Recent Decisions and Case Developments

October 30, 2012 | U.S. District Court for the Western District of Washington
Court Decides Several Motions to Seal Trade Secret Information in Microsoft Suit Against Motorola

On November 12, 2012, the Court decided a number of motions filed by both parties, as well as some non-parties, seeking to seal over 200 trial exhibits in relation to Microsoft Corp. v. Motorola, Inc. et al., in which Microsoft alleges that Defendants (collectively “Motorola”) breached its commitment to the Institute of Electrical and Electronics Engineers Standards Association (“IEEE-SA”) and International Telecommunications Union (“ITU”), as well as those organizations’ members and affiliates. Specifically, Microsoft alleges that Motorola broke its promises to offer licenses to its “essential” patents in the areas of wireless and video-coding technologies, as required by Motorola’s participation in the two organizations, respectively.

In deciding the motions, the court noted a strong presumption against sealing trial exhibits, recognizing the public interest in understanding the bases for adjudicatory decision-making. This presumption is rebuttable when the information at issue is either a trade secret, or where disclosure of the information might “harm a litigant’s competitive standing.” In addressing the different types of information included in the motions, the court drew a distinction between exhibits having little relevance to the underlying issue of the case, and those exhibits more directly related to the ultimate issue. For the former, the Court granted the motions to seal entirely. For the latter, the Court provisionally sealed the exhibits, meaning that such exhibits would not become public unless their contents were discussed by a testifying witness, or used as a basis for the Court’s ruling. The Court could not address all exhibits included in the motion, and agreed to hold daily conferences to determine requests to seal exhibits on a rolling basis throughout the trial.

The decision is important because it shows that companies can go to court to enforce their rights without necessarily losing trade secret protection. The court was generally receptive to the motions to seal, considering that some of the information did not rise to the level of trade secrets. That said, this decision also shows the uncertainty over trade secret protection that can accompany litigation, as the court's provisional seal leaves open the possibility for disclosure through testimony.

October 30, 2012 | United States District Court for the Eastern District of Michigan, Southern Division
Couple indicted in Michigan District Court faces trial for theft of General Motors trade secrets

Over the last several years, the United States government has increased its criminal enforcement efforts to protect American trade secrets from foreign nations. In a prime example, a July 2010 Grand Jury in the US District Court for the Eastern District Michigan handed down an indictment against a Michigan couple Yu Qin (Chin) and Shanshan (Shannon) Du for Unlawful Possession of Trade Secrets in violation of the Economic Espionage Act (EEA) [18 U.S.C. §1832(a)(3), (a)(5)]. In this matter, the federal government accused the defendant couple of theft and conspiracy to gain economically from the theft of thousands of General Motors electronic documents pertaining to proprietary electric engine components.

The 2010 indictment outlines a detailed and calculated business tactic wherein former GM employee Shannon Du allegedly requested at one time to be repositioned to work within the hybrid motor control systems division of GM, gaining access to secret GM documents and information. Simultaneously, Du’s husband and co-defendant Yu Chin worked for an electrical power equipment manufacturing company, while also establishing several international and domestic joint ventures, including “Millenium Technology International, Inc. (MTI) that aimed to engage in the business of power electronics. Yu Chin allegedly utilized information gained from thousands of proprietary and trade secret GM documents stolen by his wife and co-defendant Du on portable electronic storage device, in order to “seek employment in the hybrid vehicle area promote himself by referencing capabilities directly related to the GM trade secret information.” (Complaint).

Importantly, the text of 18 U.S.C. §1832 makes criminal any attempt or conspiracy to knowingly engage in the theft of trade secrets. Furthermore, this section of the EEA is underscored by its economic justifications, requiring that any misappropriated trade secret be produced for or placed in interstate commerce to garner protection. The July 2010 indictment indicates that Yu Chin utilized an electronic storage devices and email to upload and transfer particular GM confidential documents, including a “ GM trade secret computerized model that simulates and assesses hybrid motor control.” The co-conspiracy is highlighted in the alleged venture between the co-defendants MTI business in a new venture to provide hybrid vehicle technology to “Chery Automobile,” a Chinese automotive company and GM competitor.

