Recent Decisions and Case Developments

August 19, 2013 | Southern Division, United States District Court for the Western District of Michigan
How One Auto Parts Company Successfully Defended a Misappropriation Suit

Dana, a maker of car parts such as axles, recently lost a trade secrets misappropriation action against American Axle, a fierce competitor in the auto-parts industry, after three Dana employees downloaded Dana’s files and then went to work for American Axle. Dana's unsuccessful attempt to protect its trade secrets provides a useful lesson to practitioners about how to defend a misappropriation case.

The court’s decision was based on the following three main criteria: (1) Dana did not make a strong enough showing that American Axle was a direct and fierce competitor and American Axle successfully argued that it targets a different market segment (Asia instead of the United States); (2) Dana failed to show that American Axle used the trade secrets, and failed to show that the employees misused them. The court made this point by saying, “the fact that [some of the defendants] copied their work files before departing their employment does not create an inference that they did so in an attempt to steal confidential information from Dana or to bring that information to American Axle. Copying work files at the conclusion of employment does not, in and of itself, support an inference of suspect behavior”; and (3) American Axle was able to show that it did not poach the employees it hired since those employees had been laid off by Dana.

Additionally, “Dana had not previously enforced any prohibition against copying Dana files for personal use.” Defendant Adelman “said he copied the files so that he could review all the projects he had worked on before he updated his resume.” To remedy what might otherwise seem like a valid reason to copy such files, a company policy that states that company property cannot be taken for personal use could have strengthened Dana’s case. Dana lacked such a policy. To that effect, a company has to enforce its policy, not just print it and distribute it. Defendant Wenstrup testified that he was accompanied by a Dana HR employee when he went to his office after he was terminated and copied the entire contents of the “My Documents” file from his office computer to his personal computer. This type of corporate behavior opens the door for defendants to successfully argue that such behavior is tolerated by the plaintiff corporation.

Lastly, Dana's lawyers failed to properly organize the large volume of data that they claimed was stolen. The court noted that “[t]he manner in which the evidence was presented tended to blur the distinctions between what was confidential and what was not, what was reasonably protected and what was not, what was used and what was merely downloaded, what was copied and what was returned.” Since the first step of a successful misappropriation claim is to establish the existence of a trade secret, practitioners should be thorough and methodical about parsing out and encapsulating the confidential information and tracing a direct connection the defendants’ use of that information.

August 7, 2013 | Court of Appeals for the Federal Circuit
Federal Circuit Grants Preliminary Injunction in Fracking Software Case

On August 7, 2013, the Court of Appeals for the Federal Circuit granted a preliminary injunction in Core Labs. LP v. Spectrum Tracer Servs., LLC, reversing a decision of the United States District Court for the Western District of Oklahoma. Core Laboratories (Core) initially brought a number of claims, including trade secret misappropriation, against Spectrum Tracer Services (Spectrum), a company established by former Core employees. Both companies provided services to oil well operators to assist in tracing fossil fuels and underground fracking processes. Core sought a preliminary injunction on February 12, 2013, after a Tracer employee notified Core that Tracer had given him a software program clearly belonging to Core, and had asked him to recreate some of the program's functionality.

The District Court denied Core’s motion on March 13, 2013, stating that Core had failed to establish that it would be irreparably injured, because “any harm Core has suffered or may suffer . . . can be adequately remedied through an award of monetary damages.” The Federal Circuit reversed, holding that under Texas law, when a defendant possesses trade secrets and is in a position to use them, irreparable harm to the trade secret owner may be presumed. This decision upholds the proposition advanced by Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984) that the economic value of a trade secret lies in the competitive advantage the secret confers on its owner. Because Core demonstrated that Spectrum possessed its trade secret, and further demonstrated that Core lost nearly $1 million worth of jobs to Spectrum, injunctive relief was clearly appropriate under Texas law.

August 5, 2013 | United States District Court - Eastern District of Virginia
In Virginia, Improper Aquisition of a Trade Secret is Sufficient to State a Claim

A September 5, 2013 opinion from the Eastern District of Virginia reminds us that plausible claims for trade secret misappropriation against former employees can survive a motion to dismiss even in the absence of actual use of the trade secret by a defendant. In Marsteller v. ECS Federal, Inc., a former Senior VP of ECS Federal Inc. (“ECS”), a government contractor, allegedly downloaded and transmitted confidential information in the period between her notice of termination and her last day of work, including company contracts, billing rates and business development plans. ECS alleges various violations of the Virginia Uniform Trade Secret Act (“VUTSA”) and the Virginia Computer Crimes Act, as well as breach of contract, conversion, breach of fiduciary duty and unjust enrichment. Marsteller moved to dismiss these claims under the theory that ECS had not adequately alleged that she had actually used any of this information in her possession, and it is the court’s denial of this motion that is most relevant here.

