Recent Decisions and Case Developments

October 11, 2011 | United States District Court for the District of Delaware
Creator of semiconductor timing analysis tool alleges competitor misappropriated trade secrets by inducing customers to breach NDAs, then incorporating proprietary information into own product

Synopsys, Inc. voluntarily dismissed its complaint on October 11, 2011 as it acquired Extreme DA Corp.

Synopsys filed a complaint in the United States District Court for the District of Delaware on June 2, 2011 alleging trade secret misappropriation and interference with contractual obligations by its competitor, Extreme. Synopsys also asserted copyright and patent infringement allegations.

Synopsys and Extreme are both in the business of making timing analysis devices for the testing of semiconductors. Essentially, their products, “PrimeTime” and “GoldTime,” respectively, allow the computation of the expected speed of a digital circuit without the need to run a simulation.

According to Synopsys, prior to the development of PrimeTime, timing analysis was a time consuming effort and required a great amount of dedication from design teams. PrimeTime, using Synopsys’ proprietary information, significantly improved upon that task.

The complaint alleges that Extreme has taken the advances that Synopsys’ engineers have incorporated into PrimeTime and misappropriated them for use in their own GoldTime system. Synopsys notes that PrimeTime features “literally hundreds” of proprietary features that are not generally known and thereby grant a competitive edge. Additionally, these features are only disclosed to Synopsys customers when shielded by strict confidentiality obligations, and user manuals contain proprietary rights notices warning against unauthorized disclosure.

Synopsys alleges that Extreme gained unauthorized access to this proprietary information by purposefully breaching the PrimeTime end user license agreement (EULA) and by disrupting Synopsys’ contractual secrecy arrangements with its customers.

On its trade secrets claim, Synopsys has requested permanent injunctive relief preventing the further use of its trade secrets as well as any further actions intended to induce Synopsys customers to breach their non-disclosure agreements. In addition, it is requesting “compensatory, special, incidental and consequential damages according to proof” and attorneys' fees.

October 11, 2011 | United States Court of Appeals for the Federal Circuit
U.S. International Trade Commission has authority to exclude from importation products manufactured using misappropriated trade secrets

The Federal Circuit held (2-1) on October 11, 2011 that the United States International Trade Commission (“USITC”) has the authority, pursuant to Section 337 of the Tariff Act of 1930 (19 U.S.C. §1337(a)(1)(A)), to ban importation of goods manufactured using “unfair methods of competition,” including misappropriation of trade secrets, where the importation could harm a domestic company. It found in this case that the USITC properly excluded under Section 337 railway wheels that were created using an allegedly misappropriated secret process, even though the misappropriation occurred in China. The decision, however, does not enjoin continuing manufacture of these railway wheels. Although the opinion focuses on whether a presumption against extraterritoriality applies to Section 337, it signifies that the U.S. Federal government is increasing protection of domestic companies' trade secrets.

Amsted Industries, Inc. (“Amsted”) is a domestic manufacturer of railroad components, including railway wheels made using the secret Griffin® and ABC processes. It licenses the manufacture of wheels using the ABC process to firms in China. TianRui Group Co. (“TianRui”) failed to obtain such a license from Amsted and, after failed negotiations, hired employees from another Amsted licensee firm, Datong ABC Castings Company, Ltd. (“Datong”). All of the Datong employees hired by Tianrui were trained in the ABC process and almost all signed confidentiality agreements. When TianRui imported railway wheels using the ABC process into the United States, Amsted filed a complaint with the USITC to exclude the wheels from importation. Amsted argued that continued importation would harm its business in the United States, even if the alleged trade secret misappropriation occurred in China. The USITC agreed with Amsted’s arguments and issued a limited exclusion order, which TianRui appealed to the Federal Circuit.

The Federal Circuit's opinion was reported at 661 F.3d 1322 (Fed. Cir. 2011).

September 27, 2011 | Northern District of Illinois
Despite a modest damages award, plaintiffs win more than a million dollars in attorneys' fees

SKF USA Inc. v. Bjerkness et. al.

