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

When explaining to lay people what we do, trade secret practitioners often use the classic examples of the formula for Coca-Cola or KFC’s secret recipe of eleven herbs and spices. Now, we can add as an illustration the nooks and crannies of Thomas’ English Muffins, as demonstrated by a case filed by Bimbo Bakeries (“BBakeries”) in the Eastern District of Pennsylvania. BBakeries, which sells a variety of different breads and baked goods, brought an action against Chris Botticella, a high-level BBakeries executive, on January 15, 2010. In the action, BBakeries is seeking, among other things, a preliminary injunction forbidding Botticella from commencing employment as an executive with Hostess Brands, a BBakeries competitor. The Honorable R. Barclay Surrick of the Eastern District of Pennsylvania held a hearing on BBakeries’ motion on January 25, 2010. At present, he has not ruled on the motion.

Not unlike other major companies that have pursued an executive going to competitors, BBakeries is proceeding against Botticella on an inevitable disclosure theory. BBakeries’ claim is that Botticella’s knowledge of its trade secrets and confidential information is so thorough that he would inevitably use that information in his work for Hostess, thus violating a non-disclosure agreement with BBakeries and the Pennsylvania Uniform Trade Secrets Act. In its motion and accompanying declarations, BBakeries alleges that Botticella is one of “less than ten people in the world with full knowledge of how to produce Thomas’ English Muffins, famous for their distinctive ‘nooks and crannies’ characteristics.” BBakeries also claims that Botticella knows the cost structure and strategies for most of its products, such as its “super premium breads.” All of this information would, according to BBakeries, give Hostess an improper competitive advantage. Finally, BBakeries asserts that Botticella concealed his intentions to move to Hostess, and then instructed his secretary to delete information from his hard drive.

As evidenced by the proposed findings of fact and conclusions of law filed by Botticella on January 29, 2010, Botticella is making several counter-arguments, which include the following: (1) there is no evidence as to Botticella’s responsibilities for Hostess, including whether he will be working on its English muffins, so BBakeries cannot show that he would inevitably disclose confidential information; (2) Botticella did not look at confidential materials sent to him by BBakeries after signing an “Acknowledgment and Representation Form” with Hostess on December 7, 2009; (3) the materials that Botticella deleted from his hard drive were of a personal nature, although he did accidentally delete work files; and (4) Botticella used an external storage device to practice his computer skills. 

Botticella also argues that the inevitable disclosure doctrine should not apply because BBakeries set forth his post-employment obligations in its agreement with him. That agreement included a non-disclosure covenant, but not a non-compete provision. Thus, Botticella posits, the agreement provides a contractual framework governing his post-BBakeries employment and that framework should trump the inevitable disclosure doctrine.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Our own Robert Milligan, Kurt Kappes, and Timothy Nelson contributed a chapter, "Trade Secret Audits and Protection Plans," to the November 2009 update of the Continuing Education of the Bar's Treatise Trade Secrets Practice in California. Robert also co-authored a second chapter entitled "Litigation Issues." The book is the preeminent treatise in California on trade secret law, and it is cited by practitioners and courts for its reasoning on trade secret issues.

In Robert, Kurt, and Tim's chapter on trade secret audits, the authors recommend that "companies should ensure that they have adequate trade secret protections in place by conducting a thorough analysis of their protections through a formal trade secret audit." The authors also note that "Experience has shown that companies gain tremendous value by taking a proactive, systematic approach to assessing and protecting their trade secret portfolios through regular trade secret audits."

Robert's litigation chapter identifies issues in trade secret misappropriation cases from the perspective of both the trade secret owner and the accused misappropriator. In analyzing litigation procedure, the chapter identifies preliminary issues, pretrial motions, trial issues, and post-resolution issues. The chapter also addresses other remedies against trade secret misappropriation not based on the Uniform Trade Secrets Act (UTSA). The relationship of trade secret protection under the UTSA and protection under other state and federal statutes is also discussed.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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."

• Email This
• Print
• Comments (3)
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In an article published today by the Daily Journal, "Economy Leads Companies to Sue Ex-Workers," (linked with permission) author Laura Ernde talks with a number of California practitioners about what they see happening with trade secrets litigation in the wake of the California Supreme Court's ruling in Edwards v. Arthur Anderson  and the economy.  

Although Ernde indicates that the anecdotal evidence is that interest in trade secrets is on an "upswing," according to Seyfarth Shaw's own Carolyn Sieve and Robert Milligan, research regarding filings in Los Angeles indicates that the actual number of lawsuits mentioning "trade secrets" has decreased over the last two years. 

Ernde's article also touches on the "inevitable disclosure" doctrine, noting that under FLIR v. Parrish, 2009 DJDAR 8598, the doctrine is no longer applicable in California. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The U.S. Court of Appeals for the Tenth Circuit recently held that a former employer’s price quotations to prospective customers were not trade secrets under Oklahoma law because they did not contain a confidentiality provision, but the former employee who took advantage of those quotations on behalf of his new employer did violate his non-compete covenant.  Southwest Stainless, LP v. Sappington, No. 08-5127 (10th Cir.  Sept. 21, 2009).

An Oklahoma court is permitted to blue-pencil unreasonable contractual geographic limits in a non-compete to make them reasonable. The Tenth Circuit held that the  trial court’s damages award with respect to business lost due to violation of the non-compete was properly based on the ex-employer’s historic profit margins on business with the relevant customers. Moreover, injunctive relief should have been awarded because the ex-employee took advantage of the "personal contacts [with] and a knowledge of the special needs and requirements of" the ex-employer’s customers which the former employee learned during the employment relationship.

Coincidentally, only a few weeks earlier, an Oklahoma district court granted a motion for partial summary judgment in a breach of contract and trade secrets case, based on the plaintiff company’s "legitimate interest in . . . relationships . . . with . . . existing and established customers."   The Court thereby upheld a "hands-off" non-solicitation covenant an independent contractor sales agent signed with the plaintiff.  The plaintiff’s trade secret misappropriation claim was not discussed in the ruling on the partial summary judgment motion.  Drummond Am., LLC v. Share Corp., No. CIV-08-1004-F (W.D. Okla., Aug. 3, 2009), 2009-2 CCH Trade Cases ¶ 76.701.

These decisions teach that in a state (such as Oklahoma) where covenants are enforceable, a breach of contract claim against former sales personnel may be at least as strong a cause of action for a jilted employer as a suit for misappropriation of trade secrets.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In a battle of competing noodle franchises, a federal district court in Arizona recently granted a franchisee’s motion to compel arbitration in a trade secret and breach of contract dispute with its franchisor.   

Apart from its colorful facts, the court’s ruling is significant.  First, it demonstrates that franchisors that include arbitration provisions in their franchise agreements may be precluded from obtaining immediate injunctive relief in court against their franchisees, particularly where they include provisions that only permit the franchisor to obtain injunctive relief outside the arbitration proceeding (at least under Arizona law). Next, it demonstrates that a nonsignatory to a franchise agreement may be permitted to compel arbitration in the Ninth Circuit where the signatory’s claim against the nonsignatory involves a dispute that is “intertwined with the contract providing for arbitration.” The decision is also a reminder that although binding arbitration with franchisees may be beneficial, franchisors must keep abreast of the ever-changing law in the governing jurisdiction(s) to ensure that arbitration rather than litigation in the courts is the appropriate dispute resolution forum for their business objectives.  Simply put, if a rogue franchisee’s actions put a franchisor’s system in jeopardy, a franchisor may not be willing to put the fate of its misappropriated intellectual property in the hands of an arbitrator. 

In Noodles Development, LP v. Latham Noodles, LLC, 2009 WL 2710137 (D. Ariz. August 26, 2009), a federal district court in Arizona (District Judge Neil V. Wake, presiding) granted the franchisee’s motion to compel arbitration and stayed the civil action initiated by the franchisor.

The plaintiff, a franchisor owing the rights to the “Nothing But Noodles” franchise of restaurants, entered into a franchise agreement with the defendant franchisee which permitted the franchisee to open a franchise in New York. See id. at *1.

The franchise agreement provided that “any dispute or claim relating to or arising out of this Agreement must be resolved exclusively by mandatory arbitration by and in accordance with the Commercial Arbitration Rules of the American Arbitration Association (“AAA”) or another arbitration service agreed to by the parties.”  See id.

The franchise agreement also provided the franchisor with the right to petition a court of competent jurisdiction for the entry of temporary and permanent injunctions of specific performance enforcing the provisions of the franchise agreement relating to “(a) Franchisee's use of the Marks or the System ...; (d) Franchisee's violation of the provisions of this Agreement relating to confidentiality and the covenants not to compete; and (e) any act or omission by Franchisee or Franchisee's employees that ... (2) is dishonest or misleading to the guests or customers of the Franchised Restaurant or other Nothing But Noodles Restaurants ..., or (4) may impair the goodwill associated with the Marks or the System.” Id.at *1.

The franchisor challenged the franchisee’s motion on the grounds that 1) the agreement did not encompass the claims that it had brought against the franchisee; 2) it need not first arbitrate the substantive merits of its claims because pursuant to the franchise agreement it may bring an action for injunctive relief before the court and principles of judicial economy should allow it to litigate its damages claims in court as well; and 3) it need not arbitrate with one of the co-defendants because he was not a signatory to the franchise agreement.  The court rejected all three of the franchisor’s arguments.  See id. *1-*4.

First, the court stated that the franchisee agreement requires arbitration of “any dispute or claim relating to or arising out of this Agreement.”  The noted that the Ninth Circuit has observed that the phrase “arising out of or relating to” creates an arbitration clause that is “broad and far reaching” in scope.  Id. at *1 (citing Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1131 (9^th Cir. 2000)).  The court found that an arbitration clause with a broad and far reaching scope “reaches every dispute between the parties having a significant relationship to the contract and all disputes having their origin or genesis in the contract.”  Id. at *1 (citing Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 719 (9^th Cir. 1999)).

The court stated to require arbitration, the factual allegations of the complaint “need only ‘touch matters' covered by the contract containing the arbitration clause.” Id. (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 624 n. 13 (1985)).

The court found that all of the facts alleged in franchisor's complaint have a significant relationship to the franchise agreement.  The court noted that the complaint alleges trademark and trade dress infringement, misappropriation of trade secrets, and breach of contract.  The court reasoned that the factual predicate of these claims was the franchisee's alleged misuse of the Nothing But Noodles marks and system.  Because the franchisee's use of the Nothing But Noodles marks and system was the core subject of the franchise agreement, the court found that the franchisor's claims have a significant relationship to the franchise agreement and must be arbitrated.  See id. at *2.

The court also noted that the franchisor alleged that franchisee tortiously interfered with its business relationships.  The court found that the claim was significantly related to the confidentiality clauses and covenants not to compete in the franchise agreement and an area development agreement signed by the parties, which also contained an arbitration clause.  The area development agreement provided the franchisee with the right to sell new franchises on behalf of the franchisor.  The court stated that the franchisor alleged that the franchisee had instead been soliciting existing Nothing But Noodles franchises to re-brand their restaurants under another mark.  See id.

The court found that the facts of this allegation were significantly related to the franchisee's duties as a representative of franchisor under the area development agreement, especially those provisions relating to confidentiality and competition.  The court found that the franchise agreement therefore required arbitration of the tortious interference claim.  See id.

In sum, the court found that the substance of each claim asserted by the franchisor in its complaint was covered by the arbitration agreement and therefore could not be adjudicated by the court.  See id. at *2.

Next, the court acknowledged that the franchise agreement does, however, reserve to the franchisor the ability to seek preliminary or permanent injunctive relief in court for certain types of claims. The court remarked that typically courts in our circuit [Ninth Circuit] may not grant preliminary injunctive relief where interim relief is available from an arbitral tribunal.  See id.

The court found, however, that the terms of the agreement control the scope of the arbitration clause in the suit.  The franchise agreement specifically permitted the franchisor to seek injunctive relief from the court despite the availability of such relief under the rules of the American Arbitration Association.  See id.

However, the court found that the franchise agreement did not specify whether the franchisor may seek permanent injunctive relief in court before obtaining a substantive determination of the merits of its claims from an arbitral tribunal.  The franchisor argued that it need not first arbitrate the substantive merits of its claims and that because it may bring an action for injunctive relief before the court, principles of judicial economy should allow it to litigate its damages claims in court as well.  See id. at *3.

The court found that such an interpretation nullified the arbitration clause because once the court decided the merits of the franchisor's claims, there was little purpose in involving an arbitral tribunal.  The court found that the franchisor’s interpretation conflicted with the parties' demonstrated intent to have an arbitral tribunal, not a court, decide the merits of “any dispute or claim arising out of or related to” the franchise agreement.  See id. at *3.

The court stated that the franchise agreement's injunction provision may simply be intended to preserve the availability of a court to impose an injunctive remedy, rather than decide the merits of the claims.  “In other words, it may allow Franchisor to seek preliminary injunctive relief to maintain the status quo during arbitration and to seek permanent injunctive relief if the arbitral tribunal rules in its favor.”  Id. at *3.  The court found that this interpretation was equally as plausible, if not more plausible than the franchisor's interpretation.  The court held that the ambiguous relationship between the franchise agreement’s arbitration clause and the injunction provision must be reconciled in favor of arbitration.  See id. at *3.

The court found that the franchisor may seek emergency injunctive relief to preserve the status quo while it arbitrates, but it must obtain a substantive determination of the merits of its claims from an arbitral tribunal before applying for a permanent injunction from the court.  The court noted that the franchisor had not yet moved for any emergency injunctive relief.  See id.

The court also stated that at least one court had recently held that, under Arizona law, an arbitration agreement that reserves the right to seek judicial injunctive relief to only one party is substantively unconscionable.  See id. (citing Wernett v. Serv. Phoenix, LLC, 2009 U.S. Dist. LEXIS 62593 at *26-28, 2009 WL 1955612 at *8 (D.Ariz. July 6, 2009)).  The court stated that should the franchisor seek preliminary injunctive relief from the court instead of from the arbitral tribunal, it will first have to address the validity of the franchise agreement’s “one-sided injunction provision under Arizona law.”  Id.at *3. (emphasis added).

Lastly, the franchisor argued that it need not arbitrate with one of the co-defendants because he was not a signatory to the franchise agreement.  The court stated that a nonsignatory to an arbitration agreement may estop a signatory from refusing to arbitrate its claim against the nonsignatory where the dispute is “intertwined with the contract providing for arbitration.”  Id. at *3 (citing Mundi v. Union Sec. Life Ins. Co., 555 F.3d 1042, 1047 (9th Cir.2009)). “[A]pplication of equitable estoppel is warranted ... when the signatory to the contract containing the arbitration clause raises allegations of ... substantially interdependent and concerted misconduct by both the non-signatory and one or more of the signatories to the contract.”  Id. at *3 (citing Brantley v. Republic Mortgage Ins. Co., 424 F.3d 392, 396 (4th Cir.2005)). 

The court noted that the complaint alleges that “the Individual Guarantors and [non-signatory] Defendant . . . have contacted Noodles' franchisees and made attempts to induce such franchisees into breaching their respective agreements with Noodles.”  Id. at *3.  The court found that the complaint therefore raises allegations of substantially interdependent and concerted misconduct by the non-signatory defendant and the defendant signatories to the franchise agreement.  Accordingly, the court found that the franchisor was estopped from refusing to arbitrate its claim against the non-signatory defendant.  See id. at *3.

The court stayed the civil action until the arbitration has been completed, having concluded that all claims in the suit were subject to arbitration, but indicated that the franchisor may apply to the court for injunctive remedies.

The court’s decision has a number of general take-aways for franchisors. Franchisors should carefully consider whether to include an arbitration provision in their franchise agreement. Arbitration can provide a number of benefits to franchisors, such as a cost-effective and seemingly uniform method of resolution with franchisees. There can be significant drawbacks though depending upon the applicable governing law, such as having to pay for the costs of the arbitration, losing or having a limited right to seek immediate injunctive relief in a court of law, only having a limited review of arbitration decisions, and having non-signatories to the arbitration agreement made part of the arbitration proceeding. Before including arbitration provisions in their franchise agreements, franchisors should consult counsel to determine the ever changing state of the law in the governing jurisdiction and decide whether arbitration provides an adequate forum to protect any misappropriated intellectual property, such as the franchisor’s system.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

By Robert Milligan and Carolyn Sieve

As mentioned in a previous blog entry, the California Court of Appeal issued a significant trade secret decision earlier this year providing additional clarification concerning the trade secret identification disclosures which a party pursuing claims for trade secret misappropriation must make before commencing civil discovery in California state court.

The California Supreme Court subsequently denied Sylvester Stallone's and another named cross-defendant's petition for review challenging the Court of Appeal's decision.

Accordingly, the Court of Appeal decision is binding case authority.

A California statute requires that trade secrets be identified with particularity before commencing discovery relating to the trade secret in suits alleging the misappropriation of trade secrets under California’s Uniform Trade Secrets Act.

Specifically, Code of Civil Procedure § 2019.210 provides:

In any action alleging the misappropriation of a trade secret under the Uniform Trade Secrets Act (Title 5 (commencing with Section 3426) of Part 1 of Division 4 of the Civil Code), before commencing discovery relating to the trade secret, the party alleging the misappropriation shall identify the trade secret with reasonable particularity subject to any orders that may be appropriate under Section 3426.5 of the Civil Code.

In Brescia v. Angelin, 172 Cal.App.4th 133 (Mar. 17, 2009), the Court of Appeal found that Code of Civil Procedure § 2019.210 does not require in every case that a trade secret claimant explain how the alleged trade secret differs from the general knowledge of skilled persons in the field to which the secret relates. The Court found that such an explanation is required only when, given the nature of the alleged secret or the technological field in which it arises, the details provided by the claimant to identify the secret are themselves inadequate to permit the defendant to learn the boundaries of the secret and investigate defenses or to permit the court to understand the designation and fashion discovery. The Court found that the trade secret designation is to be liberally construed, and reasonable doubts regarding its adequacy are to be resolved in favor of allowing discovery to go forward.

Our recent article published by the Oxford Journals in the Journal of Intellectual Property Law & Practice discusses the Court of Appeal decision in depth and its practical significance.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Zynga Game Network, Inc., which describes itself as “the number one social gaming company with 30 million daily active users,” obtained an ex parte temporary restraining order against its competitor Playdom, Inc. and two former Zynga employees. Z ynga both filed the case in the Superior Court of the State of California, Santa Clara County, and obtained the temporary restraining order on Wednesday, September 9, 2009.  Zynga asserted its entitlement to injunctive relief on trade secret misappropriation and unfair competition grounds under California law.