The VUTSA recognizes trade secret misappropriation if there “improper acquisition” or “disclosure of use” of a trade secret. See Va. Code Ann. § 59.1-336. In Virginia, misappropriation through acquisition occurs when “a person knows or has reason to know that a trade secret was acquired by improper means” which include, among other things, “use of a computer or computer network without authority.” Id. In applying this section of the VUTSA as well as the liberal standards for reviewing motions to dismiss under the Federal Rules of Civil Procedure, the court denied Marsteller’s motion to dismiss and allowed ECS’s counterclaim to stand. See Fed. R. Civ. P. 8, 12(b) (6). The court emphasized 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.”

August 1, 2013 | U.S. Court of Appeals for the Second Circuit
Second Circuit Affirms Conviction in United States v. Agrawal

On August 1, 2013, the Second Circuit upheld Samarth Agrawal's 2010 conviction under the Economic Espionage Act (EEA). Agrawal, who had been employed as a trader by the French bank Société Générale (SocGen), was charged with delivering SocGen's High Frequency Trading (HFT) system's source code to a rival hedge fund, New York-based Tower Research Capital. On November 19, 2010, a jury found Agrawal guilty on two counts: theft of trade secrets (18 U.S.C. § 1832); and interstate transportation of stolen property (18 U.S.C. § 2314). He was subsequently sentenced to 3 years’ imprisonment, which he is presently serving.

The affirmation was particularly noteworthy considering that just last year, the Second Circuit reversed a conviction in a case with strikingly similar facts. In United States v. Aleynikov, a programmer sold source code to Goldman Sachs' HFT platform to a rival trading firm. United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012). The Second Circuit distinguished Agrawal from Aleynikov in two ways. First, the court noted that the HFT system in Agrawal was used in interstate commerce, where the HFT system in Aleynikov was not. Second the court noted that where Aleynikov had stolen the HFT source code in intangible form (on a USB memory stick), Agrawal had printed out the code on paper.

In dissent, Judge Pooler took issue with these distinctions, writing, "In order to circumvent Aleynikov, decided just months prior to oral argument in this case, the majority attempts to distinguish the present facts through mischaracterizations, while simultaneously stretching Aleynikov and disregarding the principle of stare decisis."

August 1, 2013 | Court of Appeals for the Seventh Circuit
Seventh Circuit Allows Attorney's Fees under UTSA for Suits Maintained in Bad Faith

§ 4 of the UTSA provides that “[i]f a claim of misappropriation is made in bad faith . . . the court may award reasonable attorney’s fees to the prevailing party.” A recent decision by the Seventh Circuit suggests that this provision applies to suits maintained in bad faith, even when the initial claim may have been meritorious.

In Tradesman, International, Inc. v. Black, a Seventh Circuit panel reversed and remanded a decision of the District Court for the Central District of Illinois denying a request of attorney's fees. The district court found that while the plaintiff had not initiated the suit in bad faith, bad faith had developed over the course of the litigation, as it became clear that the plaintiff’s claims were without merit. Nonetheless, the district court found that the phrase “made in bad faith” in UTSA § 4 applied only to the initial filing of a lawsuit, and denied the request accordingly

In reversing, the Seventh Circuit took a broader “common sense” reading of § 4, holding that “[a] claim is made in bad faith [under UTSA § 4] when it is initiated in bad faith, maintained in bad faith, or both.” The Seventh Circuit's decision suggests a new avenue for collecting attorneys' fees in trade secret cases.

July 12, 2013 | Federal District Court for the District of New Jersey
N.J. Federal Court Denies Motion to Dismiss Trade Secret Claims against The Weather Channel

On July 12, 2013, A federal judge denied a motion filed by The Weather Channel Interactive to dismiss a number of trade secret misappropriation claims brought by Events Media Network, Inc. The judge held that the plaintiff had alleged sufficient facts to make out a claim under the Georgia Trade Secrets Act.

The claim arose out of a license agreement between Events Media Network, Inc. (EMNI) and The Weather Channel Interactive (TWCI) under which EMNI provided TWCI access to a database of upcoming events and attractions. EMNI continually updated the database with event information drawn from publicly available sources. The license agreement allowed TWCI to use the database to serve local event listings to its website viewers.

Although the information contained in the database was publicly available, the court found that the database was a valuable compilation that gained value from its secrecy. The court further held that the general confidentiality provision contained in the license agreement was sufficient to make out reasonable efforts to protect the information under the Georgia Trade Secrets Act.

July 10, 2013 | Texas Court of Appeals
Texas Court Affirms Reasonable Royalty Damages Award

On July 10, 2013, a Texas Court of Appeals affirmed a jury’s award for damages in a trade secret misappropriation case stemming from proprietary data for natural gas extraction locations. The plaintiff, Toby Berry-Helfand, had conducted extensive geological research to determine locations likely to contain natural gas deposits. After sharing her findings under a confidentiality agreement with defendant Southwestern Energy Production Company (SEPCO) in hopes of forming a partnership, SEPCO declined to partner with Helfand, but commenced drilling in the locations recommended by Helfand’s research.