Docket Number: 1:08-cv-04709
Case Filing Date: Tue, 2008-08-19
Jurisdiction: Federal Court
Location: Illinois
Court Name: Northern District of Illinois
Summary

SKF USA Inc. successfully brought an action against former employees for willful and malicious misappropriation of trade secrets, consisting of thousands of computer files. A 2010 bench trial resulting in an award of $41,000 in actual damages and $40,000 in exemplary damages. SKF then requested more than $1.25 million in attorneys’ fees and costs. Defendants objected, arguing that such fees failed to take into account prior settlement offers that could have saved costs, were grossly disproportionate to actual damages, and that plaintiff’s billing was excessive. Nonetheless, the court awarded almost the entire requested amount of fees.

Case Report
Relevant Facts and Procedural History

Dale Bjerkness, Kevin Koch, Joseph Sever, and Walter Remick were all employees of Preventive Maintenance Company, Inc. when, in January 2007, it was acquired by SKF USA. Bjerkness had worked his way up through the company from Sales Engineer, eventually becoming a Director for SKF Reliability Systems. Similarly, at the time of their departures, Koch was working as a Reliability Engineer Manager, while both Sever and Remick were working as Reliability Engineers. Defendants continued to work for SKF until May 2008, when Bjerkness departed and opened his own competing enterprise, Equipment Reliability Services, Inc. (“ERSI”). The other defendants soon followed, and it was shortly thereafter determined that ERSI had come into possession of thousands of computer files belonging to SKF. SKF filed suit against the employees and ERSI for violation of the Illinois Trade Secrets Act (“ITSA”). Their 2008 Complaint marked the beginning of what Judge Rebecca Pallmeyer described as “dismayingly contentious litigation.”

In 2009, SKF won a preliminary injunction. In a 2010 bench trial, SKF received damages totaling $81,068 (actual damages in the amount of $41,068 and exemplary damages in the amount of $40,000). Given a finding a willful and malicious misappropriation, the court also awarded reasonable attorney’s fees and costs. When SKF filed a Bill of Costs for $44,852.84, defendants objected that the amount was excessive by $16,495.14. SKF then proceeded to petition the court for an award of attorneys’ fees and non-taxable costs totaling $1,299,579.60. Defendants objected.

Lodestar Calculation

The court first calculated a lodestar figure, a standard method for determining attorney’s fees that entails multiplying SKF’s reasonable billable hours times the reasonable hourly billing rate. Under 7th Circuit law, this calculation is presumed reasonable. In arguing that the figure should be reduced, defendants cited (A) the history of settlement offers between the parties and (B) the proportionality of fees to damages. Also, while defendants did not challenge the hourly billing rates of SKF’s lawyers, it challenged the number of hours billed as unreasonable.

A. Settlement History

Defendants argued that based on the damages awarded by the court, SKF’s rejection of offers to settle constituted bad faith, and therefore justified reducing the Lodestar amount. Defendants showed that they had offered settlements of $173,247 in November 2008, $75,000 in January 2010, and $250,000 in September 2010. They claimed that SKF had been unwilling to negotiate, and that after January 6, 2009 (the date by which Defs. argued SKF had had sufficient time to contemplate and accept the 2008 settlement offer) all efforts to continue litigation were solely directed at eliminating ERSI as competition. Using the damages ruling’s calculation that, as of January 6, 2009, SKF had only suffered $31,494 in damages, Defendants argued that the choice to continue litigation after the November 2008 offer was made in bad faith.

SKF objected to consideration of the parties’ settlement discussions on the grounds that the discussions were supposed to remain confidential. Citing Fed. R. Civ. P. 68, however, the Court found that such confidentiality did not bar consideration of settlement history. In the alternative, SKF put forth evidence that the Defendants’ own Exhibits indicated SKF’s willingness to negotiate, and that it had offered to settle for $455,000 in November 2008. SKF claimed that, even at that figure, it would have taken a loss for attorney’s fees then incurred, and noted that the damages plus requested attorney’s fees that Defendants were not challenging still exceeded the November 2008 offer.