Also outlined in the July 2012 Indictment were claims against both defendants under 18 U.S.C. §1512(c)(1) for obstruction of justice, for allegedly unloaded large garbage bags full of shredded proprietary GM documents into a dumpster behind a grocery store, after preliminary investigative interviews by the FBI.

In September 2011 both parties entered into a stipulated protective order pursuant to 18 U.S.C. §1835 (orders to preserve confidentiality), outlining a particularized format for viewing confidential GM materials during discovery. This is a common and important practice utilized by government in EEA prosecutions, aligning the US government's socioeconomic policy concerns with GM's objectives in protecting proprietary GM information at the heart of their stake in the international automobile industry.

After the exchange of several pretrial motions and replies, the trial of co-defendants Qin and Du commenced on October 30 under Honorable Marianne O. Battani, and is expected to last for several weeks.

In its most recent motion, the prosecution on Nov. 1 requested an order precluding the defense from cross-examining Robert Gragg, a US Attorney’s Office computer forensic examiner. This request comes after the defense informed the prosecution via email of their knowledge of Gragg’s purported destroying of computer evidence in a separate civil matter involving GM. While not uncommon and likely granted, if said application is denied, cross-examination of Gragg could potentially call into question some digital evidence relied upon by the United States here.

October 25, 2012 | United States District Court of the District of Colorado
Colorado Hospital Sues WebMD for Missappropriating Trade Secrets Related to "Tobacco Cessation and Weight Management" Software Programs

On October 25, 2012, National Jewish Health (“NJH”) brought suit against WebMD Health Services Group, Inc. and WebMD Health Corp.(collectively “WebMD”) in the United States District Court of the District of Colorado. The suit claims copyright infringement and contributory copyright infringement, misappropriation of trade secrets, tortious interference with prospective business relations, conversion, and unjust enrichment under Colorado law, and breach of contract under New York law.

NJH is a Colorado-based nonprofit hospital; U.S. News & World Report has ranked NJH the #1 respiratory hospital in the nation for fifteen consecutive years. According to the Complaint, between 2002 and 2008, NJH developed “a set of software implemented wellness programs, including its FITLogix® and QuitLogix® programs.” (collectively “Programs”) The Programs help assist users with obesity and tobacco addiction, respectively. On February 4, 2010, NJH entered into a non-disclosure agreement (“NDA”) with WebMD related to “Tobacco Cessation and Weight Management programs.” (“T&W programs”) Pursuant to the NDA, NJH presented WebMD with “Confidential Information” related to the Programs, including “operations, finances, plans and trade secrets . . . .” – all of which were proprietary information not known to the public.

In May 2010, NJH began negotiations with Lowes, Inc. (“Lowes”) to implement one or both of the Programs. After a “trial period,” during which NJH satisfied all of Lowes “approval criteria,” Lowes opted not to implement the Programs. NJH later learned that Lowes contracted with WebMD to implement WebMD’s program “My Lifetrack,” which “highly resemble(s)” the Programs. NJH alleges “My Lifetrack” uses “substantial portions of the [Programs’] sequencing, screen displays, textual material, and other content." Prior to its agreement with NJH, WebMD did not “offer either stand-alone obesity or smoking cessation programs.”

In its NDA with NJH, WebMD was only permitted to use the Confidential Information related to the Programs for an “Authorized Purpose” – this was loosely defined in the Complaint as relating to “a potential business relationship or transaction [between NJH and WebMD] related to [T&W programs].” NJH’s misappropriation of trade secrets claim is based on WebMD’s alleged use of NJH’s Confidential Information (including its trade secrets) for unauthorized purposes, including “enter[ing] into the market for [T&W programs] . . . .” NJH seeks to enjoin WebMD from further implementing “My Lifetrack,” and also seeks damages (including punitive), and reasonable attorney’s fees.

