Recent Decisions and Case Developments

August 4, 2011 | United States District Court, Central District of California
District Court denies Mattel's motions for Judgment as a Matter of Law and a new trial, and reduces MGA's damages award to $85 million

Most recently, Mattel, Inc.’s (Mattel) asked a federal court of appeals in San Francisco to reverse the $310 million in damages and attorneys' fees the District Court for the Central District of California ordered Mattel to pay over in a prolonged battle over the ownership rights to the billion dollar “Bratz” doll empire against a former employee and Bratz designer, Carter Bryant, and MGA Entertainment (MGA). In particular, Mattel challenged the $17.25 million that MGA won on its counterclaims for trade secrets misappropriation by Mattel. It argued that the claims were time-barred. It added that MGA also failed to prove that its alleged trade secrets were really trade secrets.

Mattel's most recent action is not its first attempt to fight the heavy judgment. On August 4, 2011 the District Court denied Mattel’s motions for judgment as a matter of law (JNOV) and for a new trial. It found that the factual record supported an eight-person jury’s conclusions that MGA had used reasonable efforts to maintain its trade secrets for the Bratz dolls, which Mattel misappropriated by misrepresentation. Although the District Court remitted MGA’s damages award of $88.5 million to $85 million, it also ordered Mattel to pay an additional $139.9 million in attorneys’ fees and costs.

In 2004, Mattel first claimed copyright infringement and theft of its trade secrets by MGA and Bratz designer, Carter Bryant. Four years later, a federal jury awarded Mattel $100 million. However, the verdict was overturned on appeal and sent back for retrial on which the scope of Mattel's claims was limited. Mattel could only pursue the copyright infringement claims against the four original MGA dolls and two later models ("Formal Funk Dana" and "Ooh La La Cloe”), but could proceed with most of its trade secret theft claims.

However, an eight-person jury returned a verdict against Mattel on April 21, 2011. Specifically, the jury found that Mattel did not own a copyright in the creative designs behind the dolls. It also found that the ideas, designs and name of the doll collection were not Mattel’s trade secrets and, generally, MGA did not misappropriate any of Mattel’s trade secrets. The jury, however, found that Mattel misappropriated 26 of MGA’s trade secrets, awarding MGA $3.4 million for each misappropriated trade secret for an approximate total of $88.5 million.

July 29, 2011 | United States District Court for the Southern District of California
Due to policy concerns, the Southern District of California required pre-discovery identification of trade secrets despite finding California Code of Civil Procedure §2910.210 inapplicable in federal court

     In Jardin v. DATAllegro, Inc., No. 10-CV-2552-IEG (WVG), 2011 WL 3299395 (S.D. Cal. July 29, 2011), the United States District Court for the Southern District of California considered whether the pre-discovery trade secret identification requirement of California Code of Civil Procedure §2019.210 also applies in California federal court. Section 2019.210 requires that trade secrets be identified with reasonable particularity before discovery commences, in an effort to prevent abuse of discovery and to enable defendants to form complete and well-reasoned defenses.

     Jardin concerns a patent dispute, in which plaintiff Cary Jardin alleged that defendant Stuart Frost stole nonpublic information while employed by Jardin. Frost then formed his own company, defendant DATAllegro, Inc., and allegedly used the misappropriated information to file for a patent. Although Jardin involves patent claims, the case implicates trade secrets law because Jardin’s patent claims were based upon the misappropriation of nonpublic information. Therefore, DATAllegro argued that discovery could not be conducted until Jardin identified the allegedly misappropriated information with reasonable particularity, pursuant to §2019.210.

     Magistrate Judge Gallo ultimately declined to apply §2019.210 in federal court. However, Judge Gallo was influenced by the policy concerns underlying §2019.210 and used his discretion under the Federal Rules of Civil Procedure to, nevertheless, order Jardin to identify the allegedly misappropriated information prior to discovery. Jardin objected to this order, but it was upheld by District Judge Irma Gonzalez on July 29, 2011. Judge Gonzalez held that Judge Gallo had committed no error in requiring pre-discovery identification and that he had broad discretion under the Federal Rules to consider policy concerns when granting his order.