The Court sided unequivocally with SKF, finding no evidence of that the decision to reject Defendants’ offers constituted bad faith. The court put particular weight on the fact that Defendants’ offer did not include attorneys’ fees, when the ITSA makes it likely that such fees will be awarded. The fact that the November 2008 offer also preceded SKF’s win on the motion for the preliminary injunction was also noted.

B. Proportionality

The Court grappled most with the issue of proportionality, clearly concerned by a request for attorneys’ fees totaling more than fifteen times the actual damages awarded. In upholding the fees, however, the Court noted that the Seventh Circuit has declined to set specific limits on the multiples of attorneys’ fees that may be awarded.

More importantly, the Court made clear that a small damage award does not alone demonstrate the unreasonableness of pursing the claim at great expense. The Court cited the Seventh Circuit’s decision in Anderson v. AB Painting and Sandblasting Inc., which states that the existence of a fee-shifting statute precludes the court’s consideration of the reasonableness of the claim. A party who prevails with more than nominal damages, has thereby demonstrated the claim’s validity. The Seventh Circuit therefore directs courts to, “…assume the absolute necessity of achieving that particular result and limit itself to determining whether the hours spent were a reasonable means to that necessary end.” Moreover, the Court cited other cases allowing similar, if not quite as high, proportions of fees-to-damages awards.

C. Excessive Billing

Finally the Court examined whether SKF’s billing was reasonable. In assessing Defendants’ characterization that the total hours billed was “outrageous,” the Court found that Defendants failed to demonstrate adequately that SKF’s billing records were unreasonable. The Court noted that Defendants had not adequately spent time to break down the attorney’s fees, devoting only two pages of their response memo to the issue.

Moreover, to the extent that the hours were extreme, the Court found that activities of both sides were to blame. In the process, the Court criticized both sides’ attorneys for appearing “to fan the flames” of “extraordinarily contentious” litigation, while singling out the defendants for refusing at multiple points to streamline the process. The Court therefore concluded that some portion of the sizable legal bills were in fact directly due to Defendants’ actions. It also agreed with Plaintiff’s assertion that that “the most straightforward evidence that counsels’ fees are reasonable is the fact that the client paid them,” and stated that it would also not second guess SKF’s decision to spend more than $1 million for attorneys to protect trade secrets that it had recently purchased at the time the litigation commenced.

Conclusion

The court granted SKF’s fee request, except for the fee paid to SKF’s damages expert, whose testimony the court mostly disregarded. Given Defendants’ failure to adequately address the removal of such a fee and associated attorney’s fees, the Court subtracted $107,991 from the fee award.

No appeal has been filed. In the wake of the fee award, at least one defendant, Joseph Sever, has filed for Chapter 7 Bankruptcy protection.

Significance

This case demonstrates that Illinois courts will presume validity of attorney’s fees upon the success of a claim, even for an extreme proportion of fees to damages awarded. The existence of the fee-shifting statute supports an award of fees of even more than fifteen times total damages, so long as there is no significant evidence of bad faith or unreasonable fees. There is also the suggestion that any settlement offer might need to demonstrate consideration of attorney’s fees in order to demonstrate a party’s bad faith in continuing litigation. Note that the award here is granted because the 7th Circuit has chosen not to set defined barriers on proportionate awards of attorneys’ fees to damages. Also underlying this case was the particularly contentious nature of the litigation, which the Court addresses at multiple points. General displeasure at the manner in which the case unfolded seems to have helped the Court to justify such a high award.

