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

By Rebecca Woods

Although Virginia is already generally hostile to non-competition agreements, enforcing only those that are very limited in function, geographic scope, and duration, a bill has been proposed in the 2012 session of the Virginia General Assembly that would severely restrict the enforceability of non-compete agreements. House Bill 1187 proposes to add to the Code of Virginia a provision that, with limited exceptions, would deem unlawful "any contract that serves to restrict an employee or former employee from engaging in a lawful profession, trade, or business of any kind." The limited exceptions would only allow businesses, partners in a partnership, or members of a limited liability company to agree to refrain from carrying on similar business in the area in which it or they had been conducting such business. The bill excepts from its coverage nondisclosure agreements intended to prohibit the sharing of certain information such as trade secrets and proprietary or confidential information.

The effect of the bill, if passed, would be to invalidate all employee non-compete agreements. Proponents of the bill claim it would transform Virginia into an entrepreneur haven like Silicon Valley. Opponents have not yet made public pronouncements, but it is generally expected that business interests will lobby against the bill.

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By Justin Beyer

In a matter of first impression, Judge William Standish of the Western District of Pennsylvania ruled in Best Medical Int’l, Inc. v. Spellman, 07-cv-01709-WLS, 2011 U.S. Dist. LEXIS 147853 (W.D. Pa. Dec. 22, 2011), that, pursuant to the Pennsylvania Uniform Trade Secrets Act (“PUTSA”), a defendant may recover attorneys' fees against a plaintiff where the plaintiff filed an objectively specious misappropriation of trade secrets claim and subsequently engaged in subjective misconduct during the course of discovery. 

At issue in this case was Best Medical’s claims that four of its former employees (Hill, Spellman, Scherch, and Bittman) misappropriated Best Medical’s trade secrets and provided those trade secrets to Accuray, Inc. Accuray and Best Medical are competitors in the radiation treatment planning and image guided therapy systems industry. 

In December 2007, Robert Hill filed suit against Best Medical claiming Best Medical denied him severance benefits after his job responsibilities were reduced due to corporate downsizing. Following what Hill claimed was his constructive discharge, Hill went to work for Accuray, Inc.

Best Medical counterclaimed, alleging, among other claims, that Hill misappropriated Best Medical’s confidential and trade secret information.   In March 2008, Hill and Best Medical agreed to a stipulated motion for permanent injunction. Included amongst the terms of the permanent injunction, Hill agreed to return all Best Medical documents in hard copy form and submit his electronic storage devices to forensic examination, permit an image of his computer to be taken, and permit the alleged trade secrets and confidential information to be deleted from his computer. At no point during the remainder of the litigation did Best Medical claim that Hill violated the stipulated permanent injunction in any way. 

In October 2008, Best Medical filed suit against Spellman, Scherch, and Bittman (the “Spellman Defendants”), all former Best Medical employees, and Accuray, alleging breaches of contract, tortious interference, and violations of PUTSA. Like Hill, the Spellman Defendants and Best Medical entered into a stipulated permanent injunction, also requiring the Spellman Defendants to turn over their electronic devices for review, imaging, and deletion of Best Medical’s documents found on the computers.  

The parties then engaged in nearly a year of settlement negotiations, which eventually culminated in Best Medical filing another complaint against Hill, the Spellman Defendants, and Accuray. In May 2010, Accuray filed a series of motions to compel seeking a definitive answer from Best Medical as to the trade secrets Best Medical claimed had been misappropriated and which Best Medical further claimed Accuray was using to Best Medical’s detriment. 

Over the course of another year, Best Medical stonewalled on answering that question, until two 30(b)(6) deponents, presented by Best Medical, conceded that Best Medical: (a) could not identify the trade secrets that Accuray allegedly misappropriated; (b) had not investigated its misappropriation claim prior to filing suit; and (c) did not have any evidence of Accuray misappropriating and improperly using Best Medical’s trade secrets.

Following the court’s grant of summary judgment in October 2011, Accuray and the Spellman Defendants sought recovery of attorneys’ fees spent defending the misappropriation claims based on three theories:

(1)        Best Medical violated PUTSA, 12 Pa. C.S. § 5305(1), which requires that “attorneys fees, expenses and costs [may be recovered by] the prevailing party: (1) if a claim of misappropriation is made in bad faith;”

(2)        Best Medical violated 28 U.S.C. § 1927, which requires that: “Any attorney or other person admitted to conduct cases in any court of the United States … who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct;” and

(3)        that the court possessed the inherent power to sanction Best Medical and award attorneys fees to Accuray and the Spellman Defendants due to Best Medical’s litigation conduct.

Finding no Pennsylvania case interpreting 12 Pa. C.S. § 5305(1), the court relied heavily on other states’ interpretation of their own versions of the Uniform Trade Secrets Act. The court decided to follow and apply a two-part test rendered by the California Court of Appeal in Gemini Aluminum Corp. v. Cal. Custom Shapes, Inc., 95 Cal. App. 4th 1249, 1262 (Ct. App. 2002). In Gemini, the California Court of Appeals ruled that, to merit an attorneys fee sanction against the plaintiff, the defendant must prove: (1) the “objective speciousness of the plaintiff’s claim;” and (2) “subjective bad faith in brining or maintaining the claim.” 2011 U.S. Dist. 147853, at * 10, citing Gemini, 95 Cal. App. 4th at 1262. 

Defining “objective speciousness,” the Best Medical court cited to decisions from the District of Maryland and the Southern District of California, in which those courts held that “objective speciousness exists where there is a complete lack of evidence supporting plaintiff’s claims.” 

