Recent Decisions and Case Developments

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.

June 9, 2012 | District Court for the Eastern District of California
District Court for the Eastern District of California held that concepts, designs, ideas and workflow shared during a business partnership were not trade secrets

On September 13, 2011, Chief Judge Anthony W. Ishii of the District Court for the Eastern District of California refused to enjoin Plaintiff’s former business partner, the Trizetto Group, Inc. (“Trizetto”), from using concepts, designs, workflow processes and flows, and other insights developed during their partnership.

Plaintiff, Agency Solutions.com, LLC (“Agency Solutions”) and Trizetto had entered into an agreement to develop software to service the administration of insurance companies. However, the parties’ relationship soured and the agreement was terminated before the software was completed. Agency Solution’s product never entered the market. Agency Solutions then filed suit against Trizetto after learning that Trizetto was marketing a similar software product to its competitors. Plaintiff sought a preliminary injunction to prevent Trizetto from marketing the product, alleging that Trizetto misappropriated 26 “trade secrets” mainly pertaining to 1) conception and design; 2) workflow processes and flows; and 3) rating and underwriting.

Judge Ishii found that the allegedly misappropriated information, consisting of ideas and general experience from software development, did not qualify as “trade secrets.” Significantly, the Court explained that a trade secret did not consist of “conceptual datum,” such as ideas, concepts, or general knowledge, but “empirical datum,” such as “customer’s preferences, or the location of a mineral deposit.”

Plaintiff filed a notice of appeal of the Court's refusal to grant a preliminary injunction, and Judge Ishii agreed to stay the proceeding pending the appeal's resolution. However, during the pendency of the appeal, Plaintiff voluntarily dismissed the action on January 4, 2012. However, the Court denied Defendant's motion for attorney's fees.

June 7, 2012 | Circuit Court of Fairfax County
Virginia Appeals Court Overturns "Lost Goodwill Damages" Award

In 2009, Perot Government Services, Inc (“Perot”) brought suit against 21st Century Systems, Inc. et al. (“Century”). Perot’s claim included several causes of action (including trade secret misappropriation) stemming from the alleged theft of Perot’s confidential information by ex-employees, who went to work for Century. Prior to trial, Dell purchased Perot; Perot’s statement of damages thus included the effect that the alleged theft had on Perot’s valuation (i.e. “lost goodwill damages”).

Although the jury returned a verdict in favor of Perot, the Circuit Court of Fairfax County overturned a large percentage of the damages award – specifically approximately $11 million in damages related to Perot’s diminution in value. The trial court had allowed Perot’s expert to testify to the effect of Century’s actions on Perot’s valuation, over Century’s objection. However, the Virginian appeals court held that the trial court should not have denied Century’s motion to strike the “speculative” testimony, and further ruled that Perot had failed to actually demonstrate that Century’s conduct in any way decreased Perot’s valuation. However, the Court upheld the jury’s verdict in regards to punitive and treble damages, as well as the extensive computer forensics work Perot incurred as a result of Century’s theft.

May 24, 2012 | United States District Court for the Central District of California
Botox manufacturer successfully obtains injunction blocking competitor’s product release on allegations of trade secrets misappropriation

Allergan, Inc., makers of the famous anti-wrinkle medication Botox, successfully obtained an injunction against the release of its competitor Merz Pharmaceuticals, LLC’s rival product Xeomin, immediately ahead of its planned nationwide launch. Allergan claimed in the United States District Court for the Central District of California that seven former employees had stolen volumes of customer information before defecting to Merz. The information consisted of spreadsheets with customer details and contact information for over 24,000 Botox customers in the United States. Merz then used this information to create anticipation for its competing product among these customers.

The terms of the injunction prohibit Merz from: “retaining, disclosing, or using” the trade secrets; selling Xeomin or soliciting its purchase for 10 months in the “facial aesthetics” market; doing the same in the “therapeutics market” for specific customers; and selling “dermal filler” products for 10 months. Some exceptions are provided for customers that seek out Merz with no solicitation. Merz is also ordered to search for and destroy all Allergan trade secrets in its possession and then follow up with a report to the court. The remedy is noteworthy because of the judge’s willingness to completely block a product’s release, instead of disgorging profits, for example.