In its Complaint and Motion for Temporary Restraining Order (posted on TechCrunch) Zynga alleges that two of its employees retained trade secret-laden documents prior to resigning to join Playdom. Specifically, the Motion asserts that Zynga employee David Rohrl copied three files to a USB storage device before business hours roughly two weeks before his resignation. The files in question concern the design and modification of some of Zynga’s online games. The Motion further alleges that Zynga employee Raymond Holmes e-mailed a number of documents to his personal e-mail account on the days leading up to his August 24, 2009 resignation from Zynga. Among the e-mailed documents was Zynga’s “Playbook,” a document that Zynga describes as “literally the recipe book that contains Zynga’s ‘secret sauce,’ and its contents would be invaluable to a competitor like Playdom.” Zynga adds that Holmes deleted these e-mails from his "Sent" e-mail folder on his computer on the date of his resignation.

Zynga also sets forth a series of allegations that Playdom obtained Zynga trade secrets through its process of recruiting Zynga employee Martha Sapeta. Playdom recruiter Jennifer Farris gave Sapeta assignments to provide suggestions to improve Playdom games, including an instruction that Sapeta’s proposed features “can be a straight up ripoff from our competitors [sic] app.” Zynga also asserted (albeit in a vaguer fashion) that Playdom also obtained Zynga trade secrets in its recruitment of Zynga employee Scott Siegel.

Although not central to its Motion for Temporary Restraining Order, Zynga also adds in a back story concerning Playdom’s alleged previous efforts to obtain Zynga trade secrets and confidential information. Zynga describes an effort by Playdom to use a sophisticated computer algorithm to obtain information about users of Zynga’s Texas Hold ‘Em game and then to solicit those users to play Poker Palace, a competing Playdom game. Zynga also claims that Playdom used the trademark of Mafia Wars, a Zynga game, in an advertisement for Mobsters, a competing Playdom offering.

The Court entered the Temporary Retraining Order in exactly the form submitted by Zynga. The Order forbids Playdom, Holmes, and Rohrl from a variety of activities, including using certain Zynga information, attempting to recreate Zynga’s applications to which Holmes and Rohrl had access at Zynga, and inducing Zynga employees to violate contractual obligations or their duties of loyalty. The Court further executed an Electronic Preservation Order that compels the Defendants to preserve potentially relevant information, identify a number of categories of data, and, most significantly, provide a number of electronic storage devices to Zynga’s forensic expert for imaging.  Finally, the Court set forth an expedited discovery schedule culminating in a preliminary injunction hearing on October 1, 2009.  We expect a flurry of activity in the case leading up to that date.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

By Rina Wang, summer associate, and Timothy B. Nelson

The California Court of Appeal recently addressed the issue of the interpretation of arbitration clauses in the context of claims for misappropriation of trade secrets in the case of Valentine Capital Asset Management, Inc. v. Agahi, 174 Cal.App.4th 606 (1st Dist. 2009).

In Valentine, respondent John Valentine was the founder and president of Valentine Capital Asset Management, Inc. (“VCAM”) and Valentine Wealth Management, Inc. (“VWM”), neither of which was a member of the Financial Industry Regulatory Authority (“FINRA”). John Valentine was subject to FINRA rules and regulations through his affiliation with FINRA member Geneos Wealth Management, Inc., but not through his affiliation with VCAM and VWM. Appellants Agahi, Luippold and Ortale worked as employees of VCAM and VWM. In their capacity as employees of VCAM and VWM, Agahi, Luippold and Ortale were given business leads, and they were responsible for following up on the leads, developing a client relationship, and providing services to those clients. Agahi resigned from VCAM and VWM to form a competing firm, which added Luippold and Ortale as employees. The competing firm was also not a member of FINRA. The three defendants allegedly brought VCAM and VWM client databases with them to the competing firm. Valentine allegedly discovered that Agahi had e-mailed VCAM and VWM’s client database to Ortale, and that files and e-mails had been deleted from Agahi’s work computer prior to his departure. Valentine also allegedly discovered that Agahi was attempting to persuade clients of the Valentine companies to move their assets to Agahi and his competing firm. Valentine sued Agahi, Luippold and Ortale for misappropriation of trade secrets, intentional interference with contractual relations, intentional interference with prospective economic advantage, trade libel, slander, and common law and statutory unfair competition.

Agahi, Luippold and Ortale moved to compel arbitration, arguing that the dispute was subject to mandatory arbitration under FINRA’s arbitration clause because all of the parties were members of FINRA. Valentine opposed the motion, contending that the defendants had waived their right to arbitrate and that the disputes in the litigation were not subject to FINRA arbitration. The trial court denied the motion to compel arbitration, finding that FINRA was inapplicable because the parties’ dispute did not arise out of their business activities as FINRA members.

The Court of Appeal affirmed. The court first explained that written arbitration provisions in interstate commercial transactions are enforceable under the FAA. Thus, the FAA applied to determine the scope of arbitration provisions in contracts with FINRA-member firms. Before engaging in activities as a registered representative for a FINRA-member firm, all registered representatives of broker-dealers, investment advisors, and securities issuers must sign a “Uniform Application for Securities Industry Registration or Transfer,” also known as Form U-4. See McManus v. CIBC World Markets Corp., 109 Cal. App. 4th 76, 88 n. 3 (2003). Form U-4 contains an arbitration provision. Valentine and the defendants signed this form, thereby agreeing to arbitrate every dispute required to be arbitrated under FINRA rules. Arbitration of a dispute between associated persons is required under FINRA Rule 13200 only “if the dispute arises out of the business activities of a member or an associated person . . . .”

The Valentine court found that the phrase “business activities of . . . an associated person” is limiting and cannot include the activities of every possible business enterprise in which an individual “associated person” might be engaged. Valentine, 174 Cal.App.4^th at 615. According to the Valentine court, this language, when reasonably read, must require arbitration of disputes only if they arise out of the business activities of an individual as an associated person of a FINRA member. Id.at 616.

The court held that there was no allegation that any of the parties were acting for any FINRA-member firm or as an associated person. No relation was alleged between any FINRA-member firm and the work performed for Valentine. The Court further determined that none of the purported wrongdoing was alleged to have occurred in the course of the parties’ duties as associated persons with a FINRA-member firm. Rather, it allegedly occurred with investment advisory firms that were not members of FINRA. The disputes thus related to defendants, but not to their business activities as associated persons of a FINRA member.

Although Valentine is based on the distinction between “broad” and “narrow” arbitration clauses, the court reached its conclusion based on the language of the pleadings. The plaintiff pled multiple causes of action alleging misconduct by various defendants.  When the court ruled on the motion to compel arbitration, the legal characterization of the parties in the Complaint controlled the ruling. 

The Valentine decision makes it clear that when prosecuting or defending a claim for misappropriation of trade secrets, one must be mindful of what forum is appropriate, arbitration or litigation. Furthermore, the Valentine decision also provides an example of the importance of pleading causes of action properly based upon the forum. Because Valentine pled his causes of action in a way that made it clear they were not based on the defendants’ business activities as associated persons of a FINRA member, Valentine was able to avoid FINRA arbitration.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In a 56-page opinion, the U.S. Court of Appeals for the Second Circuit sent a long-pending trade secrets case, Jasco Tools, Inc. v. Dana Corporation, Appeal No. 08-2762-bk, back to the lower court for further proceedings because of the bankruptcy court's "flawed application of well established summary judgment principles."  (Slip Op. at 32.)  In the case, Jasco alleged that Dana had conspired, among other things, with former Jasco employees to steal and use Jasco trade secrets.   While the case was pending, Dana filed for bankruptcy.  Jasco subsequently filed a proof of claim against Dana's estate.  (Slip Op. at 12.) 

The bankruptcy court allowed Dana Corporation ("Dana") to move for summary judgment through an objection to disallow the claim of Jasco as a creditor (the "Objection").  Where the court first erred was by ordering that the parties would file their statements of undisputed material facts (Rule 7056-1 statements) simultaneously.  (Slip Op. at 32.)  Then, as Law 360 discusses, the bankruptcy court erred by refusing to allow Jasco to complete discovery, particularly deposition discovery, of Dana employees.  Although the case had a long history, the Second Circuit concluded that, in this case, under Fed. R. Civ. P. 56(f), the bankruptcy court should have allowed Jasco to complete the additional discovery it sought.

Substantively, the Second Circuit found that, "even without discovery of additional evidence, the record as it stands was sufficient to preclude the entry of summary judgment dismissing and expunging the Jasco claim."  (Slip Op. at 38.)  After reviewing the "well established summary judgment principles" referenced earlier in the opinion, the Second Circuit concluded that the "principles were not properly applied."  (Slip Op. at 41.)  Limiting its discussion to Jasco's claim of conspiracy to misappropriate trade secrets, the Second Circuit carefully and painstakingly analyzed applicable law as well as the direct and circumstantial evidence relating to Jasco's claim, concluding that there were sufficient disputed issues of material fact on the conspiracy to misappropriate trade secrets claim that the case should have proceeded to a jury.  

One interesting aspect of the Second Circuit's analysis, which otherwise is worth reading for the facts, was its discussion of Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574 (1986) as applied to trade secret conspiracy claims.  (Slip Op. at 53-55.)   Dana cited Matsushita for the principle that "conduct that is consistent with permissible competition as well as with illegal conspiracy does not, without more, support even an inference of conspiracy."  475 U.S. at 597 n.21.   The Second Circuit rejected the application of this theory because (1) Matsushita involved antitrust claims, not claims of trade secret misappropriation; (2) Matsushita involved a situation where the actions were "economically senseless parallel actions by persons competing with each other," whereas in this case, the parties were acting collaboratively in a manner that was supported by an obvious pecuniary motive; and (3) even though the Supreme Court in Matsushita made it clear that "mere proof of conduct that is as consistent with permissible competition as with illegal conspiracy, 'without more'" will not support a inference of conspiracy, the facts in this case supplied the necessary "more."

• Email This
• Print
• Comments
• Trackbacks
• Share Link

By Robert Milligan and summer associate Alana Friedman

Production companies for Criss Angel, the star of Cirque de Soleil’s “Believe” and the A&E cable television show Mindfreak, were sued in New York state court recently by a twenty-three year old illusionist who claims that Angel’s companies have failed to pay him for the use of three alleged confidential and proprietary magic tricks that he claims that he created. 

Jacob Spinney’s eight count complaint arises out of an alleged breach of contract involving certain confidential and proprietary magic tricks (e.g. methods of staging and performing three specific illusions or magical effects) that he claims to have permitted Angel to use pursuant to a written contract. Spinney claims that Angel failed to satisfy his end of an agreement that they purportedly entered in 2005. Pursuant to the alleged agreement, Spinney purportedly assigned the rights in three of his magical effects to Angel’s production company in exchange for a percentage of the net profits realized from the magical effects. Spinney is now seeking monetary compensation and for all rights to be returned to him on two of the three illusions.

Spinney, who allegedly makes his living by selling illusions and magical effects that he originates and creates, claims that in late 2004 Criss Angel (whose real name is Christopher Sarantakos) contacted him expressing interest in performing Spinney’s Chair Self-Levitation illusion where the performer appears to be floating above the ground. Spinney claims that Angel was interested in the illusion for his upcoming television series Mindfreak. In the 2005 Agreement which result from Angel’s alleged inquiry, Spinney claims that he assigned the rights in his confidential and proprietary magical tricks entitled Chair Self-Levitation, Chair Self-Suspension (performer appears to be suspended above the ground), and Fork Bending Gimmick (performer appears to bend a fork without exerting any physical pressure upon it) to Angel’s production company in exchange for 25% of the profits that it derived from the magical effects. 

Spinney alleges that he invented, designed, and tested the method of performing all three illusions. He claims that levitation, suspension, and fork bending illusions or magical effects are valuable commodities in the magic industry because they are difficult to create and have significant audience appeal.

Their 2005 Agreement provides that “In the field of magic, a magician’s success depends upon the secrecy of the methods, apparatus, and workings of magical effects and illusions; and…a magician creates and establishes his reputation based upon the originality and novelty of the various magical illusions which are proprietary information, intellectual property and proprietary technologies, and constitute a trade secret.” 

Spinney alleges that Angel performed the Chair Self-Levitation on the second episode of his Mindfreak television series which was later broadcast on the A&E Network and included on four separate Mindfreak DVDs. According to the complaint, Angel’s production company publicized the Chair Self-Levitation illusion as Angel’s most popular demonstration and featured the illusion on “Masterminds Volume 2: Self-Levitation,” a “how to” DVD featuring only the Chair Self-Levitation illusion. Spinney further alleges that the packaging on the Mastermind DVD advertised that “Criss teaches everything you need to know about this modern day miracle; step by step instructions on the method, how to construct it…and how to perform it.” Spinney claims that the Mastermind DVD retailed for $100 and sold over 3,900 copies in its first six months, grossing over $190,000 in profits. 

Spinney alleges that despite the 2005 Agreement, Angel’s production companies did not pay Spinney any royalties from profits it made from the Mindfreak television show or DVDs and paid him only a small portion of the royalties from profits it made on the Mastermind DVDs. According to the complaint, the DVDs made approximately $267,000 in gross sales and Spinney received only $27,000. 

Spinney also claims that his Chair Self-Levitation illusion is proprietary information, intellectual property and proprietary technology, and constitutes a trade secret. He further claims that Angel’s production companies benefited from learning the confidential and proprietary methods of performing the illusion by deriving profits from certain performances and by excluding others from marketing or selling the illusion. He claims that he has suffered a detriment because he was not adequately compensated for the illusion and continues to be precluded from marketing or selling the effect on his own or through alternative means.

Additionally, Spinney alleges that Angel’s production companies failed to make reasonable efforts to sell Spinney’s Chair Self-Suspension or Fork Bending Gimmick pursuant to the 2005 Agreement. Spinney seeks lost profits for the failure to sell or market the two illusions, an amount equal to the fair market value for the illusions, or a judgment returning to him the rights in both.

Apart from its unique and colorful facts, the case highlights some of the issues that exist when confidential information or trade secrets are licensed, such as: 1) ensuring that a reasonable royalty is provided in the agreement with clear definitions of permitted use and payment terms; 2) including language in the agreement providing that the licensee agrees to keep the secrets confidential notwithstanding its use in the ultimate product or service; 3) requiring the licensee to use best efforts to market and sell the ultimate product or service if payment under the agreement is tied to sales; 4) closely monitoring sales of the ultimate product or service in the marketplace to ensure that all royalty payments are made; 5) licensors should consider using a flat fee amount for use of the confidential information and/or trade secrets in lieu or in addition to royalty payments; 6) licensors should closely protect the confidentiality of the target confidential information or trade secrets in the negotiation process with prospective licensees; and 7) the licensor should prohibit independent development of the target confidential information or trade secrets by the licensee in the agreement.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

By Carolyn Sieve and summer associate Rina Wang

A California federal court has added to the body of decisional law on preemption under the California Uniform Trade Secrets Act, Cal. Civ. Code §§ 3426, et seq. (“CUTSA”). In Aversan v. Jones, No. 2:09-cv-00132-MCE-KJM, 2009 WL 1810010 (E.D. Cal. June 24, 2009), the Court denied defendants’ motion to dismiss plaintiff’s claims for interference with contractual relations, interference with prospective economic advantage, breach of duty of loyalty, and unfair competition, finding that plaintiff had sufficiently pled facts supporting these claims without relying on the same nucleus of facts as its CUTSA misappropriation of trade secrets claim.

Civil Code section 3426.7 provides that CUTSA “does not affect (1) contractual remedies, whether or not based upon misappropriation of a trade secret, (2) other civil remedies that are not based upon misappropriation of a trade secret, or (3) criminal remedies, whether or not based upon misappropriation of a trade secret.” (Emphasis added.) This provision has been interpreted to mean that CUTSA preempts common law claims that are based on the same nucleus of facts as the CUTSA claim. Thus, preemption is not triggered where the facts in an independent claim are similar to, but distinct from, those underlying the misappropriation claim.

Defendants Jones and Mellse were employees of plaintiff Aversan, which recruits and trains engineers to perform services for Aversan’s customers and clients of its customers. They later quit to work for one of Aversan’s clients, Ambire, which had retained Aversan to provide engineers to one of Ambire’s clients, CalPERS.  Defendants had been assigned by Aversan to work on the CalPERS project. While assigned to CalPERS, defendants wrote custom software programs using Aversan’s proprietary software script. 

Aversan’s complaint alleged that defendants violated CUTSA by using Aversan’s proprietary and confidential information to continue performing work for Ambire and CalPERS. Defendants also allegedly used Aversan’s confidential information to solicit employees, contractors and recruits. In addition, Aversan sought damages for Jones’ alleged interference with a residential lease agreement, and defendants’ supposed interference with Aversan’s customer relationships.

Defendants moved to dismiss plaintiff’s claims for interference with contractual relations, interference with prospective economic advantage, breach of duty of loyalty, and unfair competition. The district court denied the motion, holding that the facts supporting these tort claims were sufficiently independent of the CUTSA claim. Under these causes of action, Aversan claimed that defendants prevented Aversan from participating in and profiting from its agreements with Ambire by working directly for Ambire and that defendants allegedly interfered by usurping Aversan's position with CalPERS.  Aversan also claimed that Jones encouraged and convinced an apartment lessor to terminate its lease with Aversan. Aversan had already paid for that month's rent as an employee benefit to Jones and re-let the same apartment unit to Jones directly. These claims survived dismissal because they did not rely on the same nucleus of facts as Aversan's CUTSA claim and they sufficiently stated an independent claim for relief.  

Aversan thus provides some guidance as to what allegations will overcome dismissal of tort claims in a case alleging CUTSA violations. If a party in a trade secrets case is faced with a possible preemption argument, it is worth comparing this decision with the recent California Court of Appeal decision in K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., 171 Cal.App.4^th 939 (2009).

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The California Court of Appeal’s recent decision in FLIR Systems, Inc. v. Parrish, 2d Civil No. B209964, 2009 WL 1653103 (Cal. App. 2d Dist. June 15, 2009), affirming a $1.6 million attorney fee award to defendants upon a finding that the action was brought in bad faith, provides a useful and interesting discussion of various factors that may lead a court to conclude that a misappropriation case has been brought in bad faith. The decision highlights the importance of considering carefully whether to bring a misappropriation claim against former employees, particularly where there is little or no evidence of actual damage, or of actual misappropriation or threatened misappropriation.

