Recent Decisions and Case Developments

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.

March 4, 2013 | 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.