The Best Medical court also defined what constituted “subjective misconduct” finding it “exists where a plaintiff knows or is reckless in not knowing that its claim for trade secret misappropriation has no merit.” 2011 U.S. Dist. LEXIS 147853, at *12.

After also considering a defendant’s burden of proof to show that attorneys’ fees should be awarded under 28 U.S.C. § 1927 or the court’s inherent power, the court analyzed why an award was appropriate pursuant to PUTSA. The court found that Best Medical acted in bad faith, and relied heavily on three salient facts; namely:

(1)        that Best Medical possessed images of the Spellman Defendants’ computers since November 2008, but failed to analyze those computers;

(2)        that an affidavit from Best Medical’s president, which indicated that Best Medical was: (a) always ready, willing and able to assist counsel in the prosecution of this matter; (b) monitored its counsel’s activities throughout the litigation; and (c) identified to counsel at the outset of the litigation the trade secrets at issue; was essentially unreliable and not supported by the facts of the case; and

(3)        that Best Medical’s 30(b)(6) witness admitted in May 2011 that Best Medical did not investigate its misappropriation claims thoroughly before it filed its complaint against Accuray and the Spellman Defendants.

The court concluded that Accuray and the Spellman Defendants were entitled to all of their attorneys’ fees incurred as a result of defending the PUTSA claims. The court did not reach the other arguments based on 28 U.S.C. § 1927 or the inherent powers of the court.

While the reach of this decision is not yet apparent, it is important to note that Pennsylvania now joins other states, including, California, Maryland, Minnesota, and Michigan, in finding that a defendant may recover attorneys' fees where a plaintiff brings or maintains a misappropriation claim in bad faith. See 2011 U.S. Dist. LEXIS 147853, at * 10-12. As seen from the above factual recitation, however, it also appears that a plaintiff must act quite egregiously and lack any evidence of misappropriation before a Pennsylvania court will award attorneys' fees.  

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By Justin Beyer

On January 17, 2012, Yuan Li, a former research scientist with Sanofi Aventis, pled guilty to one count of violating 18 U.S.C. § 1832 (the section of the Economic Espionage Act dealing with commercial economic espionage). Li, a Chinese national, was residing in Somerset, New Jersey at the time of her incarceration. 

Sanofi Aventis is a global healthcare company, headquartered in Bridgewater, New Jersey. Sanofi owns and manufactures prescription drugs such as Allegra, Plavix, Copaxone, and Ambien. In addition to these well-known pharmaceutical labels, Sanofi also develops, manufactures, and sells other prescription and over-the-counter pharmaceuticals. 

According to the criminal complaint, to protect its trade secrets and prevent competitors from improperly receiving or accessing such information, Sanofi requires its employees to sign confidentiality agreements and invention assignment agreements, repeatedly informs and reminds its employees of the confidential nature of Sanofi’s business, restricts access to its facilities, requires researchers to log in lab notebooks and maintain them under lock and key, maintains an encrypted document management system, and restricts access to its computer systems through advanced computer security measures. 

To those ends, in August 2006, when Sanofi hired Li as a medicinal chemist (later promoting her to a research scientist), it required Li to sign a “Conflict of Interest” statement, a certificate acknowledging her receipt of Sanofi’s corporate ethics and code of business conduct, an Inventions Agreement, and a document entitled “Trade Secrets and Confidential Information.” Additionally, Li confirmed to Sanofi that she “never materially participated in any illegal act relating to the development and approval of drug products, including, but not limited to, submitting false data to governmental authorities and falsifying records that are maintained by pharmaceutical and consumer health companies.” 

Despite these protections and Li’s promises, according to the government, starting sometime in or about October 2008, Li improperly accessed Sanofi’s internal database and began downloading Sanofi’s proprietary chemical structures. During that same time frame, Li was a 50 percent partner of Abby Pharmatech, LLC, a Delaware limited liability corporation, which purportedly served as a United States subsidiary to Chinese chemical producer, Xiamon KAK Science & Technology Co. Ltd. 

Over a nearly three-year period, according to the government, Li engaged in an elaborate scheme in which she improperly accessed, downloaded, transferred the downloaded information to her personal home computer by either emailing the information to her personal e-mail address or by using a USB thumb drive, and attempted to pass off Sanofi’s proprietary chemical compounds as those of Abby Pharmatech. According to the criminal complaint, Sanofi became aware in May 2011 that, on Abby Pharmatech’s website, Abby Pharmatech was advertising chemical compounds that belonged to Sanofi, including a number which Sanofi had not yet publically disclosed. 

During the course of the FBI’s investigation into Li’s illegal activities, Sanofi representatives verified that Abby Pharmatech registered over 6000 Sanofi proprietary chemical structures as Abby Pharmatech property. Moreover, in forensically examining the laptop computer Sanofi issued to Li, it was discovered that Li possessed copies of Abby Pharmatech’s 2010 tax return. Most incriminating, however, Li possessed on her laptop a document entitled “AbbyPharmatech,” which contained a list of 144,000 compounds, including compounds that were categorized with Sanofi internal control numbers. Those internal control numbers could not have been discovered but for unauthorized access to Sanofi’s internal databases. 

As a condition of her guilty plea, the United States Attorney, District of New Jersey, agreed not to prosecute Li for her theft of chemical compounds occurring between January 1, 2010 and July 27, 2011. Despite her plea and the U.S. Attorney’s agreement not to charge and prosecute her for certain thefts, Li still can be sentenced for a maximum of 10 years imprisonment and up to a $250,000 fine. Also, contingent with her plea, Li agreed to pay Sanofi a total of $131,000 in restitution damages. Judge Joel A. Pisano received and accepted the guilty plea. Pursuant to the Sentencing Reform Act, 18 U.S.C. §§3551-3742, Li’s sentence is within the sole discretion of Judge Pisano. Any immigration proceedings and potential removal from the United States will be handled through a separate proceeding. 