In 2004, FLIR acquired the assets of Indigo, of which defendants Parrish and Fitzgibbons were officers. Indigo manufactures and sells microbolometers, devices used in connection with infrared cameras, night vision, and thermal imaging. After the sale, defendants continued to work for Indigo. About a year later, defendants decided to start a new company to mass produce bolometers. The new company was based on a business plan developed by Fitzgibbons several years before FLIR acquired Indigo. Before leaving Indigo, defendants advised FLIR and Indigo of their business plan and invited FLIR and Indigo to participate. FLIR rejected the offer. 

In 2006, defendants began negotiations with Raytheon Company in accord with their business plan. Defendants assured FLIR and Indigo that they would not misappropriate Indigo’s trade secrets and that they would use an intellectual property filter similar to the one used at Indigo to prevent the misuse of trade secrets. In June 2006, FLIR and Indigo sued defendants on the theory that defendants could not mass produce low-cost microbolometers without misappropriating trade secrets. Upon learning of the lawsuit, Raytheon terminated business discussions with defendants, and one month after the suit was filed, defendants advised FLIR and Indigo that they would not go forward with their new business.

FLIR and Indigo, before trial, dismissed their damages claims and tried only the misappropriation of trade secrets and California Unfair Competition Act claims. On December 6-17, 2007, the case was tried. In a statement of decision issued in June 2008, the trial court found no misappropriation or threatened misappropriation of trade secrets. It was undisputed that defendants received no funding for their business plan, never started their new business, had no employees or customers, did not lease any facility or develop technology, and did not design, develop or sell any infrared products. The trial court ultimately denied permanent injunctive relief and awarded defendants $1,641,216.78 in attorney fees.

The California Uniform Trade Secrets Act allows for an award of reasonably attorney fees to the prevailing party where the claim was brought in bad faith. Civ. Code § 3426.4. The court ultimately held that FLIR and Indigo had essentially brought the action based on the doctrine of “inevitable disclosure,” as there was no evidence of misappropriation or threatened misappropriation, and the FLIR and Indigo witnesses were unaware of such evidence though they maintained suspicions that misappropriation would occur. Given that the “inevitable disclosure” doctrine has been definitively rejected in California, the Court found FLIR and Indigo to have brought and maintained the action in bad faith. The items the Court considered significant: 

•           The absence of any economic harm.

•           The absence of any evidence of misappropriation or threatened misappropriation of trade secrets. Notably, there was evidence at trial that one of the defendants, Parrish, had downloaded technological data onto a hard drive before leaving Indigo, and that he destroyed the hard drive a few months before the lawsuit was filed. Although evidence that an employee has downloaded confidential information shortly before leaving his employer is typically significant to support a misappropriation claim, here, the evidence was discounted because defendants first learned of the download after the complaint was filed, so it was not a consideration for bringing suit, and the download was not a threatened misappropriation because there was no evidence that the contents of the hard drive, “if such contents existed, were improperly accessed, used, or copied before the drive was destroyed.”

•           Evidence that FLIR and Indigo had an anticompetitive motive in filing the lawsuit.  On this point, the court found significant the testimony of FLIR’s CEO, who testified that “we can’t tolerate a direct competitive threat by [Parrish] and [Fitzgibbons],” inferring that the CEO had no evidence of wrongdoing but was bothered that defendants planned to compete with FLIR in the future. The Court also found significant the fact that another FLIR officer had voted to file the lawsuit but had no personal knowledge that defendants had committed a wrongful act.

•           Failure by FLIR and Indigo to identify what trade secrets would be subject to the permanent injunction. The Court found as “strong evidence of bad faith” FLIR and Indigo’s proposed injunction, which barred defendants from developing certain products for a 12-month period even if they did not use FLIR and Indigo’s technology or trade secrets.

•           Imposition of unnecessary settlement conditions. When defendants notified FLIR and Indigo of their business plan, FLIR and Indigo responded with a demand for $75,000, a non-competition agreement, and agreement that defendants would not hire FLIR and Indigo’s employees, and agreement that they would not challenge Indigo’s patent applications. The Court found these restrictions to be unlawful restraints on trade.

•           FLIR and Indigo’s experts at trial admitted there was no scientific methodology to predict trade secret misuse and agreed that no trade secrets were misappropriated.

The FLIR decision is a reminder to employers to be cautious when determining to bring a lawsuit against former employees for trade secret misappropriation. California courts may not tolerate the filing of misappropriation claims where it appears the employer is merely fearful or suspicious of wrongdoing. In such cases, the employer plaintiff risks not only a dismissal of its claims but the possibility of being sanctioned for bringing the action. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Attorneys for Sylvester Stallone and another named cross-defendant recently filed a petition for review with the California Supreme Court challenging a significant published California Court of Appeal decision (Brescia v. Angelin, 172 Cal.App.4^th 133 (March 17, 2009)) regarding the sufficiency of a trade secret identification statement.

In 2007, a Los Angeles Superior Court judge entered judgment in favor of Stallone and another cross-defendant on a claim for trade secret misappropriation in a cross-complaint brought against him and others by a manufacturer of high protein, low carbohydrate pudding. 

In March 2009, a Court of Appeal for the Second Appellate District, Division Four reversed the judgment on the grounds, among other things, that cross-complainant’s trade secret identification statement was sufficient. 

The parties have briefed Stallone’s petition for review, with Stallone’s reply filed with the California Supreme Court on May 22, 2009. The Supreme Court has yet to rule on the petition.

According to the Court of Appeal decision, the cross-complainant alleges that Stallone participated with other cross-defendants in misappropriating cross-complainant’s trade secrets, which are described in the cross-complaint as: “a formula, manufacturing process, marketing plan, funding plan and a distribution and sales plan for a high protein, low carbohydrate pudding with an extended shelf life and a stable and appealing consistency and most important, when mass produced, an appetizing flavor.” See id. at 139-140. 

According to the decision, Stallone was the chairman of the board for a company (also a cross-defendant) that allegedly conspired to steal cross-complainant’s ideas for the alleged high protein, low carbohydrate pudding that was allegedly unlike any other pudding on the market. See id. at 139. The company and another allegedly began producing and selling a pudding based on cross-complainant’s formula and business plan. See id. at 139.

At the trial court level, judgment was entered in Stallone’s and another cross-defendant’s favor on the trade secret misappropriation claim, after the court sustained their demurrer to cross-complainant’s third amended cross-complaint, based on the alleged inadequacy of the manufacturer’s trade secret designation statement.

The trial court reasoned that the trade secret designation was defective, because it made “no attempt . . . to identify why certain aspects or all of the aspects of the manufacturing process are anything other than matters generally known to persons skilled in the field,” and “no attempt . . . to indicate why the peculiar product formulation here that is stated with precision is a trade secret, as opposed to the typical ingredients involved in formulating other low-calorie, low-fat puddings.” See id. at 142. 

The trial court commented that cross-complainant’s submission was silent on the question whether the alleged trade secrets were known to skilled persons in the field: “So by its silence it's doomed to failure, because there's no attempt even to commence to describe why this formula is unique and not known to others. [] It just is a formula. Likewise, it is a cooking or manufacturing process of many steps. Some of which apparently, according to matters of which I believe I can take judicial notice are actually fairly familiar when you are trying to make a comparable product.” See id.

A California statute requires that trade secrets be identified with particularity before commencing discovery relating to the trade secret in suits alleging the misappropriation of trade secrets under California’s Uniform Trade Secrets Act.

Specifically, Code of Civil Procedure § 2019.210 provides:

In any action alleging the misappropriation of a trade secret under the Uniform Trade Secrets Act (Title 5 (commencing with Section 3426) of Part 1 of Division 4 of the Civil Code), before commencing discovery relating to the trade secret, the party alleging the misappropriation shall identify the trade secret with reasonable particularity subject to any orders that may be appropriate underSection 3426.5 of the Civil Code.

Cross-complainant appealed the trial court’s decision. On appeal, the Court of Appeal found that section 2019.210 does not require in every case that a trade secret claimant explain how the alleged trade secret differs from the general knowledge of skilled persons in the field to which the secret relates. The Court found that such an explanation is required only when, given the nature of the alleged secret or the technological field in which it arises, the details provided by the claimant to identify the secret are themselves inadequate to permit the defendant to learn the boundaries of the secret and investigate defenses or to permit the court to understand the designation and fashion discovery. The Court found that the trade secret designation is to be liberally construed, and reasonable doubts regarding its adequacy are to be resolved in favor of allowing discovery to go forward.

Specifically, the Court held that cross-complainant’s trade secret designation met the reasonable particularity standard of section 2019.210. According to the designation statement, two alleged trade secrets were identified: the pudding formula and the manufacturing process. The statement “particularly described” the details of the pudding formula as of the last quarter of 2003, listing the 15 specific ingredients by common name and the percentage of the total pudding. The statement also listed the same 15 ingredients by their supplier and brand name and particularly described each step in the mixing, testing, and code marking of the pudding. 

The Court concluded that cross-complainant’s statement was adequate because: 1) the statement permitted cross-defendants to investigate possible defenses; 2) there was no deficiency in the trade secret designation that would hamper its ability to protect the parties' proprietary information or to determine the scope of relevant discovery; and 3) there was no showing that the trial court was unable to understand the nature of the alleged secrets and fashion discovery. 

The Court concluded that the nature of the identification required in any particular case need only be reasonable under the circumstances. The Court further stated the 2019.210 requirement cannot be divorced from the statutory goals which it is intended to serve and “[t]he identification is to be liberally construed, and reasonable doubts concerning its sufficiency are to be resolved in favor of allowing discovery to commence.”

The Court of Appeal decision received some media coverage after its publication. 

The issues presented to the California Supreme Court on the petition for review are:

1)      “Does Code of Civil Procedure section 2019.210 . . . permit plaintiffs to designate purported trade secrets by simply listing all of their product manufacturing specifications, without distinguishing them from matters known in the trade, thereby forcing defendants to guess as to what aspect(s) the plaintiffs will argue at trial constitutes the actual trade secret?

2)      Does this new, diminished designation standard, which conflicts with the designation standard utilized for over a decade (which required plaintiffs to distinguish their purported secret from matters known in the trade) undermine the legislative intent behind Section 2019.210 and Business and Professions Code section 16600 . . .?.

3)      Does this new designation standard create de facto non-compete covenants (unlimited as to time or geography), restraining the mobility of technical employees , and allowing employers to circumvent Edwards v. Arthur Andersen (2008) 44 Cal.4^th 937, 946 . . .?

4)      When plaintiffs designate patented information as their trade secret, and cannot distinguish their purported secret from these patents, may trial courts take judicial notice of the designation and patents, and grant demurrer? Or, must trade secret defendants always face costly litigation, no matter how incurably insufficient the information designated as trade secret?”

Pending the California Supreme Court’s decision on the petition review, the Court of Appeal’s decision serves as a significant decision providing additional clarification concerning the disclosure requirements of Section 2019.210.  We will provide an update once the Supreme Court issues a ruling on the petition for review.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

Under California Civil Procedure Code section 425.16, a defendant sued for exercising its constitutional rights may assert that the action is Strategic Litigation Against Public Participation (“SLAPP”) and move to strike the complaint on that basis. Section 425.16, also known as the “anti-SLAPP statute,” when properly invoked, can be a powerful defense tool because it imposes an automatic stay on discovery until a ruling on the motion, potentially forces the plaintiff to establish with evidence a “probability” that plaintiff will prevail on its claim, and exposes the plaintiff to a fee award if the motion is granted. The invocation of the anti-SLAPP statute in cases involving trade secrets disputes between business competitors will most likely be futile, however, as a recent decision by the California Court of Appeal indicates.

In World Financial Group, Inc. v. HBW Insurance & Financial Service, Inc. et al., 2009 WL 1019118 (Cal. App. 2d Dist. April 16, 2009), plaintiff World Financial Group, Inc. (“WFG”), a company that provides insurance, pension and financial services, sued its direct competitor, HBW Insurance & Financial Services, Inc. and a number of former WFG associates (collectively, “defendants”) for, among others, trade secret misappropriation and use of WFG’s confidential information to solicit WFG’s associates and customers. 

Defendants filed an anti-SLAPP motion, arguing that all of WFG’s claims were based on defendants’ speech and conduct in furtherance of their right of free speech in connection with a public issue. Specifically, defendants claimed that their speech and conduct involved the pursuit of lawful employment, workforce mobility, and free competition, all of which are matters of public interest and protected policy. Both the trial court and appeals court disagreed, holding that defendants failed to meet their burden of showing that WFG’s complaint arose from speech and conduct in connection with a public issue. As the Court of Appeal explained, “[A]ll of the allegedly wrongful conduct and speech that plaintiffs attribute to defendants was committed in a business capacity, and was directed at a competitor’s associates and customers for the sole purpose of promoting the competing business as a superior employer and provider of products and services.” 

The Court of Appeal also rejected defendants’ strategy of couching their argument in terms of society’s general interest in the subject matter of the dispute—lawful employment, free competition and employee mobility—rather than focusing on the specific speech or conduct at issue in the complaint. “The focus of the anti-SLAPP statute must be on the specific nature of the speech rather than on generalities that might be abstracted from it.” Applying the statute in the general manner defendants proposed, the Court of Appeal observed, would mean that “every case alleging breach of a noncompetition agreement or the related misappropriation of trade secrets would be categorically subject to the anti-SLAPP statute,” effectively eviscerating the unfair business practices laws.

Finally, even if defendants had argued that the specific speech and conduct at issue was protected, that argument would still be unavailing because the statements by which defendants attempted to solicit employees and customers were not of public interest, were irrelevant to WFG’s claims, and were merely incidental to the conduct upon which the complaint is based.

If defendants’ immediate goal was to delay discovery, then the use of the anti-SLAPP statute essentially accomplished that objective—for the short term.  Beyond that, use of the anti-SLAPP statute to strike garden-variety misappropriation and non-solicitation claims, as confirmed in the World Financial Group decision, will likely be unsuccessful.

The Seyfarth Trade Secrets, Computer Fraud & Non-Competes practice group attorneys congratulate their colleagues, Brian Ashe, Erik von Zeipel, Daniel Sable, Kurt Kappes, and Timothy Nelson, who represented WFG at the trial and appellate levels!

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In Decision Insights, Inc. v. Sentia Group, Inc., No. 07-1596, 2009 WL 367585 (4th Cir. Feb. 4, 2009), the Fourth Circuit Court of Appeals grappled with the distinction between a claim that elements of a software program are trade secrets and a claim that the program is a trade secret as a total compilation. The Court of Appeals determined that the district court considered the former, but not the latter, and reversed the district court’s grant of summary judgment.

Decision Insights brought claims against Sentia and a number of former Decision Insights employees, alleging that the former employees used Decision Insights’ trade secrets and confidential information when they formed Sentia to develop a competing software application. Included in Decision Insights’ complaint were claims for breach of restrictive covenants and for misappropriation of trade secrets. Decision Insights alleged that the former employees used their knowledge of its software code to develop a competing product in “record time” that produced the same results as Decision Insights’ software.

After a discovery dispute regarding Decision Insights’ identification of its trade secrets and confidential information, Sentia moved for summary judgment. The district court granted the motion, holding that Decision Insights had not shown the existence of trade secrets or confidential information. The district court also found that the non-compete provision signed by one employee was unenforceable under Virginia law and that there was no evidence that any of the employees had breached their non-disclosure provisions.

The Court of Appeals reversed the district court’s grant of summary judgment. In its ruling, the Court of Appeals drew a distinction between Decision Insights’ two trade secret claims. The Court of Appeals affirmed the trial court’s conclusion that Decision Insights did not properly describe the 12 processes within its software that it claimed were trade secrets. The Court of Appeals agreed with Sentia’s expert that Decision Insights’ description of the trade secrets was “incomplete and fragmented,” thus preventing a meaningful evaluation of the trade secrets.

However, the Court of Appeals held that the trial court erred by concluding that Decision Insights had not shown, as a matter of law, that the software program as a total compilation was a trade secret. Decision Insights produced its entire source code, as well as a flow chart and narrative explaining its software program as a whole. The Court of Appeals held that the district court did not consider whether the software could collectively constitute a trade secret. Thus, the Court of Appeals remanded the matter to the district court with instructions to determine whether: (1) Decision Insights adequately identified its software compilation as a trade secret; and, if so, (2) whether Decision Insights had established a triable issue of fact as to the existence of a trade secret. 

Based on the Court of Appeals’ finding that the district court did not properly consider whether the software program as a total compilation constituted a trade secret, it also reversed the dismissal of Decision Insights’ claims for breach of contract against the former employees. The trial court had concluded that Decision Insights presented no evidence that the former employees had breached their non-disclosure of confidential information agreements. Once the Court of Appeals found that the trial court had not considered Decision Insights’ trade secret claim in totality, it also concluded that the district court did not properly consider whether the former employees breached their agreements.

The Court of Appeals similarly found that the district court erred in concluding that a non-compete provision in one of the former employees’ employment agreements was unenforceable. The district court found that Decision Insights did not show a legitimate business interest supporting the provision. The Court of Appeals reversed, stating that the district court’s conclusion on the non-compete provision was tainted by its failure to properly address Decision Insights’ trade secret claim.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

By Michael Levinson

Following up on our recent post about Faiveley Transport Malmo AB v. Wabtec Corporation, No. 08-5126 (2d Cir. March 9, 2009), the Second Circuit's reversal of the preliminary injunction in that case effectively granted a compulsory license to Wabtec, the likely trade secret misappropriator.  The evidence showed that Wabtec was using the Faiveley air brake secrets to sell its own air brakes.  The court reasoned that there was no evidence that Wabtec had or was threatening to disseminate Faiveley’s secrets any further.  Indeed, Wabtec itself gained a competitive advantage by not further disclosing the secrets.  The “only possible injury that [the] plaintiff may suffer is loss of sales to a competing product . . . [which] should be fully compensable by money damages.”  As a result, according to the Second Circuit, Faiveley did not face irreparable injury sufficient to justify equitable relief.