In affirming the jury’s award of $11,445,000, the court held that the jury had correctly applied the reasonable royalty approach in reaching this figure. Reasonable royalty, a measure of damages borrowed from patent law, is used in trade secret cases where there is no way to quantify the loss to the plaintiff. The approach attempts to determine what the parties would have agreed to as a reasonable licensing fee for the use of the trade secret, calculated at the time the misappropriation occurred.

Here, the court found that the damages awarded, roughly 3% of the revenue SEPCO generated from the drilling sites identified in Helfand’s research, represented a reasonable licensing fee for that information. While courts consider a number of factors in calculating a reasonable royalty, the court here gave particular weight to several factors. Specifically, the court noted that rates used in agreements between Helfand and other drilling companies for comparable information, the extent to which SEPCO made use of Helfand’s trade secrets, and the portion of the profit attributable to Helfand rather than to SEPCO were of particular importance.

While the court affirmed the jury’s award, it also held that the equitable remedy of disgorgement was not appropriate in this case since there was no fiduciary relationship between Helfand and SEPCO.

May 9, 2013 | Supreme Court of Texas
Texas Court to Hear Arguments Over Scope of Protective Order for "Tire Trade Secrets"

On April 19, 2013, the Supreme Court of Texas agreed to hear whether a Houston trial court ordered an overly broad disclosure of Defendant's trade secrets, such that it constitutes a "constitutional taking."

In IN RE CONTINENTAL TIRE THE AMERICAS, LLC,, Plaintiffs' allege that a defect in Continental Tire the Americas' (CTA) tires is responsible for the fatal crash of Juan Hernandez, and his daughter and granddaughter. Plaintiffs are all members of the Hernandez family. CTA claims it possess trade secrets in the tire and its manufacturing process. Furthermore, the company argues that the trial court's flimsy protective order constitutes an abuse of discretion: it not only failed to protect CTA's alleged trade secrets in the present case, but allows potential litigants in other states to access the confidential information in order to promote "shared discovery." CTA claims the extent of disclosure, as proscribed by the trial court, is so egregious it constitutes a constitutional taking without just compensation.

Per CTA's brief, under Texas Rule of Evidence 507, trade secrets, even if relevant, are privileged and not discoverable, unless the requesting party makes a particularized, evidentiary showing that disclosure of the trade secrets is necessary for a fair adjudication of the case. When the requesting party satisfies that burden of proof, the trial court ordering disclosure must issue a protective order sufficient to safeguard the trade secrets from further disclosure. Tex. R. Evid. 507.

April 8, 2013 | United States District Court for the District of Colorado
Colorado District Court Holds that Nightclub Owner's MySpace Profile May Constitute a Trade Secret

In Christou v. Beatport, LLC, the United States District Court for the District of Colorado held that log-in information to a MySpace account may constitute a trade secret. Notably, the Court denied Defendant’s motion to dismiss the trade secret misappropriation claim. The Court relied on the factors laid out by the Tenth Circuit Hertz v. Luzenac Group, 576 F.3d 1103, 1115 (10th Cir. 2009), and held that whether MySpace login information including profiles, “friends”, confidential lists of personal cell phone numbers and email addresses for DJs, agents, and promoters, and customer lists in the present circumstance constitute a trade secret is a question of fact, and that Christou had alleged sufficient facts to survive the motion to dismiss.

March 5, 2013 | United States Court of Appeals for the Fifth Circuit
Fifth Circuit Affirms Preliminary Injunction for Misappropriation of Dietary Supplement Research Compilation

On an interlocutory appeal from the Southern District of Texas, the Fifth Circuit affirmed that court's grant of preliminary injunction against the former sales partner of a dietary supplements manufacturer.

Plaintiff Daniels Health Sciences ("DHS") had "compiled a distilled version of the science and research behind [its seaweed-based supplement] Provasca into a PowerPoint presentation titled 'The Path to Provasca.'" It shared this information with its marketing partner, Vascular Health Sciences ("VHS"). Despite the fact that DHS and VHS were led by brothers, this marketing relationship soured, and VHS allegedly relied on DHS's compiled research to develop and market a competing product.

The Fifth Circuit held that the grant of preliminary injunction was proper on DHS's breach of confidentiality agreement and trade secret misappropriation claims. The court rejected the defendant's argument that no evidence of confidential information, or of the existence of a trade secret, had been presented. The court called these distinct arguments "largely repetitive," but analyzed them under the parties' contractual definition, and Texas trade secret law (which adopts the Restatement) respectively.