July 22, 2011 | Southern District of New York
2FA's claims against Oracle for misappropriation of trade secrets is stayed pending partial summary judgment in a related action

In 2010, 2FA Technology sued Oracle Corporation and Oracle Systems Corporation, formerly Passlogix, a wholly-owned subsidiary of Oracle merged with Oracle Systems Corporation, for misappropriation of trade secrets and breach of contract. 2FA alleges that Passlogix's senior engineers misappropriated 2FA's source code and incorporated the code into Passlogix's products. 2FA alleges that Oracle continued to knowingly sell products containing misappropriated 2FA technology after it acquired Passlogix.

On January 31, 2011 the defendants filed a motion to stay the proceedings pending the outcome of a partial summary judgment motion filed by Passlogix in an earlier related action in the Southern District of New York, Oracle Systems Corporation v. 2FA Technology, LLC, docket number 08–cv–10986. There, the partial summary judgment motion seeks to dismiss each of 2FA’s counterclaims in the entirety, which could spell doom for the pending similar claims in this action. 2FA filed a memorandum in opposition to the motion to stay on March 17, 2011 but the motion was granted on April 6, 2011.

On July 25, 2011, the parties stipulated that the action be dismissed with prejudice, with each side bearing its own costs and expenses, including attorneys' fees, incurred in connection with the action. The related action was similarly dismissed.

July 1, 2011 | United States District Court for the Northern District of California
Contrary to California’s public policy against non-competes, the District Court for the Northern District of California narrowly construes an ambiguous non-compete to find it enforceable

Although California Business and Professions Code §16600 generally voids non-compete provisions, the District Court for the Northern District of California narrowly construed an ambiguous non-compete provision to find it enforceable in Richmond Technologies, Inc. v. Aumtech Business Solutions. Richmond Technologies, Inc. (“Richmond”) provides software for financial service companies who provide credit card terminals to merchants. In 2007, Richmond entered into a Memorandum of Understanding with Aumtech Business Solutions (“Aumtech) and in 2009, the same parties entered into a Confidentiality and Non-Disclosure Agreement (“NDA”). The NDA contained three broad provisions regarding non-solicitation, non-interference and non-competition. These provisions broadly prohibited Aumtech from doing business with Richmond’s clients or employees, or competing with Richmond, for a year unless that client or employee had ceased his business relationship with Richmond for at least six months. Richmond alleged in its complaint that in 2010, Aumtech solicited and worked with a former employee to market competing services to Richmond's clients.

In its analysis, the Richmond court acknowledged a non-compete may be enforced to protect a former employer’s trade secrets. It declared that the non-solicitation and non-interference clauses in the NDA were unenforceable because they were drafted more broadly than necessary to protect Richmond’s trade secrets. However, it construed the non-compete to bar the use of Richmond’s trade secrets, such as “confidential source code, software or techniques developed for [Richmond’s] products or clients" and therefore found it enforceable.

June 11, 2011 | District of Columbia
DOJ settles suit against LucasFilm for alleged agreements not to compete for employees

The Department of Justice (DOJ) filed suit against LucasFilm for entering into agreements with Pixar to restrict employee recruiting practices, behavior that the DOJ felt constituted an antitrust violation. The complaint was brought solely against Lucasfilm because the DOJ had already addressed the conduct with Pixar in a previous suit, US v. Adobe Systems, a case which involved Adobe Systems, Inc., Apple Inc., Google Inc., Intel Corporation, Intuit, Inc., and Pixar.

A settlement was reached the same day that the suit was filed. LucasFilm said it would not enter into any agreement to refrain from competing for the employees of other businesses, but retained the right to unilaterally decide not to consider applications from employees of other companies.

On June 3, 2011, Judge Reggie B. Walton granted the DOJ’s motion for final judgment, pursuant to the settlement agreement, and closed the case.

June 9, 2011 | Eighth Appellate District in Ohio (Cuyahoga County)
Trade secrets plaintiff can secure both a damages award and a permanent injunction

In Litigation Management, Inc. v. Bourgeois, 2011 Ohio 2794 , the Court of Appeals for the Eighth Appellate District in Ohio (Cuyahoga County) held that a trade secrets plaintiff can now secure both a damages award for misappropriation of trade secrets and a permanent injunction to prevent further injury under Ohio's version of the Uniform Trade Secret Act.

