Recent Decisions and Case Developments

December 29, 2011 | Superior Court of California
TCW and Gundlach settle their dispute over allegedly stolen trade secrets

TCW Group Inc. and Jeffrey Gundlach, its former chief investment officer, announced on Thursday, December 29, 2011, that they had settled a lawsuit over Gundlach’s firing in 2009 and allegations he stole trade secrets to set up his own firm. The terms of the settlement agreement were said to be confidential and the parties would not discuss them. Litigation and damages assessments had not concluded at the time of the settlement, but a jury had previously made preliminary findings.

On August 20, 2011, after seven weeks of trial and two days of deliberation, the California jury in the case between TCW and Jeffrey Gundlach, a former employee, concluded that Mr. Gundlach did technically misappropriate trade secrets and breach his fiduciary duty to the company. But the jury awarded his former employer nothing in damages, finding that Mr. Gundlach’s breach of duty had caused no harm to his former employer. The jury also found that Mr. Gundlach had intentionally interfered with contracts, but that TCW had not been harmed; they awarded no damages on that issue, either.

However, the jury determined TCW had withheld wages from Mr. Gundlach in violation of the state labor code, and found TCW liable to Gundlach for nearly $67 million in back-pay.

TCW may yet recover damages on the trade secrets count; damages for the jury’s finding of misappropriation will be determined by Judge West. TCW is seeking about $89 million for the trade secrets theft. However, the jury’s determination that the theft had not been willful and malicious ruled out an award of punitive damages.

TCW had filed an amended complaint for misappropriation of trade secrets, conspiracy and aiding and abetting in the theft of trade secrets, and common law unfair competition, among other claims, on February 09, 2011. The amended complaint followed a January rejection by Judge West of TCW's claims that the DoubleLine Fund Trust and its trustees had stolen trade secrets and engaged in unfair competition, saying the firm had failed to state a factual basis to support the allegations in its complaint.

TCW's first complaint in this action came nearly a year after the company originally sued Gundlach for breach of fiduciary duty, unfair competition, misappropriation of trade secrets and civil conspiracy, among other claims. Gundlach was TCW's former investment chief who launched DoubleLine Capital LP after being fired from TCW in December 2009.

The second lawsuit targeted a trust associated with Gundlach's investment firm. Like the previous suit, the second complaint claimed that Gundlach worked to steal TCW's data, including contact and holdings data for clients. If printed out, the allegedly stolen information would amount to roughly 9 million pages, according to TCW's suit. The trustees are also named in the second suit based on allegations that they knew that Gundlach and his co-conspirators had stolen confidential, proprietary information from TCW and that DoubleLine would use that material to manage the trust's mutual funds. The complaint included allegations of misappropriation of trade secrets, unfair competition, conspiracy to steal trade secrets, unjust enrichment and other related state law claims.

December 29, 2011 | United States District Court for the District of Delaware
Claims for trade secret misappropriation against a licensee survive motion to dismiss for failure to plead with specificity

Eastman refines further the pleading standard in trade secret cases. In general, there is no heightened pleading standard for trade secret cases after Twombly/Iqbal; a plaintiff is not required “to plead all of the relevant facts in detail.” However, a plaintiff can’t simply point to an area of technology or refer generally to information or business methods. The goal of the pleading standard is to provide notice to defendants of the substance of the claims against them. In the context of claims for trade secret misappropriation, this goal must be balanced with the need to maintain secrecy. Disclosure of the actual trade secret is not required.

Here, the alleged deficiencies in the pleadings were 1) a failure to identify the particular employees alleged to have stolen the trade secrets; 2) a failure to identify the trade secrets that were allegedly misappropriated; and 3) a failure to show use or disclosure of the alleged trade secrets. After a review of the facts set forth by the plaintiff, and case law from other states applying UTSA statutes, the Magistrate judge found that by identifying a group of employees, referring to the alleged trade secrets as information “relating to the manufacture of PET” and Eastman’s “IntegRex technology,” and alleging their use in start-up of a new plant, Eastman had properly disclosed sufficient information to meet the Rule 8 pleading requirements and state a claim.

December 22, 2011 | United States District Court for the Western District of Pennsylvania (Pittsburgh)
W.D. Pa. rules that the Penn. UTSA allows for attorneys’ fee awards in cases of specious misappropriation claims made in bad faith

Judge William Standish of the United States District Court for the Western District of Pennsylvania held that Pennsylvania’s version of the Uniform Trade Secrets Act (“PUTSA”) allows awards of attorneys’ fees in cases of specious misappropriation claims made in bad faith. A radiation therapy company, Best Medical International, Inc. (“Best Medical”) had brought a counterclaim against a former employee, Hill, who had initially sued Best Medical for failure to pay severance benefits. Best Medical later added three other former employees and competitor Accuray, Inc., and alleged that all had misappropriated its trade secrets. Eventually, the former employees and Accuray were granted summary judgment after prolonged settlement discussions in which it came to light that Best Medical could not identify the alleged trade secrets, did not properly investigate its claim before filing, and did not have any actual evidence of misappropriation. The former employees and Accuray proceeded to ask for attorneys’ fees. The issue had not yet been addressed under the PUTSA, but Judge Standish granted the request, as Best Medical’s behavior met numerous other states’ established standards of “objective speciousness” and “subjective bad faith.”