Based on this analysis, the Second Circuit’s decision could be seen as a license to steal.  It means that a trade secret misappropriator who “only” uses a purloined secret for its own benefit may not be enjoined.  It would be as if a soft drink company could steal the formula for Coke, without fear of being enjoined, so long as it “merely” used the formula itself to compete with Coke and thus Coke could obtain money damages.  This flies in the face of the well-accepted presumptions that trade secrets are unique and that their loss might not be able to be measured in money damages.  This result could also empower misappropriators to steal their competitor’s secrets, confident that they can compel a license and that the worst that might happen if they get caught is that they would have to disgorge some amount of profits.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Roughly two months ago, we wrote about Michael Scott and Dwight Schrute, two fictional characters on NBC’s sit-com The Office, stealing the trade secrets of a competitor: Prince Paper. On last Thursday night’s episode, we learned the fate of Prince Paper: it went out of business. (5:35 into the linked clip.) Is this a result of Dunder Mifflin taking Prince Paper’s key customers? The show leaves this question unanswered.

Last Thursday night’s episode also illustrates a classic series of violations of the duty of loyalty by Michael Scott. At the close of the preceding week’s episode, Scott had given two weeks’ notice of his resignation from Dunder Mifflin. In last Thursday night’s episode, Scott learns that Prince Paper (where Scott had hoped to move after resigning) has gone out of business and then decides to open his own competing paper company, creatively named “Michael Scott Paper Company.” Scott proceeds to solicit a number of other employees in the office, including all three of the branch’s sales representatives, to resign from Dunder Mifflin, and join his new competitor. (The various solicitation efforts start at 6:30 in the clip and run for much of the episode.) Scott goes to the lengths of soliciting one employee in the branch parking lot and a second in the men’s room. Scott also spends company time asking Pam Beesley, the branch receptionist, to change the Dunder Mifflin invoice to say “Michael Scott Paper Company.” (8:35 into the clip.) Finally, the show strongly implies that Scott took a customer list because his new boss, Regional Vice President Charles Minor, asks the branch employees about “the client list that Michael was supposed to be working on.” (17:15 into the clip.)

Scott’s removal of a client list would be a case of trade secret misappropriation. Although the law on the duty of loyalty varies from state to state, Scott’s solicitation of employees for a competing venture while still employed by Dunder Mifflin would violate the duty of loyalty in most states. There are at least two cases in Georgia that reach this conclusion. U.S. Anchor Mfg., Inc. v. Rule Indus., Inc., 717 F. Supp. 1565, 1576 (N.D. Ga. 1989); E.D. Lacey Mills v. Keith, 183 Ga. App. 357, 362-363, 359 S.E.2d 148 (1987). More importantly for Dunder Mifflin and its Scranton branch, Pennsylvania law is similar. Reading Radio, Inc. v. Fink, 833 A.2d 199, 211 (Pa. Super. Ct. 2003). Scott’s use of company time and resources to create an order form for his new company would also be an issue for him.

While Prince Paper illustrated what an employer should not do in safeguarding its interests, Minor gives a lesson in an appropriate response. (Minor’s character is a level-headed, model manager, which is what creates comedic tension with the unorthodox, oft-inept Scott.) Minor keeps tabs on Scott after he hands in his two weeks’ notice. Minor intervenes when Scott is alone with sales representative Jim Halpert. Finally, Minor has Scott escorted out of the building by security when he learns that Scott is planning on starting a competing paper company. Dunder Mifflin likely would be in a good position to argue that it takes reasonable steps to protect its interests based on Minor’s actions.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

As discussed in our March 9th posting, Illinois Senate bill SB 2149 seeks to alter the landscape of trade secret enforcement and litigation in Illinois by, among other things, a) requiring disclosure of trade secrets before a party issues written or oral discovery; b) requiring attorneys'  fees be awarded to the prevailing party in a trade secrets case; and c) ordering a court to enter an attorneys' fees award against any party that subsequently amends their initial trade secret disclosure. SB 2149 passed through the Senate Judiciary Committee on March 12, 2009, and will now proceed to a full senate vote. The vote likely will occur within the next few weeks. If approved by the Senate (which is quite likely since SB 2149 spent less than one week before the Senate Judiciary Committee), SB 2149 will be sent to the Illinois House of Representatives Judiciary Committee for review and approval. If the House Judiciary Committee subsequently approves SB 2149, SB 2149 will then be considered and voted upon by the entire House of Representatives. We will continue to monitor the bill and its progression through the Illinois General Assembly.
 

• Email This
• Print
• Comments
• Trackbacks (1)
• Share Link

Opening with a tribute to the iconic New York City subway system, complete with citations to sources as diverse as Leonard Bernstein and The Bonfire of the Vanities, the Second Circuit Court of Appeals earlier this week vacated and remanded a preliminary injunction barring a braking system manufacturer from disclosing proprietary drawings and other information to the New York City Transit Authority during the contracting process. 

In 1993, SAB Wabco (Faiveley Transport Malmo AB’s predecessor-in-interest) entered into a license agreement with then-sister company Wabco (Wabtec’s predecessor-in-interest) that gave Wabco the authority to use SAB Wabco’s “know-how,” including manufacturing data, specifications, designs, plans, and trade secret information. Among other information, this included details related to BFC TBU, described by the court as “a unique air brake system designed to stop trains quickly and smoothly, if not always quietly.”

When the agreement terminated at the end of 2005, Wabtec began to develop its own line of BFC TBU through reverse-engineering, and in 2007 was awarded a sole source contract to provide the braking system for the Transit Authority’s overhaul of a certain class of subway cars. Faiveley sought a preliminary injunction in federal district court, asserting that the BFC TBU information constituted trade secrets that Wabtec was misappropriating by manufacturing the braking system and disclosing information to the Transit Authority during the contracting process. The district court granted the injunction.

On appeal, however, the Second Circuit held that although the district court had not erred in finding that Faiveley was likely to succeed on the merits of its misappropriation claim, there was no evidence of irreparable harm and, thus, no basis for entry of a preliminary injunction. Most notably, the court made a point of correcting the misapplication of the law by some district courts that had erroneously read Second Circuit precedent as meaning that a presumption of irreparable harm automatically arises upon the determination that a trade secret has been misappropriated. Instead, the court clarified that, although a rebuttable presumption of irreparable harm may arise where there is a danger that the trade secrets will be disseminated to a “wider audience” or their value otherwise impaired, no such presumption is warranted where “a misappropriator seeks only to use those secrets—without further dissemination or irreparable impairment of value—in pursuit of profits” because such harm can be compensated with money damages.

Thus, the Second Circuit found that no injunction was merited here because the evidence showed only that Wabtec had used Faiveley’s proprietary information to gain a competitive advantage, but had not disseminated any trade secrets and, indeed, was treating the information with the same confidentiality given its own proprietary information. Because there was no risk that Wabtec would further disclose or irreparably harm Faiveley’s trade secrets, the court vacated the injunction and remanded the matter to the district court. This decision serves as an important reminder of the facts that must be alleged and established to prove irreparable harm when seeking temporary or preliminary injunctive relief for trade secret misappropriation.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A new bill recently introduced in the Illinois State Senate would dramatically change the Illinois Trade Secrets Act (765 ILCS 1065/1 et at.) and alter the landscape of trade secret litigation in Illinois. The bill, SB 2149, requires a party asserting trade secret misappropriation to serve on the opposing party, before commencing any written or oral discovery, a written statement that describes "with reasonable specificity the trade secrets which have allegedly been improperly used, disclosed or misappropriated." The bill requires a party to obtain leave of court to supplement its written statement and 180 days after submitting its statement to identify additional trade secret misappropriation. More importantly, any court that allows a party to amend its written statement must also enter an attorneys’ fees award against the amending party for attorneys’ fees the opposing party incurred as result of the amended statement.

In addition, the new bill allows the prevailing party to recover its attorneys’ fees and also orders the court to award attorneys’ fees if:

Finally, the proposed bill allows the court to award attorneys’ fees if the court:

a. finds that a damages claim for trade secret misappropriation is "objectively specious and has been maintained without substantial proof of economic injury approximately caused by improper use;"

b. modifies an injunction because the injunction is "impermissibly overbroad, vague or ambiguous;"

c. finds that a request for injunctive relief is substantially greater than what is necessary to protect "legitimate economic interests" regarding the improper use, disclosure or misappropriation of trade secrets.

We will continue to monitor this bill and its progression through the Illinois General Assembly.

• Email This
• Print
• Comments
• Trackbacks (2)
• Share Link

By Kurt Kappes and Jim McNairy, Sacramento

Mass layoffs are painful events for employees and employers alike.  But for employers, increasingly more than just personnel are leaving their facilities: researchers estimate that data theft cost businesses $1 trillion in 2008.

In a recent study commissioned by McAfee, Inc., researchers at Purdue University's Center for Education and Research in Information Assurance and Security (CERIAS) polled 800 executives at businesses with more than $250 million in annual sales.  Of the executives surveyed, 42 percent said that laid off workers were the biggest threat to business caused by the current recession.  Businesses reported losing $4.6 million on average in 2008 as a result of data theft.  McAfee noted that a lot of anecdotal evidence shows that many of the thefts were internal. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Although one would not expect to get insights on protecting confidential information from a prime time comedy, last Thursday night’s episode of NBC's The Office provided an amusing illustration of the importance of a company not giving away sensitive material. The episode involves two employees of the fictional paper company Dunder Mifflin – Michael Scott and Dwight Schrute – being tasked by their company’s CFO to learn about a small competitor – Prince Paper – that is beating Dunder Mifflin in a certain geographic area. Scott and Schrute pose as a potential client and a potential new employee, respectively, and go to Prince Paper’s office to ask questions about the company. Prince Paper’s principal discloses the number of his company’s customers. He goes as far as to provide a customer list to Scott. His wife also permits Scott to take a picture of her with a map of Prince Paper’s customers in the background.

(The relevant scenes take place at 6:00, 8:00, 10:15, and 12:10 of the video.)

The point of the episode is to show the ham-handed Scott and Schrute taking advantage of an unsuspecting competitor and then fighting over what to do with the information. That said, the episode does illustrate the pitfalls of a company not doing enough to protect its key information. Employers are often wary of the dangers of a disgruntled employee e-mailing a customer list to a personal e-mail account before resigning, but they forget the dangers that can come from disclosing information to seemingly innocuous customers and potential hires. In this case, Prince Paper would have a hard time showing that its customer list is a trade secret if it had to acknowledge that it previously gave the list away to a person posing as a potential customer. This is especially true when that person is the bumbling Michael Scott.

• Email This
• Print
• Comments (1)
• Trackbacks (1)
• Share Link

(Thanks to Ralph Carter for preparing this posting).

As readers of our previous posts may recall, in November 2008, Judge Kenneth Karas of the Southern District of New York granted IBM’s motion to preliminarily enjoin one of its former high-level employees, Mark D. Papermaster, from working for Apple. Finding that “it is likely that Mr. Papermaster inevitably will draw upon his experience and expertise … he gained from his many years at IBM,” Judge Karas reaffirmed the viability of the “inevitable disclosure” doctrine. Int’l Business Machines Corp. v. Papermaster, No. 08-CV-9078 (KMK), 2008 WL 4974508, at *9 (S.D.N.Y. Nov. 21, 2008). 

On November 20, 2008, Mr. Papermaster appealed to the Second Circuit from Judge Karas’s preliminary injunction and also moved immediately for an expedited appeal. On December 8, 2008, Second Circuit Judge Debra Ann Livingston denied Mr. Papermaster’s motion for expedited appeal without prejudice, subject to renewal should the February 24, 2009 trial of the merits of the matter be delayed, or upon subsequent application after the scheduled trial. 

Under the current briefing schedule, Mr. Papermaster’s brief to the Second Circuit is due on January 26, 2009 and IBM’s appellee’s brief is due on February 25, 2009. Oral argument on the appeal may be heard as early as the week of April 20, 2009. Stay tuned for an analysis of Mr. Papermaster’s brief in a post to follow.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In August, federal prosecutors charged Biswamohan Pani, a former Intel Corp. engineer, with theft of trade secrets from his former employer, Intel.  This week, a Massachusetts grand jury added four new counts of wire fraud.  If convicted, Pani could serve up to 10 years in prison for the theft of trade secrets count, and up to 20 years on each count of wire fraud.

Federal prosecutors in Massachusetts allege that after Pani resigned from Intel in May 2008, he downloaded confidential documents and trade secrets worth $1 billion, including new microprocessor chip designs. Pani accessed the internal Intel network via his Intel-issued laptop, downloading "mission-critical" documents.

It is reported that Pani told his supervisors that he was leaving Intel to work for a hedge fund, but in reality he had accepted a job months earlier with Intel’s main competitor, Advanced Micro Devices, Inc., and began working there days after his resignation from Intel, but while still employed by Intel.  For a brief period, Pani was on both AMD’s and Intel’s payrolls due to accrued, unused vacation time at Intel.  Intel owns 80% of the worldwide market for microprocessors, and AMD owns the rest.

An FBI search of Pani’s home recovered eight Intel documents classified as “secret,” “top secret,” and “confidential.” Pani told FBI investigators that he planned to give the information to his wife, who also works for Intel. AMD is not accused of any misconduct, and there is no evidence that AMD had any involvement in or awareness of Pani’s actions.  Pani, of course, is no longer employed by AMD. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

 By James McNairy & Robert Milligan

A new Ninth Circuit case, Asset Marketing Systems, Inc. v. Gagnon, 2008 WL 4138181 (Sept. 9, 2008), acknowledges (at least in dicta) that there is a trade secrets exception to Business and Professions Code Section 16600.

In the case, Gagnon, an independent contractor who developed computer programs for AMS, a field marketing organization, alleged, among other things that AMS had misappropriated his trade secrets that were contained in the programs’ source code.

The Ninth Circuit rejected Gagnon’s claims that AMS misappropriated his trade secrets.  The Ninth Circuit affirmed the district court’s determination that Gagnon had granted AMS an implied, unlimited license to retain, use, and modify the software, thus destroying any trade secret status the code might have had.

In rejecting Gagnon’s trade secret claim, the Court affirmed the district court’s holding that the noncompetition agreements signed by Gagnon’s employees were invalid. Gagnon contended that even if AMS obtained an implied license, it still misappropriated his trade secrets that were contained in the programs’ source code by hiring away his employees in violation of their employment agreements. One of the provisions in the employees’ agreements was an agreement not to engage in any employment or personal contractual agreement for AMS for twenty-four months without written consent from Gagnon.

Citing the California Supreme Court’s recent decision in Edwards v. Arthur Andersen LLP, 189 P.3d. 285, 288 (2008), the Ninth Circuit stated (arguably in dicta) that noncompetition agreements in California are invalid unless necessary to protect an employer’s trade secrets. The California Supreme Court in Edwards, however, specifically did not address what it called the so-called trade secret exception to Bus. & Prof. Code § 16600 and rejected the Ninth Circuit’s narrow restraint exception to section 16600 (the “narrow restraint” exception interpreted section 16600 to allow noncompetition agreements where departing employees were barred from pursuing only a small or limited part of a business, trade or profession). According to the Ninth Circuit, the non-competition agreements that Gagnon had his employees execute “were no longer enforceable” because they were no longer necessary to protect Gagnon’s trade secrets against AMS.

In this first post-Edwards published Ninth Circuit decision regarding section 16600, the Court did not provide any specific analysis concerning the nature of the trade secrets exception and what one must show to make defensible use of it. The Court’s dicta appears to suggest that non-competition agreements executed “to protect” an employer’s trade secrets will be enforceable. But as with most things legal, with trade secrets, the devil is in the details. What exactly the Court meant by a non-competition agreement to protect trade secrets is unclear. Further, mere assertions in employee/employer noncompetition agreements that the agreement has been executed “to protect” trade secrets without more is unlikely to withstand challenge.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Sixth Circuit Court of Appeals recently held that whether a trade secret is a protectable interest is an equitable question not affected by the lack of a written instrument. Niemi v. NHK Spring Company, --- F.3d ---, 2008 WL 4273123 (6th Cir. Sept. 19, 2008).

Richard Niemi is an individual engineer who provides various automobile company manufacturers with designs related to stabilizer bars for automobiles. In the early 1990s, Niemi had an idea for a new method of stabilizer-bar manufacturing, which interested his long term client, New Mather Metals (a subsidiary of Defendant NHK Spring Co.) Although the purchase order through which New Mather ordered the manufacturing tooling, which Niemi claimed to be a “trade secret,” included the clause that “no other or different terms or conditions shall apply to this order unless specifically agreed to in writing. . .”, Niemi claimed that he had assurances that his new method would be kept “confidential.” In order to protect itself from Niemi’s selling his designs to its competitors, New Mather requested that Niemi enter into a “exclusivity agreement,” which Niemi described as “reciprocal” despite any language in the instrument to that effect. “No further writing was needed, in Niemi’s estimation, because New Mather’s obligation represented a continuation of an arrangement that had been in place for 25 or 30 years . . . .” 

Niemi learned a few years later that New Mather had disclosed his stabilizer manufacturing trade secret to other designers, and he brought an action against New Mather and its parent companies for misappropriation of trade secrets, as well as for other claims. The district court ultimately granted summary judgment to Defendants on the trade secrets claim, finding that Niemi had not taken sufficient steps to keep his designs secret. 

In reviewing Niemi’s appeal of judgment against his trade secrets claim, the Sixth Circuit considered Ohio’s adopted Uniform Trade Secrets Act, particularly focusing on the factor requiring “reasonable” efforts to maintain secrecy. Ultimately, it concluded that there were direct, disputed material facts sufficient to warrant reversal of the district court.

The decision is most significant, however, for the reasoning underlying its rejection of one of Defendants’ arguments; namely, that Niemi’s “oral reciprocal exclusivity agreement” was barred by the statute of frauds. In rejecting that argument, the court quoted Ohio law in noting that “protection afforded by trade secret laws is not a function of property interests or contract rights, but of ‘equitable principles of good faith applicable to confidential relationships.’” In other words, whether there is a contract or property interest in the trade secrets is “irrelevant” because trade secret protection derives from equity.

The progenitor of the principle quoted by the Sixth Circuit was Justice Oliver Wendell Holmes’ opinion in Masland, where he observed that, in “explaining the nature of a trade secret . . . trade secret laws are not those of property but the equitable principles of good faith applicable to confidential relationships.” Valco Cincinnati v. N & D Machining Service, Inc., 492 N.E.2d 814, 817 (Ohio 1986) (citing E.I. Du pont de Nemours Powder Co. v. Masland, 244 U.S. 100 (1917) (Holmes, J.)). 

In any event, although the fundamental character of a trade secret may be one of confidence protected by equity, there is some dispute among the states regarding whether a trade secret is a property right. Compare Envirotech Corp. v. Callahan, 872 P.2d 487, 494 (Utah App. 1994) (trade secret is a property right) with ConFold Pacific, Inc. v. Polaris Industries, Inc., 433 F.3d 952, 959 (7th Cir. 2006) (holding that, under Wisconsin law, a trade secret is not a property right but instead an interest protectable by contract).