This case highlights that, even when a company has sophisticated practices in place to protect its trade secrets, it must remain constantly vigilant in its efforts to prohibit misappropriation of those secrets. In instances like this and where a company’s trade secret is essentially its lifeblood, a company should consider using additional preventive means to prohibit employees from stealing trade secrets, such as configuring the operating system to restrict access to external devices, thus, restricting the ability to download information to an external device; blocking a user from uploading information to a web-based site; and/or utilizing software that blocks employees from sending emails to certain domain names. 

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By Robert Milligan and Joshua Salinas

We have compiled a list of the top 2011 developments/headlines in trade secret, computer fraud, and non-compete law. While large jury verdicts and criminal prosecutions garnered a significant amount of attention, there were also a number of significant state and federal court decisions that have altered the landscape of trade secret, computer fraud, and non-compete law in various jurisdictions. For example, in Illinois, the state supreme court broadened the discretion and increased the flexibility of trial courts in determining the reasonableness of non-competes.  Also, in Texas, the state supreme court made it easier to enforce non-competes by opening the door for other consideration (apart from access to trade secrets) to serve as consideration for a non-compete.  On the federal front, the Ninth Circuit in United States v. Nosal found that an employee may be liable under the Computer Fraud and Abuse Act (“CFAA”) for violations of an employer’s computer use policies (the court has since granted en banc review and heard oral arguments in December 2011) and there remains a circuit split on the applicability of the CFAA in the workplace.

There have also been significant legislative efforts to modify trade secret, computer fraud, and non-compete law in various jurisdictions. For instance, in Georgia, the Restrictive Covenant Act illustrates the state’s fundamental change in public policy toward enforcement of restrictive covenant agreements, including non-competes and non-solicits.  In New Jersey, the state recently adopted its own version of the Uniform Trade Secrets Act. In Massachusetts, a non-compete reform bill has undergone significant review, comment, and revision regarding standing, attorneys’ fees, and consideration for non-compete agreements. On the federal front, the Patent Reform Act was passed and there have also been efforts to modify the CFAA.   

In 2012, we expect to see more cases involving the intersection between cloud computing/social networking and trade secrets. With the proliferation of electronic information used to conduct business and as more data is housed remotely and outside company servers, courts have begun addressing the extent to which companies retain ownership of such information and can sue for the misuse of such information.   

We also expect to see more cases addressing trade secret preemption and the protection (or lack thereof) of confidential information.  Some courts have also continued to insist on greater specificity in pleadings on trade secret claims and the strict identification of alleged trade secrets in discovery by plaintiffs to frame the issues in dispute.  Disputes concerning the enforcement of forum selection and choice of law provisions in non-compete disputes will also remain prevalent. Lastly, we also expect to see more cases involving the interplay between employee confidentiality obligations and employees’ rights under the Sarbanes-Oxley Act.

Below is our listing of top developments/headlines in trade secret, computer fraud, and non-compete law for this past year in no particular order:

1.         Significant State Supreme Court Decisions

            Several significant state supreme court decisions have addressed the construction of enforceable non-compete provisions. The Virginia Supreme Court required employers to demonstrate that the non-compete is no broader than necessary to protect the employer’s “legitimate business interests” and does not “unduly burden” the ex-employee’s right to earn a living. The Texas Supreme Court continued the state’s movement toward non-compete enforceability and for the first time approved of something other than providing an employee confidential business information as appropriate consideration for a non-compete agreement (i.e. stock options). The Illinois Supreme Court also made non-compete enforceability easier by granting Illinois trial courts significant discretion to consider “the totality of the facts and circumstances of the individual case” when assessing whether a “legitimate business interest exists.”   The Idaho Supreme Court found that a two-year non-compete agreement executed in connection with the sale of a business was enforceable under California law and could be narrowed within a scope that was reasonably necessary to protect the goodwill of the sold business. The Montana Supreme Court ruled that an employer will not be permitted to enforce a non-compete provision in an employment agreement where the employer was solely responsible for ending the employment relationship. The Oklahoma Supreme Court recently held that non-compete agreements are reviewable by a court, even if the agreement contains an arbitration clause and there is no claim as to the validity or enforceability of the arbitration clause, and further held that provisions that are contrary to Oklahoma’s statutory limitations on non-competes may result in the court invalidating the entire non-compete.

2.         Expanded Role Of The International Trade Commission in Preventing Foreign Trade Secret Theft

            The Federal Circuit’s decision in TianRui Group Co. v. International Trade Commission confirmed that the ITC has jurisdiction to address trade secret claims, even when the alleged wrongful conduct occurs in a foreign country. The court found that the ITC has jurisdiction through section 337 of the Tariff Act, which prohibits “[u]nfair methods of competition and unfair acts in the importation of articles … into the United States….” U.S. companies now have a meaningful remedy to address concerns about the extraterritorial protection of trade secrets.

3.         Continuing Developments in Legislation

            New Jersey, one of the four remaining states that had not adopted some or all of the provisions of the Uniform Trade Secrets Act (UTSA), recently passed the state’s own version of the UTSA. New Jersey’s Trade Secrets Act was recently signed into law on January 9, 2012. 

            Senators Kohl (D-WI) and Coons (D-DE) also introduced a federal bill in October 2011 that would create a new federal private right of action for trade secret owners.