This is the second trade secret misappropriation suit that WebMD is currently litigating. The first, WebMD Health Corp. v. Anthony T. Dale, is pending trial in the Eastern District of Pennsylvania. It features WebMD in a reversed role - suing a former employee for alleged misappropriation of WebMD's trade secrets.

October 18, 2012 | United States District Court for the Eastern District of Virginia
Department of Justice Brings Criminal Trade Secret Misappropriation Charges Relating to Alleged Theft of DuPont's Kevlar™ Technology

On October 18, 2012, the Department of Justice unsealed an August 21st indictment against Kolon Industries, Inc. and five its executives (“Kolon”) in relation to Kolon’s alleged theft of E.I. du Pont de Nemours and Company’s (“Dupont”) Trade Secrets. The government brought criminal trade secret misappropriation charges pursuant to the Economic Espionage Act, accusing Kolon of engaging in massive industrial espionage over a six-year period in an effort to steal Dupont’s proprietary Kevlar™ technology.

DuPont had previously brought civil charges against Kolon in relation to the same alleged misconduct, which resulted in a damage award of almost $920 million and injunctive relief. In a statement responding to the charges, Kolon’s counsel accused the DOJ of “effectively assist[ing] DuPont in improperly extending [the company’s] monopoly over [Kevlar] technology beyond the limited term provided by the U.S. Patent laws.”

October 18, 2012 | Supreme Court of the State of New York
ARS Accused Ex-Employee of Breaking "Code of Ethics" and Stealing Trade Secrets for New Employer UBS

On Thursday, October 18, 2012, investment firm A.R. Schmeidler & Co. Inc (“ARS”) brought suit against its former Senior Vice President Michael Kahn, as well as Kahn’s new employer UBS Financial Services, Inc. (“UBS”) (collectively “Defendants”). ARS alleged Defendants stole and unfairly utilized confidential and proprietary information related to ARS’ clientele. In addition to its common law claim for Misappropriation of Trade Secrets, ARS also brought causes of action for: Breach of Contract; Unfair Competition; Breach of Duty of Loyalty; Tortious Interference; and Conversion.

In its complaint, ARS alleged that after Kahn abruptly resigned from UBS, he “systematically contacted ARS’s clients” to discuss “their specific account and performance,” as well as “ different investment opportunities available at UBS.” His conduct – if true – could be in violation of a “Code of Ethics agreement” that Kahn had agreed to as part of his employment with ARS. The agreement requires Kahn to “maintain ARS’s confidential client information and not divulge such information to third parties” after termination. ARS asserts its client list is also a trade secret, as evidenced by the amount of resources ARS expended to compile the non-publicized list of “high net worth individuals in need of investment management and services.”

In addition to damages, ARS seeks both preliminary and permanent injunctive relief against Defendants. The proposed injunctions would enjoin Defendants them from using “ARS’s trade secrets or confidential client information, including client lists, client account values, performance, investments and holdings or by soliciting any of ARS’s clients that were procured by ARS . . . .”

October 12, 2012 | 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.

October 4, 2012 | 234th Judicial District Court of Harris County, Texas
Trade Secret Holder Files for Injunctive Relief After Employee Confesses to Accepting Bribe from Competitor

On October 4, 2012, National Oilwell Varco LP (“NOV”) petitioned for a Temporary Restraining Order (TRO) and Injunction against its competitor Ceram-Kote, Inc., (“Ceram-Kote”), Ceram-Kote’s President Kevin Freeman, and former NOV employee Nelson Calderon (collectively “Defendants”). NOV brought the suit in Texas State court to stop Ceram-Kote from producing a “knock-off blast unit” that Ceram-Kote allegedly misappropriated from NOV.

