A recent Iowa U.S. district court decision upheld two-year, geographically reasonable, non-compete agreements signed by 26 veterinarians while they were employed by Iowa Veterinary Specialties, P.C. (IVS), a Des Moines, Iowa clinic they owned. When two of the vets and IVS’s operations manager learned that its sale to ISU Veterinary Services Corporation (VSC) was imminent, they used IVS’s business information and facilities to assist them in opening a competing veterinary clinic. VSC is a non-profit subsidiary of Iowa State University (ISU) which is home to the oldest veterinary college in the U.S. The purchase of IVS was made with public funds and was intended to be part of ISU’s mission to regain and enhance its veterinary college academic preeminence. The acquired assets included the non-compete agreements.   

VSC sued the two vets and the operations manager, seeking a preliminary injunction. Except as against the operations manager, who had not signed a non-compete agreement, the injunction was entered. The court held that VSC had met its burden of showing a likelihood of success on the merits and that the balance of the equities favored VSC, and the court concluded that “enforcement of valid non-competition agreements serves the public interest.” However, the court did order VSC either to post a $2 million surety bond or to provide a binding representation from ISU that it will pay any judgment the vets may obtain against the University. ISU Veterinary Services Corp. v. Reimer, 2011 WL 1595337 (S.D. Iowa Apr. 27, 2011).

The vets contended that an injunction would bankrupt them, but the court turned that contention against them by stating it showed that VSC had no satisfactory remedy at law. Moreover, VSC proved that the purchased entity had experienced a decline in its revenue and in the number of its patients since the defendants became competitors, thereby showing how harmful denial of injunctive relief would be. 

The court also rejected arguments made by the vets regarding the supposed unfairness or ambiguity of the non-compete agreements, adding that the vets were highly compensated, sophisticated and well-educated, and that the non-compete had substantial monetary significance. So, they should have retained counsel for advice before signing. Assertions that Iowa law prohibits public bodies from competing with private enterprise, and that Iowa’s Veterinary Practice Act prohibited VSC from practicing veterinary medicine, likewise were to no avail.  

Iowa law says that “discharge by the employer is a factor opposing the grant of an injunction” to enforce a non-compete agreement. One of the vets had not been offered a position by VSC. However, that individual had “expressed a complete unwillingness to remain” after the acquisition, and so an offer to him of employment would have been futile. 

The principal message of the VSC case is that sophisticated signatories to reasonable non-compete agreements have an uphill battle when faced by an injunction action. Nevertheless, a very substantial bond requirement (as here) could prove to be a significant obstacle to enforcement of an injunction.

Employment Agreement’s forum, venue and personal jurisdiction clause upheld despite argument that the agreement was signed “under extreme pressure” and without sufficient time for counsel to review.  CLP Resources, Inc. v T. Salerno, 2011 WL 1597677 (W.D.Wash.) (April 27, 2011).

Plaintiff CLP Resources, Inc. (“CLP”), a large provider of temporary construction workers, sued a former employee, defendant Salerno, and his new business, Defendant Alliance Project Staffing (“Alliance”), claiming causes of action for breach of contract, misappropriation of trade secrets and tortious interference with existing and prospective contracts. CLP’s causes of action were based upon allegations that Salerno, while employed as an Account Manager at CLP, started a directly competing business, Alliance, using CLP resources. CLP asserted that Salerno’s conduct violated the terms of his Employment Agreement with CLP.

Defendant Salerno moved to dismiss the action upon the arguments (1) that the Western District of Washington lacked personal jurisdiction and (2) that venue was not proper in that court as he had worked for CLP in central California, not Washington.

In response, CLP argued that the action was commenced in the United States District Court for the Western District of Washington pursuant to the terms of the Employment Agreement, which directed that venue for any action to enforce the agreement would be either the State Court in Pierce County Washington, or the Federal Court in the Western District of Washington. It was further argued that the Employment Agreement also contained covenants that Salerno would submit to the personal jurisdiction of either of those courts, would not raise personal jurisdiction as a defense to any action premised upon the Employment Agreement, and finally that the laws of the State of Washington would govern any dispute. 