The Sixth Circuit is correct that the lack of a written instrument does not itself negate a claim under the Uniform Trade Secrets Act. Certainly, if the existence of a written agreement – such as the “oral” mutual exclusivity and confidentiality agreement present in Niemi – would tend to increase the likelihood of a protectable trade secret, then its absence should mitigate against it.  But the Sixth Circuit seemed to go a step further in concluding that because a trade secret’s nature is one of equity, the lack of a contractual or property claim renders wholly “irrelevant” the lack of a written instrument. 

• Email This
• Print
• Comments
• Trackbacks (1)
• Share Link

 By Robert Milligan, Kurt Kappes and James McNairy

The California Supreme Court released its highly anticipated decision in Edwards v. Arthur Andersen LLP  today and held that employee non-competition agreements are invalid, even if narrowly drawn, unless the agreement falls within a statutory exception. 

In doing so, the Court rejected the Ninth Circuit’s narrow restraint exception, which excepted the prohibition contained in Business and Professions section 16600 on non-competition agreements where one was barred from pursuing only a small part or limited part of the business, trade or profession.

In its decision, the Court limited its review to two issues:

1)      To what extent does Business and Professions Code section 16600 prohibit employee non-competition agreements;

2)      Is a contract provision requiring an employee to release “any and all” claims unlawful because it encompasses nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802.

The Court concluded that Business and Professions Section 16600 prohibits employee non-competition agreements unless the agreement falls within the applicable statutory exceptions of sections 16601, 16602, or 16602.5. The Court also held that a contract provision whereby an employee releases “any and all” claims does not encompass nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802.

On the first issue, the Court found that California state courts have consistently affirmed that section 16600 evinces a settled legislative policy in favor of open competition and employee mobility. Section 16660 states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” (emphasis added) The chapter excepts non-competition agreements in the sale or dissolution of corporations (§ 16601), partnerships (§ 16602), and limited liability corporations (§ 16602.5). 

The Court noted that it had previously invalidated an otherwise narrowly tailored agreement as an improper restraint under section 16600 because it required a former employee to forfeit his pension rights on commencing work for a competitor (citing Muggill v. Reuben H. Donnelley Corp. (1965) 62 Cal.2d 239, 242-243). The Court, quoting Muggill, stated section 16600 invalidates provisions in employment contracts and retirement pension plans that prohibit “an employee from working for a competitor after completion of his employment or imposing a penalty if he does so unless they are necessary to protect the employer’s trade secrets.”

The two clauses at issue in Edwards’ agreement with Andersen provided:

1)      If you leave the Firm, for eighteen months after release or resignation, you agree not to perform professional services of the type you provided for any client on which you worked during the eighteen months prior to release or resignation. This does not prohibit you from accepting employment with a client. 

2)      For twelve months after you leave the Firm, you agree not to solicit (to perform professional services of the type you provided) any client of the office(s) [Los Angeles] to which you were assigned during the eighteen months preceding release or resignation. 

Andersen argued that the Court should interpret the term “restrain” under section 16600 to mean simply to “prohibit,” so that only contracts that totally prohibit an employee from engaging in his or her profession, trade, or business are illegal. 

The Court rejected that argument and found that Andersen’s non-competition agreement was invalid because the two specific clauses at issue in the agreement restricted Edwards from performing work for Andersen’s Los Angeles clients and therefore restricted his ability to practice his accounting profession. 

Earlier in the decision, the Court expressly stated it did not address the applicability of the “so-called trade secret exception to section 16660.” Before the Supreme Court granted the petition for review in Edwards, the lower appellate court’s decision remanded the case to the trial court to determine if the trade secret exception applied, i.e. the non-competition agreement was necessary to protect trade secrets. The Court’s disposition indicates that the issue is closed though and that there will be no such remand to the trial court:

We hold that the noncompetition agreement here is invalid under section 16600, and we reject the narrow-restraint exception urged by Andersen. Noncompetition agreements are invalid under section 16600 in California even if narrowly drawn, unless they within the applicable statutory exceptions of sections 16601, 16602, or 16602.5

Andersen asked the Court to adopt the limited or “narrow-restraint” exception to section 16600. The Court noted that confusion over the Ninth Circuit’s application of section 16600 arose in a paragraph in the Ninth Circuit’s decision in Campbell v. Trustees of Leland Stanford Jr. Univ. (9^th Cir. 1987) 817 F.2d 499, in which the Ninth Circuit stated that some California state courts have excepted application of section 16600 “where one is barred from pursuing only a small or limited part of the business, trade or profession” (citing Boughton v. Socony Mobil Oil Co. (1964) 231 Cal.App.2d 188 and King v. Gerold (1952) 109 Cal.App.2d 316). The Court found that the reasoning in these state court cases does not provide persuasive support for adopting the narrow restraint exception because Boughton involved the use of land, not a restriction upon a plaintiff’s practice of a profession, and King relied upon a trade secret exception to the statutory rule. 

The Court acknowledged that recent Ninth Circuit cases have followed Campbell to create a narrow-restraint exception to section 16600 in federal court. The Court stated that California state courts have not embraced the Ninth Circuit’s narrow restraint exception and stated “no reported California state court decision has endorsed the Ninth Circuit’s reasoning, and we are of the view that California courts have been clear in their expression that section 16660 represents a strong public policy of the state which should not be diluted by judicial fiat” (citing Scott v. Snelling and Snelling, Inc. (N.D. Cal. 1990) 732 F. Supp. 1034, 1042).

In sum, while the Court’s decision clearly states California does not recognize a “narrow restraint” exception to the general rule that employee non-competition agreements are invalid, the Court did not specifically address when non-solicitation of customer and employee clauses are permissible to protect trade secrets. 

The San Francisco Chronicle also has posted an article about this case.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

           According to the California Supreme Court's website, the Court’s highly anticipated decision in Edwards v. Arthur Andersen, LLP will be available tomorrow, August 7, 2008 at 10:00 a.m. on the Court’s website.

            Trade secret and employment attorneys have been closely following the Edwards case after the Supreme Court granted review of the case on November 29, 2006. 

            In the lower court, the Court of Appeal for the Second Appellate District expressly rejected somewhat settled Ninth Circuit case law that provides an exception to the general rule in California that covenants not to compete are unlawful in the employment context pursuant to Business and Professions Code section 16600. The narrow restraint exception essentially provides that a noncompetition agreement is not unlawful where it leaves a substantial portion of the market open to the employee. The lower court expressly found that the narrow restraint exception was a “misapplication of California law when applied to an employee’s noncompetition agreement.” The court further stated “[i]n our view, section 16600 prohibits noncompetition agreements between employers and employees even where the restriction is narrowly drawn and leaves a substantial portion of the market available for the employee.”

            The lower court also found that the broadly worded release that Edwards allegedly was required to sign was unlawful because it purportedly waived Edwards’ Labor Code section 2802 rights. Labor Code section 2802, subdivision (a), provides: "An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties . . ." The lower court held that “[b]ecause Labor Code section 2802's indemnity provisions implement public policy, requiring Edwards to waive indemnity rights as a condition of continued employment violated public policy and constituted an independently wrongful act for purposes of . . .[Edwards’] intentional interference with prospective economic advantage claim.”

            The issues that the Supreme Court are expected to address in tomorrow’s decision are:

 (1) Is a non-competition agreement between an employer and an employee that prohibits the employee from performing services for former clients invalid under Business and Professions Code section 16600, unless it falls within the statutory or judicially-created trade secrets exceptions to the statute?

(2) Does a contract provision releasing "any and all" claims the employee might have against the employer encompass non-waivable statutory protections, such as the employee indemnity protection of Labor Code section 2802?

            We will provide a follow-up blog entry once the decision comes out.  

By Robert Milligan, James McNairy and Summer Associate Julia Brodsky

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Mississippi State University v. People for the Ethical Treatment of Animals, Inc., No. 2006-CA-02120-SCT, 2008 WL 2927836 (Miss. July 31, 2008).

The Mississippi Supreme Court has reversed a lower court’s order granting a request by People for the Ethical Treatment of Animals (“PETA”) seeking disclosure of documents from Mississippi State University (“MSU”) regarding its care of research animals. Specifically, PETA had requested that MSU release records relating to research and testing that was funded by Iams, a pet food company. PETA subsequently modified its request to seek only certain animal care protocol review forms prepared by MSU in conjunction with Iams pursuant to a series of agreements specifying that MSU would not disclose Iams’ confidential information and that MSU would maintain its animal care facilities in conformance with the federal Animal Welfare Act, 7 U.S.C. § 2131 et seq., and all other applicable laws and policies.    

Iams sought a court order prohibiting the disclosure of exempt information under the Mississippi Public Records Act, Miss. Code Ann. §§ 25-61-9 and 79-23-1, on the ground that the information PETA requested constitutes trade secrets. In particular, Iams asserted that the data and information reveals aspects of Iams’ “strategic product development portfolio” that is not generally known by its competitors in the marketplace, including its formulations, improvements, and new product development. After reviewing relevant documents in camera, the trial court, however, concluded that, with the exception of a section entitled “Experimental Design” and certain personal information about the researchers, the protocol forms were not exempt from disclosure because the Act only covers protocols developed by MSU under contract with Iams, which, it found, was not the case here.

However, the Mississippi Supreme Court reversed because the unrefuted evidence on the record established that the information in the protocol forms was developed by MSU pursuant to its agreements with Iams; thus, the “plain and unambiguous language” of the Act requires exemption of the substantive portions of the forms. See 2008 WL 2927836, *13-14. In addition, the Court observed that the protocol forms are required by the federal Animal Welfare Act, which also exempts from public disclosure “trade secrets or commercial or financial information which is privileged or confidential.” Id. at *14, citing 7 U.S.C. § 2131(a)(6)(B). In closing, the Court noted that “[a]ny disagreements with those directives are best aimed toward the Legislature.” Id.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

  By Erik Weibust (Boston) 

          Illustrating the roadblocks that Taiwanese companies still must overcome to do business in mainland China (Taiwan split from China amid a civil war in 1949), Forbes.com is reporting that electronics giant Hon Hai Precision Industry Co. recently took out half-page ads in major Taiwanese newspapers complaining about delays in a Chinese court over the prosecution of a Chinese competitor for allegedly stealing its trade secrets. In 2006, Hon Hai, which employs approximately 500,000 Chinese workers, sued BYD Company Limited, a Chinese competitor, for allegedly “systematically looting its trade secrets.”   According to Hon Hai, in 2006, two of its former employees took secret information when they left to work for BYD. Although the two employees have since been convicted of infringement in a Chinese court, according to Hon Hai, that may only be the tip of the iceberg. Specifically, Hon Hai alleges that over the past 4 to 5 years, 400 of its employees have moved to BYD, many of whom are suspected of providing the company with Hon Hai’s trade secrets and proprietary information. 

            According to the newspaper ads, the head of BYD is a member of the powerful People’s Congress, which has “the power to remove members of the judiciary.”  This, Hon Hai alleges in its ads has “result[ed] in a certain degree of unwillingness among local judicial and police members to deal with the case.” Nevertheless, Hon Hai believes that its rights will be vindicated eventually, particularly given China’s senior leaders’ commitment to protecting the interests of Taiwanese businesses on the mainland. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

United States v. Malhotra, No. 5:08-CR-00423-JF (N.D. Ca.)

Former Hewlett Packard vice president Atul Malhotra today pleaded guilty in federal district court in San Jose, California to one count of theft of trade secrets. In an information filed on June 27, 2008, the United States charged Malhotra with violating the Trade Secrets Act, 18 U.S.C. § 1832(a)(2), by disclosing to HP certain confidential pricing information he obtained while employed at IBM. Specifically, the government charged that in his capacity as director of sales and business development for output management services for IBM Global Services, Malhotra obtained trade secret information regarding the IBM Global Services “CC Calibration Metrics.” This information concerned products costs and materials that IBM used to compete in the marketplace for printers and other output devices. Accordingly the document was stamped “IBM Confidential” on each page.

 Approximately two months after obtaining the confidential IBM information, Malhotra accepted a position as vice president of imaging and printing services at Hewlett Packard in Palo Alto, California. Shortly thereafter, the government alleges, Malhotra sent e-mails to two separate HP senior vice presidents entitled “For Your Eyes Only,” and attached the IBM Global Services CC Calibration Metrics.  An HP statement at the time indicated that HP conducted an internal investigation, terminated Malhotra’s employment, and reported the activity to law enforcement and to IBM.

Malhotra faces up to ten years in prison and a $250,000 fine on the single count of theft of trade secrets. Sentencing is scheduled for October 29, 2008, before District Judge Jeremy Fogel.

• Email This
• Print
• Comments (1)
• Trackbacks (1)
• Share Link

Judge Leoni Brinkema (E.D. Va.) sentenced Gregg W. Bergersen to almost five years in prison for his role in providing secret information about U.S.-Taiwanese military relationships to a Chinese spy.   According to Matthew Barakat, writing for the Associated Press, View Article, the Chinese spy (Tai Kuo) fronted as a New Orleans furniture salesman who was aligned with Taiwan.  Instead, Barakat reports, it turns out that Kuo was forwarding the information to China.   Bergersen stated in court that he believed he was helping Taiwan develop a new air defense system and did not turn over the information with a motive for financial gain, a claim that federal prosecutors challenged.

According to the article, Kuo has pleaded guilty to espionage, and sentencing for him should occur later this month.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Associated Press (Anna Jo Bratton) is reporting that a state district court judge in Lancaster County, Nebraska tagged two Nebraska Municipal Power Pool executives with millions of dollars in damages arising out of their scheme to use American Public Energy Agency's "company information, financial data and copyrighted material."  View Article. It appears that Nebraska Municipal Power Pool ("NMPP") previously provided services to American Public Energy Agency.  Then the two NMPP executives decided to create their own agency to compete with American Public Energy Agency.  AP also reports that the two executives attempted to steal away American Public Energy Agency's customers in an effort to eliminate or severely harm the company. 

I have not been able to locate a copy of the opinion, but I am hoping that it will be up on a website or a search service soon.   If I find it publicly available, I'll try to post a link to the judge's decision.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A company's trade secrets may be some of its most important assets.  Recent headlines underscore their importance, and vulnerability:

1. Recently, an employee was arrested at the airport and over 1,000 company proprietary documents containing trade secrets were seized that the employee was attempting to transport with her to her new job.
   
2.  A national retailer recently was hit with a $21.5 million verdict after a jury found the retailer liable for stealing the design of a popular home improvement tool. 
   
3. A former employee recently pleaded guilty in a U.S. District Court in California to stealing proprietary technologies from his former employer and selling or offering them for sale to foreign governments and military contractors.

A survey of companies estimated that in just one year, companies likely were to have lost as much as $53 to $59 billion dollars in proprietary information and intellectual property through theft and misappropriation.  Seeking trade secret counseling and an audit can assist clients to determine best practices to help protect their most important assets.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

United States v. Meng, No. CR 04-20216 JF (U.S.D.C. N.D. Calif.).

Judge Jeremy Fogel of the U.S. District Court for the Northern District of California in San Jose today imposed a 24-month prison sentence on Xiaodong Sheldon Meng, who pleaded guilty to possessing night vision software for pilots belonging to Quantum3D, his former employer, and using that information in a sales demonstration to Chinese naval officials.

According to the indictment, Meng was employed by Quantum3D in various systems engineering and analysis positions, and later as a consultant to Quantum3D. In that capacity, he had access to various trade secrets belonging to Quantum3D, a producer of hardware and software components for simulation systems for commercial and military customers. Among the products to which Meng had access were “Mantis,” a product used to visually simulate motions and three-dimensional scenes for training and other purposes, and “viXsen,” a visual simulation software program using for training military fighter pilots using thermal imaging (night vision) equipment. As part of his employment, Meng signed an “Employee Proprietary Information Agreement” acknowledging his obligation to return Quantum3D’s information, documents and other property to the company at the end of his employment.

Upon ending both his employment and consulting relationship with Quantum3D, Meng took a position with Orad, a direct competitor of Quantum3D in China. The government charged that Meng then traveled to China and made a presentation and demonstration to various foreign governments and officials, including the Royal Thai Air Force, the Royal Malaysian Air Force, and government entities and military contractors of the People’s Republic of China, using Quantum3D’s products, modified to seem like they belonged to Orad.

The United States government charged Meng with misappropriating Quantum3D’s trade secrets without authorization and attempting to export them from the United States to China in violation of various federal laws including, among others, the Economic Espionage Act (18 U.S.C. § 1831), the Trade Secrets Act (18 U.S.C. § 1832), and the Arms Export Control Act (22 U.S.C. § 2778). Although the statutory maximum for the economic espionage count to which he pleaded guilty is 15 years in prison, Meng’s plea agreement with the government, in which he pleaded guilty to 2 of the 36 counts of the indictment, recommended a maximum sentence of 24 months’ imprisonment.

At the sentencing hearing, Judge Fogel imposed the 24-month maximum under the plea deal, emphasizing the need to deter others who would consider stealing and selling American technology and jeopardizing national security. In doing so, Judge Fogel became the first judge in the country to sentence a defendant convicted under the rarely-used Economic Espionage Act.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Tracy v. Winfrey, et al., No. 07-1630 (1st Cir. June 11, 2008).

The U.S. Court of Appeals for the First Circuit has affirmed the dismissal of Darlene Tracy’s copyright infringement and trade secret misappropriation suit against Oprah Winfrey, Harpo Productions, and ABC Television.

In a pro se complaint filed in federal district court in Boston, Tracy alleged that she came up with the idea that eventually became the hit reality TV show “Oprah’s Big Give.” In the show, which recently completed its run, Winfrey gave money to ten contestants, who then competed to make the biggest impact on the lives of complete strangers by giving the money away. Tracy alleged that she conceived of the idea for a show entitled “The Philanthropist,” and submitted a proposal to an executive producer for The Oprah Winfrey Show. She claims that a second producer told her the proposal was under review, but that the producers stopped returning her phone calls and ignored her requests to return her proposal. The complaint asserts that more than a year later, Winfrey announced at the end of her daily talk show that she was giving $1,000 to audience members to use for a charitable purpose in their communities. Shortly thereafter, Winfrey and ABC announced a new program with the working title “The Big Give,” which Tracy alleged mirrored her concept for “The Philanthropist.”