Update: Defendants requested a modification of the injunction order to also add an exception for “customers who are provided or purchase dermal filler products, or who are solicited to purchase dermal filler products, from a company other than” Merz. Judge Guilford issued an in camera order denying this amendment on April 12, 2012, noting that the defendants had not complied with his instructions to keep the order as-is and to “solve the problem” as applied to co-defendant Amber Prumer, a salesperson for Allergan who went to work Merz after sending sensitive sales information to her personal e-mail account. (Ostensibly the injunction, as is, would be too broad to apply properly to Prumer, but the reasoning is not clear from the judge’s order.)

The parties are conducting post-injunction discovery, and the court has scheduled the jury trial to commence on March 26, 2013.

May 10, 2012 | U.S. District Court for the Central District of California
CBS Broadcasting sues ABC, Inc. and affiliates for misappropriating secret production processes for the hit CBS show, “Big Brother”

CBS Broadcasting, Inc. (“CBS”) filed suit against ABC, Inc. and the Walt Disney Co. on May 10, 2012 in the Central District of California, alleging trade secrets misappropriation amongst nine other claims. CBS claims that defendants, in developing a new series “Life in a Glass House,” misappropriated CBS’ trade secrets about several production processes for the “Big Brother” reality television show. CBS argues that these processes are unique in the industry and make the show successful by enabling the “Big Brother” staff to “prep, produce, edit and deliver each episode in two and a half days.” It adds that the defendants (and anyone else) could not have independently discovered the processes by merely watching the show. Rather, CBS believes that ABC improperly acquired knowledge about these processes from former “Big Brother” producers and staff who have signed non-disclosure agreements with CBS but are now working for ABC on “Life in a Glass House.”

CBS requested a preliminary injunction in order to stop ABC from premiering the show, however U.S. District Judge Gary Allen Feess said he is unlikely to grant it.

May 3, 2012 | U.S. District Court for the Southern District of New York
In a fight over ownership of the Pepsi cola formula, heirs of formula creator seek to disclose documents regarding creation of formula

The heirs of Richard Ritchie, who created the Pepsi® cola formula in 1931, filed a declaratory judgment in the District Court for the Southern District of New York on May 3, 2012, requesting the court to declare that the documents relating to the creation of the soda formula are the Ritchie heirs’ personal property, which the heirs may publicly share. PepsiCo, Inc. (“Pepsi”) counters that the documents are the company’s trade secrets but the heirs argue in response that Pepsi has no claim for trade secrets misappropriation. Ritchie allegedly developed the Pepsi formula while working for a separate candy company and was not a Pepsi employee until 1939. He left Pepsi in 1951 and signed an agreement which only prohibited him from disclosing the formula to a competing beverage company but it did not cover his heirs’ use of the formula and did not require him to return the formula documents. Alternatively, even if the formula was Pepsi’s trade secret, the heirs argue that they have a First Amendment journalistic right to disclose the “historically significant, newsworthy” documents.

While the parties are currently in mediation, and by request of the court Silleck requested leave until September 28, 2012 to file an amended complaint.

May 1, 2012 | United States District Court for the Northern District of California
N.D. Cal.: Free Exercise Clause Does Not Preclude Evaluation of Asserted Trade Secrets of Spiritual Nature

The Northern District of California recently held that its involvement was not so “entangled” with the Free Exercise Clause of the First Amendment that it should be precluded from evaluating a plaintiff’s trade secrets claim.

The Art of Living Foundation brought an action for copyright infringement and misappropriation of trade secrets under the California UTSA against former members of its movement who turned to blogs to voice their criticism under the monikers “Skywalker” and “Klim.” The organization provides courses on “healthy living” topics such as yoga and controlled breathing that are embodied in manuals and teaching notes. As part of their criticism, the bloggers posted some of these teaching notes and other materials on their blogs and/or linked to other sites that hosted them.