Salerno attempted to counter the enforceability of the Employment Agreement by claiming that he signed the agreement “under extreme pressure," three days after he began working for CLP, and after he had irrevocably relocated from Tennessee to work for CLP in California.  He further claimed that he did not have an attorney review the document, and did not have time to review it himself, thereby making the jurisdiction, venue and  are unenforceable due to duress and fraud. Finally, he claimed that the agreement was not supported by consideration because he had already begun working at the time he signed it.

In addition to his common law defenses to the agreement, Salerno added a statutory defense, alleging that the Employment Agreement also contained a non-competition provision which was not consistent, and as such void under, California Code §16600.

The Western District of Washington rejected all of Salerno’s arguments, denying his motion in its entirety. In denying the motion and upholding the jurisdiction, venue and choice of law provisions of the Employment Agreement the court held as follows.

First, whether California Code §16600 would ultimately be dispositive of CLP’s claims was not relevant at this stage in the litigation because “it plainly does not apply to the consent to personal jurisdiction, forum selection and choice of law provisions.”  Further holding that “[t]his California statute is not a defense to jurisdiction or venue in this Court.”

Next, with respect to Salerno’s argument that the Employment Agreement was procured by fraud or duress, or was otherwise not enforceable because Salerno was “coerced” into signing without adequate time to review the document, and without the benefit of the advice of counsel, the court held that “[t]here is no authority for the proposition that such time or attorney review is a prerequisite for the execution of a binding Employment Agreement. Nor is it novel that one seeking employment is offered the same conditioned on the acceptance of the terms of an employment agreement.”  

Finally, with respect to Salerno’s claim that he did not see the actual agreement before he began working for CLP, the court found that “…it is undisputed that his employment was always expressly conditioned upon his agreement to those terms. His claim about the consideration provided for his agreement is not enough, therefore, to negate his assent to the terms of the Employment Agreement.”

A recent Indiana Court of Appeals opinion, designated as non-precedential, discussed that state’s law concerning non-competition agreements. Most significant, the court upheld a commitment not to solicit the employer’s current or recent customers for two years even though the covenant contains no geographical limitation. However, provisions precluding any “contact with” such customers, and forbidding acceptance of “referrals of” them, were “blue penciled.” The court reversed the entry of summary judgment for the ex-employees and remanded for trial. Think Tank Software Dev. Corp. v. Chester, Inc., No. 64A03-1003-PL-172 (Ind. Ct. Appeals, Apr. 11, 2011).

Think Tank Software Development Corporation, and a number of companies affiliated with it (collectively, “Think Tank”), sued 10 former employees almost all of whom went to work for defendant Chester, Inc. Think Tank and Chester are competitors, engaging in what the court called “computer-related business activities.” Think Tank alleged violation of covenants not to compete and misappropriation of trade secrets. 

After more than five years of motion practice and discovery, the trial court granted summary judgment to the defendants on the grounds that the covenant not to compete “is overbroad and is therefore unenforceable . . . and cannot be reformed,” and that the property rights in which Think Tank claimed confidentiality did not constitute trade secrets. What the trial court apparently viewed as the covenant’s fatal flaw was that it was unlimited as to an applicable territory. Further, the affidavit of a former Think Tank director of technology seemingly demonstrated that the company had no protectable business information.

The Court of Appeals disagreed. Although upholding a two-year restriction on solicitation of recent former customers, the appellate court struck as unreasonable the prohibition against contacting them. Similarly, the court approved a ban on selling to, servicing, consulting, or negotiating with those customers, but a prohibition on acceptance of referrals of new customers — for example, by the ex-employer’s customers — was invalidated. Indiana recognizes “blue penciling” as an option for a court. The absence of a territorial restriction was not fatal, according to the court, because “the class of prohibited contacts [customers who had been such within two years of the former employees’ termination] is well defined and specific, thereby eliminating the need for any geographical limitation.” 

As for trade secrets, the appellate tribunal held that Think Tank sufficiently raised genuine issues of material fact with respect to whether the company’s “customer identities” and “tailored solutions to the customers’ information technology needs combine to form confidential information.” Similarly, Think Tank provided enough evidence of “its extensive security provisions in protecting” that information to withstand a motion for summary judgment.