The district court dismissed the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failing to allege facts sufficient to support her claims. Tracy, now represented by counsel, appealed to the First Circuit. But the First Circuit affirmed the dismissal, concluding that “neither copyright nor misappropriation of trade secrets are apt legal theories for the facts as pled by Tracy, which, even construed in her favor, reveal that Tracy voluntarily and without reservation submitted her material to the defendants.”

While the lawsuit was pending, it garnered widespread media coverage, which was rumored to cause at least one large publishing house to back out of discussions concerning a possible companion “Big Give” book out of fear that it, too, might be named in the suit.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The recent California appellate decision, Cypress Semiconductor Corp. v. Superior Court, is instructive not just on the issue of when the statute of limitations begins to run in a trade secret matter, but also contains important language with respect to the obligations of the trade secret owner to notify good faith, third-party users of the alleged misappropriation of trade secrets.

In Cypress, Silvaco Data Systems had developed and licensed electronic design automation software (“EDA”). This software was used by Silvaco’s customers to design their own products. One of Silvaco’s EDA products was known as Smart Spice, and Silvaco maintained the source code for SmartSpice as a trade secret. In late 1998, a former Silvaco employee began working for Circuit Systems, Inc. (“CSI”) and incorporated the SmartSpice trade secrets into a CSI product known as DynaSpice. Silvaco first suspected the trade secrets misappropriation in 2000 and sued its former employee and CSI at that time. Silvaco did not directly notify or take any action against CSI customers who had licensed DynaSpice. In August 2003, Silvaco and CSI entered into a settlement agreement and a stipulated judgment. The judgment included an express finding that Silvaco’s trade secrets had been incorporated into DynaSpice. The judgment also required CSI to discontinue licensing DynaSpice, as well as notify DynaSpice license holders that the software contained Silvaco trade secrets and to encourage customers to discontinue using DynaSpice.

Cypress Semiconductor Corporation (“Cypress”), which was one of CSI’s customers, learned of the judgment in late August 2003. After judgment was entered, Silvaco also directly notified CSI customers that DynaSpice contained misappropriated trade secrets from Silvaco. Silvaco contacted Cypress in September 2003 and demanded that Cypress cease using Silvaco’s trade secrets. Silvaco claimed that despite this notice, Cypress continued to use the DynaSpice program, and thus continued to use Silvaco’s trade secrets. Silvaco brought suit against Cypress in May 2004.

The central issue decided by the California Sixth Appellate District in Cypress involved the statute of limitations of Silvaco’s claims against Cypress. However, the decision also contains important language regarding the obligations of a trade secret holder with respect to third parties who are using the holder’s trade secrets.

The Cypress court stated that “a cause of action for misappropriation against a third-party defendant accrues with the plaintiff’s discovery of that defendant’s misappropriation.” The Cypress court also noted that trade secret owners have an incentive under the California Uniform Trade Secrets Act (“CUTSA”) to put good-faith third parties on notice. According to Section 3426.1(d) of the CUTSA, “a trade secret loses its protected status if the owner does not undertake reasonable efforts to keep it secret.” Also, according to Section 3426.1(b)(2)(C) of the CUTSA, good faith acquirers of trade secrets who do not receive notice before materially relying upon the trade secrets may not be liable for misappropriation at all. Therefore, according to the Cypress decision, “the failure of the trade secret owner to take prompt action to protect its trade secrets or to alert good-faith acquirers to the existence of its trade secret claims can serve as a defense in the event the trade secret owner eventually decides to pursue a misappropriation claim against the third party.” (emphasis added).

A trade secret owner, therefore, must promptly investigate instances of possible misappropriation and seek to notify any third parties who may have acquired the owner’s trade secrets. Failure to act promptly, under the CUTSA and the Cypress decision, can give rise to statute of limitations defenses, as well as the possibility that the Court may find that the claimed trade secrets are no longer protected trade secrets at all.

The full text of the Court's decision can be accessed here http://www.courtinfo.ca.gov/opinions/documents/H032114.PDF.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A California appellate court recently held that the statute of limitations for trade secret misappropriation claims against third parties who receive stolen trade secrets from others begins when the plaintiff, not the third party, suspects a misappropriation of trade secrets.

The Court stated: "We conclude that with respect to the element of knowledge, the statute of limitations on a cause of action for misappropriation begins to run when the plaintiff has any reason to suspect that the third party knows or reasonably should know that the information is a trade secret. The third party’s actual state of mind does not affect the running of the statute."

The Court indicated that the trade secret holder's failure to take "prompt action" in notifying the third party about the purported misappropriation may diminish the holder's trade secret misappropriation claim.

Justice Eugene M. Premo, the author of the court decision, stated "A trade secret loses its protected status if the owner does not undertake reasonable efforts to keep it secret."

The Court's opinion is significant because the decision demonstrates that trade secret holders need to take "prompt action" once they suspect a misappropriation of trade secrets, including investigating potential misuses of their secrets.

A trade secret audit can be an invaluable part of protecting a company's trade secrets before and after a company's trade secrets have been compromised. For more information on Seyfarth Shaw LLP's trade secret audit capabilities, click here.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

By Scott Krol, New York

The United States Court of Appeals for the Fourth Circuit recently upheld summary judgment holding that a former employee did not violate the Virginia Computer Crimes Act (“VCCA”) when the former company could not prove that they were unaware of employees’ use of company funds. Further, the employee did not violate the Virginia Uniform Trade Secrets Act (“VUTSA”) when the company could not show any evidence that the employee in fact used any of the otherwise protected trade secrets for his benefit.

The parties to this case are closely linked. Jerry Nims is an entrepreneur who obtained patents on many technologies used in making identification cards more difficult to temper with or counterfeit. Nims started Orasee which owned many of these patents.

In 2003, Nims formed EC4 Technologies Limited (“EC4 UK”), a wholly owned subsidiary of Orasee, to license the technologies.

In 2005, Nims set up Othentec Ltd. (“Othentec UK”) as a subsidiary of EC4 UK.

Nims’s son-in-law, Jeffrey Phelan, was appointed Managing Director of both EC4 UK and Othentec UK, and later was put in charge of better distributing the company’s product in the United States.

On March 17, 2005, Phelan formed EC4 Technologies, Incorporated (“EC4 USA”) and became that company’s CEO. He began to market and distribute Orasee technologies in the U.S. pursuant to a sublicense agreement between the EC4 UK and EC4 USA. In November 2005, another executive formed Othentec Limited (“Othentec USA”) for the same purpose as EC4 USA, this time as wholly owned by Othentec UK.

By early 2006, after a considerable amount of friction developed between the parties, Phelan was discharged from his positions at the UK companies, but continued to do business as EC4 USA. This gave rise to the case at hand, essentially Nims’ companies claimed that Phelan abused his position of power and trust to form EC 4 USA fraudulently and proceeded to use Othentec UK’s money and trade secrets to run the U.S. business successfully. Phelan moved for and won summary judgment against Othentec UK on all issues except whether Phelan breached his fiduciary duty to Othentec UK.

The district court explained that there are three elements of committing a violation of the VCCA: “(1) using a computer or computer network (2) without authority (3) intending to obtain, embezzle, or convert the property of another.” Va. Code Ann, §18.2-152.3.

The Court found that Phelan clearly was authorized to access Othentec UK bank account, Othentec UK was aware of the withdrawals, and Phelan did not directly withdraw the money using a computer. Instead, Phelan merely sent an email to the accountant asking for the withdrawal. Hence, there was no evidence of the unauthorized use of a computer to commit a crime. Othentec UK “produced no evidence outside of self-serving speculations that Phelan committed a violation. of the VCCA.”

The VUTSA makes it illegal for a person to misappropriate trade secrets from another. Othentec UK argued that Phelan, as Managing Director, was intimately familiar with the technology, “unless someone is foolish enough to believe that all that (EC4 USA’s technology) was developed in a clean-room environment without reference to, use of, or attempting to work around” Othentec UK’s proprietary and highly confidential software and manufacturing process, than Othentec UK had no basis for its argument. The Court agreed with the last part, ruling that these “allegations, speculations, and inference are not enough to survive summary judgment.” See Othentec Ltd. v. Phelan, --- F.3d ----, Case No. 06-2297, 2008 WL 2009740 (4th Cir. May 12, 2008) (emphasis added).

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Topps Company, maker of “Bazooka” bubble gum, licensed Stani to manufacture and distribute the gum in Argentina. The original license was entered into in 1957 and was to expire in 20 years. It provided that Topps would share its “know-how, formulae, processes and techniques” with Stani in exchange for royalties on Stani’s sales. In 1976, the parties entered into a new 10-year agreement, with Stani given an option to extend it for another 10 years. The new agreement provided for the parties sharing Topps’ “manufacturing technology, marketing concepts and techniques, … and trademark use” in exchange for Stani’s payment of a yearly license fee. In the 1976 agreement, Topps also gave Stani “the exclusive non-assignable right and license to manufacture ... and sell within the [relevant] Territory, during the continuance of this Agreement, Licensed Products utilizing TOPPS Technology.” Emphasis added. Four years later, the parties entered into two new contracts: a third license agreement, and an escrow agreement. The 1980 license agreement, which expired by its terms in April 1996, gave Stani the same “exclusive non-assignable right and license” that had been given in 1976 except that the corresponding 1980 provision ended with the words “Licensed Products” and did not include "utilizing TOPPS' technology." The escrow agreement (for which Stani paid $100,000) recited that, absent a default, upon expiration of the 1980 license agreement legal title to the registration in Argentina of the trademarks “Topps” and “Bazooka” would pass to Stani.

In 1999, three years after the 1980 license agreement expired, Topps sued Stani and its parent corporation, Cadbury (to whom Stani had assigned the trademarks), alleging that Stani was continuing to use Topps technology which constituted misappropriation of trade secrets. In its answer, Stani denied that it was using Topps’ formulae but argued that, in any event, it had the right under the parties’ agreements to do so. The district court granted summary judgment to Stani and its parent, reasoning that the 1976 and 1980 documents (including the assignment to Stani of the Argentina registration of the trademarks) necessarily gave Stani the right to continue using Topps’ chewing gum formulae after April 1996. The Second Circuit reversed on the ground that summary judgment was inappropriate because the agreements were ambiguous with regard to Stani’s rights after April 1996. Topps Co. v. Cadbury Stani S.A.I.C., No. 06-5316-cv (2d Cir., May 15, 2008).

The court of appeals said that, on the one hand, the 1980 license agreement provided that the “TOPPS Trademarks and the Topps Technology shall at all times remain the exclusive property of TOPPS or its assigns” and gave Stani the right to use TOPPS formulae only “during the continuance” of the agreement. Those provisions suggest that Stani had no post-April 1996 rights. On the other hand, the “during the continuance” provision might have been intended to refer solely to what was to happen if there was an early termination of the 1980 license for cause, and there was no provision expressly granting or expressly denying Stani the right to the formulae after April 1996. Moreover, the assignment of trademark registration gave Stani at least the right to make a substantially similar product if it could do so without using the Topps formulae and without deceiving customers. Therefore, the parties’ intent was a material disputed issue requiring a trial.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Georgia’s Trade Secrets Act prohibits knowing misappropriation of trade secrets. See Ga. Code Ann. § 10-1-761. In a recent decision, the Eleventh Circuit briefly examined this principle in affirming a district court’s grant of dismissal and concluded that the Complaint must set forth facts from which the court could infer that any misappropriation of trade secrets was knowing. Southern Nuclear Operating Co., Inc. v. Electronic Data Systems Corp., 2008 WL 1700204 (11th Cir. Apr. 14, 2008).

Southern Nuclear Operating Company had retained Electronic Data Systems (“EDS”) to provide computer and software services. Southern Nuclear eventually terminated that agreement and hired Computer Technologies Solutions, Inc., (“CTS”) to perform the same functions. EDS requested that Southern Nuclear return EDS’s products and documentation or certify their destruction. Southern Nuclear never did so, and so EDS filed an action against Southern Nuclear and CTS for misappropriation of its trade secrets.

The only issue on appeal was whether the district court had erred in granting dismissal on the grounds that EDS did not allege that CTS knew or should have known at the time it was hired that it had misappropriated trade secrets of EDS. The court of appeals agreed with the district court and affirmed the dismissal in a very brief opinion because there was “nothing in the Complaint that provides facts from which the court could infer that CTS knew or should have known that it had misappropriated trade secrets of EDS.”

Nonetheless, service providers such as CTS should still be conscious of trade secrets issues when they enter into new agreements to provide services or products, ensuring that information used by the client and made available to the service provider is not a competitors’ trade secrets, particularly if there is some reason to suspect that the information may be protected.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Illinois Appellate Court affirmed a ruling granting summary judgment to American Family Mutual Insurance Company on its declaratory judgment action seeking a determination that it has no duty to defend the insured defendants in an underlying trade secret misappropriation action the company brought in federal court. American Family Mut. Ins. Co. v. Roth et al., No. 1-07-0526 (Ill. App., 2d Dist., Mar. 31, 2008).

American Family, a Wisconsin-based insurer, entered into written agency agreements with defendants Bonnie Roth and Connie Roth, owners of Roth & Roth Insurance, pursuant to which Bonnie and Connie worked as exclusive agents of American Family. The agency agreements provided that the policies, policyholder records, and other materials furnished by American Family to the defendants remained American Family’s property and that all originals and copies were to be returned to American Family within 10 days of termination of the agreements. The agreements also contained provisions, signed by the defendants, governing their access to American Family’s proprietary computer system, software and database, which included customer lists and confidential customer information. In addition, the agreements contained nonsolicitation agreements prohibiting the defendants from soliciting American Family policyholders for one year following termination of the agreements.

After terminating the agreements with Bonnie and Connie, American Family demanded the return of all of its property, including policyholder records, and reminded Bonnie and Connie that privacy laws and the agreements prohibited them from disclosing policyholder information to third parties. Nonetheless, the defendants solicited American Family customers, including sending a solicitation letter to at least one American Family customer that contained personal financial information Connie Roth obtained while an agent of American Family.

American Family sued the defendants in federal court alleging violations of the Wisconsin Uniform Trade Secrets Act, Wis. Stat. Ann. § 143.90(1)(c); federal law; and state common law for breach of contract and tortious interference. American Family also instituted a declaratory judgment action in the Illinois circuit court seeking a determination that it has no duty to defend the defendants in the federal court action pursuant to the terms and conditions of the business-owners’ package insurance policy it had issued to them as its agents. The circuit court granted summary judgment in favor of American Family.

On appeal, the defendants asserted that the circuit court erred because the underlying complaint contained factual allegations of “personal and advertising injury” that brought the action within the policy’s coverage. But the appellate court rejected this argument, finding that the defendants’ alleged retention and use of confidential information gleaned from American Family’s database and computer system amounted to trademark and trade secret infringement, thus bringing the action with the policy exclusion for injuries knowingly caused by the insured and arising out of such infringement. The appellate court also found that the defendants’ alleged retention of American Family’s information and use of that information to solicit American Family’s customers constituted a breach of the agency agreements, thus bringing the action within an exclusion to the policy’s coverage for injuries that arise from breach of contract. Accordingly, the court concluded that American Family did not owe a duty to defend its former agents in the underlying action.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

One of the nation’s large home builders recently filed suit against a former executive in federal court in Albuquerque, New Mexico for alleged misuse of the company’s trade secrets related to a highly confidential internal strategic plan.

Pulte Home Corporation filed suit against former executive Lynn Galindo, a former area vice president based out of Las Vegas, Nevada, in the United States District Court of New Mexico (Case 1:08-cv-00210-JB-LFG) alleging claims of trade secret misappropriation, conversion, breach of fiduciary duty, breach of contract, fraud, breach of implied covenant of good faith and fair dealing, and unjust enrichment.

The complaint alleges that shortly before Galindo’s departure from the company, she misappropriated an internal strategic plan related to the Albuquerque housing market and later used it to create a similar plan for a competitor.

According to the complaint, the plan, which cost in excess of $1 million dollars to produce, contained information that would allow a competitor at Pulte’s expense to make informative decisions regarding the “relative health of the market in terms of marco/micro economic and market forces; the size of the mobility of the population within the market; the organization of Pulte’s Target Consumer Groups; the location preferences by consumer group, price sensitivity, product preferences, over-and under-served consumers groups which indicates market opportunity; and the top performing communities in the market organized by Target Consumer Group.” The plan also contained Pulte’s analysis of this data, its strategy for increasing its presence in the market, an “identification of specific challenges of this market and Pulte’s proposed solutions to those challenges.”

According to Pulte’s complaint, “A knowledgeable person would be able to use Pulte’s . . . [strategic plan] to assess the viability of a specific location (or multiple locations), understand the best opportunities for targeting specific consumer groups in the locations under evaluation and be able to fine tune a product offering in terms of community layout, community design, community amenities, lot size and configuration, floor plan selection and specifications of homes.”

According to the suit, Pulte provided Galindo with notice of her termination in the spring of 2007 as part of a reduction in force. Galindo negotiated a lucrative severance package that paid her nearly $300,000 in severance pay, bonuses and other compensation. Pulte claims Galindo conspired to obtain the strategic plan while she was negotiating her severance from the company and that if it would have known she had obtained the highly confidential plan that it would not have entered the severance agreement. Galindo apparently obtained the plan by contacting a subordinate and induced the employee to send her a copy prior to her separation.

During Galindo’s employment and as part of her severance agreement, Galiando signed agreements to keep Pulte’s proprietary information, such as the strategic plan, confidential, according to the complaint. Pulte claims that Galindo agreed to provide a developer in the Albuquerque area with a marketing study and used material from Pulte's confidential strategic plan in the report.

The case has yet to be set for trial and has been assigned to District Judge James O. Browning and Magistrate Judge Lorenzo F. Garcia.

This case highlights the need for employers to review the activities of departing employees shortly before their departure to ensure that company confidential/trade secret information has not been compromised and that the employees understand their continued confidentiality obligations to the company. Employers should consider reviewing these employees’ e-mail activity and access to proprietary databases prior to their departure, as well as remind other employees to report any suspicious activities, to attempt to safeguard company secrets.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A former software engineer for a Chicago-area telecommunications company has been indicted for allegedly misappropriating over 1,000 proprietary documents containing trade secrets which she was evidently attempting to transport with her to her new job in China. Neither company has been named.

