texas-imageApplying new Texas Supreme Court precedent, a Texas Court of Appeals recently held that a six-year-old cease-and-desist letter alleging trade-secret misappropriation did not constitute proof of knowledge for purposes of the discovery rule. By allowing for the accrual date of this claim to be deferred, the court appears to have made it easier for trade-secret plaintiffs to overcome the statute-of-limitations defense in the future.

According to the opinion issued by the First Court of Appeals in Houston, Garner Environmental Services, Inc. (“Garner”) provides disaster-response training and related services. In 2008, Garner’s then-vice president quit, formed a competing company called First in Rescue, Safety and Training, LLC (“FIRST”), and hired several Garner employees. In January 2009, Garner sent FIRST a letter accusing it of wrongfully using Garner’s customer lists, contacts, and other trade secrets to solicit Garner’s customers. Garner based these allegations solely on the fact that, shortly before sending this letter, Garner had learned that a client scheduled to attend one of Garner’s training classes switched at the last minute to attend a class held by FIRST instead. Later that month, FIRST responded that it had not stolen Garner’s trade secrets because Garner’s customer lists and contacts were readily available to the general public, could be replicated from memory, and were therefore not confidential information in the first instance. FIRST’s letter also pointed out that none of the former Garner employees had entered into non-compete or non-solicitation agreements while employed by Garner, so they were not prohibited from contacting Garner’s customers. Apparently, this mollified Garner because it did not file suit against FIRST at this time.

Fast-forward nearly five years: In late 2013, FIRST filed suit against a former employee that had gone to work for another competitor. At an unspecified time in 2014, after reviewing documents the employee had filed in that suit, Garner determined that FIRST had unlawfully used Garner’s confidential information. So, in July 2015—more than six years after sending the initial cease-and-desist letter in January 2009—Garner filed suit against FIRST asserting, inter alia, a claim for misappropriation of trade secrets. FIRST filed for summary judgment, arguing that all of Garner’s claims were barred by the statute of limitations because it discovered or should have discovered the nature of its injury in January 2009. Garner argued in response that the discovery rule applied and, as such, limitations did not begin to run until it discovered the injury in 2014 when it reviewed the documents filed in connection with the lawsuit FIRST’s former employee had asserted against a third party. The trial court granted FIRST’s motion and dismissed Garner’s claims with prejudice.

On appeal, the sole issue before the Court of Appeals was when Garner discovered, or in the exercise of reasonable diligence should have discovered, the nature of its injury. Under the discovery rule, the accrual of a claim is deferred until the injured party learned of, or in the exercise of reasonable diligence should have learned of, the wrongful at causing the injury. Garner argued that the court of appeals was bound by the Texas Supreme Court’s recent decision in Southwestern Energy Production Co. v. Berry-Helfand, 491 S.W.3d 699 (Tex. 2016), which involved the discovery rule in the context of trade-secret misappropriation. In that case, the court held that surmise, suspicion, and accusation, even if sufficient to make one aware of a potential for misuse of trade secrets, are not facts that in the exercise of reasonable diligence would lead to the discovery of theft of trade secrets. Furthermore, the Southwestern court held that the defendant asserting the limitations defense “ha[d] not identified any evidence revealing what [the plaintiff] would have discovered had she made further inquiry.”

Finding “no meaningful differences between Southwestern and this case,” the Garner court noted that although Garner alleged in its January 2009 letter that FIRST had stolen its trade secrets, it had no facts to support these allegations other than mere suspicion that FIRST was competing with Garner’s clients. As in Southwestern, accusations were insufficient to establish knowledge of injury, the discovery rule applied. The Court of Appeals further noted that FIRST did not explain why it is entitled to have Garner’s statements of accusation construed as proof of knowledge while having its own statements of denial construed as “lawyer posturing” upon which Garner could not reasonably rely. The court thus rejected FIRST’s attempt to have its cake and eat it too.

FIRST also argued that Garner could have discovered the injury had it conducted presuit depositions under Texas Rule of Civil Procedure 202, which it did not do. In order to take a presuit deposition under Rule 202, the petitioner must show that there is a reason that the deposition must occur before the anticipated lawsuit is filed, and not after. The Court of Appeals, however, reiterated that Garner lacked any proof of its suspicions and thus had no basis to establish that FIRST had any information in its possession that could justify a Rule 202 deposition. A petitioner is also entitled to conduct a Rule 202 deposition if it demonstrates that the likely benefit of the requested deposition to investigate a potential claim outweighs the procedure’s burden or expense. The Court of Appeals stated: “To allow a rule 202 deposition in th[is] situation would require the other party to reveal the confidential information in their possession,” which the court concluded was too heavy a burden on FIRST. Thus, FIRST failed to establish a date (prior to Garner’s stated discovery date in 2014) by which Garner knew or, with reasonable diligence, could have discovered the nature of its injury. Accordingly, the Court of Appeals reversed the judgment of the trial court, and remanded for further proceedings.