The enforceability of a non-compete and non-solicitation agreement in a particular case frequently turns on the applicable facts and circumstances, the precise wording of the restriction, and the jurisdiction. The question of whether particular information qualifies as a trade secret also is fact-intensive. When in doubt, contact a Seyfarth Shaw Trade Secrets Group attorney.

By Scott Schaefers and Robert Milligan

On April 28, 2011, the Ninth Circuit Court of Appeals held in an important decision upholding legal protections for employer data that employees may be held liable under the federal Computer Fraud and Abuse Act (18 U.S.C. 1030 et seq.) in cases where employees steal or remove electronic files or data in violation of their employers’ written computer-use restrictions.

In U.S. v. Nosal (9th Cir. No. 10-10038), the Ninth Circuit held that a former employee “exceeds authorized access” to data on his employer’s computer system under the CFAA where the employee takes actions on the computer that are prohibited by his employer’s written policies and procedures concerning acceptable use (e.g. prohibitions against copying or e-mailing files to compete or help a third party compete with the employer).

The court rejected the argument that it was overruling its 2009 decision in LVRC Holdings LLC v. Brekka, 581 F.3d 1127 (9th Cir. 2009), which dismissed an employer’s CFAA claim against an employee who had e-mailed confidential documents to his personal address when working for the employer, and used those files post-termination to compete with the employer. The Brekka panel said that so long as the employee was authorized to use the computer for any purpose and such authorization had not been completely rescinded, the employee could not be held liable under the CFAA for using files for unauthorized purposes.

In distinguishing Brekka, the Nosal panel held that the employer in Brekka did not place any restrictions on employees e-mailing themselves confidential files, and thus the employees could not be said to have exceeded any such computer-use restriction. The employer in Nosal, on the other hand, had password-protected computers, written computer-use agreements with its employees which restricted access to computers to employer business, and automatically placed restrictive legends on its confidential database printouts advising readers that the printouts were confidential and company property.

The employers’ computer-use restrictions, the Nosal court held, were the key distinction from Brekka, and the touchstones for “exceeding authorized access” under the CFAA. The Nosal majority noted that it was siding with the First, Fifth, and Eleventh Circuits’ decisions in prior cases which similarly upheld employer CFAA claims against dishonest employees for exceeding authorized access by stealing employer files.

The dissent in Nosal argued that the majority’s decision goes too far, and potentially criminalizes otherwise innocuous employee use and access of his employer’s computer. The definition of “exceeding authorized access” under the intent-to-defraud provision of the CFAA (i.e. Section 1030(a)(4)), the dissent said, was inconsistent with the statute’s use of the same phrase in section 1030(a)(2), which made such access a crime whether or not the employee intended fraud. Any time the employee even technically violated an employer’s restrictions, the employee could be indicted at the whim of the government.

With the Nosal decision, employers in the Ninth Circuit now have a clear CFAA remedy against dishonest employees who exceed their authorized access of their employers’ computer systems. Employer computer-use restrictions determine whether an employee exceeds authorized access under the CFAA. Conversely, employees looking to avoid federal indictment or civil liability under federal law should strictly adhere to their employers’ computer-use restrictions.

To avail themselves of the helpful Nosal decision, employers should ensure that they have written computer-use policies which prohibit improper computer use and activities. The policies should prohibit the use of company computers to copy, e-mail, or otherwise distribute company files to compete or help a third party compete with the employer. Computer access should be authorized for work activities only. Employers should also consider prohibitions on the distribution of company data to employees’ non-work e-mail accounts and prohibitions or limitations on the use of electronic storage devices, such as external hard drives and data sticks. Employers should also audit employee computer use and access activity to ensure that employees are following company policies. Recurring training on acceptable computer usage is also critical. Employers should carefully circumscribe employee access to company prized data to only those employees who truly need to have access to such data to perform their jobs. Employers should also require employees to return all company data upon termination, as well as all company computers and other electronic devices.  

The Nosal decision provides employers with a viable remedy to help address employee data theft but employers must be vigilant and ensure that they have crafted thoughtful computer-use policies to maximize their protections under the CFAA.