            Georgia passed the Restrictive Covenant Act. The Act has three significant implications: (1) it creates statutory presumptions that restraints two years or less in duration are reasonable in time and restraints more than two years are unreasonable; (2) it eases the drafting requirements for specific restrictive covenants; and (3) permits Georgia courts to “blue pencil” (i.e. partially enforce) restrictive covenants that otherwise would be overbroad and, therefore, completely unenforceable under existing Georgia case law. At least one Georgia court has interpreted the new Act as providing courts discretion to re-write restrictive covenants to make them enforceable, rather than merely providing the authority to remove overbroad covenants.

            The Massachusetts legislature heard testimony in September 2011 regarding a non-compete bill that aims to modify the common law pertaining to non-compete agreements and to simultaneously afford greater procedural protections to those affected by the contractual restrictions on mobility in employment. Changes include the elimination of a threshold that confined the use of non-compete agreements to employees earning over $75,000 per year in favor of a requirement that courts more broadly consider the economic impact on an affected employee before deciding whether to enforce a non-compete agreement. Bill 2293 also provides for mandatory attorneys’ fees to employees.  However, an employer can avoid paying fees if the court determines that it took “objectively reasonable efforts to draft the rejected or reformed restriction so that it would be presumptively reasonable.”  Finally, the new bill would permit the signing of mid-employment non-compete agreements so long as “fair and reasonable” consideration is provided to the affected employee. To date, the Massachusetts legislature has yet to approve the proposed bill.

            There have also been efforts to amend the CFAA. Proposed amendments to the CFAA that would restrict the definition of “exceeds authorized access” have recently been the subject of debate. U.S. Senator Patrick Leahy (D-VT) proposed a bill that excluded violations of computer use policies and terms of service agreements from “exceed[ing] authorized access” in violation of the statute. The Department of Justice has taken a pro-employer stance and objected to CFAA changes, while emphasizing the importance of holding employees liable for violations of computer use policies to protect our nation’s economic security. 

            Additionally, the American Invents Act of 2011 was signed into law. The America Invents Act of 2011 changes the U.S. Patent system to a “first-to-file” format. More importantly, it allows companies to defend against alleged patent infringement when they practice information they elect to keep as trade secrets, but are sued for infringement because another inventor filed for a patent first. Companies can keep information related to their inventions a trade secret and retain these “prior use rights” as long as they have “commercially” practiced their invention.

4.         Significant Jury Trials Verdicts and Criminal Sentences

            In 2011 we saw several significant trade secret jury trial decisions. The second jury in the contentious Barbie vs. Bratz case awarded more than $80 million in damages, plus attorneys’ fees and treble damages to MGA for Mattel’s alleged trade secret misappropriation; a reversal of the case’s first jury trial that resulted in a large jury verdict in favor of Mattel. Mattel is appealing the decision and we expect to see more litigation in this case in 2012.

             The jury in Pacesetter Inc. v. Nervicon Co. awarded more than $2.3 billion in damages (later pared down to $947 million by the trial court judge) to St. Jude Medical for a former employee’s theft of confidential technical information about the company’s medical devices. Additionally, the jury in DuPont v. Kolon awarded more than $919 million in damages for a former employee’s theft of information regarding DuPont’s anti-ballistic Kevlar fiber. 

              The TCW Group, Inc. v. Gundlach case, followed with great interest in the financial community ended in split jury verdicts, after each party had sought hundreds of million of dollars in damages against the other. The jury found the former investment chief liable for alleged trade secret misappropriation and breach of his fiduciary duty but did not award any damages on the fiduciary duty claim. Instead, the jury assigned the determination of damages for trade secret theft to the judge. The jury awarded the former investment chief $66.7 million for back pay after his termination.  The parties recently settled the litigation pursuant to a confidential settlement, prior to the court’s ruling on the amount of damages to award on the trade secret claim.   

              Regarding criminal prosecution, an ex-Goldman Sachs programmer was sentenced to more than 8 years in prison for the theft of confidential information regarding the company’s trading system. Additionally, an ex-Dow AgroSciences scientist was sentenced to more than 7 years in prison for the theft of secret information about organic insecticides. 

5.         Emerging Areas in Social Media and Cloud Computing

            The explosion of cloud computing and the ubiquity of social media has increased the risks and vulnerabilities in protecting valuable company data and prized trade secrets. Companies utilizing cloud-computing services must employ effective measures to protect and secure their intellectual property. Issues have also arisen regarding the ownership of employee created social media content and passwords. For example, the current PhoneDog v. Noah Kravitz case in the Northern District of California involves a dispute regarding the ownership of an employee’s Twitter account, specifically the account’s follower list and password. The outcome of this case will be closely monitored by employers, especially in light of the 2010 case Sasqua Group v. Courtney. In that case, a New York district court found that an allegedly misappropriated customer list was not a trade secret because the information could be easily located through Google and LinkedIn searches. 

            A New Jersey district court in Syncsort Incorporated v. Innovative Routines, International, Inc., 2011 U.S. Dist. LEXIS 92321, (D.N.J. August 18, 2011), however, found that posting information on the internet might not necessarily void that information’s trade secret status. The takeaway is that prior methods to maintain confidentiality may no longer be viable with the heightened connectivity of social media and cloud computing. More recently, a Pennsylvania federal court held that an employer may claim ownership of its former executive’s LinkedIn connections where the employer required the executive to open and maintain an account, the executive advertised her and her employer’s credentials and services on the account, and where the employer had significant involvement in the creation, maintenance, operation, and monitoring of the account. 