The defendant, Hanjuan Jin, a naturalized citizen, took a medical leave of absence from the Chicago-based company (Company A) in February 2006. During her medical leave, she accepted a job with a company in China (Company B) where she was to develop communications software. She then informed Company A that she would return to work on February 26, 2007, without notifying the company that she had secured a job in China. After purchasing a one-way ticket to China for Feb. 28, 2007, Jin returned to Company A and allegedly downloaded hundreds of documents. She allegedly returned that night as well as the next night to copy more documents. These documents included descriptions of how Company A provides an interstate communication feature that cost the company hundreds of millions of dollars to develop, and federal authorities claim that had Jin succeeded in bringing them to China, Company A could have lost more than $600 million over the next three years.

Jin was arrested and the documents seized at O’Hare Airport on Feb. 28, 2007. She was charged with three counts of theft of trade secrets. If convicted, each count carries a maximum penalty of ten years in prison and a $250,000 fine.

For more information, see http://www.earthtimes.org/articles/show/suburban-chicago-woman-indicted-for,337647.shtml or http://www.chicagotribune.com/news/local/chi-trade-secrets-webapr03,1,1758307.story.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Eleventh Circuit Court of Appeals affirmed the sentence of a former Coca-Cola Company employee and one of her co-conspirators for conspiracy to commit theft of trade secrets in violation of 18 U.S.C. § 1832(a). In United States v. Williams, a jury convicted Joya Williams of taking trade secrets related to secret marketing materials from Coca-Cola and working with her co-conspirator, Edmund Duhaney to try to sell them to Pepsi Company through a third-party, Ibrahim Dimson. (Mr. Duhaney pleaded guilty.)

The facts under which Ms. Williams and Mr. Dimson were convicted and sentenced read like a serial clock-and-dagger television series. Ms. Williams snuck files (and even a product sample) out of her workplace, gave them to Mr. Duhaney (who testified against Ms. Williams and Mr. Dimson as part of his plea-bargain), who then contacted Mr. Dimson to act as the go-between with Pepsi Co. Mr. Dimson contacted Pepsi Co. by mailing an executive at Pepsi an offer to provide “very detailed and confidential information” about Coca-Cola he would provide “to the highest bidder.” Pepsi Co., of course, notified Coca-Cola, which then notified the FBI. An undercover agent with the FBI posed as a Pepsi executive and began the process of purchasing small confidential items with an aim towards one large purchase. After the terms of the large purchase were consummated, the FBI arrested each of the three conspirators.

As stated by the Court, the facts leave no doubt as to the validity of the underlying convictions, but Ms. Williams raised two constitutional challenges to her trial. First, she argued that the trial court’s limitation on her cross-examination of Mr. Duhaney violated her Sixth Amendment right of confrontation (the Eleventh Circuit disagreed). Second, she argued that the trial court denied her due process by striking her closing argument’s reasonable doubt analogy (again the Court of Appeals disagreed). And both Ms. Williams and Mr. Dimson appealed their sentences, arguing that the district court had placed too heavy an emphasis on the seriousness of the offense in going above the recommended sentencing guidelines for each of them. The Court of Appeals, however, held that the trial court had not abused its discretion in sentencing them.

¹ Trial lawyers frequently have a series of “reasonable doubt” stories and analogies for use at closing argument, tailored to the case and whether they are the prosecutor or defense attorney. Ms. Williams’ attorney’s analogy is arguably one of the stranger ones: “Williams argues that her counsel properly explained the concept of reasonable doubt by comparing it to a patient's desire to seek a second opinion when told by a doctor ‘you know, I'm looking at you and I think you need to have both of your legs amputated.’”

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Chemical Abstracts division of the American Chemical Society (ACS) sued three software developers who left ACS to start their own company, Leadscope. ACS sued for trade secret misappropriation, alleging that the software developers used ACS trade secrets to develop their own product. The filing of the lawsuit scuttled several pending (very promising) deals that Leadscope was about to close on. Leadscope counterclaimed for defamation, tortious interference, unfair competition and deceptive trade practices.

The lawsuit was filed in 2002 was hotly contested. Among other things, there was a dispute over insurance coverage, resulting in a court of appeals decision in favor of coverage, see Am. Chem. Soc. v. Leadscope, Inc. , 2005-Ohio-2557.

The trial lasted 2 months in the Franklin County Court of Common Pleas (Columbus, Ohio). On March 27, the jury returned a verdict ruling in favor of Leadscope (the defendant and counterclaimant), awarding counterclaim compensatory damages of $27 million.

In closing arguments, Leadscope's attorney argued, that ACS "destroyed the reputations of three dedicated scientists...They have ruined the financial position of LeadScope...These scientists did their own work. They didn't take anything from [ACS]". Much of the case focused on expert analysis of Leadscope's source code. Leadscope presented expert testimony that the source code of their own product was NOT copied.

Certainly, a cautionary tale for people filing trade secret lawsuits!

The Columbus Dispatch has reported on the verdict. See
http://www.columbusdispatch.com/live/content/business/stories/2008/03/28/LEADSCOPE.ART_ART_03-28-08_C12_HF9P1EG.html?sid=101

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Stanley Steemer licensed AAA Abachman to operate a carpet and upholstery cleaning business under the Stanley Steemer name. The franchise agreement gave Abachman “the sole right to use Stanley Steemer’s ‘trademarks, service marks, patents, and trade secrets’ in its carpet and upholstery cleaning business within its assigned territory.”

After Abachman had secured this right, however, Stanley Steemer licensed a second company to operate a “duct cleaning” business in an overlapping geographic area. Abachman complained to Stanley Steemer that this second license violated its exclusive rights in the area, and, after being rebuffed, sought a declaratory judgment that this was so. The parties’ cross summary judgment motions resulted in judgment for the defendant, Stanley Steemer, on the basis that the franchise agreement granted exclusive rights only as to “carpet” and “upholstery” cleaning, not “duct” cleaning. Abachman appealed to the 11th Circuit.

The central issue in the appeal was whether the contract between Abachman and Stanley Steemer afforded Abachman an exclusive right in Stanley Steemer’s mark generally, or only as to carpet and upholstery. The relevant portion of the agreement gave “Abachman the exclusive and perpetual rights ‘to own and operate a Stanley Steemer carpet and upholstery cleaning business (hereinafter referred to as a ‘Stanley Steemer Business’) in the ... ‘Franchisee’s Area’[ ] and to use the trademarks, services marks, patents, [and] trade secrets ... solely in a Stanley Steemer Business in that area and in no other manner.’”

The per curiam decision affirmed the district court, holding that this language provided an exclusive right to the Stanley Steemer mark only as to “carpet and upholstery.” Relying on the language “and in no other manner,” the Court held that this unambiguous language foreclosed any broader understanding of the contract, even a subsequent term requiring payment by Abachman to Stanley Steemer for “any additional sale resulting from or associated with the name Stanley Steemer.”

Although there was a weak, facial argument that the broad language “trademarks, services marks, patents and trade secrets” is broader than only “carpet and upholstery cleaning” if done under the Stanley Steemer name, it seems clear that the Court concluded from the contract language quoted in its opinion that such use is constrained to “Stanley Steemer Business,” a term defined as “a Stanley Steemer carpet and upholstery cleaning business.”

Although neither a trendsetting case nor a departure from black letter law, this case is a good reminder that clearly written, descriptive contract language is (still) critical and definitive in disputes. Here, Stanley Steemer did a good job of providing both the breadth necessary for Abachman to run a successful franchise and at the same time limiting that franchise strictly so as to enter into a separate agreement with another entity.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On February 29, 2008, Allen Cotten pleaded guilty in U.S. District Court in Sacramento to stealing microwave technologies from his former employer, Genesis Microwave, Inc., and selling or offering them for sale to foreign governments and military contractors. In a scheme that lasted two years, Cotten downloaded confidential information from Genesis computers, including plans, designs, and specifications for microwave technologies that, according to the U.S. Attorney’s Office, have military applications such as “enhancing navigation and guidance capabilities, radar jamming, electronic countermeasures, and the ability to locate and pinpoint enemy signals during warfare.” Cotten also stole mechanical parts and hardware made with the confidential plans belonging to Genesis, and both sold and offered to sell those components to foreign governments and military contractors. At his sentencing hearing in May, Cotten faces up to ten years’ imprisonment and a fine of $250,000.

Cotton’s illegal activities were uncovered by the Export Enforcement Task Force comprised of various federal agencies, including the Department of Justice, FBI, Immigration and Customs Enforcement, Department of Commerce, Department of Defense, and the armed services. The task force was created to detect, investigate, and prosecute cases involving the theft or export of sensitive technology.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In almost every trade secret/restrictive covenant dispute, a company whose trade secret information has been stolen must confront the possibility that its customers will be dragged into the dispute. One company decided to take the bull by the horns pre-litigation and sent a letter to all of its customers notifying them of a misappropriation by one of its former employees and “suggesting” that, to avoid potential involvement in any ensuing litigation “as a material witness, or otherwise,” the customers should not do business with the former employee.

Unsurprisingly, the former employee sued his former employer for defamation. The former employer brought a motion to strike the defamation complaint under California’s anti-SLAPP statute, which authorizes a court to dispose of lawsuits that are brought to chill “the valid exercise of constitutional rights,” such as the right of free speech. The trial court’s decision to grant the former employer’s anti-SLAPP motion and strike the defamation complaint was upheld yesterday by the Court of Appeal . See Neville v. Chudacoff, __ Cal.Rptr.3d __, 2008 WL 650658 (Cal.App. 2d. Dist. March 12, 2008).

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In a February 29, 2008 Order, the Northern District of California entered a preliminary injunction against four defendants on behalf of Verigy US, Inc. Verigy demonstrated in discovery that Romi Omar Mayder, the principal of Silicon Test Systems, Inc., e-mailed a number of sensitive documents to a business partner, Robert Pochowski. The documents concerned technology for testing flash memory cards.

In granting the preliminary injunction, the district court rejected a number of arguments put forward by Defendants. Defendants first argued that a difference of opinion between Verigy witnesses regarding the application of Verigy’s confidentiality policy, but the court found that the existence of such a policy, along with non-disclosure agreements, was sufficient for Verigy to show reasonable efforts to maintain the secrecy of its information.

Defendants further argued that the items alleged by Verigy to be trade secrets were publicly known elements. However, the court concluded that Verigy demonstrated that the combination of those elements was not publicly known and was therefore entitled to protection as a trade secret.

Finally, Defendants argued that the product they ultimately developed did not utilize Verigy’s trade secrets because Defendants made significant changes to the final product. The court rejected this argument, holding that Defendants’ use of Verigy’s items gave Defendants a head start in ultimately developing their final product, even if the final product varied from the Verigy plans. Additionally, the court relied upon Defendants’ misappropriation of Verigy information regarding the requirements of other vendors in concluding that Defendants’ actions gave them an unwarranted competitive advantage.

The court was also forced to grapple with the question of the duration of the injunction restricting Defendants marketing or selling their product. To answer this question, the court had to determine how much of a temporal head start Defendants obtained by misappropriating Verigy’s trade secrets. The court determined that Mayder took eight months at Verigy working on the project in question, but then elected to shorten the injunction period to five months because: (1) some of the technology used on the project was publicly available; and (2) Defendants’ final product ultimately went in a different direction than the product sold by Verigy.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.”

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.”

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In Patriot Homes, Inc. v. Forest River Housing, Inc., No. 06-3012, 2008 WL 90081 (7th Cir. Jan. 10, 2008), the U.S. Court of Appeals for the Seventh Circuit vacated an injunction entered by the U.S. District Court for the Northern District of Indiana, ruling that it was insufficiently specific and therefore was not in compliance with Rule 65(d) of the Federal Rules of Civil Procedure.

The facts of the matter as set forth in Patriot Homes are as follows: Forest River hired four employees of Patriot Homes after merger talks between the two companies fell through. Forest River formed a new company named Sterling with the new employees. Patriot Homes, Forest River, and Sterling are all in the modular homes industry. The four employees copied information from Patriot Homes’s computer system before resigning and utilized that information for Sterling. Sterling did not deny that its employees had done so, but it argued that the information taken from Patriot Homes was not a trade secret because it was filed by Patriot Homes with various state governments and could be procured through Freedom of Information Act requests. Discovery revealed that most, but not all, of the information taken from Patriot Homes and used by the four employees could indeed be procured from state governments.

The District Court entered a preliminary injunction forbidding Sterling from “[u]sing, copying, disclosing, converting, appropriating, retaining, selling, transferring, or otherwise exploiting Patriot's copyrights, confidential information, trade secrets, or computer files.” The preliminary injunction also required Sterling to: “[c]ertify that copied data and materials of Patriot's property, confidential information and trade secrets on computer files and removable media (CDs, DVDs, tapes, etc.) have been deleted or rendered unusable.”

The Court of Appeals found that the injunction was not specific enough to put Sterling on notice as to what acts on its part would constitute contempt of court: “The preliminary injunction entered by the district court uses a collection of verbs to prohibit Sterling from engaging in certain conduct, but ultimately it fails to detail what the conduct is, i.e., the substance of the “trade secret” or “confidential information” to which the verbs refer.” The Court of Appeals based its decision on Sterling’s uncertainty as to what information was truly a trade secret or confidential information and what was not entitled to such protection by virtue of being publicly available. The case stands as a reminder that injunctions compelling parties to simply “follow the law” without more instruction do not comply with Rule 65(d).

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A California appellate court held in a recent decision that a broad “no-hire” provision contained in a consulting agreement was unenforceable as a matter of law because it was an impermissible restraint on trade in violation of the California Business and Professions Code Section 16600.

Despite the frequent use of “no-hire” and “non-solicitation” provisions in consultant and employment agreements, the validity of these provisions in California, especially broad “no-hire” provisions, is far from certain in light of the Court of Appeals for the Fourth Appellate District’s recent decision in VL Systems Inc. v. Unisen Inc., 152 Cal.App. 4th 708 (2007).

The full text of the Court’s decision can be found at http://www.courtinfo.ca.gov/opinions/archive/G037334.PDF

Though the holding in VL Systems appears to be limited to broad “no-hire” provisions, the Court’s policy analysis in the decision suggests, though it is far from certain, that even more narrow “non-solicitation” provisions would be subject to scrutiny by California courts and enforceable only to the extent that they are necessary for legitimate business reasons and are not overly broad in time and scope.

The contract in question included a “no-hire” provision. Specifically, the contract provided that defendant would not hire any of plaintiff’s employees for 12 months after the computer consulting contract’s termination, subject to a liquidated damages provision.

In analyzing the validity of the “no-hire” provision, the Court found that this type of contractual provision may seriously impact the rights of a broad range of third parties, including those who were not even employed by plaintiff at the time of its contract with defendant.

To this end, the court noted that the employee in question was not employed by plaintiff at the time the contract was performed, and that the employee had independently sought employment with defendant.

The court recognized that certain narrower restrictions have been held valid in the past by California courts and expressly stated that it took no position on whether a more narrowly drawn and limited “no-hire” provision would be permissible under California law.

However, it found that the “no-hire” clause at issue was too broad in that it covered not only solicitation by defendant, but all hiring, and it applied to all of plaintiff’s employees, regardless of whether they worked for defendant or were even employed at the time.

The court’s emphasis on the employees’ freedom of mobility protected by Section 16600 of the Business and Professions Code suggests that any contractual restriction on such mobility will be highly scrutinized by California courts.

In light of VL Systems, businesses should reconsider the inclusion of broad “no-hire” provisions in both business service agreements and employment agreements.

Prior to requiring your California employees to sign agreements containing such restrictive covenants, a consultation with a Seyfarth Shaw LLP attorney is recommended.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Polar Molecular Corp. v. Amway Corp., et al., No. 1:07-CV-460, 2007 WL 3473112 (W.D. Mich. Nov. 14, 2007).

A Michigan federal court recently declined to dismiss a petroleum additives company’s claim under the Michigan Uniform Trade Secrets Act (“MUTSA”) against several manufacturers and distributors of its fuel additive product, but held that the company’s common law claims of misappropriation and conversion were displaced by the statute.

Polar Molecular Corporation (“Polar”) sued twelve defendants, alleging violations of the Lanham Act, breach of contract, misappropriation of trade secrets under the MUTSA, and common law claims for misappropriation, conversion, and conspiracy. Polar had entered into a series of licensing agreements with certain defendants (the “Amway Defendants”) to make, use, and sell its fuel additive, called “DurAlt” and marketed as “Freedom Fuel.” Pursuant to the agreements, Polar provided the Amway Defendants with confidential formulas for DurAlt. After the parties had a falling-out over failed negotiations concerning royalties and fleet sales, Polar alleges that the Amway defendants provided its confidential formulas to another group of defendants (the “DNS Defendants”), who used the formulas to manufacture and sell a “knock off” of DurAlt called “ProFuel” and marketed as “Freedom 2.” Polar further alleges that the defendants misrepresented to potential customers that they had a licensing agreement with Polar for the manufacture and sale of “Freedom 2.”

The defendants argued that Polar’s claim under the MUTSA should be dismissed because Polar published the DurAlt formula in a patent, and thus it was no longer secret. Polar countered that, during the course of its licensing arrangement with the defendants, it had provided Amway with additional, improved DurAlt formulas that were not disclosed in the patent, including the specific formula at issue in this litigation. The court observed that “[a]lthough information disclosed in a patent cannot be a trade secret,…the existence of a patent covering the general subject matter does not necessarily mean that the patent disclosed the specific formula (the trade secret) used to produce a specific commercial product.” The court then concluded that the allegations in the complaint—that the defendants had obtained confidential information not known to others and that this information gave them a competitive advantage—were sufficient to state a claim for misappropriation of trade secrets under the MUTSA.

However the court also had before it the defendants’ motion for summary judgment on the MUTSA claim. The court found that Polar’s evidence was insufficient to controvert the seven affidavits produced by the Amway Defendants asserting that there had been no unauthorized disclosure of Polar’s confidential information and that ProFuel had been independently developed based on a reverse-engineering analysis of the Freedom Fuel product and the information in Polar’s expired patent. But the court concluded that Polar had shown a need for some discovery to resolve the issue, and thus declined to rule on the summary judgment motion until after a sixty-day period of limited discovery.

