Cases from California

United States District Court for the Southern District of California
Court dismisses Tablet Maker Fraud Claims, Trade Secret Missapropriation Claims Remain

Popular children’s toy purveyor “Toys ‘R’ Us” (TRU) recently turned tech, having introduced its “Nabi” children’s electronic tablet device in late 2011 and “Nabi 2” in summer 2012. With TRU’s announcement of its own “Tabeo” tablet set for October 2012, the company was set to enter into its “first move into house-brand electronics.” (WSJ; Complaint Exhibit A). However, according to a September 24, 2012 filing, TRU is now being sued by Nabi maker FUHU in the United States District Court for the Southern District of California. In FUHU v. Toys R Us, No 3:12-cv-02308, electronics manufacturer FUHU claimed breach of contract, unfair competition, breach of implied covenant of good faith, and alleged misappropriation of its trade secrets by Toys R Us in its development of the TRU Tabeo tablet. The Tabeo was designed by TRU to progress upon and replace the original Nabi devices created by FUHU, and formerly sold in TRU stores. These devices were the subject of an exclusive distribution license between FUHU and TRU, terminated in 2011 for alleged under-performance and frustration to market on the part of TRU. The current lawsuit claims that TRU is seeking to capitalize on the Tabeo device by breaching its non-disclosure agreement with FUHU, executed during production of Nabi 1, and by subsequently misappropriating FUHU ’s trade secrets for use in the creation of the Tabeo tablet.

While most of FUHU ’s pleadings address the breach of contract and unfair competition claims, the fourth claim alleges TRU’s trade secret misappropriation stemming from earlier disclosures by FUHU of proprietary information about its “FOOZ KIDS” device and software interface, the prototype for what eventual became the Nabi devices. While this disclosure was made in the context of a prior exclusive distribution agreement between FUHU and TRU for Nabi products, FUHU asserts that upon the agreement’s termination TRU continued to utilize FUHU trade secret materials. The FUHU trade secret information surrounding the Nabi “user interface” was only made available to TRU upon execution of a non-disclosure agreement prior to entering into the exclusive agreement. FUHU claims that TRU subsequently used FUHU ’s trade secret information to develop and manufacture its latest Tabeo tablet for commercial gain.

FUHU ’s complaint was immediately followed by motions for a temporary restraining order (TRO) against TRU, and to expedite discovery in order to preliminarily enjoin TRU from its upcoming release and sale of the Tabeo tablet. On October 19, 2012 Judge Hayes of the District Court denied all three FUHU claims supporting their application for a TRO, including TRU's alleged trade secret misappropriation. The court first reasoned that temporary restraining orders are an extreme remedy fashioned only where the plaintiff is likely to succeed on the merits and is likely to suffer harm in the absence of preliminary relief. See Winter v. NRDC 555 US 7, 20 (2008). However, FUHU's pleadings did not demonstrate a likelihood of irreparable harm because the information identified by FUHU as trade secret was considered "general business concepts and broad marketing ideas that do not fit within the definition of trade secret under New Jersey Law (note that the existing NDA between the parties stipulated to NJ law). Order at 6. Denial of Fuhu's application for a temporary restraining order is a setback for the technology company, as the Toys R' Us Tabeo tablet was recently released in Mid-September.

After TRU's answer and subsequent FRE 12b6 motion to dismiss, the District Court issued an order on March 4th 2013 granting part of TRU's motion to dismiss six of FUHU's claims. fraud. However, the court left ten of the sixteen claims intact, including those for breach of contract and misappropriation of Trade Secrets. View the order by clicking the link below.

Northern District of California
ND Calif. Holds CUTSA Pre-Empts Non-Trade Secret Claims

On February 13, 2012, solar panel manufacturer SunPower Corporation filed suit against competitor SolarCity Corporation and former employees who left Sunpower to work at SolarCity. SunPower alleged that SolarCity and SunPower’s former employees misappropriated SunPower’s trade secrets in violation of the California Uniform Trade Secrets Act (CUTSA), Cal. Civ. Code § 3426 et seq. SunPower also alleged a number of causes of action based on misappropriation of what SunPower termed “non-trade secret proprietary information,” including: breach of confidence, conversion, trespass to chattels, tortious interference with prospective economic advantage, and statutory and common law unfair competition.