The take-away from this case is that potential plaintiffs who, although suspicious, lack concrete proof that a potential defendant has misappropriated its trade secrets, will, on account of the Southwestern and Garner decisions, likely find it easier to assert the discovery rule to defer the accrual date of its misappropriation claim. Moreover, according to Garner, such potential plaintiffs will find it difficult, if not impossible, to meet their burden to establish the necessity of the information to be entitled to conduct a Rule 202 presuit deposition. It remains to be seen, however, if this case might decrease the use of Rule 202 depositions in trade-secret cases. Still, the boot-and-suspenders approach of attempting a Rule 202 deposition may be the better course to preserve the legal rights of a potential misappropriation plaintiff.

Garner Envtl. Services, Inc. v. First In Rescue, Safety & Training, LLC, 01-16-00388-CV, 2016 WL 7671377 (Tex. App.—Houston [1st Dist.] Dec. 22, 2016, no. pet. h.)

shutterstock_521249434The United States International Trade Commission (“ITC”) is an independent, quasijudicial Federal agency with broad oversight over trade matters.  In addition to trade practices such as dumping and subsidies, the ITC adjudicates matters involving the misappropriation of trade secrets and theft of intellectual property.  Specifically, Section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337(a)(1)(A), prohibits “unfair methods of competition and unfair acts in the importation of articles … into the United States.”

In 2012, the Federal Circuit—which has jurisdiction over all ITC matters—was asked to consider whether the ITC had authority to investigate the misappropriation of trade secrets protected by domestic law when the misappropriation occurred exclusively in China.  See Tianrui Group Co. Ltd. v. ITC, 661 F.3d 1322 (Fed. Cir. 2011).  The Federal Circuit answered in the affirmative and held that the ITC had authority to “investigate and grant relief based in part on extraterritorial conduct insofar as it is necessary to protect domestic industries from injuries arising out of unfair competition in the domestic marketplace.”  Tianrui, 661 F.3d at 1324.  Following Tianrui, domestic companies have used the ITC to redress misappropriation of trade secrets far from American shores so long as the misappropriation resulted in the importation of products into the US causing domestic injury.  For further background on the Tianrui decision, please see our prior post here.

The ITC’s extraterritorial authority established in Tianrui is once again being challenged.  Recently, in another case involving the misappropriation of American trade secrets in China, the Supreme Court was asked to decide whether Section 337 of the Tariff Act does, in fact, authorize the ITC to investigate misappropriation that occurred entirely outside the United States.  See Sino Legend (Zhangjiangang) Chemical Co. Ltd. v. ITC, cert petition available here.  The crux of Sino Legend’s argument is that for a statute to apply abroad, there must be express congressional intent.  Not surprisingly, Sino Legend argues that such intent is missing from Section 337 of the Tariff Act.  In Tianrui, the Federal Circuit held that such intent was manifest in the express inclusion of “the importation of articles .. into the United States” which evidenced that Congress had more than domestic concerns in mind.  Tianrui, 661 F.3d at 1329.  To prevail, Sino Legend must convince the Supreme Court to not only hear its case, but to overrule Tianrui’s holding that such intent is evident from the “importation of articles” clause in the Act.

Sino Legend’s petition comes at an interesting time.  The Supreme Court is only 8 justices following the death of Justice Scalia, perhaps making it even more difficult for cert to be granted.  At the same time, trade with China was a repeat theme of President-Elect Trump’s presidential campaign.  Companies with operations abroad should closely monitor the progress of Sino Legend, as reversal of Tianrui will result in the removal of a powerful tool in a trade secret owner’s arsenal against extraterritorial misappropriation of trade secrets.

webinarWe are pleased to announce the webinar “Proving-Up Trade Secret Misappropriation: Best Practices and Tales from the Trenches” is now available as a webinar recording.

In Seyfarth’s final installment in the 2016 Trade Secrets Webinar Series, James McNairy and Justin Beyer, joined by computer forensics expert Jim Vaughn of iDiscovery Solutions, focused on best practices for assembling the evidence most often needed to prosecute a claim for misappropriation of trade secrets

As a conclusion to this well-received webinar, we compiled a summary of three takeaways that were discussed during the webinar:

  1. The first step in prosecuting trade secret misappropriation starts with identifying your trade secret information, maintaining its confidentiality, and putting in place safeguards such as robust confidentiality agreements, computer use and access policies, and exit interviews that are tailored to flag any exfiltration of data by high risk employees or business partners with whom your company is parting ways. Diligence on the front end will better alert your organization of potential data theft and enable it to secure the data, should it be misappropriated.
  2. As part of your investigation of potential trade secret misappropriation, remember to conduct a complete audit of devices and sources of data storage and transmission to ensure nothing is overlooked. While doing so, it is critical to maintain the forensic integrity of the devices and data to allow the best chance of admitting the information into evidence in any litigation.
  3. Efficiently organizing the right team to prosecute trade secret theft is critical. The “team” most often includes human resources professionals (to authenticate key agreements, policies, dates of employment etc.), a senior manager or executive (who can validate the existence of the trade secret, its value, the measures taken to maintain secrecy etc.), senior managers who worked with the suspected misappropriators (who can attest to access, use, and possession of the at issue information), in-house IT professionals (who can lay the foundation for devices, data, and access rights of the suspected misappropriators), and an independent computer forensics expert (who can objectively present the facts concerning data accessed, by whom, through what means, and explain any technical nuance to “connect the technical dots” of the bad actor(s) conduct).

webinarOn Tuesday, December 13, at 12:00 p.m. Central, Seyfarth attorneys, James McNairy and Justin Beyer, joined by computer forensics expert Jim Vaughn of iDiscovery Solutions, will present the final installment of the 2016 Trade Secrets Webinar Series. This program will provide attendees with best practices for assembling the evidence most often needed to prosecute a claim for misappropriation of trade secrets.