Seyfarth Shaw LLP partner Robert Milligan will speak on trade secrets and cloud computing at the 2011 ITechLaw World Technology Law Conference and Annual Meeting set for May 12th-May 14th.

ITechLaw has been serving the technology law community worldwide since 1971 and is one of the most widely established and largest associations of its kind. It has a global membership base representing six continents and spanning more than 60 countries. Its members and officials reflect a broad spectrum of expertise in the technology law field. Seyfarth Shaw LLP is a member and Milligan serves as a Vice-Chair of the Intellectual Property Section.

The conference will be held at the Four Seasons Hotel – San Francisco. The presentation will begin at 9:00 a.m. on Friday, May 13th. 

The presentation will cover the following topic area:

The explosion of cloud computing has provided both large and small companies with many technological benefits; but with those well recognized benefits, there are incumbent risks to valuable company data, including prized trade secrets. Companies utilizing cloud computing must employ effective measures to legally protect and secure their intellectual property. Cloud computing arrangements require carefully drafted agreements and policies to accomplish the same. Sensible executives will seek advice from competent counsel to ensure that the cost savings in cloud computing are not outweighed by the potential legal and business risks.

Those interested in attending the conference can register at  http://www.itechlaw.org/sanfrancisco2011/speakers.shtml

           Delaware Court of Chancery Vice Chancellor J. Travis Laster, faced with an unreasonable non-compete/non-solicitation agreement, indicated that he would have preferred to hold it invalid but said that he had no choice other than to modify its terms because its Maryland choice-of-law provision requires judicial “blue penciling.” He did enjoin the ex-employee from using his ex-employer’s customer list, a trade secret, but held that the ex-employee may call on any customer whose name is within his own knowledge.

            Delaware Elevator, Inc. (“DEI”), a national elevator installer and servicer, sued ex-employee John Williams who had 20 years of experience in the industry (six of them with DEI) at the time he left that corporation and started his own — one man — competing elevator maintenance company. He had signed an agreement with DEI (a) barring him for three years after leaving its employ from working in a competing business within 100 miles of any DEI office, and (b) prohibiting him from soliciting business from anyone who during the last six months of his employ had been either an actual DEI customer or a potential customer DEI was actively soliciting. While he claimed his signature on the agreement was a forgery, the court said that no rational fact finder could accept his claim. 

            The agreement contained a Maryland choice-of-law provision and a stipulation that a violation would inflict irreparable harm on DEI. Maryland law upholds non-competes if the restraints are reasonably necessary for the protection of the employer, do not impose an undue hardship on the employee, and are in the public interest. Even DEI recognized the unreasonableness of the territorial restriction as written (within 100 miles of any DEI office) and sought to enforce the agreement within 100 miles of just the Newark, Delaware office where Williams worked.   

            The Vice Chancellor observed that Williams has 34 years in the workforce, has personal and family ties to the area where he has been working, and could not readily re-locate or find an equivalent job in a new field. Rhetorically, the court asked DEI’s attorneys “how they would fare if forced to re-start in a far-off jurisdiction, to re-invent themselves as practitioners in a completely different subject-matter area, or to leave the law entirely and find employment in another industry.” 

            While he might have preferred to invalidate the agreement altogether, the Vice Chancellor stated that Maryland “does not authorize a policy-based refusal to enforce an unreasonable non-compete agreement. Maryland law instead calls on the court to carve back overly broad restrictive covenants by wielding the judicial ‘blue pencil.’” Accordingly, he modified the restrictive provisions to a two-year-30-miles-from-Newark-radius (since the two year period began January 17, 2010, Williams’ date of termination, it will expire less than one year after the decision was announced in March 2011). The court observed that, as modified, Williams would be able to earn a living by using his contacts and knowledge of the industry outside the non-compete zone immediately, and within the zone shortly, while at the same time DEI’s relationships with existing and prospective customers were adequately protected. 

            Williams admitted that he took a DEI customer list with him and used it. Because the list was held to constitute a trade secret, he was ordered to destroy all electronic and paper copies. However, the court said he is free to call on customers he knows, even if their names are on the list. A hearing on damages for wrongful use of the list will be scheduled.