On August 2, 2012, the defendants filed a motion to dismiss the non-trade secret causes of action based on preemption by CUTSA. The Northern District of California dismissed the non-trade secrets causes of action on December 11, 2012, holding that they were preempted by CUTSA. The parties subsequently stipulated that the action be dismissed with prejudice, with each side bearing its own costs and expenses, including attorneys’ fees. On January 28, 2013, the Court dismissed the action with prejudice and retained jurisdiction to enforce the parties’ settlement agreement.

Superior Court of the State of California
Zynga Alleges Ex-Employee Used a Personal Dropbox Account to Steal the Company's Trade Secrets

On October 12, 2012, Zynga Inc. (“Zynga”) brought suit in California Superior Court against former employee Alan Patmore for Misappropriation of Trade Secrets and Breach of Contract. The suits concerns theft of confidential information related to Zynga’s online games, and includes additional defendants (“DOES 1 through 50”) whom Zynga does not yet know the identity of, but who allegedly aided and abetted Patmore’s wrongful conduct.

Zynga, Inc. is a San Francisco-based online social gaming company, responsible for popular games such as CityVille and Words With Friends. Patmore was the General Manager for CityVille at Zynga, and signed a Confidentially Agreement with Zynga pursuant to his employment. The contract obligated Patmore to protect Zynga’s confidential, proprietary, and trade secret information. However, on August 16, 2012, Patmore resigned from Zynga. Zynga alleges that at that time (if not earlier), Patmore had been recruited by, and agreed to join, Zynga’s competitor Kixeye. On the day of his departure, Patmore allegedly transferred 760 confidential Zynga files to his personal Dropbox account without Zynga’s consent, which he intended to provide to Kixeye. During Patmore’s exit interview, he refused to sign a Termination Certification that he had complied with his prior contractual obligations.

Zynga alleged that the stolen information – which includes “unreleased game design documents” and other “strategic roadmaps”– could be used to improve Kixeye’s “internal understand and know-how of core game mechanics and monetization techniques, its execution, and ultimately its marketing standing to compete more effectively with Zynga.” According to the complaint, Patmore attempted to cover up his conduct by uninstalling Dropbox. However, Patmore’s attempts were apparently unsuccessful, and “he left a forensics trial of his wrongful conduct.” Both the relatively new subject matter of the claim (i.e. “free-to-play online social games”), as well as the defendant’s alleged use of cloud technology to misappropriate his employer’s trade secrets, make this an interesting case and one to follow as the litigation moves forward.

UPDATE: Kixeye's CEO Will Harbin fired back at Zynga: "Zynga is burning to the ground and bleeding top talent and instead of trying to fix the problems -- better work environment and better products -- they are resorting to the only profit center that has ever really worked for them: their legal department." Two weeks after making that statement, Zynga expanded the suit to include Kixeye as named Defendants.

Superior Court of the State of California
Former Stage Designer Sues Mötley Crüe Over Idea For "Tommy Lee Loop Coaster"

On September 20, 2012, Howard Scott King brought suit against popular rock band Mötley Crüe (itself, its touring company and bassist Tommy Lee as an individual, collectively “MC”), for misappropriation of trade secrets in the Superior Court of California. The suit relates to MC’s allegedly unlawful use of King’s proposal for a “Tommy Lee Loop Coaster” (“Coaster”).

According to his complaint, King developed the idea for the Coaster as part of his now defunct business “Stages ‘N’ Motion.” King described it as “a track on which [Tommy Lee] would play his drums on a platform on wheels which follow the track until Lee was in an upside down position playing the drums and he would continue playing the drums as the platform followed the track in a complete loop.” On or about November 21, 1991, King alleged that he discussed a proposal for the Coaster with Top Rock Development Corp. (MC’s agents). King claims that both the proposal, as well as a signed confidentiality agreement (which has since been lost or misplaced), expressly stated that the ideas were confidential, and that King was to be compensated should MC implement the Coaster. In June 2011, MC begin using the Coaster, or a substantially similar device, as a centerpiece for concerts, as well as in commercials and other promotions.

(link to video of device in question)

King brings trade secret misappropriation actions under both the California Uniform Trade Secret Act (CUTSA), as well as common law. The key difference between the claims is that the CUTSA claim seeks relief in the form of actual damages ($400,000), or in the alternative, a “reasonable royalty”; conversely, the common law claim does not seek a reasonable royalty damages award. Both claims seek injunctive relief, as well as punitive damages in light of MC’s alleged “willful and malicious” conduct.