Topics covered will include:

  • Preventative measures to alert companies of potential trade secret theft
  • Once theft is suspected, steps for identifying and preserving evidence
  • Considerations for deciding on forum and state vs. federal court
  • Injunctive relief: what to seek and how to be effective
  • Early discovery: foundation for preliminary injunction and fleshing out case theme

Please join us for this informative webinar.

register

On Tuesday, December 11, 2013 at 12:00 p.m. Central, Seyfarth attorneys Michael D. Wexler, Molly M. Joyce and Justin K. Beyer will present the twelfth and final installment in our 2013 Trade Secrets webinar series, focusing on criminal liability for trade secret misappropriation.

The topics they will cover include

  • Trade secret misappropriation: what it is and how does it happen
  • An introduction to criminal liability under Economic Espionage Act and the Computer Fraud and Abuse Act
  • A discussion of recent court decisions finding criminal liability for violation of these Acts
  • How to work with criminal prosecutors to compliment your civil claims for trade secret misappropriation
  • Best practices to avoid misappropriation and what to do when you suspect misappropriation has occurred, including a discussion of forensic investigation options

Our panel consists of attorneys with significant experience litigating trade secret issues, advising clients on trade secret protection, drafting confidentiality and restrictive covenant agreements, and conducting trade secret audits. This CLE is recommended for management, HR personnel and in-house counsel.

There is no cost to access this program, however, registration is required.

If you have any questions, please contact events@seyfarth.com.

*CLE credit is available. Seyfarth has applied for CLE credit in IL, NY, and CA. If you would like us to pursue CLE credit in any additional states, please contact events@seyfarth.com. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.

The United States District Court for the Eastern District of Virginia recently denied a motion to dismiss a counterclaim for violation of Virginia’s Uniform Trade Secrets Act (“VUTSA”), holding that the counterclaim sufficiently alleged trade secret misappropriation based on improper acquisition of a trade secret, even in the absence of allegations of use or disclosure.

Factual allegations:

Plaintiff Jacqueline Marsteller was a Senior Vice President and Account Executive employed by defendant Electronic Consulting Services, Inc. (“ECS”).  On November 3, 2011 ECS informed Marsteller that she was being terminated and that her last day of employment would be December 31, 2011 in order that she would be eligible to receive a $95,000 bonus.  The bonus was indeed paid to Marsteller on December 30, 2011.  Marsteller began work for a competitor to ECS in December 2011.

Procedural history:

Almost a year and a half after Marsteller left ECS, she sued her former employer on grounds not identified in the court’s opinion.  ECS filed a six-count counterclaim alleging, among other things, that after Marsteller was notified she was being terminated, she misappropriated various trade secrets by transferring information to an external storage device as well as e-mailing information to her personal e-mail account in violation of VUTSA.

Motion to dismiss: 

Marsteller moved to dismiss the counterclaims, including the VUTSA claim on the grounds that ECS failed to allege that: (1) the alleged trade secrets derived independent economic value; and (2) Marsteller used the trade secret information. 

In ruling on the motion, the court explained that a claim for violation of VUTSA must allege that: (1) the information in question constitutes a trade secret, and (2) the defendant misappropriated it.

The court further explained  that to constitute a “trade secret” under VUTSA, information must: (1) derive independent economic value; (2) not be known or readily ascertainable by proper means; and (3) be subject to reasonable efforts to maintain its secrecy.   The court concluded that ECS validly pleaded the information allegedly taken by Marsteller was trade secret because it alleged that: (1) the information derives independent economic value because ECS spent time, effort and money developing the information and the information would allow a competitor to know ECS’s business development and bidding plans, target its contracts and access its unique format for summarizing contract opportunities; (2) the information is not readily ascertainable by proper means as it reflects ECS’s internal strategies and plans not publicly available; and (3) ECS took reasonable steps to protect the information by storing it on an internal password protected server.

With respect to “misappropriation,” the court stated that VUTSA recognizes two kinds: (1) improper acquisition of a trade secret; and (2) disclosure or use of a trade secret.  Improper acquisition means “acquisition of a trade secret by a person who knows or has reason to know that the trade secret was acquired by improper means.”   “Improper means” is defined under VUTSA as including “theft, bribery, misrepresentation, use of a computer or computer network without authority, breach of a duty or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.”  The court also cited case law for the proposition that “[u]nder the VUTSA, improper acquisition of a trade secret, even in the absence of allegations of use or disclosure, is sufficient to state a claim.”  Systems 4, Inc. v. Landis & Gyr, Inc., 8 Fed. Appx. 196, 2000 (4th Cir. 2001) (improper means alone can give rise to misappropriation claim) (unpublished). 