NOV claims that “Ceram-Kote along with its president, Kevin Freeman, secretly recruited and paid Nelson Calderson – while he was still working at [NOV] --to build a knock-off of a . . . sophisticated piece of [NOV] industrial machinery,” which was an NOV trade secret. Calderon had access to highly confidential information by virtue of his employment with NOV, and had signed multiple confidentially agreement with the company. After NOV received an anonymous tip about a possible knock-off blast unit at Ceram-Kote, it approached Calderon, who confessed to accepting a bribe from Freeman and providing him with confidential designs.

Per NOV’s filing: “Rather than investing in research and development themselves, they decided to cheat — by paying a [NOV] employee $40,000 to design a large scale blast unit for them by using [NOV's] proprietary technology.” In addition to NOV’s claim for misappropriation of trade secrets pursuant to the Texas Uniform Trade Secrets Act, NOV brought additional causes of action for breach of contract[s], tortious interference with a contract, conversion, conspiracy, unjust enrichment and constructive trust.

October 4, 2012 | California State Court of Appeal for the Fourth Appellate District, Division One
Appellate Court upholds injunction for California waterproofing company barring competing former employees from soliciting customers.

Plaintiff Wanke Industrial is a waterproofing systems installation company in Southern California, former employer of defendants Scott Keck and Jacob Bozarth, who left the company in order to form their own competing waterproofing company, WP solutions. While Bozarth was not named in the proceeding, Wanke filed a complaint against Keck and WP Solutions in 2008 for breach of confidentiality and misappropriation of Wanke trade secret information. The complaint pointed specifically to the significant amount of time, effort and money Wanke had spent in the “acquisition, development, compilation, and maintenance” of confidential customer business, and product information, including

The identity of Wanke’s existing and prospective customers, the objectives of each customer, the strategies developed for each customer, the identities of key personnel at those customers, the special needs and characteristics of Wanke’s existing and
potential customers, and the histories and account balances of existing customers. (Opinion 3-4).

After the former employees responded in cross-compliant against Wanke for unpaid compensation, both parties entered into a mutual release settlement agreement. In this stipulation WP Solutions et al agreed to pay Wanke $38,000.00 in damages, and to a stipulated injunction including a liquidated damages provision. In pertinent part, the stipulated injunction prohibited Keck, Bozarth, and WP solutions from contacting or soliciting any “person, entity, project owner, or representative on Wanke’s attached customer list for the purpose of gaining any business” (Op. 5) for five years, and from performing any work for named customers that solicited WP contracts for 18 months. Wanke subsequently filed an order to show cause in May 2010 seeking to find Keck and WP Solutions in violation of the agreement on eleven occasions.

On Wanke’s motion to enforce the settlement agreement, the trial court determined that although WP Solutions had violated the terms, the agreement itself was invalid “to the extent that it prohibited defendants from soliciting an entity merely because the entity appeared on the customer list attached to the stipulated injunction.” Simply, the trial court determined that Wanke failed to put forth evidence of the existence of a trade secret within the names and identifying information of it’s customers. Although the trial court acknowledged the potential existence of a trade secret within certain customer lists of information, the court emphasized that CA Bus. and Prof. Code §16606 recognizes the right of an employer to bar a former employee from soliciting existing customers of the employer if the employee is utilizing trade secret information to solicit those customers. However, the statute also will void any contract that subsequently restrains any former employee from engaging in an otherwise lawful profession or trade. (CA Bus. Prof. §16602.5). As such, the trial court determined that the stipulated injunction was overbroad and thereby “acquitted” the defendants on eleven counts. In addition, the court further modified the scope of the existing stipulated settlement to be within the bounds of the California unfair competition law. The trial court subsequently examined one count of a specific Wanke customer “AV Builders: Saratoga West” and determined Keck and/or Bozarth to have “obtained or undertaken” their employment contracts while employed by Wanke. Defendants objected on the grounds that the names and general information of perspective customers in their industry was not trade secret material, but the trial court entered an order awarding Wanke $58,000.00 in liquidated damages according to the stipulated injunction, and $8600 in attorney fees.