While the equitable underpinnings of trade secret law might suggest that some limits should be placed on fee awards, such limits remain unarticulated, at least in the Seventh Circuit. For cases of willful and malicious misappropriation, the Defendant still has the opportunity to demonstrate that Plaintiff’s requested fee amount is the result of bad faith. In this case, Defendants failed to do so. Yet it does seem somewhat unusual that SKF should bear none of the burden for the length of the litigation, given that the Court noted poor conduct on both sides. Defendants bore greater weight here, but the Court could still, it seems, have reduced some of Plaintiff’s award.

September 26, 2011 | United States Court of Appeals for the Ninth Circuit
9th Circuit: No Competitors Needed for Trade Secrets to Exist Under the EEA

United States v. Chung, 659 F.3d 815, 826 (9th Cir. 2011)
Docket No. 10-50074
Federal Court of Appeals for the 9th Circuit
Decided: September 26, 2011, Judge Susan P. Graber

In a 2011 opinion, the Court of Appeals for the Ninth Circuit affirmed the first trial court conviction under the Economic Espionage Act. Notably, the appellate court in United States v. Dongfan Chung addressed the independent economic value requirement under 18 U.S.C §1839(3)(B) as either actual or potential. In line with the statutory language, the Court asserted that the owner of secret information need not have actual competitors in order to rightfully protect its economic value.

In US v. Chung, the defendant Dongfan “Greg” Chung, a former engineer for the US-contractor Boeing, was found in possession of over 300,000 Boeing documents, including six documents containing Boeing trade secrets. On appeal of his conviction, Chun argued insufficient evidence as to the existence of any Boeing trade secrets within the documents he possessed. The court looked specifically at four Boeing documents relating to a NASA space-shuttle antenna. Judge Graber found that Boeing maintained the secrecy of the particular Boeing information and enacted reasonable protective measures to maintain secrecy. Most notably, the Court endeavored in an extensive analysis of he economic value required for such information to be trade secrets. While the EEA’s definition of trade secret is grounded upon the standard outlined in the Uniform Trade Secrets Act (UTSA), the text of §1839(3)(B) further defines the economic value of trade secret information as either actual or potential, and does not mention the existence of competitors.

The court reasons that such information “could assist a competitor in understanding how Boeing approaches problem-solving and in figuring out how best to bid on a similar project in the future, for example, by underbidding Boeing on tasks at which Boeing appears least efficient.” Thus the Court held Boeing’s secret information independently valuable not for Boeing’s potential use, but for use of such information by any potential Boeing competitor. Thus the Ninth Circuit held that under the EEA, companies need not have actual competitors in order to derive economic value from maintaining the secrecy of certain information.

September 26, 2011 | United States District Court for the Northern District of Illinois
Rash of EEA Prosecutions Continues with Indictment of Boeing Engineer Accused of Transmitting Trade Secrets to China

In yet another indictment in the continuing trend of prosecution of trade secret theft under the Economic Espionage Act, the government has indicted Chunlai Yang with two counts of trade secrets theft in the United States District Court for the Northern District of Illinois (Chicago). The government asserts that Yang stole proprietary source code from his employer, CME Group Inc., in order to start his own futures exchange software company. Yang pled not guilty to both counts.

CME brought the case to the U.S. Attorney with evidence that Yang had downloaded over 1,000 source code files from the secure company computer system to his unsecure work computer. Yang then moved the files to his own personal computer. His apparent intent was to use the source code of CME’s own Globex trading system as the backbone for his own company’s system. His company was to be entitled Tongmei Futures Exchange Software Technology Co.

The potential repercussions for Yang are up to 10 years in prison and a $250,000 for each count. In addition, the government seeks to take control over Yang’s computers and other equipment and any proceeds from his actions.

The fact that CME brought the case directly to the U.S. Attorney has been touted by the U.S. Attorney’s office as a good example of corporate and law enforcement cooperation on the protection of trade secrets.

September 23, 2011 | Central District of California (Western Division - Los Angeles)
Employer alleges concerted defections to competitor by former employees, sensitive information in hand

Ikon Office Solutions Inc. ("Ikon") filed a notice of settlement in this case on September 23rd, 2011, but details of the settlement are currently unknown.

