Recent Decisions and Case Developments

October 6, 2015 | Appellate Division, First Department, Supreme Court of New York
NY Appellate Court Revives Claim Against Early Equity Investor in Pinterest

Plaintiff Theodore F. Schroeder alleged that defendants Brian S. Cohen, New York Angels, Inc. (“NY Angels”), and Pinterest Inc. (“Pinterest”) misappropriated Schroeder's confidential ideas, technology and business plans in developing the popular social network bulletin board, Pinterest.com. In 2005, Schroeder had initially invited Cohen to participate in planning meetings for another project and during these meetings, Schroeder had shared confidential information, which Schroeder alleges Cohen then provided to Pinterest.

On October 6, 2015, the NY appellate court revived the trade secret misappropriation claim, stating that the Complaint provides sufficient support for the trade secret misappropriation claim against Cohen and NY Angels. The court noted that Cohen had indeed been exposed to the confidential information and had provided the confidential information whilst knowing the information must remain confidential. Further, the opinion notes Schroeder’s efforts in trying to maintain secrecy over the technology he worked on for roughly four years. However, the court did not extend the misappropriation claim to Pinterest, as there were no facts in the pleadings demonstrating that there had ever been a confidential relationship established between Plaintiff and Pinterest, let alone any contact between them at all.

Click here to read the full opinion.

October 2, 2015 | United States District Court for the Western District of North Carolina
Huang Pleads Guilty to Theft of Trade Secrets

On October 1, 2015, Chinese businessman, Xiwen Huang, pled guilty to theft of trade secrets under 18 U.S.C. 1835(a)(2). According to the Bill of Information, between September 2006 and May 2015, Huang "schemed and stole trade secrets from companies within the United States and intellectual property from the United States government...to further his aspirations of forming and operating his own company in the People's Republic of China." Huang received his Bachelor's of Science and Masters Degrees in chemical engineering from Tianjian University in China, and then came to the United States to obtain a doctorate in chemical engineering from Auburn University. According to the Bill of Information, while an undergraduate student, Huang wrote that he "'had a dream of learning more advanced technology to serve [his] homeland' China and decided that to 'fulfill [his] wish' he needed to go abroad and then 'return to China with [his] newly acquired methodology and research skills to teach in China.'"

In 2009, Huang became a naturalized citizen of the United States. Huang worked for numerous companies in the United States as well as a research facility operated by the United States government. Beginning in 2012, Huang incorporated a company in North Carolina and began negotiating with various Chinese companies to bring the technology he learned back to China. Huang engaged in a joint venture arrangement with a Chinese company where Huang was responsible for providing the technology, including the stolen United States intellectual property, and the Chinese company was responsible for supplying the necessary capital. In April of 2014 Huang moved back to China to work for the newly created company, taking stolen confidential and proprietary information with him. Upon attaining his previously stated goals, Huang wrote a document titled, "Trip of Dream Realization" in which he described his "scheming" and "planning" to steal United States Intellectual Property. Huang also stated that "As the main thrust during [China's] development, it is necessary and obligatory for our generation to fulfill our share of responsibility in contributing towards the societal progress of China." Huang was arrested in May of 2015 when he returned to the United States.

The stolen trade secrets are valued between $65 million and $150 million. During the plea agreement hearing, "prosecutors revealed that Huang has also agreed to now help the U.S. government," though Huang's attorneys would not comment on how Huang will help.

September 29, 2015 | Northern District of California
After Husband Convicted in Dupont Economic Espionage Case, Wife Gets Probation

On September 29th, 2015, Judge White of a California federal district court accepted Christina Liew’s plea agreement, sentencing her to three years of probation and restitution to the IRS in the amount of $6 million. As part of the plea agreement, Ms. Liew pled guilty to conspiracy to tampering with evidence. Her Husband, Walter Liew, was the first person to be convicted of economic espionage by a U.S. jury in March 2014 and was sentenced to 15 years in prison.