Plaintiff-appellant, Litigation Management, Inc. (“LMI”) is a litigation support company, specializing in analyzing medical records. The lead defendant, Jean Bourgeois, was LMI’s chief operating officer. Bourgeois and the other defendants were all subject to noncompetition, nonsolicitation, and confidentiality agreements. Bourgeois was terminated in May 2003. In December 2004, she founded Excelas as a direct competitor to LMI and, in the words of the court, set up business “almost literally across the street.” She recruited the remaining defendants from LMI, all of whom were medical analysts, to work for Excelas and perform the same function.

LMI brought claims against the individual defendants for breach of the noncompetition, nonsolicitation, and confidentiality agreements; a claim against Excelas for intentional interference with contractual relations; and a request for a permanent injunction under the Uniform Trade Secrets Act, R.C. 1333.61, et seq.

LMI prevailed at trial on its claim for damages caused by defendants-appellees, Jean Bourgeois, Excelas, LLC, and a number of Excelas employees, all of whom were former LMI employees who breached the terms of nondisclosure and trade secrets agreements they made with LMI prior to founding Excelas, a direct competitor to LMI. In addition to damages, LMI sought a permanent injunction to enforce prospectively the terms of the noncompetition and trade secrets agreements. The court denied the injunction, finding that LMI failed to establish that it had suffered “irreparable” damages in light of the damage award. LMI argues that the court abused its discretion by finding that an injunction for prospective relief was barred when damages for the breach had been awarded.

In a ruling issued at the close of evidence in the trial, the trial court upheld the validity of the noncompetition agreements, but limited their geographic scope. It then submitted the amended noncompetition agreements and the trade secrets violations to the jury. In a general verdict, the jury found against each individual defendant and the corporation, awarding damages of $4,000 per individual defendant and $45,000 against Excelas.

Following the verdict, LMI asked the court to enter a permanent injunction against eight of the individual defendants and enforce the terms of the noncompetition, nonsolicitation, and confidentiality agreements. The court refused to enter a permanent injunction on the noncompetition claim because LMI did not show that it suffered an irreparable injury. It noted that each defendant had been ordered to pay damages as a result of the breach of their agreements, thus being made whole: “In short, not only is an adequate remedy at law available, it has been given. The wrong of competing unfairly has been righted by the jury’s award: LMI as received fair and reasonable redress.”

The Eighth District Court of Appeals disagreed, noting that the damages award only remedied the plaintiff's past damages, not its future damages. The Eighth District recognized that "injunctions concern the prevention of future harm, not compensation for, or punishment of, past harm" (Opinion at Para. 18). Without an injunction, the defendants would continue to have the benefit of the trade secrets post-trial and would continue to use them against the plaintiff.

In another noteworthy holding, the Eighth District found that the jury's verdict created a rebuttable presumption of irreparable harm resulting from the loss of the proprietary information. As a result, it found that the defendant now bears the burden of proving that the injunction should not issue in this situation.

The appeals court held that the evidence at trial had showed that LMI suffered irreparable harm from the misappropriation of its trade secrets; LMI expended money and effort into developing proprietary information that it wished to remain confidential and it took steps to protect this information by requiring its employees to sign nondisclosure and confidentiality agreements.

“Despite being under agreement not to disclose LMI trade secrets, Bourgeois and the other individual defendants took LMI’s proprietary information like pricing strategies and used them so that Excelas could solicit and underbid LMI clients. The evidence showed that Bourgeois used information compiled by LMI on existing customer preferences to win jobs for Excelas that, as an upstart, it might not have qualified enough to acquire... LMI’s trade secrets were undeniably misappropriated and used by the defendants to LMI’s disadvantage. Without an injunction, it is plain that those trade secrets would continue to be used in the future against LMI.” (Opinion at Paragraphs 15, 19.)

The appeals court held that the trial court had erred as a matter of law by finding that an award of compensatory damages showed that LMI’s harm was not “irreparable” for purposes of an injunction.

June 6, 2011 | Colorado Supreme Court
Colorado Supreme Court rules that individual acts of misappropriation of a trade secret are parts of a single claim

Plaintiff Timothy A. Gognat filed suit against defendants Ellsworth, Smith and MSD Energy, Inc., alleging that defendants had misappropriated proprietary information, such as methodology, maps, charts logs and calculations, Gognat had gathered and developed to identify and extract oil and natural gas reserves in western Kentucky. However, the trial court dismissed Gognat’s trade secret misappropriation claim, finding the claim was barred by the three-year statute of limitations.