In analyzing the counterclaim, the court concluded that ECS’s allegation that Marsteller transferred and retained ECS’s internal documents outside of the scope permitted by her employment, including transferring proprietary documents to an external storage device, sufficiently stated a claim for “misappropriation” through improper acquisition.

Alternative basis for ruling:

Interestingly, the court also noted (in what is arguably dicta) that ECS’s VUTSA claim contained “plausible allegations” that Marsteller also used certain misappropriated ECS information.  The court apparently reached this opinion based on ECS’s allegations that: (1) the ECS information in question was developed in order to obtain ISO certification; (2) ISO certification requires development and implementation of “business processes” required by ISO standards: (3) Marsteller began working for her new employer as the Vice President of Business Process Engineering in December 2011; and (4) Marsteller’s new employer obtained ISO certification in July 2012.

The court stated that these allegations raised a “reasonable inference” that Marsteller used ECS’s information and that it was “plausible, not just possible, that Marsteller used or disclosed” ECS information to benefit her new employer.

As a somewhat related side note, Virginia does not recognize the doctrine of inevitable disclosure.  Gov’t Tech. Servs. v. IntelliSys Tech. Corp., 1999 WL 1499548 (Va. Cir. Ct. Oct. 20, 1999).

Takeaway:

Having survived the motion to dismiss, it is unclear where ECS goes from here.  Given that ECS waited more than a year and a half after Marsteller’s departure (and her new employer’s ISO certification) to raise its allegations, ECS will likely have an uphill battle obtaining any injunctive relief.  The court will presumably also be unlikely to award damages if there is no evidence Marsteller used any of ECS’s information.    

What can employers do to avoid ending up in this situation?  There are a number of safeguards and procedures that companies should consider as part of “best practices” in preventing trade secret misappropriation: (1) emphasizing to workers the importance of protecting the company’s confidential, proprietary and trade secret information; (2) using non-disclosure and trade secret protection agreements to protect sensitive information; (3) continued education to remind workers regarding their obligations to protect company information; (4) employing reasonable protective measures to safeguard trade secrets; and (5) using exit interviews and certifications requiring departing workers to confirm they do not have any company trade secrets or confidential or proprietary information.

When misappropriation is suspected, it is essential not to delay to do a thorough factual and legal investigation before filing any misappropriation claim.  Such investigation should identify any evidence showing: (1) what specific trade secrets are at issue; (2) what reasonable measures were taken to maintain their secrecy; (3) how the departed employee was able to acquire the trade secrets; (4) any threat of misappropriation or damages arising from the misappropriation.  If it is suspected the trade secrets were transferred electronically, it is important that a forensic examination of relevant computers and/or other electronic devices be performed by experienced experts.  Be mindful that using in-house IT personnel may create evidence spoliation issues. 

Finally, if evidence of misappropriation is found, delaying legal action is likely to reduce the chances of obtaining injunctive relief to stop impermissible use of the misappropriated trade secrets, and thereby reduce your chances of preventing harm to your company.

The California Uniform Trade Secrets Act (“CUTSA”) allows for an award of attorney’s fees to the prevailing party on a trade secret misappropriation claim. The statute permits award of attorney’s fees to a plaintiff for a defendant’s “willful and malicious” misappropriation and to a defendant when a plaintiff makes a claim in “bad faith”:

“If a claim of misappropriation is made in bad faith, a motion to terminate an injunction is made or resisted in bad faith, or willful and malicious misappropriation exists, the court may award reasonable attorney’s fees and costs to the prevailing party.…”

Civil Code section 3426.4.

Since there are relatively few published decisions addressing attorney’s fees awards to defendants under the statute, a review of the recent unpublished decision in All American Semiconductor, LLC v. APX Technology Corp., No. G 046605, 2013 Cal. App. Unpub. LEXIS 5718, (Cal. App. 4 Dist. Aug 18, 2013) may serve as a good opportunity to remind prospective plaintiffs of the need to ensure they have a good faith basis for any misappropriation claim before filing suit.

The plaintiff in All American Semiconductor had purchased all the assets of a bankrupt company, and, based on statements in the bankruptcy bid solicitation materials, erroneously believed it had purchased the rights to certain proprietary memory module designs. When the plaintiff was unable to locate any design plans for the memory modules among the bankrupt company’s assets, and no paper files whatsoever, the plaintiff grew suspicious. Upon finding empty directories on the bankrupt company’s computers, the plaintiff concluded that those empty directories must have contained data related to the designs and someone must have erased the data. Based on these mistaken beliefs, the plaintiff filed a nine-count complaint against Richard McCauley, the bankrupt company’s former general manager and vice president, his new company, and APX Technology Corporation — the company that actually designed the memory modules. Among other things, the complaint alleged misappropriation of trade secrets based on the defendants’ supposed misappropriation of the memory module designs.