Walter Liew was found guilty of economic espionage and trade secret theft after selling DuPont's coveted titanium dioxide (TiO2) recipe to Chinese state-owned entities. The highly guarded DuPont recipe was used for both the Oreo cream recipe, as well as the manufacturing of paper and plastics.

September 11, 2015 | Ramsey County District Court
Breaking News

Last week, Bryan Szweda, a former vice president at St. Jude Medical was charged with theft of trade secrets in Ramsey County District Court in Ramsey County, Minnesota. While at St. Jude Medical, Szweda filled the role of vice president of operations for global manufacturing of structural heart devices. Szweda presently works at Edwards Lifesciences, one of St. Jude’s competitors that manufactures artificial heart valves. In addition to five felony counts of theft by swindle, Szweda is accused of taking over 4,000 files related to his work at St. Jude before he was placed on administrative leave in September 2014. The stolen files included one of St. Jude’s most restricted documents- its strategic plan which detailed a roadmap of St. Jude’s research and marketing initiatives. Szweda had already moved out of state by the time investigators executed the search warrant on Szweda’s former home in Plymouth, Minnesota. Stay tuned for more developments in this case.

For more information on the case see here and here.

August 28, 2015 | Supreme Court of the State of Utah
Utah Supreme Court Holds That Misapropriation Under the UTSA Gives Rise to a Rebuttable Presumption of Harm

On August 28, 2015, the Supreme Court of the State of Utah reversed the Utah trial court’s grant of summary judgment to defendant Amanda Mercer, holding that trade secret misappropriation under the Uniform Trade Secrets Act (UTSA) gives rise to a rebuttable presumption of irreparable harm.

In InnoSys Inc. v. Amanda Mercer, plaintiff defense industry technology company sued its former engineer, defendant Amanda Mercer, for violating her non-disclosure agreement and misappropriating the company’s trade secrets, protected material under the UTSA. Mercer had forwarded confidential emails to her private email account and copied a confidential business plan to her own personal external storage device. Further, after InnoSys ended her employment and she was later denied unemployment benefits, she submitted these protected documents into the administrative record of her appeal before the Department of Workforce Services.

The Utah trial court granted Mercer’s summary judgment motion based on InnoSys’ failure to establish any actual or threatened harm. Additionally, the lower court entered rule 11 sanctions against Innosys and awarded Mercer attorney fees. The lower court’s reasoning stemmed in part from the fact that Mercer had apparently destroyed the confidential documents that she misappropriated, thereby defeating the potential for harm to InnoSys.

The state’s Supreme Court reversed the lower court and remanded for further proceedings, reviving InnoSys’ claims against Mercer. Because it was undisputed that Mercer misappropriated these protected documents, the sole issue on appeal concerned the evidence of harm. The Utah high court reasoned that the instant facts demonstrated a prima facie case of misappropriation under the UTSA and thus, gives rise to a rebuttable presumption of irreparable harm. Judge Lee instructed that “trade secrets are a right of property”1 and upon proof of misappropriation, the “trade secret claimant is entitled to a rebuttable presumption of irreparable harm for the purposes of injunctive relief . . . .”2 Judge Lee observed that such a principle is widely accepted under UTSA caselaw and is considered a core standard of trade secret law. Additionally, even though Mercer had apparently destroyed the protected documents at the center of the case, such actions were not sufficient to rebut the presumption of harm to InnoSys. Judge Lee noted that injunctive relief would yield little harm to Mercer if she did indeed destroy the documents, and would provide great protection to InnoSys if she did not, and had intentions to continue misappropriating the confidential information.

1 InnoSys Inc. v. Amanda Mercer, 2015 UT 80U, ¶33.
2 Id. at ¶34.

August 20, 2015 | United States District Court for the District of Massachusetts
Zebra Enterprise Solutions Changes Venue and Files for Declaratory Judgment

On June 10, 2015, Lynx Systems Developers Inc. (“Lynx”) sued Zebra Enterprise Solutions Corp. (“Zebra”) in the United States District Court for the District of Massachusetts for a number of claims including misappropriation of trade secrets, breach of contract, and fraud. The dispute between the two parties stemmed from a joint venture the parties engaged in to build a system that would track NFL football players’ actions in real time using hardware installed in players’ shoulder pads. The business relationship between the parties disintegrated and the parties then developed competing tracking systems independently. After Zebra won a contract with the NFL, Lynx brought the initial suit in Massachusetts District Court.