The court also dismissed the common law misappropriation and conversion claims, concluding that they were preempted by the MUTSA because Polar had not sufficiently alleged that these claims were based on wrongful conduct independent of the misappropriation that served as the basis for the MUTSA claim. But the court declined to dismiss the conspiracy claim as preempted, to the extent that, rather than being based upon the alleged theft of a trade secret, it was based on “palming-off or unfair competition” arising out of the defendants’ alleged representations that Pro-Fuel was a “knock off” of DurAlt and their alleged false statement that they manufactured it pursuant to a licensing agreement with Polar. The court also declined to dismiss the trademark infringement claim under the Lanham Act and granted summary judgment to the Amway defendants on the breach of contract claim to the extent that it was based upon a certain provision of the licensing agreement.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A recent ruling from the U.S. District Court for the District of Delaware serves as a reminder that, in addition to civil liability, an ex-employee stealing his or her former employer’s trade secrets can face jail time and a fine. On November 6, 2007, former DuPont employee Gary Min was sentenced to 18 months in prison and two years of supervised probation, fined $30,000, and ordered to pay $14,500 in restitution to his former employer. According to a statement released by the company, Min had been a senior scientist. Shortly before he resigned to take a position with another company, he “misappropriated a significant volume of confidential and proprietary DuPont technical documents.” DuPont filed a civil suit against him in federal court, and that “suit was resolved to our complete satisfaction” according to the company's statement. Then, he was indicted for theft, entered a plea of guilty and was sentenced. United States v. Min, No. 1:06-cr-00121-SLR (D.Del.).

• Email This
• Print
• Comments
• Trackbacks
• Share Link

RRK Holding Co. v. Sears, Roebuck & Co., No. 04-CV-3944, Verdict (N.D. Ill. Nov. 19, 2007)

A family-owned Wisconsin company that makes power tools recently won a $21.5 million verdict against Sears, Roebuck and Co. after the jury found the national retailer guilty of stealing the design for the popular Craftsman all-in-one cutting tool. Plaintiff RRK Holding Co., formerly known as Roto Zip, convinced the federal jury in Chicago that Sears had willfully and wantonly misappropriated its trade secrets under the Illinois Trade Secret Act and breached the parties’ nondisclosure agreement.

In the late 1990s, Roto Zip was one of Sears’ major suppliers of the rotary saw. The suit alleged that in 1999, pursuant to a nondisclosure agreement, Roto Zip disclosed to Sears drafts for a next generation, hand-held combination power saw, but after negotiations broke down over price, Sears declined to make a deal. Instead, Sears took the design to a Chinese manufacturer for lower-cost production. Unaware of Sears’ breach of the nondisclosure agreement, Roto Zip continued to develop the tool to bring it to market. While Roto Zip’s finished product sold for $119, Sears’ Craftsman combination tool undercut at just $59. Sales of Roto Zip’s rotary saw declined dramatically after the Sears version launched.

The $21.5 million verdict includes $13.5 million for lost profits and an additional $8 million in punitive damages. Sears plans to appeal. http://www.suntimes.com/news/metro/658969,CST-NWS-tool20.article; http://ip.law360.com/secure/ViewArticle.aspx?Id=41303

• Email This
• Print
• Comments
• Trackbacks
• Share Link

New lawsuit filed in Utah accuses a former research scientist employed by a nutritional supplement company of stealing trade secrets, customers, and employees when forming a rival vegan supplement company.

Systemic Formulas, Inc. claims that its former research director, Daeyoon Kim, is using Systemic’s trade secrets and proprietary information as the basis for its formula in the rival vegan supplement company. In its complaint against Kim, Systemic alleges that Kim executed Confidentiality and Non-Disclosures Agreement intended to protect Systemic’s proprietary information. Systemic alleges that Kim was specifically hired to develop a line of nutritional supplements without the RNA/DNA factor that is considered to be an animal product and therefore less appealing to certain portions of the supplement-consuming public that want a more natural supplement. Kim asserts that his primary duty was an employee manager and claims that Systemic did not have a research facility. However, Systemic’s website states, “Systemic Formulas uses a technologically advanced research and production facility to manufacture the bottling and capsulation process of its product’s raw materials.”

After Kim resigned from Systemic, he requested a modification to the Confidentiality Agreement to allow Kim to manufacture a line of vegan dietary supplements. Systemic alleges that Kim admitted that the proposed line of vegan dietary supplements would represent a line of products in conflict with his obligations under the Confidentiality Agreement and therefore requested a modification. Kim asserts he reached an agreement with Systemic in June regarding his request to develop the vegan supplements and that the lawsuit surprised him.

This case should be full of classic trade secret issues including an analysis of the scope of the confidentiality agreement and Kim’s exposure to proprietary information as a research director or an employee manager. Another area of inquiry will no doubt be whether the confidentiality agreement was altered by an oral or written agreement. Ultimately, the degree of similarity between Systemic’s supplements and Kim’s vegan supplements will be a major factor in this dispute. Another interesting issue may be whether Kim had a certain amount of knowledge before he was an employee of Systemic or whether he developed his vegan formula idea independently from the scope of his duties at Systemic.

This case can be monitored under Case No. 07-CV-159 in the District Court of Utah, Central Division.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The taking and using of customer lists is no longer just a matter for civil proceedings and injunctive relief. On Monday, November 26, 2007, the Georgia Court of Appeals affirmed a jury’s criminal conviction of an individual who took and used her former employer’s master client list to solicit customers, who used company computers to plan her new business venture, and otherwise misappropriated client files.

Defendant Shan DuCom was tried and convicted after it was discovered that she had attempted to wipe out her former employer (C&D)’s property management business completely by converting the property management function to her own, newly created entity. Indeed, DuCom conspired with other employees to start a new firm, used C&D’s computers to create new “letterhead and logos, press releases, solicitation postcards, and various ‘to-do’ lists,” as well as to engage in “massive” copying of information maintained on C&D’s computer hard drives to discs. Her actions were apparently so wanton that the day after she left, the former employers’ team came to work and found the office had “been left barren, ‘cleaned out.’ The computer server was turned off, the hard copies of client files were missing, the fax and credit card phone lines had been sabotaged, and office supplies and equipment were missing.” Once the computer service was restored, C&D found that entire databases were missing and that the C&D website had been transferred to DuCom’s new firm. Three of DuCom’s co-workers resigned and joined her new firm as well. Georgia’s Uniform Trade Secrets Act specifically protects client and customer lists as trade secrets, provided they

(A) Derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(B) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

O.C.G.A. § 16-8-13(a)-(b). The appellate court remarked, in particular, that as a new business, DuCom’s new firm “would have opened its doors with little or no property to manage, and with no property to manage, it would have very little income,” reflecting that her head-start approach runs afoul of the law. Noting the damage that she caused by her acts in stealing the client list, the court affirmed the lower court’s award of restitution based on valuation of C&D’s “book of business.”

DuCom also was convicted of “computer theft” under O.C.G.A. § 16-9-93(a) for using C&D’s computers without authorization. The appeals court reflected that she had downloaded data she was not permitted to use and that the jury could have found “beyond a reasonable doubt that DuCom used a computer, owned by her employer, with knowledge that such use was without authority and with the intention of removing programs or data from that computer and appropriating them for her own use.” Under Georgia law, unauthorized use includes “the use of a computer or computer network in a manner that exceeds any right or permission granted by the owner of the computer or computer network” O.C.G.A. 16-9-92(18). With a broad definition and unassailable facts, the appellate court did not waste much time in discussing its reasoning to affirm.

Although it is not unusual to hear tales of such wanton conduct in preparing to compete in a new business, it is not very often that we hear of criminal prosecutions of such matters at the state level in Georgia. We’ll be keeping our eyes and ears open for any further such cases.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A recent California Court of Appeal decision reaffirmed what those who practice trade secret law already knew, but do not always focus upon, in trade secret litigation --the purported trade secret cannot qualify for protection under California’s trade secret statute unless there is a showing that the information has a demonstrated economic value from not being known to third parties who can obtain economic value from its disclosure or use.

The Court’s decision appears to add an additional wrinkle to this proposition by suggesting that to show independent economic value, one must also demonstrate that there is a discrete advantage to third parties who could utilize the information to the disadvantage of the original owner, thereby creating economic value in its secrecy. Secrecy and usefulness alone will not establish independent economic value.

In Yield Dynamics, Inc. v. Tea Systems Corp., 154 Cal. App. 4th 547 (2007), the California Court of Appeal for the Sixth Appellate District upheld the trial court’s decision granting a former employee’s motion for nonsuit and dismissing a software design company’s trade secret misappropriation claim on the basis that it had failed to demonstrate that segments of its computer source code had independent economic value.

The text of the Court’s entire opinion can be located at this link http://appellatecases.courtinfo.ca.gov/search/case/mainCaseScreen.cfm?dist=6&doc_id=286480&doc_no=H029604

California defines a trade secret under the Uniform Trade Secrets Act as information that “derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from it disclosure or use, and is subject to efforts that are reasonable under the circumstances to maintain its secrecy.” Cal. Civ. Code § 3426.1(d)(1), (2) (2007).

On appeal, the software design company argued that testimony that segments of its source code that were taken would provide “some help” to a programmer to create new routines or to save time programming and that this helpfulness was alone sufficient for a finding of independent economic value in the segments. The appellate court rejected this argument and stated that testimony merely suggesting that the information was useful in carrying out a certain activity does not compel a finding that the information was sufficiently valuable to afford an economic advantage over others.

Appellant also argued that the segments achieved independent economic value because it kept the segments in confidence and entered into non-disclosure agreements with its employees. The Court was unpersuaded and stated that secrecy only exhibits an opinion that secrecy may be advantageous.

The Court also found that appellant failed to establish independent economic value because there was testimony that the segments were not of high quality and were not designed for use by others. The Court noted that the testimony suggested that the segments had no value to anyone outside of the parties themselves. According to the Court, appellant failed to establish that the segments “in and of themselves would provide a competitive advantage to a competitor.” The Court found that there was no evidence that appellant derived independent economic value in keeping the segments from others’ use.

In sum, Yield Dynamics suggests that information lacking value to anyone except its holder that cannot be exploited to gain a competitive advantage by others cannot qualify for trade secret protection despite its secrecy.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Adcor Industries, Inc. v. Bevcorp, LLC, 2007 WL 3104796, No. 06-4260 (6th Cir. Oct. 23, 2007).

Last month, the United States Court of Appeals for the Sixth Circuit affirmed an Ohio federal d istrict court’s grant of summary judgment in a trade secrets misappropriation case. Adcor Industries, Inc. sued Bevcorp, LLC, among other defendants, in the Northern District of Ohio for allegedly misappropriating Adcor’s trade secrets and violating a consent decree entered in 1988.

The consent decree was issued against Baron Haag and Chester Romp, individual defendants in the Adcor case, arising out of a scheme in which Haag and Romp, who owned Brau Manufacturing, Bevcorp’s predecessor corporation, illegally obtained drawings to manufacture replacement parts for beverage fillers created by Crown, the predecessor to Adcor. The main thrust of the decree was that it prohibited Haag and Romp from manufacturing Crown parts. Furthermore, the decree applied to their successors, among others.

In 2003, Adcor sued Bevcorp and the other defendants, claiming that Bevcorp, as successors to Brau, had violated the consent decree and misappropriated Adcor’s trade secrets by using the drawings obtained by Haag and Romp. The district court granted summary judgment on the breach of consent decree claim, finding that Adcor had failed to prove to a reasonable certainty that the owners of Bevcorp had acquired the drawings directly from Haag and Romp. The court also granted summary judgment in the trade secrets misappropriation claim, ruling that the claim was time-barred.

In affirming the district court’s decision, the Sixth Circuit pointed to Ohio’s Uniform Trade Secrets Act, which provided that a trade secret misappropriation claim must be brought within four years of the discovery of the misappropriation, or when the plaintiff should have reasonably discovered it. The statute further provided that a continuing misappropriate constituted a single claim. The court found that there was undisputed evidence that Adcor had inquiry notice of the misappropriation more than four years before the suit was commenced. Furthermore, the court noted that there was evidence in the record that Adcor’s delay in commencing the lawsuit was a “strategy deadlock.”

Finally, the court ruled that Adcor had failed to prove by clear and convincing evidence that the defendants had violated the consent decree, agreeing with the district court that there was not sufficient evidence to conclude that the owners of Bevcorp had obtained the drawings from Romp and Haag.

Judge Karen Nelson Moore concurred in part and dissented in part, arguing that Adcor had presented evidence that there were genuine issues of material fact as to when Adcor should have known that the defendants misappropriated the drawings.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Bob Fernandez of the Philadelphia Inquirer reports that scientist Dr. Manhua Mandy Lin has taken a significant step in clearing her name of trade secret allegations, well, at least in the opinion of one government employee. Lin, who has been engaged in a protracted legal battle with her former employer, materials innovator Rohm & Haas Co., recently received word from a Department of Energy chemist, Charles Russomanno, of his determination that she did not steal trade secrets to develop her innovative procedure for the production of methacrylic acid. Despite this apparent victory, it does little to advance Lin’s interests in her pending litigation.

In November 1999, Lin resigned from her position with Rohm & Haas pursuant to a settlement agreement reached as a result of allegations that she was the victim of unlawful discrimination while at the company. Following her departure from Rohm & Haas, among other legal disputes that have ensued, the company alleged that Lin misappropriated its trade secrets in engaging in her independent research for her company EverNu Technology L.L.C. Montgomery County Court Judge Bernard A. Moore has refused to order an independent scientific assessment in the case and has imposed daily fines of $200 on Lin for her failure to release her research to Rohm & Haas. In total, she has already been penalized more than $200,000.

Worried that her business was in jeopardy due to Rohm & Haas’s suggestion that the Department of Energy was in the process of investigating Lin, she sent confidential court submissions to the Department of Energy in the hopes of avoiding agency action. Although Russomanno’s review of the documents resulted in a finding that Lin did not misappropriate any trade secrets, it remains to be seen whether this conclusion will educe any measurable benefit to Lin in the courtroom. Presumably, Russomanno’s determination will either help spur settlement negotiations or, ultimately, just represent another hollow victory in the course of this seemingly never ending litigation.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Woburn Daily Times Chronicle has reported that iRobot Corp., a Burlington, MA corporation, has been granted a preliminary injunction in the District of Massachusetts in its case against Robotic FX, Inc., and its founder and president, former iRobot employee Jameel Ahed. iRobot is suing Ahed and Robotic for misappropriation of trade secrets.

iRobot’s lawsuit alleges that Robotic used iRobot’s trade secrets to develop the Negotiator, a replica of iRobot’s PackBot robot. iRobot describes the PackBot robots as “robots that perform dull, dirty or dangerous missions in a better way.” The PackBots were the first ground robots to be used in combat by U.S. forces.

The U.S. Army had a $280 million contract with Robotic for use of the Negotiator, but set aside the contract in October pending a re-examination of Robotic’s ability to deliver the Negotiator “as a responsible contractor.” The Army has notified both Robotic and iRobot that if Robotic is unable to provide the Negotiator, the contract will be awarded to iRobot instead.

In issuing the preliminary injunction, U.S. District Judge Nancy Gertner found that iRobot had shown a likelihood of success on the merits of its case. The exact terms of the order are under seal so as to further protect iRobot’s trade secrets; however, iRobot reports that the injunction prohibits Robotic from using “critical features” in the design of the Negotiator.

iRobot has a separate lawsuit pending in the Northern District of Alabama for patent infringement. iRobot sought the injunction in Massachusetts after discovering that Robotic had attempted to destroy evidence in both the Alabama case and the Massachusetts case. Judge Gertner ordered a trial date of no later than April 7, 2008.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

It appears that the Georgia Court of Appeals narrowly interpreted the phrase “on behalf of” in a non-solicitation clause to prevent application of a non-solicitation provision to support a breach of contract claim. Although the parties did not dispute that the Clause applied to clients who transacted business with the plaintiff, Atlantic Insurance Brokers LLC (“AIB”), and dealt with the agent (“Phillips”) during the course of the relationship, the Court nonetheless concluded that there was no breach of the Agreement.

The Clause provided, in pertinent part, that

Phillips covenants that during the term of this Agreement, and for a period of two (2) years following termination of this Agreement for any reason, he shall not at any time, directly or indirectly, solicit, sell, attempt to divert or provide competing insurance services or coverages to any insureds who transacted business with AIB and with whom Phillips dealt with on behalf of AIB and had material contact . . . .

Atlantic Ins. Brokers LLC v. Slade Hancock Agency Inc., Case No. A07A1177, 07 FCDR 3002 ( 10/12/07).

In some unusual facts, the client at issue, 24/7 contacted Phillips for assistance in procuring insurance after Phillips left AIB but before the Agreement terminated. He referred the business to AIB to assist him in procuring insurance. AIB assisted in procuring the insurance for 24/7 (splitting the commission with Phillips’s new employer), but the insurer declined to renew the policy the following year. 24/7 again asked Phillips for help, and he brokered insurance for them through his new company, without assistance from AIB. AIB sued, alleging that 24/7 was an insured covered by the Clause, and thus Phillips breached the agreement. The Court rejected AIB’s claim because AIB did not ask Phillips to work with 24/7. In other words, it appears that the Court may have equated the phrase “on behalf of” to be equivalent to “at the request of.” Although the factual scenario is highly unique, one should consider whether through its interpretation of the agreement the Court created unusual defenses in upcoming breach of contract cases about the meaning of “on behalf of.”

• Email This
• Print
• Comments
• Trackbacks
• Share Link

InstitutionalInvestor.com reported that the National Futures Association (“NFA”) has issued the new rules, “to prevent members from using illegitimate means to gain a competitive advantage if doing so would harm customers.”  InstitutionalInvestor.com noted, click here to view article, that new Compliance Rule 2-4 is directed at activity such as:

• Misusing customer information, for example by misappropriating social security numbers or deliberately violating the firm's privacy statement.
• Disclosing customer orders before execution.
• Obtaining or trying to obtain information disclosing a commodity trading adviser's historical trading positions without the CTA's permission.

 According to the article, Rule 2-4 became effective last month; however, the Securities and Exchange Commission has yet to rule on it.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

WebWire reports: http://www.webwire.com/ViewPressRel.asp?aId=50093

Economic Espionage and Theft of Trade Secrets – On Sept. 26, 2007, Lan Lee and Yuefei Ge were charged in a superseding indictment the Northern District of California on charges of economic espionage and theft of trade secrets. The indictment alleges that the pair conspired to steal trade secrets from two companies and created a new firm to create and sell products derived from the stolen trade secrets. The charges also allege that Lee and Ge attempted to obtain funds for their new company from the government of China, in particular China’s General Armaments Division and China’s 863 Program, otherwise known as the National High Technology Research and Development Program of China. The case was investigated by the FBI.

Strategy Page also discussed the case recently: http://www.strategypage.com/htmw/htintel/articles/20071002.aspx.

• Email This
• Print
• Comments
• Trackbacks
• Share Link