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

By Paul Freehling

A recent Eighth Circuit Court of Appeals decision, extremely favorable to a plaintiff alleging trade secret misappropriation, holds that protection may be accorded to a compilation of information if reasonable efforts were made to keep the compilation secret, where the compilation adds value to the information, regardless of the amount of the information that already was in the public domain. The defendant, who used the compilation after obtaining it from a third party who was not authorized to provide it, was hammered by the court. 

Rolls-Royce developed procedures, approved by the FAA, for repairing and overhauling helicopter engines. The procedures were compiled and disclosed in documents provided to its Authorized Maintenance Centers (AMCs) with, in at least some instances, a proprietary rights legend on the front page. AvidAir, which was not an AMC, acquired the information partly from public sources and partly by a purchase from an AMC that did not have permission to sell it. When AvidAir began using the procedures, Rolls-Royce demanded that AvidAir deliver the compilation documents to Rolls-Royce and cease using them. AvidAir proceeded to file suit in a Missouri federal court seeking a declaratory judgment that the information was not a trade secret and accusing Rolls-Royce of antitrust violations and tortious interference. Rolls-Royce countered with a misappropriation lawsuit in an Indiana federal court. Both Indiana and Missouri have adopted the Uniform Trade Secrets Law. The two cases were consolidated in the Missouri court. 

On cross-motions for summary judgment, the trial court ruled in favor of Rolls-Royce and dismissed AvidAir’s claims. A jury then awarded Rolls-Royce $350,000 in damages. The trial court entered judgment on the jury verdict and awarded permanent injunctive relief to Rolls-Royce. The Eighth Circuit affirmed in all respects. AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corp., No. 10-3444 (8th Cir., Dec. 13, 2011).

AvidAir asserted that the non-public information in the compilations was too trivial to be accorded protection. The appellate court rejected that assertion, stating that a compilation has value if it gives the compiler “a competitive advantage,” even if the compiled information itself is generally available. Contrasting a trade secret with a patented invention, the court said that engineering advances are not a prerequisite to trade secret protection: “Unlike patent law, which predicates protection on novelty and nonobviousness, trade secret laws are meant to govern commercial ethics.” Rolls-Royce’s compilation was a trade secret because (a) it consisted of information with value “independent of older publicly available versions,” and (b) Rolls-Royce made “reasonable efforts to keep it secret.” The court stressed that Rolls-Royce showed that the compilation required “a substantial investment of time, effort, and energy,” and so the fact that others could have duplicated it by legitimate means is not a defense to a misappropriation claim. Indeed, “AvidAir’s repeated [unsuccessful] attempts to secure the [compilation] without Rolls-Royce’s approval belies its claim that the information in the documents was readily ascertainable or not independently valuable.” 

AvidAir maintained that Rolls-Royce did not try very hard to protect the confidentiality of the compilation. The court responded: “Reasonable efforts to maintain secrecy need not be overly extravagant, and absolute secrecy is not required.” Rolls-Royce’s use of a proprietary legend is evidence of Rolls-Royce’s attempt, and its “[m]isplaced trust in a third party who breaches a duty of confidentiality does not necessarily negate efforts to maintain secrecy.”

The lesson of this ground-breaking decision is that one who makes commercial use of even a minimal amount of confidential information, after obtaining it from a source without authority to provide it, runs a risk of incurring the wrath of a court adjudicating a trade secret misappropriation lawsuit (at least in the Eighth Circuit).

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By Robert Milligan and Joshua Salinas

Police officers are free to review private and confidential information stored on your cell phone if the search is incident to an arrest in California. The Supreme Court of California recently upheld the warrantless search of a cell phone text message folder in People v. Diaz, 51 Cal. 4th 84 (2011). The decision places no restraints on the type or amount of data police officers may access when searching an arrestee’s cell phone.

Defendant Gregory Diaz allegedly purchased Ecstasy from a police informant. Police officers arrested Diaz, seized his cell phone from his pocket, and transported him to the sheriff’s station. Ninety minutes later, a police officer searched Diaz’s cell phone text message folder and found an incriminating message. The officer showed Diaz the message and Diaz admitted to the alleged sale of Ecstasy. Diaz later argued that the search of his phone’s text messages folder constituted an unlawful warrantless search.

The Supreme Court of California found the cell phone search a valid search incident to lawful custodial arrest. The court compared the search to previous U.S. Supreme Court cases that allowed the search of a cigarette box (United States v. Robinson, 414 US 218 (1973) and clothing (United States v. Edwards, 415 US 800 (1974) found on the arrestee’s person. The court rejected the argument that a warrantless search of property turns on the character of the property. The court found that the seizure and search was valid because of the reduced expectation of privacy resulting from the arrest. The court rejected the argument that cell phones’ ability to store vast amounts of personal information warrants heightened privacy interests. The court also found that there was no legal basis for distinguishing the contents of an item found on the person from the item itself.

In the dissenting opinion, Justice Moreno criticized the majority’s decision stating it “goes much further, apparently allowing police carte blanche, with no showing of exigency, to rummage at leisure through the wealth of personal and business information that can be carried on a mobile phone or handheld computer merely because the device was taken from an arrestee’s person. The majority thus sanctions a highly intrusive and unjustified type of search, one meeting neither the warrant requirement nor the reasonableness requirement of the Fourth Amendment to the United States Constitution.”

What does this case mean for those who carry smart phones or other electronic devices that store confidential or private information?

1. Confidential and private information contained on electronic devices can be seized by law enforcement if you are arrested. Technological advancements have shrunk the size of storage devices and simultaneously increased their accessibility and storage capacity. iPhones, Blackberries, and other smart phones have become intertwined with business and personal information, including social networking. Diaz’s phone search involved text messages. However, this case arguably permits police officers to access confidential emails, documents, and voicemail messages that may contain private business or client information and personal information. Additionally, the character of the property seized is irrelevant. Thus, flash drives, digital cameras, and laptops found on the person may also be searched. 

2. Password protecting a device may not be enough. If a device requires a password for access, an arrestee may decide to refuse to provide police officers with his or her password. However, nothing prevents officers from seizing the device and using forensic software to copy and analyze the data and circumvent any password protection.

3. Diaz may be headed to the U.S. Supreme Court. Unlike Diaz, a 2009 Ohio Supreme Court case found a warrantless search of an arrestee’s cell phone unlawful. (State v. Smith, 920 N.E. 2d 949 (2009)). While the Court denied Smith cert., it may take up Diaz in light of the current state split and the scarce case law on cell phone searches.

4. Employers need to be cautious in determining what access to confidential and business information that they permit their employees to have in general, and specifically, through electronic storage devices, such as cell phones, laptops, thumb drives, etc., as sensitive data stored on such devices may be subject to search if the employee is later arrested.

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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.

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