It is not unreasonable to speculate that the trial court was influenced by Coleman’s pre- and post-resignation behavior when it elected to enjoin Coleman in a broad fashion based on the non-compete provision.

Coleman appealed directly to the Georgia Supreme Court, which held unsurprisingly that the non-compete provision was unenforceable because it lacked geographic or temporal terms. However, the Supreme Court decided that the Clinex-RE package was a trade secret belonging to Retina Consultants, so Coleman could be enjoined from using it. Coleman could not be enjoined from using Clinex, because that was his property. Thus, the Supreme Court found that the trial court erred when it enjoined Coleman from retaining Clinex encryption keys, access codes, source codes, manual/installation instructions, passwords, and documentation. In the end, Retina Consultants was able to prevent Coleman from using the software that it owned, but the trial court went too far in stopping Coleman from using his software and in enforcing a limitless non-compete provision. 

The case illustrates the fact that the statutory protections of an applicable trade secret statute can act as a useful backstop in the event that a non-compete provision is unenforceable.

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By Jason Stiehl

Often one of the most confidential aspects of a business is its pricing mechanism and the quotes that it provides its customers. It is for this reason that the general rule governing trade secret law is that a company’s non-published pricing is a trade secret. See generally PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1270 (7^th Cir. 1995).  What happens, however, when a company does not prohibit its customer from sharing that pricing with others in the industry? 

This precise question was addressed in Southwest Stainless, LP v. Sappington, 582 F.3d 1176 (10^th Cir. 2009), and we touched on it in an earlier posting.  However, as the issue comes up fairly frequently, we thought it might warrant deeper discussion.

In Southwest Stainless, the U.S. Court of Appeals for the Tenth Circuit held that although pricing generally may be protectable, a court needs look at the specific pricing at issue in the case to determine whether the company protected that pricing. Ultimately, the Court in Southwest Stainless held that sharing pricing with a customer, without restriction, removes any claim of confidentiality that may have existed.

John Sappington and William Emmer worked for over ten years supplying metals to customers in the Tulsa-area on behalf of Southwest Stainless. Within a month of each other (and shortly after the departure of another Southwest employee), Sappington and Emmer left Southwest to work for a local competitor, Rolled Alloys. After their departure, Southwest identified two Southwest customer (previously serviced by Sappington and Emmer) who transferred business to Rolled Alloys. At trial, it was adduced that the former employees had assisted in preparing pricing quotes to these customers, including re-quoting Rolled Alloys’ prices at a price lower than the Southwest quote known to the former employees. The trial court entered judgment on behalf of Southwest, relying upon the steps undertaken by Southwest to keep its pricing confidential, such as: (1) confidentiality agreements, (2) password protection, (3) expenditure of hundreds of thousands of dollars to keep the information confidential, and, notably (4) the admission of the former employees that they understood price quotes to be confidential. Southwest Stainless, 582 F.3d at 1189.

On appeal, the Tenth Circuit reversed this holding,[1] drawing a distinction between “general measures” used to protect trade secrets and the “particular” pricing at issue in this case. Id. at 1190. It cited record evidence that Southwest had provided customers with “posted pricing,” that customers revealed competitors’ pricing, and that Southwest did not prevent customers from sharing its information. Id. The Tenth Circuit relied upon the United States Supreme Court decision of Rucklehaus v. Monsanto Co., 467 U.S. 986, which held:

If an individual discloses his trade secret to others who are under no obligation to protect the confidentiality of the information, or otherwise publicly discloses the secret, his property right is extinguished.

Here, because Stainless had “disclosed the quote” and the customer was “under no obligation to keep the information confidential,” the Court held the district court erred in holding such a price quote confidential and reversed the judgment in favor of the Plaintiff. 

This holding implies, however, that a company still may be able to assert trade secret protection for information necessarily shared with customers so long as the company requires its customers to treat the information as confidential as well.

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Today is the first in our series of webinars.  Our team will be discussing identifying and protecting your company's trade secrets.  Please join us.  Information on registration is available here.

Coming up on December 9th, we will host the second in our series, Trade Secret Triage and Restrictive Covenant Relief.  Please register to join us to discuss what to do when you fear that someone has misappropriated your trade secrets. 

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