Recent Decisions and Case Developments

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.

September 20, 2012 | 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.

September 6, 2012 | United States District Court for the Western District of Washington (Seattle)
Baden Sports, Inc. claims Wilson Sporting Goods Co. misappropriated secrets behind its ball inflation technology

Wilson Sporting Goods Co., one of the world's leading manufacturers of sports equipment, has been sued by a competitor, Baden Sports Inc., for patent infringement, unfair trade practices, and misappropriation of trade secrets. At issue in this case is Baden's inflation table, which is used to inflate and package inflatable balls. Baden claims that Wilson solicited confidential and proprietary information from a retired Baden employee regarding Baden’s inflation table and basketball products. According to Baden’s complaint, Wilson used the information to develop a “soft”-feel basketball that is manufactured with a cellular sponge layer. Baden claims that the product infringes its patent covering cushion-control technology.

On May 23, 2011, Wilson moved to dismiss the complaint for failure to state a claim. It argues that Baden failed to show a plausible trade secret since Baden’s method of ball inflation is common among manufacturers. Additionally, Wilson requests the court to bar Baden’s common law unfair competition claim, arguing that it is preempted by the Washington Uniform Trade Secrets Act. Wilson argues that the underlying facts of Baden’s unfair competition claim are the same as those giving rise to its trade secrets claim.

On July 26, 2011 the court granted Wilson's second claim in the earlier motion to dismiss, combating the allegations that defendant contacted a former employee and offered him consulting fees, causing subsequent disclosure of information about the operation and design of Baden’s inflation table. Importantly, the court dismissed Baden's claim of trade secret misappropriation in finding that Baden's inflation table did not constitute a valid trade secret under Washington Uniform Trade Secret law. The court further contended that the allegedly novel inflation table was not described with enough accuracy or detail so as to highlight any trade secret components or features. Thus, in failing to plead any details about inflation table that make it a trade secret, Baden did not meet the pleading requirements for the claim of trade secret misappropriation, dismissing Baden's third claim of unfair competition as well. Both claims were dismissed without prejudice, while the court gave leave for Wilson to eventually amend it's complaint on September 7, 2011.

With Baden's October 19th answer, the basketball inflation table litigation entered a discovery and deposition phase, with both parties trading opening briefs and filing declarations with the court. In late July, 2012 Baden Sports filed its motion for summary judgment on the pleadings and limited discovery, countered by Wilson's own motion for summary judgment days later. Wilson replied in late August 2012 to Baden's motion for summary judgment, and on September 6, 2012 a stipulation and order was entered for extension of ongoing mediation proceedings by the parties. This stipulation was granted and the mediation deadline was extended until October 4, 2012 to the parties to reach a potential mediated settlement.

August 29, 2012 | U.S. District Court for the Northern District of Illinois.
Court Imposes Four-Year Prison Sentence on Ex-Motorola Employee Caught with Trade Secrets and a One-Way Ticket to China

In 2008, Jin was indicted on charges relating to the alleged theft of Motorola’s Trade Secrets. She was recently found guilty, and on August 29, 2012, sentenced to four-years imprisonment.

Jin began working as a software engineer at Motorola beginning in 1998. In February 2006, Jin took medical leave, during which time she accepted employment with Chinese competitor Sun Kaisens. After accepting employment, Jin allegedly returned to work to Motorola under false pretenses: She planned to take her former employer’s technical documents and other confidential, proprietary information on a one-way ticket to her new employer in China. However, Jin was searched at the airport and arrested before she could board her flight. Police recovered over 1,000 electronic and paper documents for her person.

Although U.S. District Judge Ruben Castillo acquitted Jin on espionage charges, she was found guilty of stealing Motorola’s Trade Secrets pursuant to the EEA. Jin’s lawyers argued in favor of a probationary sentence; however, prosecutors recommended a sentence of 70 to 96 months, arguing that Jin’s conduct justified a substantial sentence of imprisonment report. This was actually below the 121-151 month sentencing range set forth in the Pre-Sentence Investigative Report, as it accounted for Jin’s allegedly failing health. The four-year prison sentence -- although less than the government’s recommendation – nonetheless evidences courts’ increasing awareness of the importance of trade secrets to modern companies, and the devastating consequences of their theft.