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By Joshua Salinas

As a follow-up to yesterday's blog entry about a new California trade secret designation decision, another important issue that trade secret litigators face is whether the pre-discovery trade secret identification requirements of California Code of Civil Procedure section 2019.210 apply in California federal court.  There is a split in authorities but recent cases suggest that California federal courts will require at a minimum an identification of trade secrets by the plaintiff as part of a trade secret plaintiff’s Rule 26 disclosure or during the infancy of discovery.

In Jardin v. DATAllegro, No. 10-CV-2552-IEG (WVG), 2011 WL 3299395 (S.D. Cal. July 29, 1011), the Honorable Magistrate Judge William Gallo “wholeheartedly” agreed that section 2019.210 did not apply in federal district court.  Yet despite refusing to directly apply the statute, Judge Gallo’s pre-discovery trade secret identification order mirrored the procedures and policies provided in section 2019.2010.  Jardin epitomizes the growing trend in which federal district courts will require parties to identify trade secrets with particularity before commencing discovery, without explicitly applying section 2019.210.

Section 2019.210 requires a plaintiff to identify allegedly misappropriated trade secrets before commencing discovery.  The requisite pre-discovery identification helps serve four purposes: (1) promotes well-investigated claims, (2) avoid abuses of the discovery process, (3) frames the appropriate scope of discovery, and (4) enables the formation of complete and well-reasoned defenses.  Computer Economics, Inc. v. Gartner Group, Inc., 50 F. Supp. 2d 980, 985 (S.D. Cal. 1999).

Jardin involved a dispute over the inventorship of U.S. Patent Number 7,818,349 (“Ultra-shared-nothing parallel database”).  Plaintiff Jardin had previously filed a related suit two years earlier against Defendant DATAllegro regarding the infringement of a different patent. Consequently, discovery in the prior case allegedly provided Jardin with access to DATAllegro’s confidential information.  Additionally, a protective order entered in the previous case limited the use of the produced protected information.  DATAllegro brought this issue to Judge Gallo, concerned that Jardin would improperly use confidential information from the prior case.

Judge Gallo found DATAllegro’s confidentiality concerns legitimate. Despite his explicit rejection of section 2019.210, Judge Gallo ordered that no discovery would take place until Jardin identified the allegedly misappropriated information.  In fact, Judge Gallo’s orders and underlying policy considerations mirrored section 2019.210.

Jardin objected to Judge Gallo’s order.

The Honorable Chief Judge Irma Gonzales upheld Judge Gallo’s order, finding nothing erroneous in his refusal to apply section 2019.210. Judge Gonzales noted that the Ninth Circuit has not decided whether section 2019.210 applies in federal court and California district courts continue to reach conflicting conclusions.  However, she stated that Federal Rule of Civil Procedure 26 provides district courts with broad discretion to control discovery. Thus, Judge Gallo could properly fashion his order after section 2019.210 without necessarily applying section 2019.210.

This case is significant because it illustrates the court's movement toward applying the procedures and policies behind section 2019.210 while retaining their “inherent discretion to manage discovery.”

The Southern District court in Computer Economics, Inc. v. Gartner Group, Inc., 50 F. Supp. 2d 980 (1999) was one of the first federal courts to directly apply section 2019.  That court recognized that the statute codified the holding in Diodes, Inc v. Franzen, 260 Cal. App. 2d 244 (1968), that pre-discovery trade secret identification is necessary to provide reasonable notice of the issues at trial and reasonable guidance in ascertaining the scope of appropriate discovery.  The Northern District in Neothermia Corp. v. Rubicor Medical, Inc., 345 F. Supp. 2d 1042 (N.D. Cal. Nov. 14, 2004) followed Computer Economics and directly applied section 2019.210.

The Eastern District in Funcat Leisure Craft, Inc. v. Johnson Outdoors, Inc., No. S-06-0533 GEB (GGH), 2007 WL 273949 (E.D. Cal. Jan. 29, 2007) was the first federal court to reject the direct application of section 2019.210.  That court found the statute to be a procedural rule that conflicted with the Federal Rules.

Since Funcat many district courts have continued to apply section 2019.210 either directly or indirectly. The Northern District applied the statute directly in M.A. Mobile LTD. v. Indian Inst. of Tech. Kharagpur, No. C08-02658 RMW (HRL), 2010 WL 3490209 (N.D. Cal. Sept. 3, 2010). The Eastern District in Hilderman v. Enea Teksci, Inc., No. 05cv1049 BTM (AJB), 2010 WL 143440 (S.D. Cal. Jan. 8, 2010), rejected the direct application of section 2019.210, yet held that plaintiffs would be barred from presenting trade secret claims for failing to provide defendants with “fair notice.” Moreover, the court in Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment (Shanghai) Co., Ltd., No. C 07-5248 JW PVT, 2008 WL 183520 (N.D. Cal. Jan. 18, 2008), declined to rule on section 2019.210 applicability, but required the plaintiffs to disclose the allegedly misappropriated trade secrets.

Jardin signifies this recent departure from Funcat’s complete elimination of section 2019.210 from federal court.  Indeed, federal courts should not ignore the purposes behind the statute as articulated in Computer Economics.  It is interesting to note that Jardin is from the same Southern District of California as Computer Economics. While Jardin refused to directly apply section 2019.210, it indirectly applied the statute with the same reasoning set forth in Computer Economics.

The Ninth Circuit has yet to resolve the dispute. However, in nSight, Inc. v. PeopleSoft, Inc., 296 F. App'x 555, 560 (9th Cir. 2008) (unpublished), it upheld the dismissal of a trade secret misappropriation claim because the plaintiff failed to identify any trade secret with “reasonable particularly” per section 2019.210.  While unpublished, and thus nonbinding, nSight may foreshadow the Ninth Circuit’s views regarding section 2019.210 applicability.