December 21, 2011 | United States District Court for the Southern District of Indiana
Canadian national residing in US pleads guilty to trade secret theft and transfer to China and Germany; Sentenced to 87 months in prison

Defendant Kexue Huang pled guilty at an October plea hearing in a high-profile criminal trade secrets misappropriation case in the United States District Court for the Southern District of Indiana. Huang, a Canadian national permanently living in the United States, was charged with illegally exporting $300 million worth of trade secrets to China and Germany through an intermediary. Huang was sentenced to 7 years and 3 months in prison on December 21, 2011.

The case was particularly interesting because it dealt explicitly with the prong of the Economic Espionage Act that criminalizes stealing trade secrets for the benefit of a foreign government. This provision has been very seldom used since the law was passed in 1996, but its use in prosecutions is on the rise.

18 U.S.C. §1831(a) provides that individuals or organizations that, while “intending or knowing that the offense will benefit any foreign government,” steal, copy, or otherwise appropriate any trade secret or attempt to do so may be fined for up to $500,000, imprisoned for up to 15 years, or both.

The charges concerned trade secrets related to a commercial insecticide developed by Dow Chemical Co. in Indiana, where Huang worked from 2003 to 2008 until he was fired. In addition, some related to trade secrets owned by grain distributor Cargill, Inc., where Huang went to work as a biotechnologist in 2008. At the plea hearing, Huang admitted he stole a key component of a new Cargill food product and gave it to a student at Hunan Normal University in China.

Huang, while charged with 12 counts of economic espionage to benefit a foreign government or instrumentality and 5 counts of interstate or foreign transportation of stolen property, only pled guilty to one count of stealing trade secrets from Cargill and one count of engaging in economic espionage at Dow.

December 16, 2011 | Supreme Court of Texas
Texas relaxes standards concerning consideration required to bind employees to non-competition agreements; must be “reasonably related to an interest worthy of protection”

The Texas Supreme Court held that stock options can act as appropriate consideration to bind an employee to a non-competition agreement under Texas law.

The dispute arose between an insurance company, Marsh USA, Inc., and its former managing director, Rex Cook, over whether or not stock options were enough to bind Cook to his non-competition agreement. Cook had started to work for Marsh’s direct competitor and sought to invalidate his non-competition agreement on the grounds that it was unenforceable.

Texas has a statute which dictates that restrictive covenants, such as non-competition agreements, must be ancillary to otherwise enforceable agreements. Prior to the decision in this case, this meant that an otherwise enforceable agreement must “give rise” to the employer’s interest in enforcing a non-competition agreement. The parties disagreed not only on whether or not stock options met the "ancillary to an otherwise enforceable agreement" language, but also on whether or not mere consideration consisting of stock options could "give rise" to or create the interest in restraining competition.

In eliminating the “give rise” requirement and holding that the consideration only need be “reasonably related to an interest worthy of protection, such as trade secrets, confidential information or goodwill,” the court significantly loosened standards for Texas entities seeking to enforce non-competition agreements. The court noted that Marsh satisfied this standard, as the stock options, the value of which is clearly tied to the long-term success of the company, were reasonably related to the company’s interest in its former employee not working for a competitor and in maintaining industry goodwill.

December 13, 2011 | Eighth Circuit, United States Court of Appeals
Eighth Circuit holds that compilations of publicly available and proprietary information may qualify as trade secrets

In AvidAir Helicopter Supply Inc. v. Rolls-Royce Corp., the Eighth Circuit interpreted the state’s implementation of the Uniform Trade Secrets Act, holding that compilations including both proprietary and public information may be entitled to trade secret protection where time and money were expended in their preparation and reasonable efforts were taken to maintain their secrecy.