August 10, 2012 | Indiana Court of Appeals
Indiana Appellate Court Adopts Majority "All or Nothing" Approach to UTSA Preemption, Denies Protection for Information Not Rising to the Level of Trade Secrets

On August 10, the Court of Appeals of Indiana in HDNET LLC v. North American Boxing Council joined states which have held that their enactment of the UTSA preempts related common law claims pertaining to trade secret misappropriation. The court reversed a lower court’s grant of partial summary judgment which held that the Indiana Uniform Trade Secrets Act did not preempt common law claims for idea misappropriation and civil conversion.

The North American Boxing Council (“NABC”), a mixed martial arts (“MMA”) sanctioning body, sued Mark Cuban’s HDNET television channel for misappropriation of a branded fight series concept that the parties had tried to develop in partnership. NABC also alleged misappropriation of trade secrets, but there had been no determination of whether the series concept met the IUTSA’s statutory definition of a trade secret because the Court of Appeals first heard an interlocutory appeal on the question of preemption.

The court’s analysis focused on a provision of Indiana’s enactment which it noted was “stronger than that found in either the 1979 or 1985 versions of the UTSA.” Indiana’s version provides that “the IUTSA ‘displaces all conflicting law of this state pertaining to the misappropriation of trade secrets, except contract law and criminal law.’” Although NABC’s claims all related to the same subject matter, i.e. the series concept, it argued that its alternative claims did not “pertain” to trade secrets under the statute’s meaning because they were not predicated on the existence of a trade secret.

The court, reasoning that the legislature intended the UTSA to be construed consistent with other UTSA jurisdictions, followed the Supreme Court of Hawai’i in holding that the UTSA “abolishes all free-standing alternative causes of action for theft of misuse of confidential, proprietary, or otherwise secret information falling short of trade secret status (e.g. idea misappropriation, information piracy, theft or [sic] commercial information, etc.).” (quoting BlueEarth Biofuels, LLC v. Hawaiian Elec. Co., 123 Hawai’i 314, 321 (Haw. 2010)) (internal quotation marks omitted).

The court emphasized that the IUTSA “does not preempt claims for misappropriation of information or ideas that are protected by contract.” Nevertheless, under similar circumstances where no express obligation has been created, the decision bars recovery for a defendant’s use of confidential information that does not rise to the level of a trade secret.

The court also rejected NABC’s argument that its conversion claim was “derivative” of criminal law, and thus entitled to the statute’s exception. In so holding, the court distinguished civil conversion claims from civil claims brought under RICO, which are not preempted.

August 9, 2012 | Eastern District of Pennsylania
WebMD Alleges Former Vice President will Inevitably Disclose Trade Secrets Through Employment with Competitor

Plaintiff, WebMD Health Corp., sued Anthony T. Dale, a former employee, alleging by accepting employment with Health Grades, Inc., Dale breached his Restrictive Covenant Agreement, violated Delaware’s Uniform Trade Secrets Act, engaged in unfair competition, and converted WebMD’s trade secrets and confidential information. Plaintiff then moved for a preliminary injunction to enjoin Dale from employment with Health Grades for one year.

WebMD’s complaint alleged that in Dale’s ten years of employment, including three years as Group Vice President, he was exposed to, and involved in the development of, highly confidential information such as pricing policies, product development plans, business plans, sales strategies, and market positioning. Further, it stated that Health Grades was a direct competitor as defined by the terms of the restrictive covenants that Dale signed and that he could not perform the role he has planned at Health Grades without using WebMD’s confidential information, either consciously or inadvertently.

The District Court for the Eastern District of Pennsylvania, applying Delaware Law, granted WebMD’s motion for a preliminary injunction, finding that WebMD was likely to succeed on the merits. However, the court also found that that the definition for “competing businesses” in the restrictive covenants was overbroad and thus it “blue penciled” the definition to only restrict Dale’s involvement online advertising of health and wellness-related products, which constituted a marginal portion of Dale’s responsibilities at Health Grades.