On September 17, 2009, the Court of Appeals of Colorado, Division Seven, affirmed that Gognat’s multiple allegations of misappropriation were rooted in a single trade secret or related trade secrets, for which the statute of limitations had already run. 224 P.3d 1039 (Colo. Ct. App. 2009). It interpreted that the statute of limitations in the Colorado Uniform Trade Secrets Act (UTSA) did not renew for each individual act of misappropriation of a single trade secret or related trade secrets. Id. Rather, the limitations period accrued when Gognat first learned of the defendants’ misappropriation. Id.

Undeterred, Gognat sought review in the Colorado Supreme Court. The Supreme Court also interpreted the UTSA to specify that a “continuing misappropriation” of a trade secret (but not “related” trade secrets) constituted a single claim. Additionally, it noted that a “continuing wrong approach,” in which the statute of limitations renewed for individual acts of misappropriation of a trade secret, was rejected in the UTSA commentary. However, a “separate and distinct misappropriation of a different trade secret” would constitute separate claim for which the statute of limitations would start anew.

May 26, 2011 | Santa Clara County, Superior Court of California
PayPal files suit against Google for misappropriation of trade secrets after Google woos over a former PayPal senior executive

Paypal, Inc. (“PayPal”) and eBay, Inc. (“eBay) sued Google, Inc. (“Google”) and Osama Bedier, a former PayPal senior executive, alleging that Bedier and Google misappropriated PayPal’s confidential marketing research, point-of-sale (“POS”) technology and services for retailers, and mobile payment strategies and procedures.

Before the suit, PayPal sought to serve as a payment option for mobile app purchases on Google’s Android market. Bedier was then the senior executive leading negotiations between PayPal and Google to set up the business relationship. However, during the final steps of the negotiations, Bedier interviewed for a position at Google without notice to PayPal. He terminated employment at PayPal and began work for Google’s Mobile Payments division on January 24, 2011. PayPal alleges that Bedier left the company with knowledge of its trade secrets for retail POS technology and services and mobile payment. Additionally, it claims that Bedier transferred and possessed upon departure PayPal’s and eBay’s confidential information on his personal computers.

May 20, 2011 | Southern District of Florida (Ft. Lauderdale)
Ultimate Software Group obtains permanent injunction against use of confidential client information by former sales representative

Ultimate Software Group (Plaintiff) designs and implements human resources, payroll, and talent management solutions. Defendant, a former member of Plaintiff's sales team, allegedly took with him a number of confidential spreadsheets identifying Plaintiff’s current accounts and prospects prior to his last day of employment. After Defendant’s termination, he accepted a position with one of Plaintiff's direct competitors. Plaintiff brought a lawsuit for breach of contract and misappropriation of trade secrets, among other claims, and sought a temporary restraining order to keep Defendant from disclosing the materials that he allegedly misappropriated.

Although Plaintiff sought for more than $75,000 in damages and punitive damages, the parties stipulated to dismiss the case with prejudice according to a Consent Permanent Injunction against Defendant entered on May 20, 2011 barring the Defendant from disclosing any document obtained during his employment. No damages were awarded.

May 12, 2011 | United States District Court for the Middle District of Alabama Northern Division
Fruit of the Loom and Russell Brands stipulate to dismiss (with prejudice) the action against a former employee for breach of a non-compete clause

Fruit of the Loom, Inc. (Fruit of the Loom) and Russell Brands, LLC (Russell) sued Lonnie Bishop, a former employee, for violating a Trade Secrets and Non-Competition Agreement that he signed in July 2010. Bishop served as manager of a Russell distribution center in Alabama and helped develop a system of managing inventory. According to the Agreement, Bishop would not work for a competitor of Fruit of the Loom or Russell Brands for twelve months after his employment terminated. Shortly after resigning from his position at Russell’s in November 2010, Bishop went to work for Gildan Activewear, Inc. a competitor of the plaintiffs.

On January 21, 2011, Fruit of the Loom and Russell’s motion for a preliminary injunction was denied. Although a denial of a preliminary injunction is typically considered outcome determinative, often resulting either in settlement or withdrawal of the complaint, Fruit of the Loom and Russell persisted. However, the parties stipulated to dismiss the case with prejudice on May 12, 2011.