Ikon sued two former employees, John Kolacinski and Robert Hornbeck, along with their current employer, Myriad Litigation Solutions LLC, for allegedly stealing client contacts and trade secrets. Ikon Legal Document Services, a division of Ikon Office Solutions, provides litigation support to law firms and in-house counsel. According to the complaint, Kolacinski and Hornbeck coordinated their November 2010 resignations from Ikon to go to work for Myriad, a direct competitor, and copied sensitive business information, such as pricing and contract details, onto flash drives before leaving the office. Ikon alleges that this was done in direct violation of nondisclosure agreements that the employees signed while under its employ.

Ikon filed a motion for Preliminary Injunction on February 17, 2011, but withdrew its Motion on March 28, 2011.

August 23, 2011 | deleted
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August 23, 2011 | County of Los Angeles, Superior Court of the State of California
Clash between Hollywood talent agency and competitor over stolen client information

Hollywood talent agency Diverse Talent Group, Inc. sued three of its former agents who left for a competitor, but not before allegedly stealing confidential information to poach clients. In the suit, filed August 23, 2011 in Los Angeles Superior Court, Diverse alleged misappropriation of trade secrets, intentional interference, breaches of duty and contract, conversion, and slander. The agency also sought a temporary restraining order prohibiting the disclosure or use of proprietary information. According to its website, Diverse represents actors and directors from TV shows like "Mad Men" and "Lost."

The complaint alleges that former Diverse employees Isam Durzi, Ehab Durzi and Wendy Morrison left Diverse to join Function Talent Group (also named as a defendant) and diverted business to their new employer by using confidential client information misappropriated from Diverse and by falsely claiming their former agency was closing. The three supposedly used the confidential materials, such as customer lists and the personal and financial information of clients, to poach those clients for Function. "Defendants have taken the confidential information without the permission of Diverse and have used it for their own financial gain and business purposes," the suit said. "Despite demands to cease and desist from using this information, defendants continue to use the confidential information." Diverse demanded that the files be returned, but the employees refused, according to the complaint.

Diverse claims that the Durzis and Morrison agreed as a condition of their employment that the agency's client list and other customer information were property of the agency. According to the complaint, the three accepted positions at Function earlier this year, but before they started their new jobs, the employees sent letters to Diverse customers soliciting them to take their business to Function. The letters made "false, defamatory and damaging statements," including that Diverse was going out of business, according to the complaint. The complaint goes on to say that they had some success, causing the termination of some of the plaintiff’s client representations.

The complaint also asserts that the employees "hacked into Diverse's computer system and changed the agency's contact information," and sent messages to clients instructing them to contact Ehab Durzi using the newly-diverted number.

The suit seeks unspecified damages, an injunction barring the employees from disclosing Diverse's confidential information and an order compelling them to arbitrate the dispute. According to the complaint, Diverse expects the dispute to be headed to arbitration as a result of employment agreements with the three former agents, but the company says it was forced to seek provisional remedies to deter the diversion of its clients.

The talent agency says on its website that its "highly valued clientele" includes "Academy Award winners, top sitcom actors, one-hour drama directors, editors and producers." The site states that the agency's clients have worked on shows including "The Big Bang Theory" and "Battlestar Galactica" and movies including "Transformers" and "Good Night and Good Luck."

The parties are scheduled to appear before Judge Meiers for a case-management conference on January 10, 2012.

August 18, 2011 | District Court of the District of New Jersey
Judge rules that a trade secret does not necessarily lose its secret status simply because it has been posted on the Internet

On August 18, 2011, Judge Walls of the District Court of the District of New Jersey held in Syncsort Incorporated v. Innovative Routines International, Inc. that a trade secret does not automatically lose its secret status if it has been posted online. His opinion, instead, offered practical guidance on how to determine whether a trade secret should remain secret after exposure on the Internet.