Discovery, including several depositions, revealed no evidence that the bankrupt company had ever designed any memory modules, let alone had any trade secrets. To the contrary, McCauley testified the bankrupt company did not and could not design the memory modules, as it did not have the software or electrical engineers to do so. Instead, McCauley testified it merely assembled the modules based on designs provided by APX. APX’s president testified that APX owned the designs and provided them to memory module assemblers, including the bankrupt company, on a non-exclusive basis. Finally, an electrical engineer at APX testified he had designed the memory modules using complex computer software.

Based on this evidence, APX moved for summary adjudication on the misappropriation claim. The plaintiff opposed, citing testimony from a former shipping clerk of the bankrupt company stating he believed, without foundation, another employee at the bankrupt company designed memory modules. That employee, however, testified he was not an engineer and did not design the modules. The plaintiff also claimed to have found some evidence on the bankrupt company’s computers of software that could have been used to design memory modules, and offered other speculative testimony suggesting it would have been possible for the bankrupt company to design memory modules if it had the right software and tools, but that he had no knowledge of it ever doing so. Finally, the plaintiff blamed McCauley for its lack of evidence, arguing his new company controlled the bankrupt company’s employees and suggested that they therefore would not provide evidence adverse to their new employer.

Having failed to offer any evidence the bankrupt company ever designed memory modules, the plaintiff submitted a supplemental opposition claiming instead the bankrupt company had purchased the designs from APX citing vague invoices for nonrecurring engineering charges.

The trial court granted summary adjudication in favor of APX and awarded attorney’s fees for the plaintiff’s bad faith prosecution of the misappropriation claim. On appeal, the Court held that the trial court correctly found that the plaintiff failed to provide any evidence it owned a trade secret. Specifically, the plaintiff failed to identify what constituted a trade secret in any alleged memory module design. Instead, the Court held, the plaintiff attempted to show it could have designed memory modules, based on an inference that some scrubbed data could have been software that could be used to design memory modules, and that former engineers could have designed such modules. Missing was any evidence the bankrupt company actually designed the memory modules, or evidence of what part of the design was trade secret and unknown to the public and competitors.

In affirming the attorney’s fee award, the Court explained that the statute does not define “bad faith” and recited case law holding it requires both “objective speciousness” and “subjective bad faith.” “Objective speciousness exists where the action superficially appears to have merit but there is a complete lack of evidence to support the claim.” FLIR Systems, Inc. v. Parrish, 174 Cal. App. 4th 1270 (2009). “Subjective bad faith” will “rarely be susceptible of direct proof; usually the trial court will be required to infer it from circumstantial evidence.’ ” Gemini Aluminum Corp. v. California Custom Shapes, Inc., 96 Cal. App. 4th 1249, 1263 (2002). Further, subjective bad faith “may be inferred where the specific shortcomings of the case are identified by opposing counsel, and the decision is made to go forward despite the inability to respond to the arguments raised.” Id. at 1264. Subjective bad faith exists where a plaintiff intends to cause unnecessary delay, filed the action to harass, or harbored other improper motives. FLIR Systems, 174 Cal. App. 4th at 1278. Finally, “[a] court may find subjective misconduct by relying on direct evidence of [the] plaintiff’s knowledge during certain points in the litigation and may also infer it from the speciousness of [the] plaintiff’s trade secret claim and its conduct during litigation.” Computer Econs., Inc. v. Gartner Group, Inc., No. 98-CV-0312 TW (CGA), 1999 U.S. Dist. LEXIS 22204, at *18-19 (S.D. Cal. Dec. 14, 1999).

In its analysis, the Court found the trial court could reasonably infer objective speciousness from the plaintiff’s lack of evidence of what constituted its alleged trade secret designs and that the designs were not known to the public or others in the industry. In addition, APX repeatedly argued from the outset that the plaintiff could not identify any trade secrets because the bankrupt company never designed memory modules. Further, the trial court could reasonably infer subjective bad faith from the plaintiff’s prosecution of its claims without evidence, and its shifting theories in opposition to summary adjudication. Finally, the Court dismissed the plaintiff’s argument that the trial court erred in not considering self-serving declaratory statements from its president claiming that it filed the lawsuit “in good faith and without improper motive.” Bad faith cannot be avoided simply by claiming “it appeared at the time of the filing of the action some evidence would be obtained in discovery that would support a misappropriation claim.” SASCO v. Rosendin Electric, Inc., 207 Cal. App. 4th 837 (2012).

Tips for Avoiding “Bad Faith” Misappropriation Claims

All American Semiconductor is an unusual case in that the plaintiff was unable to identify its alleged trade secrets because it never actually received the assets it believed it purchased from the bankrupt company. However, there are still lessons prospective plaintiffs can learn from this case to avoid a similar unpleasant fate.