Moreover, the Eastern District in N. Am. Lubricants v. Terry, 2011 U.S. Dist. LEXIS 133672 (E.D. Cal., Nov 18, 2011) recently applied the rationale from Computer Economics regarding trade secret identification.  N. Am Lubricants involved a motion to compel for the plaintiff’s failure to identify trade secrets with sufficient particularity in response to an Interrogatory requesting said information.  The court noted that although the dispute did not involve section 2019.210, the court found the rationale in Computer Economics persuasive regarding the need for reasonably specific identification of claimed trade secrets in response to interrogatories at the outset of litigation.  It is notable that the decision was from the same magistrate who decided the Funcat case.

Trade secret defendants who find themselves in California federal court should request from plaintiffs the identification of any allegedly misappropriated trade secrets.  While some federal courts may not directly apply section 2019.210, the growing trend is for those courts to fashion orders to ensure that the policies of both Rule 26 and section 2019.210 are achieved and that there is a trade secret identification disclosure either before the commencement of discovery or at the infancy of the discovery process.  Thus, federal courts are more willing to either directly or indirectly use section 2019.210 because it is a helpful guideline to give defendants proper notice of the claims, enable complete defenses, guide proper discovery, and eliminate disadvantageous surprises at trial.

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The trend of some recent judicial decisions seems to reflect an increasing concern by courts that, notwithstanding trade secret misappropriation plaintiffs’ understandable reluctance to disclose proprietary information in more detail than absolutely necessary, they must describe with considerable specificity whatever is alleged to have been purloined. For example, a California district court ruled recently that “Whatever [the plaintiff] wishes to claim as trade secrets that [the defendant] misappropriated, it must identify each particular composition, formula, technology and manufacturing techniques, application and manufacture of [the applicable product] without further delay.” Delphon Industries, LLC v. International Test Solutions, Inc., Case No. C 11-01338 PSG (N.D. Cal., Jan. 4, 2012).

Plaintiff Delphon develops and manufactures gel products used in safely transporting delicate technology devices within and between laboratories. The gels are polymers created using proprietary formulas consisting of mixtures, blends and balances of specific chemical elements. In response to an interrogatory from Defendant ITS seeking identification of the trade secrets that allegedly were misappropriated, Delphon stated that it “customizes the composition of its gel materials to its customers’ needs” and that the trade secrets are “The ‘recipe’ for its different gel materials - including the amount of each ingredient used, the process . . . [and] methods of combining the ingredients, the use of solvents with gel materials, and the blending, mixing and dispersion of additives into the gel material.” ITS told Magistrate Judge Paul Grewal that Delphon had not identified its trade secrets with the specificity required by Section 2019.210 of the California Code of Civil Procedure, and he agreed. 

Section 2019.210 provides that, before commencing discovery relating to a trade secret allegedly misappropriated, the alleging party must “identify the trade secret with reasonable particularity.” According to Judge Grewal, the statute provides a “flexible standard” which does not require “every minute detail” of the claimed trade secrets but must be adequate “to permit the defendant to learn the limits of the secret and develop defenses [and] to permit the court to understand the secret and fashion discovery.” He held that Delphon had fallen short. First, it had admitted that its depiction of the trade secret was imprecise; the court added that “In fact, the description is so general that Delphon did not even bother to protect the description under the terms of the Stipulated Protective Order.” Second, Delphon’s Director of Materials Technology conceded at her deposition that the disclosures were “conceptual” and lacked specific details even though Delphon has this information. Third, the court explained that Delphon had offered “no credible expert testimony suggesting that those in the field would be able to review Delphon’s designations and distinguish the alleged trade secrets from information in the field.”

The lessons learned from this case are that a trade secret misappropriation plaintiff should 1) insist on the entry of a protective order; 2) should state that the description of the confidential information is covered by that order, and 3) should avoid referring to the disclosed information as “general” or simply “conceptual.” Finally, the plaintiff should consider seeking to retain a qualified expert witness to the extent necessary to testify that the unique characteristics of the trade secrets have been described sufficiently to differentiate the trade secrets from public information.

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A manufacturer engaged an independent contractor to improve the efficiency of certain machinery.   After the task was completed, the contractor did the same for a competitor of the manufacturer.   The manufacturer, claiming that the improvements were its trade secrets, sued the competitor in an Ohio state court for misappropriation. The case went to trial before a jury which returned a verdict of liability, answered special interrogatories consistent with that verdict, but awarded no damages. The trial judge entered judgment on the verdict and enjoined the competitor from using the trade secrets for five years unless the manufacturer was paid a specified royalty. On cross-appeals, the Ohio appellate court recently affirmed the judgment in all respects. Columbus Steel Castings Co. v. King Tool Co., 2013 Ohio 6826 (10th Appellate Dist. Court of Appeals, Dec. 30, 2011).

Columbus manufactures steel bolsters that support and stabilize railroad cars. In 2003, Columbus retained King Tool to build a new, more efficient machine. As a result, Columbus’ productivity increased three-fold. Then, Columbus’ competitor Alliance Castings retained King for the same purpose and achieved production six times its former output. Columbus, claiming that the improvements to its machine made it “unique as a whole” and afforded a competitive advantage, sued King and Alliance for misappropriation of trade secrets. The defendants sought and obtained summary judgment, but Columbus appealed. In 2008, the Ohio Court of Appeals identified genuine issues of material fact and, therefore, reversed and remanded for a trial.  