Court of Appeal of California, Division One, Fourth District
Angelica Case Discusses California State Laws

The plaintiff, Angelica Textile Services (Angelica), sued Jay Park, its employee since 1982, who helped found Emerald Textiles (Emerald) beginning in 2008 and left Angelica in 2010. Emerald won the business of two key Angelica customers, Sharp Healthcare and Scripps Health. The trial court dismissed the case, and the appellate court remanded non-trade secrets claims on appeal, awarding costs to Angelica. This case is important to practitioners in California because of its discussion of state law claims.

First, it found that California's Business and Professions Code section 16600, which forbids restrictive covenants (subject to enumerated exceptions), did not apply where the employee violated the employer's trust during employment instead of after employment.

Second, it found that California's Uniform Trade Secrets Act (CUTSA) did not pre-empt claims that were based on contract, not trade secrets. Thus, the lower court was wrong to dismiss Angelica's claims for breach of contract, breach of fiduciary duty, unfair competition, interference with business relations, and conversion because they "each have a basis independent of any misappropriation of a trade secret." In footnote three, the appellate court admitted that Angelica initially only asserted trade secret claims but noted that after Emerald filed a motion for summary judgment, Angelica asserted additional claims about Park's conduct while Park was still an employee of Angelica. The appellate court said that the trial court was wrong to "simply ignore the additional theories of liability advanced by Angelica and the additional evidence it produced."

District Court for the Central District of California
California district court held that reverse engineering proprietary software in breach of a consumer form contract does not constitute misappropriation

On February 13, 2012 the United States District Court for the Central District of California held that Plaintiff Aqua Connect, Inc. (“Aqua Connect”) failed to state a claim of misappropriation where defendant Code Rebel, LLC (“Code Rebel”) reverse engineered its software in breach of an end user license agreement (“EULA”). Aqua Connect argued that the EULA created a “duty to maintain secrecy” which was breached when Code Rebel reverse engineered the software. The district court, however, pointed out that California courts defined the “duty to maintain secrecy” to exist in the context of a fiduciary duty or an employment agreement, and the duty does not arise from a form license agreement. It stated that “nowhere has it been recognized that a party wishing to protect proprietary information may employ a consumer form contract to…change the statutory definition of ‘improper means’ under trade secret law to include reverse engineering.” See DVD Copy Control Association, Inc. v. Bunner, 31 Cal. 4th 864, 901 n.5 (2003) (quoting).

The dismissed the trade secrets claim without leave to amend, because "no additional facts [could] be alleged to support a legally cognizable misappropriation . . . claim."

District Court for the Eastern District of California
District Court for the Eastern District of California held that concepts, designs, ideas and workflow shared during a business partnership were not trade secrets

On September 13, 2011, Chief Judge Anthony W. Ishii of the District Court for the Eastern District of California refused to enjoin Plaintiff’s former business partner, the Trizetto Group, Inc. (“Trizetto”), from using concepts, designs, workflow processes and flows, and other insights developed during their partnership.

Plaintiff, Agency Solutions.com, LLC (“Agency Solutions”) and Trizetto had entered into an agreement to develop software to service the administration of insurance companies. However, the parties’ relationship soured and the agreement was terminated before the software was completed. Agency Solution’s product never entered the market. Agency Solutions then filed suit against Trizetto after learning that Trizetto was marketing a similar software product to its competitors. Plaintiff sought a preliminary injunction to prevent Trizetto from marketing the product, alleging that Trizetto misappropriated 26 “trade secrets” mainly pertaining to 1) conception and design; 2) workflow processes and flows; and 3) rating and underwriting.

Judge Ishii found that the allegedly misappropriated information, consisting of ideas and general experience from software development, did not qualify as “trade secrets.” Significantly, the Court explained that a trade secret did not consist of “conceptual datum,” such as ideas, concepts, or general knowledge, but “empirical datum,” such as “customer’s preferences, or the location of a mineral deposit.”

Plaintiff filed a notice of appeal of the Court's refusal to grant a preliminary injunction, and Judge Ishii agreed to stay the proceeding pending the appeal's resolution. However, during the pendency of the appeal, Plaintiff voluntarily dismissed the action on January 4, 2012. However, the Court denied Defendant's motion for attorney's fees.