            Employers should be cognizant of the applicable legal principles when they include a choice-of-law provision in a non-compete or non-solicitation agreement. If DEI’s agreement with Williams had provided for application of Delaware law, the agreement might have been voided altogether. By applying Maryland law, the employer salvaged at least some protection. Designation of another state’s law might have been even more favorable to the employer. Ask your Seyfarth Shaw trade secrets attorney for advice about choice-of-law provisions.

Entities do not have the right to claim a privilege against self-incrimination. Accordingly, even though agents of a corporation may refuse, based on the Fifth Amendment, to comply with a court order requiring the individuals to submit an affidavit stating whether their principal has ever possessed specified products that allegedly embody purloined trade secrets, the corporation itself must abide by the order even though the effect may be incriminate the agents.  

PCS4LESS, LLC and an affiliated company sued a corporation and certain of its employees in a Michigan state court, alleging that the plaintiffs were the exclusive licensees with respect to certain software, which constituted trade secrets, used in the secondary market for refurbished cell phones. The plaintiffs claimed that the defendants had misappropriated the software. The court was asked to enter a TRO directing the defendants neither to use nor to destroy the trade secrets, and to deliver the products containing the software to the plaintiffs. 

Initially, the defendants denied that they possessed, or ever had possessed, the products. However, when the court required submission of an affidavit to that effect, the defendants declined on the ground that the information at issue was protected by the Fifth Amendment. Plaintiffs moved to compel all of the defendants to comply with the earlier order, the court granted the motion, and they appealed.

The Michigan Court of Appeals agreed with the employees that their own privilege against self-incrimination could be compromised if they, individually, were forced to comply. So, the trial court’s order was reversed to that extent. But the appellate court affirmed the order requiring the corporate defendant to submit the affidavit, rejecting the argument that compelling the corporation to reveal whether it has possessed the software essentially would disclose the same information that the individual defendants were excused from providing. The court pointed out that “organizations with independent existence apart from their individual members may not assert the Fifth Amendment privilege.” Analogizing the individual defendants to custodians of corporate records, the Court of Appeals stated that “the custodian of an organization’s records may not refuse to produce records even if those records might incriminate the custodian personally.” PCS4LESS, LLC v. Stockton, Nos. 296870 and 09-000380-CZ (Mich. Ct. of App., Mar. 8, 2011), citing Paramount Pictures Corp. v. Miskinis, 418 Mich. 708, 344 N.W.2d 788 (1984).

The PCS4LESS case shows that wrongful possession of someone else’s proprietary information can lead not only to a civil suit for damages but also to criminal prosecution. Trade secret counsel should be consulted promptly by anyone charged with misappropriation.

The first webinar of the 2011 series will focus on trade secret considerations in the banking and finance industry, with a particular focus on a firm’s relationship with its FINRA members.  Topics will include:

  • What practical steps can financial services institutions implement to protect trade secrets and client relationships
     
  • What should you  do if your trade secrets are improperly removed or disclosed, or if your former employee is violating his/her agreements
  • How do you prosecute a case against a former employee who is a FINRA member

Our panel consists of attorneys with experience advising clients on international non-compete and trade secret issues. CLE credit will be available for participants.*

Wednesday, April 6, 2011

10:00 am – 11:00 am Pacific
11:00 am – 12:00 pm Mountain 
12:00 pm – 1:00 pm Central
1:00 pm – 2:00 pm Eastern

For questions, please contact events@seyfarth.com and reference this event.

 CLICK HERE TO REGISTER

 

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.

A few years after ruling that the Air Force violated the confidentiality clauses of contracts with a government contractor by disclosing its proprietary information relating to the manufacturing process for a conveyor used in assembling smart bombs weighing more than a ton each, the Court of Federal Claims recently determined the contractor’s damages. The court treated the controversy as involving a “lost asset” for which there is no known market, and not a “lost profits” case as the Government contended. Therefore, the appropriate measure of damages was an estimate of the amount a willing buyer would have paid a willing seller for the proprietary information. The proper methodology was to multiply the number of conveyor units the Air Force expected to purchase as of the date of the breach, times the contractor’s bid price, times a reasonable profit, and then to discount for the “risk that a potential buyer of [the] proprietary information would associate with realizing the profit stream deriving from the use of that asset.” Spectrum Sciences & Software, Inc. v. U.S., No. 04-1366C (Court of Fed. Claims, Feb. 14, 2011) (the court’s decision regarding liability is reported at 84 Fed. Cl. 716 (2008)). 