Columbus settled with King and tried, to a jury, the dispute with Alliance. The jury returned a general verdict in favor of Columbus on liability but awarded no monetary relief. In answers to special interrogatories, the jury found that (a) the “machine made by King Tool for Columbus Steel was not generally known to, or readily ascertainable by proper means by, someone who might obtain economic value from its use,” (b) Columbus “made reasonable efforts to maintain the secrecy of the design of the” machine, (c) the design was a trade secret of Columbus, and (d) Alliance misappropriated Columbus’ trade secret.   The trial court enjoined Alliance’s use of its new machine for five years but, as an alternative, established a royalty of $10.60 -- approximately 1% of the average sales price -- for Alliance to pay Columbus for each bolster manufactured on the machine during that period. Both parties appealed. 

Columbus argued that the jury’s zero damages verdict resulted from misleading jury instructions. The Court of Appeals determined, however, that the instructions “as a whole” did not mislead “the jury in a manner affecting [Columbus’] substantial rights.” 

Alliance maintained that the case should not have been submitted to the jury at all because there was no evidence to support Columbia’s claims that (a) the machinery design qualified as a trade secret, (b) Columbus took “reasonable steps to protect the secrecy of the design,” (c) Alliance misappropriated the design, and (d) “Alliance’s alleged misappropriation caused Columbus damage.” The appellate tribunal, reviewing de novo, rejected all of these contentions and affirmed the judgment in its entirety. The court held that it must affirm “if substantial evidence exists to support” the verdict and “reasonable minds could reach different conclusions on essential elements of the claim.” As to Alliance’s contentions:

            1.         Trade secret. The design qualified as a trade secret under the Ohio Uniform Trade Secrets Act, even though certain components “were readily ascertainable, because the machine as a whole was unique and afforded a competitive advantage to Columbus Steel.” 

            2.         Protection of confidentiality. There was some evidence that Columbus had told King that the design was to be kept confidential and not shared with Columbus’ competitors. Further, Columbus “had security guards, fences, and locked entryways, and that the sketches and engineering drawings for the new machine were kept in a locked office.”  Alliance claimed that the improvements were readily ascertainable by viewing the machine, but the appellate court pointed to evidence that Alliance’s representatives “obtained unauthorized access by means of false representation in order to view the new machine.”

            3.         Misappropriation. Alliance may have used improper means to acquire knowledge of the trade secrets. There was some evidence that an Alliance misrepresented to King that he was working for both Alliance and Columbus. The Court of Appeals said it was the province of the jury to determine whether there was a misrepresentation and whether Alliance had reason to know of it.

            4.         Damage. There was evidence from which a jury could have found that Columbus lost an indeterminate amount of profits due to misappropriation. In trade secret cases, “it is often difficult to prove money damages or lost profits” with certainty. The injunction provided “some relief for the misappropriation [because] the facts and circumstances of this case, particularly the zero damages verdict, lend themselves to a presumption of [irreparable] harm and a finding that money damages could not adequately compensate Columbus Steel.” 

This decision provides insights with respect to proper jury instructions and special interrogatories in trade secret misappropriation cases. It shows that appellate courts will strive to reconcile all aspects of a jury’s verdict and a trial court’s judgment.

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Expanding what until recently had been very limited options for U.S. companies to enforce their rights against Chinese companies misappropriating trade secrets, the Federal Circuit in TianRui Group Co. v. International Trade Commission, Fed. Cir., Case No. 2010-1395, held that the International Trade Commission has statutory authority to review and rule on conduct occurring in China in the course of a trade secret misappropriation investigation. The primary effect of this decision is that US companies are now afforded the ability to sue Chinese parties in the United States, an avenue previously foreclosed such companies because, generally, in such cases a substantial amount of the wrongful activity would have taken place in China, and the Chinese parties are thus beyond the reach of most long arm statutes.  In sum, the decision allows US companies through the International Trade Commission to block the importation of products produced by a foreign company using trade secrets stolen from a U.S. competitor.

The relevant factual particulars of TianRui are as follows. Amsted Industries, an American manufacturer of cast steel railway wheels, granted a license to Datong, a Chinese manufacturer of the same product, for a proprietary foundry process for the manufacture of these wheels. There was no question that the process was a trade secret belonging to Amsted. TianRui, another Chinese manufacturer, approached Amsted in 2005 and attempted to negotiate a similar license as Datong for the process. However, an agreement was never reached with Amsted. After the failure of the negotiations, TianRui hired away nine Datong employees trained in Amsted’s manufacturing process.  Notably, all of these former Datong employees had actual knowledge that the manufacturing process was a confidential trade secret belonging to Amsted, and moreover eight of the nine had signed confidentiality agreements with Datong covering, amongst other trade secrets, the Amsted process.  In addition to having their trade secrets misappropriated, Amsted was further injured because TianRui ultimately sold the wheels it manufactured with the process in the U.S. through a joint venture.

Amsted there after filed a complaint with the International Trade Commission, alleging that the importation of the wheels into the U.S. violated § 337 of the Tariff Act of 1930, 19 U.S.C. §1937, by reason of TianRui’s use of the Amsted manufacturing process which was developed in the U.S. and therefore subject to protection by U.S. trade secret laws.  TianRui interposed a defense that no action against it could lie because Congress did not intend for § 337 to apply to territories outside the U.S., including China. After hearing the matter, the International Trade Commission rejected TianRui’s reading of Congressional intent on § 337, and issued a limited exclusion order relating to the wheels produced with the Amsted manufacturing process. TianRui sought review of the decision by the Federal Circuit after the International Trade Commission elected not to review the decision itself.