The case involved engine repair procedures developed by Rolls-Royce, the manufacturer of said engines. Rolls-Royce documented its federally-approved methods, techniques, and specifications in Distributor Overhaul Information Letters (“DOILs”), which it exclusively distributed to selected authorized maintenance centers (“AMCs”). DOILs were periodically updated to keep pace with federal certification requirements. Although Rolls-Royce’s predecessor did not restrict access to DOILs, upon acquisition of the company in 1995, Rolls-Royce made efforts to establish proprietary control over the documents, stamping each subsequent revision with a proprietary legend and enforcing previously-executed nondisclosure agreements. The Eighth Circuit affirmed the trial court, holding that, based on value and efforts to maintain secrecy, revisions issued after Rolls-Royce’s takeover and implementation of precautionary measures were protectable as trade secrets. In response to AvidAir’s argument that the minimal amount of new information in the updated DOILs was insufficient to sustain a trade secret claim, the Court stated,

“Compilations are valuable, not because of the quantum of secret information, but because the expenditure of time, effort, and expense involved in its compilation gives a business a competitive advantage.”

AvidAir's petition for certiorari was denied on October 1, 2012.

November 22, 2011 | District Court of Johnston County, Supreme Court of the State of Oklahoma
Oklahoma Supreme Court held that an arbitration agreement in an employment contract did not prohibit judicial review of non-competition clauses

On November 22, 2011, the Supreme Court of the State of Oklahoma held in Howard v. Nitro-Lift Technologies, LLC that an arbitration agreement in employment contracts between two former employees, Eddie Lee Howard and Shane Schneider, and Nitro-Lift Technologies, LLC (“Nitro-Lift”) did not prohibit judicial review of the contracts’ non-competition and non-solicitation provisions where Oklahoma adopted a legislative public policy against restraints of trade. See 15 Okl. St. §217 et seq. Generally, a Federal or State court will enforce parties’ agreement to arbitrate and submit appropriate disputes to arbitration unless the court finds that the arbitration agreement itself was invalid. However, the supreme court in Howard refused to submit the question of whether the restraints of trade were valid to arbitration, suggesting that the Oklahoma judiciary had primary authority over the question and not the arbitrator.

Nitro-Lift argued that the non-competition and non-solicitation agreements were necessary to protect trade secrets about its process used to generate nitrogen for application on oil and gas well sites and to prevent the former employees from disclosing the trade secrets to a competitor. Nevertheless, the supreme court found the non-competition and non-solicitation agreements between the former employees and Nitro-Lift void pursuant to 15 Okl. St. §219A. The statute provides that a former employer cannot prevent a former employee from engaging in the same or similar business as the employer, as long as the former employee does not directly solicit goods and services from the former employer’s established customers.

November 4, 2011 | Supreme Court of Virginia
Supreme Court of Virginia Departs from Precedent in Nullifying Non-Compete for Overbreadth Identical to One Previously Upheld

Departing from precedent, the Supreme Court of Virginia narrowed the outer limits of enforceability for non-competition agreements in its Nov. 4, 2011 opinion in Home Paramount. The decision has created a stir with legal observers and drew some criticism from dissenting Justice McClanahan for its opposite holding to a prior case, Paramount Termite Control Co. v. Rector, 238 Va. 171 (1989), despite that case’s identical non-compete being upheld. The language that troubled the majority in the employment agreement clashed with the “function” element of the standard non-compete reasonability test. While the geographic scope and duration of the non-competition agreement were quite limited, the court found the functional aspects to be overbroad, because they prevented Shaffer from associating with other pest control companies in any manner, even as a passive stockholder. This was so overbroad as to nullify the narrowness of the other factors in evaluating reasonability. Concerning the departure from precedent, the court noted that Paramount Termite was decided twenty-two years earlier, and that in the intervening time, jurisprudence surrounding such broadly drafted non-competes had been “gradually refined.” In this sense, the case represents a reining in of previously acceptable, but very broad, non-competes in Virginia.

November 3, 2011 | Southern District of New York
Injunction to enforce non-competition agreement denied in managerial transfer - Disclosure of trade secrets not inevitable at new job

The 2nd Circuit Court of Appeals, on November 3, 2011, affirmed the Southern District’s denial of a preliminary injunction for IBM, citing the lower court’s “thoughtful and well-reasoned opinion” in finding no evidence of abuse of discretion.

On Jan. 19, 2011, Giovanni Visentin, a senior executive at International Business Machines Inc. (IBM), announced his intention to leave IBM to become senior vice-president at Hewlett-Packard Company (HP). On Jan. 20, IBM filed a complaint alleging breach of contract and misappropriation of trade secrets, and moved for a preliminary injunction in the U.S. District Court for the Southern District of New York. Visentin had signed two non-competition agreements with IBM, one in 2009 and one in 2008, in which he agreed not to work for a competitor for the first year after the termination of his employment. IBM alleged that Visentin was in possession of trade secrets including “highly confidential and commercially sensitive information about the strategic plans and financial performance of the business he is leaving, competitive bidding strategies, internal price and cost models, new client opportunities and targets for 2011, perceived gaps in IBM’s products and services, and the proprietary tools processes and methods IBM uses to win client contracts…” The requested preliminary injunction would be to enforce the non-competition agreements as written.