Most trade secret misappropriation claims arise when an employee with access to trade secrets leaves an employer to go to work for a competitor. Fearing the departed employee will use the former employer’s trade secrets to compete, the initial reaction is often to quickly file suit and seek injunctive relief. Before doing so, it is important to recognize that California has rejected the “inevitable disclosure” doctrine. Schlage Lock Co. v. Whyte, 101 Cal. App. 4th 1443, 1447 (2002). Thus, mere suspicion of misappropriation is not enough. SASCO, 207 Cal. App. 4th at 844. It is therefore essential to do a thorough factual and legal investigation before filing any misappropriation claim. Such investigation should identify any evidence showing: (1) what specific trade secrets are at issue; (2) what reasonable measures were taken to maintain their secrecy; (3) how the departed employee was able to acquire the trade secrets; (4) any threat of misappropriation or damages arising from the misappropriation. If it is suspected the trade secrets were transferred electronically, it is important that a forensic examination of relevant computers and/or other electronic devices be performed by experienced experts. Be mindful that using in-house IT personnel may create potential spoliation issues. Finally, if a defendant identifies alleged problems with a trade secret claim, plaintiffs would be wise to recognize that continuing to pursue the claims without being able to address the identified problems may expose them to bad faith claims if things go south. Gemini Aluminum Corp., 96 Cal. App. 4th at 1264.

By Robert Milliganand Jeffrey Oh

As highlighted in our recent webinar, The New Risk: Employee Theft Of Trade Secrets And Confidential Information In The Name Of Protected Whistleblowing, companies continue to struggle with anonymous whistleblowers in the Internet and social media age, including anonymous individuals who post trade secrets and other intellectual property on the Internet. Courts are often relunctant to require internet service providers ("ISPs") to disclose account holder information pursuant to a plaintiff’s third party subpoena in a John Doe action against the alleged infringer/misappropriator without a strong showing on the merits by the plaintiff.

In a recent federal case from Illinois, Pacific Century International, Ltd. v. John Does 1-37, No. 12 C 1057, Chief Judge James F. Holderman of the U.S. District Court for the Northern District of Illinois granted in part and denied in part plaintiff’s motion to compel ISPs’ compliance with previously issued subpoenas.

Over the past decade, US courts have seen a marked rise in copyright lawsuits as media companies scramble to protect their intellectual property from digital infringement. Within this landscape, no industry has been more litigious than that of adult entertainment and pornography. To date, over 118 suits have been filed on behalf of producers of pornographic movies with over 15,000 defendants being named in just the last year and a half. Given the anonymity accorded to Internet users, copyright holders are often only able to identify alleged infringers by their IP addresses, requiring them to file against anonymous John Does. During the ensuing discovery, the plaintiffs in these suits often seek subpoenas from ISPs demanding information on the individuals associated with anonymous IP addresses. However, despite their frequency the validity of these subpoenas is often challenged by ISPs.

In Pacific Century International, Ltd., the court held that the subpoenas for information linked to IP addresses specifically named in the suit with direct evidence of infringement should be enforced, but that subpoenas seeking information related to non-party IP addresses should not. The ruling encompasses six cases, which were consolidated due to their similarities, stemming from four separate cases filed in varying Districts over the infringement of copyrighted pornographic videos shared online using the BitTorrent peer-to-peer (“P2P”) file-sharing protocol.

In its analysis, the court outlined what it sees as the typical holding pattern for suits of this nature: (1) the plaintiffs sue large numbers of Doe defendants in a single suit; (2) they obtain through subpoena the identities linked to IP addresses; (3) they threaten the identified parties with legal action, often leveraging them into settlement due to the stigma associated with pornography. Once a subpoena is issued, ISPs are required to inform Doe defendants of the case prior to divulging their information in order to give them the opportunity to dispute the claim. The court noted two arguments used by previous Doe defendants that would compel the court to quash the subpoenas. First, if the Doe defendant does not reside in “the judicial district in which the action was brought” then they may argue that they are not subject to the personal jurisdiction of the court. Second, “the Doe defendants [can] contend that joinder of the defendants is improper under Federal Rule of Civil Procedure 20(a)(2).”

To skirt this judicial hurdle, the plaintiffs in three of the four underlying cases named a single defendant connected to an IP address located in the district where each respective suit was filed, but were seeking through discovery the identities of individuals linked to non-party IP addresses, or those that were not joined as defendants. The ISPs argued, and the courts agreed, that “the identity [sic] of individuals connected with non-party IP addresses is not relevant to the pending claims.” Allowing the plaintiffs to justify the subpoena based on the identities’ associated with non-party IP addresses relevance to “claims against future defendants who have not yet been sued” was not something the court was willing to accept. The plaintiffs’ claim of civil conspiracy was also rejected in all of these cases due to the anonymous nature of the BitTorrent protocol in which users are blind to the identities of fellow users “and have no connection to them beyond the mere fact that they downloaded the same file.” The court also struck down the civil conspiracy claim based on the plaintiffs’ failure to plead “the existence of an agreement among the alleged conspirators.” Based on this reasoning, the court denied the motion to compel the ISPs to comply with the five subpoenas where the identities of non-party ISPs were sought, quashing all five completely.