On appeal, Keck and WP solutions objected on two grounds: (1) in the awarding of attorneys fees to Wanke as a prevailing party, namely because as the trial court determined the stipulated injunction to have been invalid, and therein could not be in contempt of an invalid injunction; and (2) that the liquidated damages award was improper because Keck nor WP Solutions misappropriated Wanke trade secret information or committed any act constituting tortious unfair competition. Wanke followed with a cross-motion and a petition for writ of mandate, both asserting that the trial court erred in determining that the aforementioned stipulated injunction was invalid and unenforceable.

Upon review, the Appellate court fashioned its reasoning by first invoking the double jeopardy clause of the Fifth Amendment to the US Constitution to preclude Wanke’s writ of mandate to retry Keck and WP on the contempt charges. Interestingly, the court in dicta purposefully points to precedent to alleviate any concern of utilizing double jeopardy in a civil matter, first by citing the Dixon court’s determination that the double jeopardy clause applies to “nonsummary criminal contempt prosecutions.” (Op. 15). Further, the court notes the distinction between civil and criminal contempt, namely that civil contempt is and “remedial and for the benefit of the complainant,” and that the contempt at issue was not a forward looking remedy, but a procedure used to punish past conduct in violation of a court order. (citing Int'l Union v. Bagwell, 512 U.S. 821, 827 (U.S. 1994). As such, court determined that the Wanke matter was transformed into a criminal contempt proceeding “between the public and the defendant.” (citing In re Nolan W., 45 Cal.4th 1217, 1236-1237 Sup. Ct. CA 2009). Further, the alleged contempt in violating the stipulated injunction took place outside of judicial proceedings, and therein were deemed nonsummary in nature. As the opinion crafts the Wanke proceedings to fit within the bounds of double jeopardy application, Judge Aaron determined that the lower court validly found that Wanke failed to establish the violation of a valid court order, and therefore their evidence was previously factually insufficient to hold Keck and WP in contempt. This was deemed a sufficient acquittal on a nonsummary contempt claim for the appellate court to deny reexamination of the issue on double jeopardy grounds.

Notwithstanding this determination, the Appellate court concluded that the trial court in fact erred by invalidating the stipulated injunction and denying Wanke’s initial motion to enforce the settlement agreement. The Court reasoned that one could not conclude that the aforementioned stipulated injunction did not protect Wanke’s trade secrets on its face. Merely because the particular trade secret information related to the customers listed and annexed to the agreement did not, for this court, invalidate the existence of trade secret information. Thus, without a proper showing that language in the stipulated injunction actually does not protect Wanke trade secrets, the trial court erred in assuming an unlawful business restraint. Judge Aaron therein reversed and remanded the Wanke matter for further proceedings, while affirming the lower court’s prior order to enforce the settlement agreement as to Saratoga West.

October 2, 2012 | United States District Court for the Western District of New York
Digital Document Security company DSS Sues Coupons.com for Alleged Theft of Coupon Technology