County of Los Angeles, Superior Court of the State of California
Clash between Hollywood talent agency and competitor over stolen client information

Hollywood talent agency Diverse Talent Group, Inc. sued three of its former agents who left for a competitor, but not before allegedly stealing confidential information to poach clients. In the suit, filed August 23, 2011 in Los Angeles Superior Court, Diverse alleged misappropriation of trade secrets, intentional interference, breaches of duty and contract, conversion, and slander. The agency also sought a temporary restraining order prohibiting the disclosure or use of proprietary information. According to its website, Diverse represents actors and directors from TV shows like "Mad Men" and "Lost."

The complaint alleges that former Diverse employees Isam Durzi, Ehab Durzi and Wendy Morrison left Diverse to join Function Talent Group (also named as a defendant) and diverted business to their new employer by using confidential client information misappropriated from Diverse and by falsely claiming their former agency was closing. The three supposedly used the confidential materials, such as customer lists and the personal and financial information of clients, to poach those clients for Function. "Defendants have taken the confidential information without the permission of Diverse and have used it for their own financial gain and business purposes," the suit said. "Despite demands to cease and desist from using this information, defendants continue to use the confidential information." Diverse demanded that the files be returned, but the employees refused, according to the complaint.

Diverse claims that the Durzis and Morrison agreed as a condition of their employment that the agency's client list and other customer information were property of the agency. According to the complaint, the three accepted positions at Function earlier this year, but before they started their new jobs, the employees sent letters to Diverse customers soliciting them to take their business to Function. The letters made "false, defamatory and damaging statements," including that Diverse was going out of business, according to the complaint. The complaint goes on to say that they had some success, causing the termination of some of the plaintiff’s client representations.

The complaint also asserts that the employees "hacked into Diverse's computer system and changed the agency's contact information," and sent messages to clients instructing them to contact Ehab Durzi using the newly-diverted number.

The suit seeks unspecified damages, an injunction barring the employees from disclosing Diverse's confidential information and an order compelling them to arbitrate the dispute. According to the complaint, Diverse expects the dispute to be headed to arbitration as a result of employment agreements with the three former agents, but the company says it was forced to seek provisional remedies to deter the diversion of its clients.

The talent agency says on its website that its "highly valued clientele" includes "Academy Award winners, top sitcom actors, one-hour drama directors, editors and producers." The site states that the agency's clients have worked on shows including "The Big Bang Theory" and "Battlestar Galactica" and movies including "Transformers" and "Good Night and Good Luck."

The parties are scheduled to appear before Judge Meiers for a case-management conference on January 10, 2012.

United States District Court for the Northern District of California
Federal prosecutors indict a state-owned Chinese company and its executive on charges of conspiracy to steal DuPont’s trade secrets

On February 7, 2012, in a rare action, federal prosecutors indicted Pangang Group Limited Company (“Pangang”), a state-owned steel manufacturer in China, and a Pangang executive on charges of conspiracy to steal DuPont’s trade secrets about titanium dioxide technology in violation of the Economic Espionage Act (EEA), 18 U.S.C. §1831 et seq. This indictment supercedes a 2011 indictment in which federal prosecutors originally charged Californians Walter and Christina Liew with witness tampering and making false statements in a federal criminal investigation into the alleged trade secrets theft. DuPont is the world’s largest manufacturer of chloride-route titanium dioxide, a white pigment used in paint, plastics and paper, and defendants allegedly made a “long-running effort” to obtain DuPont’s trade secrets about the process to benefit Chinese companies. Arraignment is scheduled for March 1, 2012.

United States District Court for the Northern District of California
Man sentenced for theft of Trade Secrets from DuPont

Walter Liew was sentenced to 15 years in prison, and fined $28 million following his conviction under the Economic Espionage Act. The conviction arose from the theft of trade secrets from DuPont, particularly information and documents pertaining to the production process of a white pigment, titanium dioxide (TiO2). The pigment is what DuPont uses to achieve its whitest whites in everything from cars to paper.

Judge White, writing in the Northern District of California on a post-conviction motion for acquittal, explained that the evidence demonstrating the intent to injure Dupont, and intent to benefit a foreign government was sufficient for a rational juror to find Liew guilty. It was also noted that the money was tracked to various accounts in Singapore and China, but could not be recovered.