Over the course of several decades beginning in the early 1970s, the Air Force developed and upgraded the conveyors. In 2000, Spectrum Sciences & Software (Spectrum) self-funded an effort, which ultimately failed, to become the principal supplier of new versions of the conveyor. However, Spectrum needed the Air Force’s cooperation in order to refine and test its products. So, the parties entered into a Cooperative Research and Development Agreement (CRADA) which prohibited disclosure by either of them of the other’s proprietary information. Since Spectrum’s confidential data was expressly identified in the CRADA, protection should have been assured. Moreover, when Spectrum thereafter submitted a proposal to build the conveyor and the proposal contained the data, the cover page of the submission “warned, inter alia, that ‘[t]he data in this proposal will not be disclosed outside the Government and will not be duplicated, used, or disclosed in whole or in part for any purpose other than to evaluate the proposal.’” 

Ultimately, Spectrum’s proposal was rejected. However, it was not returned to Spectrum, and contrary to orders the contracting officer opened it and circulated it among a number of Air Force officials. Spectrum’s proprietary information then was used extensively by the Air Force procurement team and was incorporated in a subsequent RFP that was distributed to outside vendors, including Spectrum’s competitors. 

The trial with respect to liability was bifurcated from the damages determination. With respect to liability, in 2008 the Court of Federal Claims held that “the Air Force repeatedly breached the CRADA in failing to protect adequately Spectrum’s proprietary information.” Spectrum, 84 Fed. Cir. at 744. At the subsequent trial on damages, each party presented an expert witness. Spectrum’s expert computed its damages as roughly four times the amount proposed by the Government. The final award was $1.2 million.

A significant reason for the difference between the two valuations resulted from Spectrum’s expert basing damages on the number of conveyor units the Air Force anticipated buying as of the date of the breach (2003) whereas the Government’s expert used the much smaller number that had actually been ordered on the date when the court’s liability ruling was issued (2008). The court observed that the number ultimately ordered was irrelevant because it was a function, in part, of the poor performance by Spectrum’s competitor that had been awarded the contract, something that could not have been known or anticipated several years before when the breach occurred.

With regard to the per unit price, Spectrum’s expert used the company’s initial bid. Although that bid had been rejected, and while “unaccepted offers to sell property, like other unconsummated transactions, generally represent poor barometers of value,” in this instance use of the bid price was appropriate. It was well below the Government’s pre-bid estimate, and it approximated Spectrum’s selling price to the United Kingdom for the same product. The Government’s expert, by contrast, suggested use of Spectrum’s bid for a similar product several years after the breach, but the court disagreed because that bid constituted “a last ditch effort by Spectrum to realize something from its efforts . . . [at a time it was competing] with firms that were being handed its intellectual property gratis.” Thus, that bid was “based upon a price cut triggered by the Air Force’s improper release of Spectrum’s proprietary information [and] would effectively reward defendant for the misconduct of its officers in a way that the law simply does not countenance.” 

With respect to the appropriate profit margin, the court held that a reasonable expectation of profit was the 15% ceiling for federal procurement under a cost-plus-fixed-fee contract (even though this procurement involved simply a fixed-fee contract). Finally, the proper way to compute the discount rate was to take the risk-free interest rate (for short-term Treasuries) plus an equity risk premium, plus or minus factors reflecting the riskiness of investing in stock of a company in Spectrum’s industry, of a company Spectrum’s size, and of a company like Spectrum that had a key-customer dependence factor. Having decided that “defendant appropriated significant benefits for itself and inflicted significant harm on plaintiff by breaching the CRADA,” it is not surprising that substantial damages were awarded.

This opinion is significant for several reasons. First, it is a rare example of a court detailing the method of computing damages in a lawsuit involving misappropriation of proprietary information for which there is no known market. Second, the court clearly differentiated between the valuation of a lost asset and the computation of lost profits.