August 6, 2012 | 295th Judicial District Court of Harris County, Texas
Baker Hughes Accuses Departing Scientist of Leaving Confidential Information

On August 6, 2012, Plaintiffs Baker Hughes Incorporated and Baker Petrolite Corporation (collectively “Baker”) filed an application seeking a temporary restraining order, and a temporary and permanent injunction against its former employee, Defendant Jun Tian (“Tian”). Plaintiffs allege Defendant misappropriated “confidential information and trade secrets, resigned from [Plaintiffs’ company], and went to work for a direct competitor, Multi-Chem Group LLC (‘Multi-Chem’).” Defendant has refused to return said information, and Plaintiffs seek to enjoin Tian from every using or disclosing it.

Plaintiffs offered specific details regarding the events leading up to the lawsuit. Tian was a Senior Development Engineer on Plaintiffs’ “Flow Assurance” work group, as part of which he played “a critical research and development role,” had access to confidential information and was “a listed inventor on several patents and patent applications.” Tian entered into an explicit “Employment Agreement” with Plaintiff that barred him from disclosing Plaintiffs’ confidential information. After resigning, Tian allegedly acted “suspiciously” and was “tight-lipped” at his exit interview. This, combined with reports from fellow employees that Tian had downloaded work files to an external harddrive prior to his departure, lead Plaintiffs to perform a forensics investigation of Tian’s harddrive. At the close of the investigation, Plaintiffs concluded that Defendant had transferred proprietary information to an external harddrive without authorization.

In addition to the trade secrets misappropriation claim, Plaintiffs also allege causes of action for breach of contract, threatened misappropriation/inevitable disclosure, breach of fiduciary duty, unjust enrichment and conversion.

One of the first issues that will likely arise is the fact that Plaintiffs did not specify exactly what confidential information Tian allegedly took. Plaintiffs are understandably hesitant to commit this information to public record, and will likely seek a protective order and/or in camera review by the Judge. Interestingly, even if Plaintiffs fail to prove that Tian took confidential information, the court could still bar Defendant from working at Multi-Chem through the inevitable disclosure claim.

July 26, 2012 | United States Court of Appeals for the Fourth Circuit
Fourth Circuit says CFAA does not apply to an employees unauthorized use of information where access to that information was authorized.

The Fourth Circuit has become the most recent Federal Court of Appeals to take a stance on the scope of the "without authorization" language of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030. Following the Ninth Circuit's recent en banc decision in Nosal, the Fourth Circuit concluded that the CFAA does not apply where an employee is authorized to access a company computer system but is not authorized to use the information he accessed in the manner in which it was used (against the employer's interest). The ruling narrows the scope of the CFAA, a statute that is often used to obtain jurisdiction in federal courts by plaintiffs asserting trade secret misappropriation or other state law-based claims.

In WEC Carolina Energy Solutions, LLC v. Miller, No 11-1201, July 26, 2012, the Fourth Circuit upheld the trial court's dismissal of the plaintiff's CFAA claim. Defendant Miller had downloaded his employer's files onto his personal computer before resigning and used them in a presentation made on behalf of a competitor to a potential WEC customer. WEC claimed that because company policies did not permit the downloading of confidential and proprietary information to a personal computer, and because Miller had breached his fiduciary duties, Miller either lost all authorization to access the information or exceeded his authorization, both of which are violations under the CFAA. The Fourth Circuit held that in the absence of a restriction of access to the company's computers, the alleged acts did not violate the CFAA. The Court rejected the view held by the Seventh Circuit that by violating the duty of loyalty to an employer, the employee's agency relationship is terminated and the employee consequently loses any authority to access company computers. The Court also declined to adopt the Ninth Circuit interpretation of the CFAA, which they considered a harsher approach that could lead to unwarranted criminal liability. Ultimately, the Court held that improper use of information validly accessed from a computer does not violate the CFAA.

July 10, 2012 | Circuit Court of St. Louis
Designing Group Claims Anheuser-Busch Pilfered Group's Confidential Design For a Home Beer Tap

AFA Dispensing Group B.V. and Dispensing Technology (collectively "plaintiffs") have brought suit against Anheuser-Busch InBev S.A., Anheuser-Busch InBev Worldwide, Inc. and Anheuser-Busch, LLC (collectively "defendants"), claiming violation of the Missouri Uniform Trade Secrets Act, as well as Breach of Contract. The basis of the claim is plaintiffs' allege trade secret in a "Confidential Dispensing Technolog[y]" dubbed a "'bag-in-bottle' dispensing system."