Defendants asserted that the court should be barred from assessing the plaintiff’s trade secrets claim due to excessive entanglement with the Free Exercise Clause. Specifically, as the plaintiffs had argued that they had added novel elements to traditional Hindu concepts, the defendants claimed that this necessarily involved an adjudication of what is traditionally religious or not and therefore would ensnare the court in impermissible evaluation of religious doctrine. The court rejected this, noting that even though the nature of the work is religious, it could still evaluate the trade secrets claim as it would any other: by comparing the allegedly novel portions to what is generally known to the public and then assessing the value of nondisclosure of those elements.

After a lengthy discussion that concluded that the training materials might be eligible for trade secret status, the court dismissed the motion to strike as to Skywalker, as he had personally posted some of the materials on his blog, constituting enough evidence of potential misappropriation for the case to move forward. However, the motion to strike was granted as to Klim because there was no evidence that he posted any materials to his blog.

April 26, 2012 | U.S. District Court for the Northern District of Illinois
Illinois district court rules that unjust enrichment and fraudulent inducement claims concerning information not rising to level of trade secrets are not preempted by ITSAe

In Miller UK Ltd. v. Caterpillar, Inc., the U.S. District Court for the Northern District of Illinois held on April 26, 2012 that the Illinois Trade Secrets Act, 765 ILCS §1065/1 et seq., preempted only common law claims of misappropriation of trade secrets and did not preempt unjust enrichment and fraudulent inducement claims involving misappropriated information that did not constitute trade secrets. In its ruling, the district court refused to follow an Illinois Appeals Court decision in Pope v. Alberto-Culver Co., 26 Ill. App. 3d 512 (1st Dist. 1998), which held that the Act preempted both common law claims for misappropriation of trade secrets and confidential information that did not rise to the level of trade secrets. The district court found that the Appeals Court in Pope failed to address §1065/8(b)(2), which provided that the Act would not affect “other civil remedies that are not based upon misappropriation of a trade secret.” The Illinois Supreme Court had not ruled yet on whether the Act preempted claims involving misappropriated confidential information that did not constitute trade secrets. But the district court was confident that the State’s highest court would have also, at least, declined to follow Pope.

Miller UK, Ltd. (“Miller”), a supplier of parts for construction and mining equipment, filed its claims for misappropriation against Caterpillar, Inc. (“Caterpillar”) on June 17, 2010. Miller’s claims arise from a 1999 supply agreement to supply parts to Caterpillar for its machines. During this relationship, Miller disclosed to Caterpillar its trade secrets and confidential information about the design, manufacture, and testing of Miller’s coupler technology. Miller asserted that the disclosed information was subject to confidentiality requirements in the supply agreement. Caterpillar, however, allegedly took the information and used it to design its own parts.

April 11, 2012 | Southern District of New York
Conviction of former Goldman Sachs programmer for trade secrets theft is reversed by the Second Circuit

In 2011, Sergey Aleynikov was sentenced to more than eight years in prison for the theft of trade secrets under the Economic Espionage Act and transportation of stolen property in interstate commerce under the National Stolen Property Act (NSPA). This case marked the first instance of federal prosecutors using the Economic Espionage Act (EEA) to police the misuse of source code related to high frequency trading. The trade secrets at issue are segments of computer source code from Goldman Sachs & Co. (Goldman) that are used in its high frequency trading platform.

In February 2012, the court reversed Aleynikov's conviction of trade secrets theft in a one-page order. In an opinion published April 11, 2012, the Second Circuit held that Sergey Aleynikov was wrongly charged with theft of property because the code did not qualify as a physical object under a federal theft statute. The court held that "because Aleynikov did not ‘assume physical control’ over anything when he took the source code, and because he did not thereby ‘deprive [Goldman] of its use,’ Aleynikov did not violate the [National Stolen Property Act]." It also ruled that Aleynikov was wrongly charged with espionage, since the code was not a product designed for interstate or foreign commerce. The decision called into question the government's ability to prosecute theft of internal trading systems or other internal financial instruments under the Economic Espionage Act.