Recent Decisions and Case Developments

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.

April 10, 2012 | United States Court of Appeals for the Ninth Circuit
The Court of Appeals for the Ninth Circuit decides to rehear United States v. Nosal en banc, ordering district courts to ignore panel decision

On April 10, 2012, Chief Judge Alex Kozinski, writing for the Ninth Circuit Court of Appeals (en banc), issued a final decision in the case United States v. Nosal, narrowly interpreting the scope of the Computer Fraud and Abuse Act (CFAA). Chief Judge Kozinski’s opinion made clear his unwillingness to expand the reach of the CFAA for fear of criminalizing a wide range of seemingly innocuous behavior that Congress did not intend.

The particular facts of this case are not nearly as significant as the question of law and statutory interpretation presented, but briefly, the United States government brought charges against defendant David Nosal and his alleged accomplices for violations of the CFAA. Nosal was a former employee of executive search firm, Korn/Ferry International, while his suspected co-conspirators were current employees of the firm. The twenty-count superseding indictment alleged that current Korn/Ferry employees transferred confidential and proprietary information to Nosal from a confidential database of executives and companies, which was developed and maintained by Korn/Ferry and considered to be of great value to the company as against competitors.

The legal question presented was whether the employees “exceeded [their] authorized access” to the company computer system, within the meaning of the CFAA, when they transmitted confidential Korn/Ferry information to Nosal in violation of their employer’s computer use restrictions. The district court denied Nosal’s motion to dismiss the indictment at first, but later dismissed most of the counts against him after granting his motion to reconsider in light of the holding in LVRC Holdings LLC v. Brekka, 581 F.3d 1127 (9th Cir. 2009). However, a 2-1 panel decision of the Court of Appeals for the Ninth Circuit reversed the district court and reinstated counts of the indictment. The majority found factual distinctions from the present case to Brekka and held that “under the CFAA, an employee accesses a computer in excess of his or her authorization when that access violates the employer’s access restrictions.” 642 F.3d at 789.

On October 27, 2011, the Ninth Circuit Court of Appeals granted Nosal’s petition for rehearing en banc, clarifying that the previous three-judge panel decision would hold no precedential value. Oral arguments were heard on December 15, 2011, and despite the circuit split now created over the scope of the CFAA, the en banc court affirmed the district court’s dismissal of several counts of the indictment. The April 10, 2012 decision held that “exceeds authorized access” in the CFAA pertains to violations of restrictions on access to information, and not restrictions on its use.

March 6, 2012 | United States District Court for the Northern District of California
Tech company’s suit against former employee for misappropriation of trade secrets related to Twitter account survives motion to dismiss

PhoneDog is a company that delivers news about mobile phones, and provides information about them for consumers to use when comparison shopping. The company had employed Noah Kravitz to write online reviews of phone products using a variety of online mediums; one such medium was Twitter, where Kravtiz’s handle was “@PhoneDog_Noah.” However, after Kravitz left the company, he refused relinquish use of the Twitter account, and instead changed the handle to “@noahkravitz,” and installed a new password. Whether an exiting employee can take his Twitter followers with him, and the potential trade secret implications involved, is a case of first impression.

PhoneDog sued Kravitz in the United States District Court for the Northern District of California on July 15, 2011. The suit claimed misappropriation of trade secrets, interference with economic advantage, and conversion. On November 8, 2011, the court denied Kravitz’s motion to dismiss the trade secrets and conversion claims, noting that PhoneDog had described the elements of trade secrecy in sufficient detail. The case received publicity for potentially determining “ownership” of an employees Twitter account and followers. However, the alleged trade secrets at issue is actually the Twitter account password itself. Although PhoneDog’s conversion claim explicitly asserted ownership of the Twitter account, courts have interpreted the California Uniform Trade Secrets Act to preempt common law claims (such as conversion) if they are based on the same nucleus of facts as a concurrent trade secret misappropriation claim. Thus, the court can decide the case without analyzing the parties’ competing ownership claims. Moreover, even if the court finds in favor of PhoneDog, the specific remedy and calculation of damages could influence whether it would be cost-effective for parties to bring these types of claims moving forward.

The case exemplifies the complex challenges companies face when trying to protect their confidential information in the digital era, and more specifically, the dangers of not instituting explicit internal policies for employees and their social media accounts.

On or around December 19, 2012, the parties settled. Although the actual details of the settlement were confidential, it appears Kravitz has been permitted to retain ownership of the Twitter account.

February 27, 2012 | Supreme Court of Connecticut
Connecticut high court rules that UConn’s donor lists are trade secrets

On February 27, 2012, the Connecticut Supreme Court ruled that the University of Connecticut’s donor list is a trade secret and not subject to easy access through a Freedom of Information request. The court reasoned that UCONN spends resources to acquire the information and that other institutions could use that information to lure away dollars and loyalty from those on the list.

In 2009, the Connecticut Freedom of Information Commission (FOIC) had received a complaint alleging that the University of Connecticut (UConn) improperly refused a request for disclosure of the names and addresses of (1) purchasers of tickets to the school's athletic events held by the University Athletics Department and to performing arts events at the Jorgensen Auditorium, (2) persons who made inquiries about programs at the Center for Continuing Studies, and (3) donors to the University Libraries Division. UConn claimed that the requested records were "customer lists" that were exempt from the disclosure requirements of the freedom of information act as trade secrets.

The FOIC ordered the records disclosed, finding that a public entity such as UConn cannot maintain its own protected trade secrets because UConn is largely subsidized by public funds and is not engaged in a trade or business dependent on earned income for its continued existence. On appeal, the trial court found that nothing in the statute suggests that a public agency cannot maintain trade secrets, noting that the university competed with other institutions that operate performing arts, sporting events, and educational programs for a profit, and that compiling these lists had cost UConn much time and effort.

Although the trial court found that the list of donors to the University Libraries Division does not constitute a customer list under the trade secrets exemption because donors are not purchasing goods or services, the court remanded the matter to the FOIC for findings as to whether the records qualify as another type of "information" protected as a trade secret and as to whether the records do not qualify for exemption because they are readily ascertainable from other sources. The FOIC appeals from the decision to the Supreme Court.

In oral arguments to the Supreme Court, the appellant (Connecticut's Freedom of Information Commission, represented by its attorney Clifton Leonhardt) argued that it is conceivable that the University of Connecticut could hold trade secrets, even though the Commission's brief contended the public institution could not. The Commission argued two other factors should make the lists public: because general interest outweighs UConn's need for confidentiality, and because UConn never showed the records were unavailable elsewhere. Later, Leonhardt said in an interview that he does not believe the commission, in its final decision, definitively settled the question of whether UConn can maintain trade secrets. If the commission had found definitively against UConn, he said, such a finding would contradict state law authorizing UConn to create and own intellectual property and to enter into research contracts with private businesses.

On February 27, 2012, the Connecticut Supreme Court ruled that the University of Connecticut’s donor list is a trade secret and not subject to easy access through a Freedom of Information request. The court reasoned that UCONN spends resources to acquire the information and that other institutions could use that information to lure away dollars and loyalty from those on the list.