According to the Complaint, the parties had engaged in preliminary talks for defendants to license the technology. During these talks, plaintiffs took extensive efforts to alert defendants that the dispensing technology in question was a confidential trade secret. At some point, defendants broke-off negotiations, and proceeded to patent plaintiffs' confidential bag-in-bottle technology, which it eventually marketed under the name "Draftmark." Moreover, plaintiffs allege that this was not the first time that defendants engaged in such inscrutable behavior; a high-ranking executive at defendants' company allegedly bragged about stealing other companies intellectual property, using vulgar and obscene metaphors to describe its actions.

This situation -- in which confidential information is misappropriated through licensing negotiations -- is not uncommon, and often hinges upon the specific facts of the case, the precautions taken by the trade secret holder, and the relative industry standards. Since this claim is based in Missouri (a state with a Uniform Trade Secrets Act), plaintiffs will not have to prove the trade secret was "continuously used" in its business, which is required under the Restatement of Torts definition for a trade secret. The requirement can be an obstacle for companies that bring trade secret claims based on the misappropriation of a new product idea. However, given that the design would have lost secrecy as soon as it was sold to the public at large (or patented), it will be interesting to see how the court levies damages, assuming plaintiffs succeed on their claim.

June 21, 2012 | United States Court of Appeals for the Fifth Circuit
5th Circuit Affirms Sanction for Law Firm Based on Accidental Disclosure

In Trenado v. Cooper Tire & Rubber Co., the surviving members of the Trenado family brought a products liability suit against Cooper Tire & Rubber Co. (“Cooper”), alleging the manufacturer was responsible for the family’s tragic rollover car accident. A jury returned a verdict in favor of the defendant, which the Fifth Circuit Court of Appeals affirmed in March, 2012.

As part of the litigation, plaintiff’s attorneys (“Smith & Fuller”) were privileged to Cooper’s trade secrets and confidential information. Smith & Fuller accidentally disseminated the information when it mistakenly copied the confidential files onto compact discs, which were then distributed to other personal injury attorneys. According to court documents, the recipients were attending a conference that specifically discussed “obtaining discovery from Cooper,” and were lawyers that generally “sue[d] Cooper and other tire manufacturers.”

Smith & Fuller’s dissemination violated the trial court’s Protective Order of Confidentiality regarding Cooper’s trade secret and confidential information. Following trial, the district court held that Smith & Fuller did not willfully violate the Protective Order. It determined, however, that sanctions should be imposed based on: (i) Cooper’s vigorous enforcement of the protective order prior to the violation; (ii) the costs Cooper incurred as a result of the violation; and (iii) the fact that Smith had previously violated similar protective orders. Pursuant to Rule 37(b)(2)(C), the court ordered Smith & Fuller to reimburse Cooper $29,667.71 in attorneys’ fees and expenses incurred as a result of Smith’s violation.

On appeal, Smith & Fuller argued the violation of the Protective Order was inadvertent and that the court erred by imposing sanctions. They further argued that the district court’s remedial powers were limited to the “Inadvertent Disclosure” provision of the Protective Order. However, the Fifth Circuit Court of Appeals affirmed the damages award. The Court held that:

[p]ursuant to Rule 37(b), the [district] court is authorized to impose
sanctions against parties or counsel, “‘including attorney’s fees,’ caused
by the failure to comply with discovery orders.” The district court provided
specific and well-reasoned grounds to impose sanctions as it determined that
any lesser penalty would not have been an adequate future deterrent. Appellants
concede that they violated the court’s Protective Order, and it was well within
the court’s discretion to use sanctions as a tool to deter future abuse of
discovery.

The Court’s decision cleared up ambiguity over whether Rule 37(b) sanctions can be imposed for violating Rule 26(c) protective orders. The Court not only questioned the Eleventh Circuit’s “narrow reading” of Rule 37(b), but moreover held that a Protective Order can also constitute an “order to provide or permit discovery.” The decision further exhibits the extremely delicate nature of trade secrets, such that an even accidental dissemination can destroy the vitality of the secret forever. Courts must decide whether a party should be punished for such a disclosure, and if so, how much.