In the last of the four underlying cases, the plaintiffs named 37 specific defendants with IP addresses located within the jurisdiction of the U.S. District Court for the Southern District of Texas in which plaintiffs brought suit. The corresponding subpoena sought the identity of a single Doe defendant. In evaluating the motion to compel for this case, the court found that the subpoena would be a minimal burden on the ISP and was therefore not subject to rejection based on the court’s obligation to protect non-party witnesses from “undue burden.” Fed. R. Civ. P. 45(c)(3)(A)(iv). Similarly, questions of relevancy and personal jurisdiction were set aside given that the IP address in question was already a named defendant who resides within the district’s jurisdiction. Although the joinder issue of whether the plaintiffs are justified in bringing the suit against these multiple defendants remains, the court reasoned that it was not relevant to the motion to compel the ISPs to comply with the subpoena. The court noted that ISPs have an obligation to notify their customers of the subpoena in order to give them an opportunity to object, which is when it argued that the joinder issue could be settled. For these reasons, the court granted plaintiffs’ motion to compel for this case.

Litigating against a group of anonymous individuals can be extremely challenging. While the courts appear to be willing to support subpoenas aimed at bringing pirates hiding behind the cloak of anonymity to justice, they will only do so within the strict constructs of the law. Rather than allowing the wholesale indictment of thousands of alleged infringers in a single suit, many courts have begun demanding a higher standard of proof requiring copyright holders and other intellectual property holders to point to the specific individuals they are accusing of infringement or misappropriation. Moreover, using the process of discovery to unearth information on Internet users potentially subject to future claims is not a practice most judges will tolerate. In order to successfully bring suit against Internet users who have allegedly infringed on protected material, complaints must be carefully tailored to meet the requirements of relevancy, personal jurisdiction, and permissive joinder. Additionally, although the temptation to overreach in these suits can be great, it is imperative that a suit of this nature is not so broad in scope that it could be seen as an undue burden on non-parties, including ISPs. Actively protecting against infringement and misappropriation is critical for any owner of intellectual property, yet a large part of this proactive approach may require a great deal of patience in navigating the legal landscape.

In a recent, lengthy decision involving allegations of deceitful acts and unfair competition, the Utah Court of Appeals largely affirmed the lower court’s grant of summary judgment to the defendants with respect to a complaint alleging misappropriation of proprietary data and related conduct. Particularly noteworthy, the appellate court held that the Utah Uniform Trade Secrets Act (UTSA) preempts many common law claims relating to allegations of misuse of confidential information not qualifying as a trade secret. CDC Restoration & Constr., LC, v. Tradesmen Contractors, LLC, 2012 UT App. 60 (Feb. 24, 2012).

Paul Carsey was a long-time employee of CDC, a company that repairs concrete and installs protective and decorative coatings. CDC and its customer Kennecott entered into a preferred provider agreement containing CDC’s confidential labor and material costs. In January 2006, while Carsey was assisting CDC in the preparation of a Kennecott contract bid, he resigned from CDC and was elected vice president and project developer for Tradesmen Contractors, a CDC competitor.

At the same time, Kenneth Allen worked for an independent project manager hired by Kennecott to supervise projects such as the bidding. Previously, Allen had been a long-time Kennecott employee. Like Carsey, Allen had intimate knowledge of CDC’s bid. Shortly before Carsey joined Tradesmen, Allen formalized his ownership interest in that company. According to CDC, both Carsey and Allen went to great lengths prior to CDC’s bid submission to conceal their involvement with Tradesmen.

CDC, Tradesmen and a third company all bid on the Kennecott contract. Tradesmen’s bid was lower than CDC’s, a fact CDC attributed to Tradesmen’s knowledge of CDC’s prospective bid. Although Tradesmen’s bid was higher than the third company’s, Tradesmen was awarded the contract. CDC sued Tradesmen, Carsey and Allen, alleging (among other wrongs) misappropriation of trade secrets — CDC’s labor and equipment rates, and its bid — as well as the defendants’ intentional interference with CDC’s economic advantage. CDC also accused Carsey of breach of fiduciary duty.

The trial court granted the defendants’ motion for summary judgment. The appellate court agreed that CDC had failed to demonstrate that there was a genuine issue of material fact in dispute with respect to most of the counts of its complaint but reversed and remanded for trial the trade secret misappropriation claim relating to CDC’s bid. There was no evidence that the pricing information was unobtainable by proper means, or that it required a substantial amount of time and money to develop. Making an argument similar to the basis for a number of court rulings in favor of trade secret claims, CDC maintained that “if Defendants could have easily developed pricing for their [bid] without using CDC’s confidential information, why did they not do so?” The Court of Appeals was not persuaded and held that “mere use” of confidential information is neither “sufficient to maintain a finding of trade secret status, [nor] even a factor relevant to that inquiry.” Moreover, because Carsey himself had provided input into development of CDC’s pricing information, and Allen “lived and worked” this type of data, the court concluded that their general knowledge and experience defeated CDC’s trade secret claim. Finally, the equipment rates, at least, were readily ascertainable simply by making an inquiry to equipment rental companies.

Both courts held that CDC’s bid was a trade secret, but the trial court reasoned that there was no evidence that the bid was used by the defendants, or that they even knew the amount. CDC persuaded the appellate court that there was sufficient circumstantial evidence of the defendants’ use and knowledge of CDC’s bid to defeat a motion for summary judgment.

