Recent Decisions and Case Developments

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.

February 21, 2013 | American Arbitration Association
Halliburton Served with $300 Million Demand for Arbitration over Trade Secret Theft

On February 21, 2013, Ecosphere Technologies, Inc. (“Ecosphere”) put industry giant Halliburton Energy Services, Inc. (“Halliburton”) on notice of a Demand for Arbitration ("Demand") that Ecosphere filed with the American Arbitration Association. The Demand alleges that “Halliburton took and disclosed Ecosphere’s trade secrets and proprietary technical, business and strategic information.”

Ecosphere is a water engineering, technology licensing and innovative manufacturing company that develops non-chemical water treatment solutions for industrial markets throughout the world. According to a press release from Ecosphere's counsel, Haliburton misappropriated Ecosphere's trade secret information related to hydro-fracking liquids, in violation of a non-disclosure agreement between the companies. Ecosphere had initially contracted to share the information with Haliburton. However, after Haliburton made a failed attempt to purchase Ecosphere outright, Haliburton continued to use Ecosphere’s trade secrets without authorization “to immediately market itself as an environmentally friendly company . . . .” The Demand claims $300 million in damages.

The issue of trade secrets in hyrdo-fracking has become a hotbed for litigation and legislation. TSI recently covered state attempts to legislate the issue. It was also a main topic at the 2012 TSI Symposium, “Private Data/Public Good: Emerging Issues in Trade Secrets Law.

February 4, 2013 | undefined
Sixth Circuit Vacates Defendant's Sentencing in Goodyear Trade Secret Theft Case and Remands for Re-evaluation of the Misappropriated Information

In United States v. Clark Alan Roberts and Sean Edward Howley, the United States Court of Appeals for the Sixth Circuit vacated the Eastern District of Tennessee’s sentencing of Roberts and Howley for seven counts related to the theft of trade secrets under the Economic Espionage Act and three counts related to wire fraud.

Roberts and Howley were both employed as engineers for Wkyo Tire Techonology (“Wyko”). Wyo made a deal to supply Chinese tiremaker HaoHua with certain tire-building parts; however, Wyko did not actually know how to create parts. Roberts and Howley leveraged Wyko’s business relationship with Goodyear Tire and Rubber co. (“Goodyear”) to surreptitiously photograph Goodyear's designs for Wyko. Roberts and Howley’s conduct was was in violation of confidentiality agreements both engineers signed with Goodyear, and a federal jury found them guilty on all counts in December, 2012.

The Sixth Circuit upheld Roberts and Howley’s convictions. However, it threw out the District Court’s lenient sentencing. The District Court erred by assigning zero value to the misappropriated trade secrets. Although it was within the District Court’s discretion to disregard the government’s expert's testimony regarding the value of the information under Daubert, it was still required to assign some value to the trade secrets.

The EEA provides guidelines for sentences, which are tied to the value of the misappropriated trade secret. Here, the District Court held the trade secrets had no value, and imposed sentences of four months of home confinement, 150 hours of community service and four years of probation for each defendant. The Sixth Circuit basically instructed the District Court that it could not artificially lower the defendants’ sentences through the “legal fiction” that the trade secrets in question were worthless (which is clearly not the case). As the Circuit Court instructed:

“Yes, all else being equal, an estimate of a substantial loss necessarily will increase the guidelines range, but it will not override the district court’s duty to exercise discretion in deciding what sentences to impose on the defendants, whether within the guidelines range or outside of it.”

February 2, 2013 | Circuit court of Harrison County, Mississippi
Isle of Biloxi Casino Claims Ex-Employee Took Trade Secrets to Margaritaville

On February 8, 2013 Riverboat Corporation of Mississippi, owner of the Biloxi Hotel Casino ("Biloxi"), brought suit against its competitor and ex-employees. The suit brings claims against defendants Doug Shipley, Stacey McKay and the Margaritaville Casino & Restaurant ("Margaritaville") both individually and collectively, including breach of contract and trade secret misappropriation

From September 14, 2008 through November 29, 2012, defendant Shipley served as Vice President and General Manger of Biloxi. Shipley’s employment agreement with Biloxi included non-compete and non-solicitation of employees clauses, as well as a confidentiality agreement. Shipley left Biloxi to work as General Manager at Margaritaville, which is located less than two miles from Biloxi. Biloxi alleges that Shipley not only initially lied about accepting the position, but also began actively soliciting employees of Biloxi and using Biloxi's confidential information. Shortly thereafter, McKay, who was Director of Marketing at Isle Biloxi, left to join Margaritaville.

Plaintiff seeks injunctive and declaratory relief, as well as monetary damages including compensatory and punitive damages, and attorney’s fees.

January 11, 2013 | United States District Court for the Eastern District of New York
Ex-Charles Schwab employee Alledgedly Recruits Former Clients to Join New Competing Financial Group

Securities brokerage firm Charles Schwab & Co. Inc. has filed suit against former financial consultant Douglas Castro, employed in the brokerage’s Garden City, New York office from until December 2011, when he allegedly abruptly left Schwab and immediately began work at ADC Wealth management, Castro’s newly formed wealth management firm. Schwab’s complaint alleges that Castro was responsible form managing a portfolio worth neatly $275 million, and possessed voluminous information about his former clients and access to extensive amounts of client account information, assets and tax information, as well as investment objectives and other client financial records. The Schwab brokerage complaint includes allegations of Castro’s breach of contract, misappropriation of trade secrets, breach of duty of loyalty, and unfair competition. According to Schwab, Castor utilized Schwab trade secret customer information without authorization, and therein misappropriated said information by soliciting Schwab clients for his newly formed competing firm ADC Wealth Management (ADC).