A primary basis for IBM's trade secrets claim was the inevitable disclosure doctrine, which protects against misappropriation of knowledge when an individual changes employers and it is found to be "inevitable" that the individual will use the knowledge in his or her new position.

On Feb. 16, 2011, the court denied IBM's motion, finding that Visentin's position at IBM required general managerial expertise as opposed to highly technical, secret, or proprietary knowledge and that the likelihood that Visentin would disclose IBM's proprietary information to HP was minimal.

The doctrine of inevitable disclosure provides a three-factor test as to whether or not trade secrets will inevitably be disclosed after a change in employment: Whether (1) the employers in question are direct competitors providing the same or very similar products or services; (2) the employee's new position is nearly identical to his old one, such that he could not reasonably be expected to fulfill his new job responsibilities without utilizing the trade secrets of his former employer; and (3) the trade secrets at issue are highly valuable to both employers. See Finding of Fact and Conclusions of Law at 41-42. In addition, the nature of the industry and the trade secrets at issue should be considered on a case-by-case basis. Id. at 42.

The court, evaluating these factors, noted that while the first prong is satisfied in that IBM and HP are direct competitors dealing in similar products and that the industry tends to produce many trade secrets, the second two factors “heavily weigh[ed]” in favor of Mr. Visentin. Id. at 43.

First, the scope of Mr. Visentin’s position was found to far exceed his previous post at IBM and included many geographic responsibilities that he didn’t have at IBM. While some overlap did exist, the court was confident that the non-competition agreement’s restrictions on working with former clients dealt with this satisfactorily.

Second, the trade secrets were not of such value to HP that Visentin would inevitably disclose them to HP. While IBM contended that Visentin would be eventually so pressured by HP that he would disclose the trade secrets, despite being legally bound not to do so, the court disagreed. His knowledge of IBM’s desired profit margins would not be so useful because he did not have any detailed documentation and could not possibly remember every detail. Additionally, his knowledge of pending deals would be marginally useful at best as his team was responsible for between 5000 and 9000 deals a quarter and therefore he was not in possession of many of the pertinent details.

Accordingly, the court denied IBM’s request for a preliminary injunction.

October 21, 2011 | Circuit Court of Cook County, Chancery Division
Three employees sued by Groupon for breach of a non-compete agreement counter Groupon's lawsuit is a "sham litigation"

The three employees whom Groupon, Inc. (“Groupon”) sued on October 21, 2011 filed a counterclaim against Groupon on January 25, 2012. The three former employees, Nikki Dorough, Brian Hanna and Michael Nolan, countered that the coupon company pursued a "sham litigation" and requested the Illinois state court to void the noncompete provisions in their Groupon employment contracts.

The employees now work Google Offers, a directly competing discount service started by Google, Inc. (“Google”) after Groupon rejected Google’s buy-out. Groupon alleged in its complaint that the employees, were provided with proprietary and confidential information relating to Groupon’s business practices and strategies, such as Groupon’s price structures and deals with merchants, its timing of the deals and its list of current and potential merchants.

Dorough, Hanna and Nolan began work for Google Offers allegedly in breach of their non-compete agreement with Groupon which bars them from working with a direct competitor for 24 months after leaving the company. Groupon does not claim that Hanna and Nolan already disclosed the above trade secrets to Google or stole any trade secrets, in violation of the Illinois Trade Secrets Act. Rather, it alleges that Hanna and Nolan would inevitably disclose the trade secrets to Google because Google Offers directly competes with Groupon. According to Groupon, the “ongoing and/or threatened” disclosure by Hanna and Nolan would cause the company irreparable harm if the two employees are not enjoined from continuing their activities at Google Offers.

The inevitable disclosure doctrine is preemptively used by a court to prevent disclosure of a trade secret where a former employee’s “new employment will inevitably lead him to rely on [a former employer’s] trade secrets.” PepsiCo, Inc. v. Redmont, 54 F.3d 1262, 1269 (7th Cir. 1995). The doctrine is not universally adopted and even limited in some jurisdictions. See , e.g., EarthWeb, Inc. v. Schlack, 71 F. Supp. 2d 299 (S.D.N.Y. 1999). The doctrine may prevent a former employee from working with a direct competitor even if the employee was never subject to a non-compete agreement and attempts in good faith to prevent using his knowledge of a former employer’s trade secrets. See PepsiCo, 54 F.3d at 1270 (finding that even though no trade secrets were stolen or misappropriated, defendant, PepsiCo, Inc.’s former employee, could not help but rely on Pepsi’s confidential and proprietary information on how to price, distribute and market sports drinks in his work for Quaker Oats Company’s competing GATORADE branded sports drinks).