CDC struck out completely on its common law claims relating to misappropriation “of confidential, proprietary, or otherwise secret information falling short of trade-secret status (e.g., idea misappropriation, information piracy, theft of commercial information, etc.” This was an issue of first impression in Utah appellate courts and one which has divided that state’s federal district courts. Agreeing with a majority of decisions from other states and from Utah district courts, as well as a concern about a ruling that could “undermine the uniformity that motivated the creation and passage of the” uniform trade secrets statutes, the Court of Appeals held that CDC’s common law causes of action were preempted by the UTSA because they “are dependent on the same facts as” CDC’s trade secrets misappropriation claim. Well aware that this holding produces the harsh result that CDC’s common law claims are “preempted by a statute that grants [CDC] no cause of action,” the court observed that the UTSA expressly permits protection of “valuable commercial information contractually, regardless of whether such information meets the statutory definition” of a trade secret.

Although for different reasons, the Utah trial and appellate courts rejected CDC’s claim that Carsey breached a fiduciary duty to the company arising because he was an employee. Without addressing preemption, the trial court held that there was no evidence of a fiduciary duty. The Court of Appeals observed that Utah law is unclear as to whether an employee owes a fiduciary duty to the employer. However, since the supposed breach of fiduciary duty was based on an alleged obligation not to disclose or use confidential business information, the claim was dependent on “misappropriation-of-trade-secret facts” and, therefore, preempted because those are precisely the facts with which the UTSA deals.

Lastly, neither court found a basis for a trial regarding CDC’s averments of tortious interference. While “the evidence supports the allegation that Carsey and Allen did engage in deceptive and deceitful acts,” those acts “all were done to facilitate Tradesmen’s preparation of the winning bid using CDC’s pricing information.” Since CDC’s claim for intentional interference with economic relations relies “on the misuse of confidential information,” that claim also is preempted by the UTSA.

Not all courts would have reached the same result, or would have based the result on the same arguments, as the Utah court did. Other jurisdictions have stronger protections for confidential information that may not rise to the level of a trade secret. One lesson learned is that protecting confidential information by contract may be preferable to reliance solely on a trade secrets statute, at least in Utah.

Distinguishing between continuing misappropriation of one trade secret and separate misappropriations of related trade secrets can be a daunting task. The Supreme Court of Colorado recently held that, for statute of limitations purposes, the distinction may be inconsequential where misuse occurs on disparate occasions but the proprietary information was disclosed to the same person at substantially the same time, and in furtherance of the same commercial venture. That constitutes misappropriation of a single trade secret.

Gognat developed proprietary information relating to the methodology for identifying and extracting reserves of oil and gas. In 1997, he shared this information with Ellsworth when they entered into a joint venture to develop reserves in western Kentucky. At about the same time, Ellsworth secretly formed MSD Energy, Inc. (MSD) for the same purpose. 

By January 2001, Gognat knew that MSD was using his trade secrets in connection with acquiring leases in the same area of Kentucky as the joint venture. He demanded that the joint venture compensate him. Ellsworth assured him that his demand would be resolved fairly. Relying on that assurance, Cognat deferred filing a lawsuit against Ellsworth and MSD. That proved to be a big mistake. 

In 2005, Gognat learned that MSD was using his proprietary information in connection with development of a different area of western Kentucky, and that MSD’s activities in the first area were more extensive than he had previously known. He filed suit against Ellsworth and MSD for misappropriation of trade secrets. The defendants moved for summary judgment based on Colorado’s three-year statute of limitations, contending that Cognat was aware four years earlier, in 2001, that Ellsworth and MSD were using the trade secrets. Gognat responded that until 2005 he did not know, and had no reason to suspect, that Ellsworth and MSD were using his trade secrets in the second area. The trial court granted the defendants’ motion to dismiss, and both the Court of Appeals and the Supreme Court affirmed. Gognat v. Ellsworth, 224 P.3d 1039 (Colo. App. 2009), aff’d, Case No. 09SC963 (Colo. Sup. Ct., June 6, 2011).

Colorado’s Trade Secrets Act is modeled after the Uniform Act. It defines a trade secret as all or part of proprietary information that the owner has taken measures to prevent from becoming available beyond those to whom the owner has given limited access. In the instance of separate acts of misappropriation with respect to related trade secrets, when does the statute of limitations begin to run? According to the Colorado Supreme Court, the misconduct of Ellsworth and MSD was one continuing misappropriation and, therefore, the cause of action accrued in 2001 when Gognat learned of the first instance of misuse. Further, the fact that what Gognat knew in 2001 may not have been sufficiently damaging to justify the cost of litigating is immaterial.

The Gognat decision teaches that litigation with respect to trade secret misuse must be initiated promptly after learning of misappropriation, even though accrued damages may be quite modest. Otherwise, the claim may be held to have been waived by the passage of time notwithstanding a substantial subsequent increase in the amount of resulting damages. Contact a trade secrets attorney at Seyfarth Shaw for assistance in determining whether a potential trade secrets misappropriation cause of action is time-barred.