Not surprisingly, Castro executed confidentiality, non-solicitation and assignment agreements that barred him from using Schwab customer information to divert Schwab business to a new company or solicit Schwab clients to transition their accounts outside the brokerage. In the terms of his agreement with Schwab, Castro agreed not to solicit Schwab customers upon the termination of his employment, to protect the confidentiality of customer information, and not to use or disclose Schwab's confidential information for any purpose aside from performing his duties and responsibilities on behalf of Schwab” (Complaint, 5). According to Schwab, Castro violated the terms of this agreement after he quit and subsequently contacted Schwab clients with accounts he managed, in attempts to have these individuals transfer their accounts to Castro’s new firm. The case against Castro presents a familiar factual import where a former employee is alleged to have violated previous contractual and statutory obligations not to utilize investor-client information for financial or personal gain. Here, Schwab asserts that Castro could not have possibly learned of the identities of the individual he solicited for ADC’s business services without the information Castro obtained through Schwab.

However, somewhat unique to the case at bar is that both the identities of the Schwab customers themselves, in addition to their respective financial portfolio and wealth management information are seemingly claimed as Schwab trade secrets in this matter. While simply customer names themselves are likely not considered trade secret information, generally customer lists developed by a business through substantial effort and kept in confidence may be treated as a trade secret and protected at the owner's instance against disclosure to a competitor, provided the information it contains is not otherwise readily ascertainable. See North Atlantic Instruments v. Haber, 188 F.3d 38 (2d Cir. 1999). Determination of whether the Schwab customer information is trade secret will include a consideration of the cost, energy, and time taken by Schwab to cultivate their customer information, a question of fact rather than law. Importantly, the complaint goes to great lengths to outline the steps taken by Schwab to maintain the secrecy of their client information, an essential element for client-lists to be considered trade secrets under common law and count III of the complaint at bar. No answer has been filed by Fisher and Phillips LLP, the New Jersey firm representing Douglas Castro.

December 19, 2012 | United States District Court for the Western District of Tennessee Western Division
Tennessee District Court Grants Preliminary Injunction for Medical Device Distributor Against Former Employees

On December 19, 2012, the United States District Court for the Western District of Tennessee Western Division granted a preliminary injunction in favor of Smith & Nephew Inc. (“Smith”) against several former employees, barring them from contacting several of Smith’s clients.

Smith manufactures and distributes medical devices. Smith had a sales representative agreement, with the defendants of Northwest Ortho Plus, Inc., Smith claimed that former employees – now employed by Ortho Plus, Inc. – violated their non-compete clauses by diverting customers they served for Smith & Nephew. The court concluded that there is a strong likelihood that Smith will be able to prove that the non-compete clauses at issue were enforceable and were violated by the Defendants.

December 14, 2012 | Supreme Court of Texas
Texas Supreme Court to Review Jurisdictional Dismissal of Misappropriation Suit Against Russian NG Producer

In December, the Texas Supreme Court granted review of a lower Texas court's dismissal, on jurisdictional grounds, of Texas-based plaintiff Moncrief's misappropriation suit against Russian natural gas giant Gazprom. Moncrief's petition for review (available below) was filed in 2011. A record of the court's grant of review is available Here.

December 13, 2012 | Western District of Washington
W.D. Wash. Rules NFL Scouting Grades May be Trade Secrets

Defendant Rang, a sports writer, published NFS’s proprietary “Player Grades” intended for use by its customer football teams. The Western District of Washington denied cross-motions for summary judgment finding questions of material fact as to whether plaintiff's subjective assessments represented by the player grades were protectable as trade secrets.

The court first addressed the issue of whether Rang had violated copyright law through release of the National’s player grades. Finding three of the four fair use factors weighed in Rang’s favor, the court decided that while the grades were copyrightable, Rang’s use of the grades constituted fair use. On the issue of trade secret misappropriation, the court found that the grades did constitute “information” under the relevant trade secrets statute, and therefore, could be considered trade secrets. However, the court found that any determination on whether the grades were in fact trade secrets was an issue for a jury, since questions remained over whether National made reasonable attempts to protect the secrecy of the grades.

December 11, 2012 | 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.

December 7, 2012 | Superior Court of New Jersey
New Jersey UTSA Does Not Displace Common Law Misappropriation

The Superior Court of New Jersey, Chancery Division, considered the applicability of the New Jersey Trade Secrets Act (NJTSA). The act, recently passed by New Jersey, enacted the widely endorsed and adopted Uniform Trade Secrets Act (UTSA).

The issue in SCS Healthcare v. Allergan was one of first impression and considered whether the NJTSA “preempts common law causes of action which are based on the same set of operable facts.” The court held that the NJTSA does not preclude parties from seeking relief under both the NJTSA and the common law. The court cited the legislature’s intent regarding the provision and the final statutory language that stated the NJTSA supplemented, but did not displace, common law remedies. Accordingly, claimants may seek relief via the statute and traditional common law avenues. This decision makes New Jersey a particularly friendly forum for trade secret plaintiffs. Moreover, the courts interpretation affords misappropriated information that does not rise to the level of “trade secret” protection under common law.