On July 13, 2012, the US District Court for the Western District of New York gave notice to the parties in Document Security Systems, Inc. (DSS) v. Coupons.com rescheduling the motions hearing set for October 9th, 2012 . Motions will now be heard on August 16th regarding DSS’s October 24, 2011 claims against Coupons.com for breach of contract, misappropriation of trade secrets, unfair competition and unjust enrichment. Specifically, DSS is a cloud-computing data integration company specializing in anti-counterfeiting, authentication, and mass-serialization technologies. The lawsuit alleges that Coupons.com misappropriated DSS’s proprietary digital copy protection technology, using said technology in their coupons without authorization. The business relationship between DSS and Coupons.com was centered around DSS’s secret “Blockout” technology that when placed onto an image, will render a print-out of the image unable to be copied or scanned by high-end electronic devices (Complaint ¶ 2). Coupons.com representatives signed non-disclosure agreements and were shown three kinds of DSS security technology including the proprietary Blockout software, for the purposes of “evaluating a potential business relationship (Complaint ¶ 24; quoting 2005 NDA ¶ 3). DSS alleges in its complaint that Coupons.com used the proprietary Blockout software in their digital coupons without paying for or being granted rights to commercial use of their proprietary product in any contract or otherwise.
In response, Coupons.com’s motion to dismiss filed early December 2011 argues that DSS’s trade secrets misappropriation and unfair competition claims must be dismissed as duplicative of the breach of contract for violation of the non-disclosure agreement. Furthermore, Coupons.com does not specifically deny violation of its NDA with DSS or use of the DSS Blockout software in its coupons, but instead asserts that the other claims must be thrown out under New York law. Citing Clark-Fitzpatrick, Inc. v. Long Island Railroad Co., Coupons challenges DSS’s tort claims arising from an alleged breach of contract, because DSS did not plead an independent legal duty extraneous to the contract. In other words, Coupons.com defends that without any further contractual obligation, they are liable only for damages arising under violation of the existing non-disclosure agreement.
Undoubtedly the Western District Court expedited the hearing schedule on this matter lay in anticipation of Coupons.com pending method patent (granted on July 17th) for a “System and Method of Augmenting Content in Electronic Documents with Links to Contextually Relevant Information. ” Such a patent will allow for the digitization of Coupons.com on handheld electronic devices for use by consumers, essentially eliminating the need the printable coupons and their electronic protections (like the DSS Blockout software). However, Coupons.com recent announcement of its new merchant self-service “Brandcaster Retail” coupon e-platform may imply Coupons.com continuing need for digital copy protection technology like the DSS Blockout software . Thus while early settlement was at one time possible, October 2012 mediation sessions failed to amicably settle the relevant and substantive legal issue of whether Coupons.com’s sole breach of their non-disclosure agreement with DSS (by way of unauthorized commercial use the Blockout software) bars subsequent trade secret misappropriation claims under the same cause of action. As such, the case is currently in pre-trial discovery posture as both parties adhere to the discovery schedule outlined by Hon. Marian W. Payson on December 12, 2012.

September 27, 2012 | United States District Court for the Northern District of Oklahoma
ND Okla. Orders Reasonable Royalties under UTSA

On September 27, 2012, the Northern District of Oklahoma found that “exceptional circumstances” existed in a dispute between competing aerial broadcast camera makers, warranting the imposition of reasonable royalties in place of a prohibitory injunction under Section 87(B) of the Oklahoma UTSA.

A jury found misappropriation of trade secrets belonging to plaintiff Skycam, LLC in September, 2011. On Skycam’s Application for Injunction, the court held that forward-looking relief in the form of a permanent injunction was warranted, finding (inter alia) that “the threatened injury outweighs the harm that the injunction may cause” and that the injunction would not “adversely affect the public interest” as required by Tenth Circuit law.

The court found, however, that because these conditions were not met with respect to a prohibitory injunction, but only with respect to the imposition of a reasonable royalty, the case presented a set of “exceptional circumstances” under the meaning of the UTSA.
First, the court agreed with defendant Actioncam, LLC that a prohibitory injuction would “put [it] out of business,” also noting that the existence of direct competition between the parties, and thus the benefit to Skycam of a prohibitory injunction, was in question. The court further held that a prohibitive injunction would be in derogation of the public interest because it would “eliminate competition and technologal innovation” in the market for aerial cameras.

Damages in the case had been based on a flat and per-event royalty through the date of the judgment. The court therefore ordered further per-event royalties lasting from the date of the judgment and ending 42 months after the defendant’s system had entered the for-profit market. The amount and duration of these royalties were determined on the basis of the plaintiff's expert testimony.