The case dates back to July 29, 2004, when Syncsort Incorporated (“Syncsort”) filed suit against its competitor in the data transformation market, Innovative Routines International, Inc. (“IRI”). As explained in the complaint, data transformation is the process of taking data in one form and changing it to another, such as by editing, reordering, or aggregating portions of the data. Syncsort’s and IRI’s data transformation programs (SyncSort UNIX and CoSORT, respectively) were incompatible.

Syncsort alleged that IRI misappropriated 1) the SyncSort UNIX command language, an “extensive symbolic system by which a user instructs the SyncSort UNIX program to perform specific data processing and transformation jobs” and 2) the SyncSort Unix Reference Guide that “defines commands, parameters and syntax and formal grammar definitions of the SyncSort UNIX command language.” In 2000, IRI developed software programs, SSU2SCL and RESCRIPT, which translated the SynSort UNIX command language for compatibility with CoSORT. Syncsort alleged that the translation programs were developed using pilfered scripts from the SyncSort UNIX command language and the Reference Guide, which IRI partly obtained from various websites.

IRI challenged that the scripts it found on the Internet had already lost their trade secret status and that Syncsort did not take precautions to maintain the secrecy of the scripts. Judge Walls, however, declared that “public posting of parts of the command language did not destroy the trade secret because the information contained in those postings were insufficient to develop the translator.” He considered the circumstances around each online posting and concluded that Syncsort did not lose its trade secrets. He wrote, “Widespread, anonymous publication of the information over the Internet may destroy its status as a trade secret.... But publication on the Internet may not destroy a secret if it is ‘sufficiently obscure or transient or otherwise limited so that it does not become generally known to the relevant people, i.e., potential competitors or other persons to whom the information would have some economic concern.’ The guiding ‘concern is whether the information has retained its value to the creator in spite of the publication.’”

Importantly, this decision marks a progressive benchmark in the acknowledgment in federal courts of the vast and pervasive nature of the internet. Moreover, Judge Walls also recognized the inevitable interplay with the internet and trade secret information, and how even if available on the internet, information may retain trade secret status if it cannot be replicated and is of some value.

August 12, 2011 | United States District Court for the Eastern District of Michigan, Southern Division
Energy drink maker alleges former manager, now subject of criminal probe, misappropriated trade secrets by divulging to direct competitor

Innovation Ventures, L.L.C., d/b/a Living Essentials (“Living Essentials”) filed a complaint in the United States District Court for the Eastern District of Michigan, Southern Division on August 12, 2011 asserting that Aspen Fitness Products, Inc. (“Aspen”), along with Derrick George (“George”) and his family of companies (“On Go”) misappropriated its trade secrets related to its popular “5 Hour Energy” beverage. The drink comes in a small bottle and is taken as a “shot” containing caffeine and B vitamins. George and On Go directly compete with Living Essentials with their own drink, On Go Energy Shot.

Kevin Zwierzchowski (a non-defendant), who worked at Living Essentials as controller and operations manager from March 2006 until September 2007, allegedly was in possession of the trade secrets in question. Living Essentials discovered that Mr. Zwierzchowski had retained information such as product formulae, pricing information, and supplier and vendor contact lists and shared that information with third parties including George and On Go.

Living Essentials maintains that Mr. Zwierzchowski had no authorization to possess or reveal these trade secrets, particularly as he was in a position “charged with the highest level of responsibility” and “having a duty of loyalty to Living Essentials.” Thus, Living Essentials asserts that the only way Living Essentials’ competitors could have gained this information is by wrongfully obtaining it from Zwierzchowski.

These allegations about Zwierzchowski, George, and On Go additionally are the subject of a current criminal investigation by the FBI.

Additional claims include both direct and contributory copyright infringement (of its caution label), trademark infringement (of its allegedly well-known “Running Man” logo), unfair competition and dilution under the Lanham Act, common law unfair competition, and common law unjust enrichment.

Living Essentials seeks injunctive relief as well as the greater of actual damages or statutory damages caused by the improper use of its proprietary information, copyrighted material and trademark, including attorneys’ fees.