Ultimately, the Federal Circuit found that § 337 was properly applied by the International Trade Commission based upon TianRui's conduct within the U.S., specifically the importation of the wheels, by its joint venture, into the U.S. Significantly, the Federal Circuit further found that despite the fact that most of the offending conduct, the misappropriation of Amsted’s trade secret and production of the wheels using these misappropriated secrets, took place in China, the International Trade Commission’s exclusion order was nevertheless proper because the Commission was empowered under § 337 to set the circumstances pursuant to which products may or may not be imported into the U.S., including the exclusion of products found to be manufactured by means of misappropriated U.S. trade secrets.

In sum, an ITC proceeding can be a powerful tool to protect trade secrets that are misappropriated by the foreign competitors of U.S. companies. 

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Legislation intended to help protect the trade secrets of New Jersey businesses has been signed into law by Gov. Christie. The New Jersey Trade Secrets Act (S-2456/A-921) establishes by law specific remedies available to businesses in the event that a trade secret – such as a formula, design, a prototype or invention – is misappropriated. New Jersey was one of the four remaining states that have not adopted some or all of the provisions of the Uniform Trade Secrets Act (Massachusetts, New York and Texas are the others), but instead NJ courts have relied wide range of common law decisions in order to establish a trade secret misappropriation claim.

The New Jersey Senate approved the bill 39-0; the Assembly approved the measure 79-0. The law takes effect immediately, except it does not apply to misappropriation that occurred prior to the effective date or to a continuing misappropriation that began prior to the effective date of the law and continued after the effective date of the law.

The new law provides for damages for both actual loss suffered by a plaintiff and for any unjust enrichment of the defendant caused by the misappropriation of trade secrets. Damages also may include a reasonable royalty for unauthorized disclosure or use of the trade secrets. In cases of willful misappropriation, punitive damages and attorneys’ fees may be awarded. In addition, if a claim for misappropriation is brought in bad faith, attorneys’ fees may be awarded.

The New Jersey Act also has a couple of unique and helpful provisions, including a requirement that a court "preserve the secrecy of an alleged trade secret by reasonable means consistent with" court rules. There is also "a presumption in favor of granting protective orders in connection with discovery proceedings" as well as provisions limiting access to confidential information to only the attorneys for the parties and their experts, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.

It remains to be seen if New York will now follow New Jersey’s lead and adopt similar legislation.

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By Scott Schaefers

In the age of social media and networking, where employees undoubtedly use their company-issued computers to network with customers, vendors, colleagues, and friends, a legal question presents itself: can employers claim an interest in their employees’ LinkedIn accounts, or other social networking accounts, which the employees use in part to grow and maintain their relationships for the benefit of their employers? 

A.        Can An Employer Claim Ownership Of Its Executive’s LinkedIn Profile?

A federal court in Philadelphia recently said “Yes,” though not definitively. In Eagle v. Morgan, No. 11-4303, 2011 WL 6739448 (E.D. Pa. Dec. 22, 2011), the court held that an employer may claim ownership of its former executive’s LinkedIn connections where the employer required the executive to open and maintain an account, the executive advertised her and her employer’s credentials and services on the account, and where the employer had significant involvement in the creation, maintenance, operation, and monitoring of the account. More specifically, the court refused to dismiss employer Edcomm’s counterclaims for “misappropriation of an idea” and unfair competition against its former chief executive, Dr. Linda Eagle, who allegedly accessed and used her Edcomm-generated LinkedIn account three weeks after she was terminated. Edcomm had an established policy requiring its executives to create LinkedIn accounts using an Edcomm-prepared template, and requiring them to respond to LinkedIn client and colleague inquiries using an Edcomm template. This policy and participation regarding the executive’s LinkedIn account and activities was enough to state a valid claim for misappropriation of Edcomm’s alleged ownership of the account. Notably, the court did not cite any social-networking-related precedent in its decision.

And interestingly, the court dismissed Edcomm’s claims of statutory trade secret misappropriation and common law conversion to the extent they were premised on Eagle’s alleged misuse of the connections and content in her Edcomm LinkedIn account. The court held that such connections could not be trade secret if they were posted on the internet.

There is another active case in the Northern District of California that we previously blogged on that addressed similar issues. 

The lesson here is that employers and their lawyers should consider getting more involved in their employees’ social-networking activities, particularly to the extent that such activities are used for company business and where employees are required or expected to promote themselves on behalf of the company using these networking sites. The day may come where the employer wished it would have kept a closer eye on departing employees’ online profiling.

B.        The Eagle Court Sides With The Pro-Employee Line Of Cases Which Hold That
            Employers Cannot Use The Federal Computer Fraud And Abuse Act To Sue Employees
            Who Misuse Their Employers’ Computers

The Eagle decision is noteworthy for another reason: it agreed with other federal courts which held that employers may not sue unfaithful employees under the federal Computer Fraud and Abuse Act, 18 U.S.C. § 1030 et seq. (CFAA) for stealing or misusing company computer files, so long as the employees had authorized access to the computers for company business. 

The court noted the existing divide between federal courts – some which hold that employers may sue employees under CFAA (e.g. EF Cultural Travel BV v. Explorica, Inc., 274 F.3d 577 (1st Cir. 2007), Int’l Airport Ctrs., LLC v. Citrin, 440 F.3d 418 (7th Cir. 2006), see also U.S. Rodriguez, 628 F.3d 1258 (11th Cir. 2010)), and some which hold they may not (e.g. Int'l Ass'n of Machinists & Aerospace Workers v. Werner–Masuda, 390 F.Supp.2d 479, 498 (D. Md. 2005) and similar Pennsylvania federal cases).  Congress and the Supreme Court have yet to resolve this conflict among lower federal courts. Until then, whether employers may sue their employees under the CFAA may depend largely on the federal circuit court of appeals in which the employer or employee is located.

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