Last week, in response to the complaint, Zebra filed a motion to dismiss the suit in Massachusetts District Court and on August 20, 2015, brought a new complaint against Lynx in Santa Clara County Superior Court in Santa Clara, California. Zebra’s complaint pleads for declaratory relief of no (1) trade secret misappropriation, (2) breach of contract, (3) interference with existing and advantageous business relationships, (4) fraud, (5) breach of fiduciary duty, (6) unfair competition or unfair or deceptive acts, (7) unjust enrichment, (8) conversion, and (9) intentional interference with prospective contractual and advantageous business and economic relationships. The California case is filed under docket number 115CV284620.

June 30, 2015 | United States Court of Appeals for the Fifth Circuit
The Fifth Circuit holds that Trade Secrets Fixed Within Software Fall within Copyrightable Subject Matter

On June 30, 2015, the Fifth Circuit affirmed the lower court's decision which found Spear Marketing's (SMI) Texas Theft Liability Act and trade secret misappropriation claims precluded by the Copyright Act.

Spear Mktg., Inc. v. Bancorpsouth Bank involved a dispute over cash management software. SMI, producer of the software VaultWorks, alleged that its competitor, Argo, had stolen both technical and business trade secrets related to VaultWorks. On April 1, 2010, SMI had approached Argo to measure Argo's interest in acquiring SMI. In the pursuit of this deal, SMI provided a demonstration of its software and sent Argo screenshots of its software interface. The instant controversy arose when Argo launched its own cash management software at the end of 2011 and SMI's client, BancorpSouth Bank (BCS), had informed SMI that it had no intention of renewing its licensing contract with SMI.

An issue of first impression for the Fifth Circuit, the court confronted the intersection of trade secrets and the preemption purview of federal copyright law. Because processes and methods are excluded from copyright protection per section (102)(b) of the Copyright Act, SMI argued that their trade secrets fell outside the scope of the Act. Thus, the court was presented with whether processes and systems that had been fixed in a tangible medium of expression may be copyrightable subject matter for purposes of preemption, even though such matter may not be copyrightable matter generally.

The court addressed the issue by noting the current circuit split and followed the majority of its sister circuits,* holding that ideas fixed within tangible matter falls within the scope of copyright subject matter for preemption purposes, even if some of the underlying matter is not copyrightable. The court first stated that the Copyright Act protects computer software as a tangible medium. Then the court noted that the ideas that were allegedly stolen were fixed within the provided screenshots and the overall computer software. Therefore, SMI's trade secrets were fixed within the software, falling under the scope of the Copyright Act's preemption provision.



*The Second, Fourth, Sixth, Seventh and Ninth Circuits recognize that the Copyright Act's preemption provision, § 301(a), covers ideas fixed in tangible media. See Forest Park Pictures v. Universal Television Network, Inc., 683 F.3d 424 (2d Cir. 2012); U.S. ex rel. Berge v. Bd. of Trustees of the Univ. of Ala., 104 F.3d 1453 (4th Cir. 1997); Stromback v. New Line Cinema, 384 F.3d 283 (6th Cir. 2004); ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996); Montz v. Pilgrim Films & Television, Inc., 649 F.3d 975 (9th Cir. 2011) (en banc). The Eleventh Circuit disagrees, finding that ideas are categorically excluded from copyright protection, even if the matter is fixed in a tangible medium. See Dunlap v. G&L Holding Grp., Inc., 381 F.3d 1285 (11th Cir. 2004).

June 26, 2015 | Court of Appeal of California
California Supreme Court to Review Eligibility for Malicious Prosecution Claims

On October 14, the California Supreme Court agreed to review the Second District Appellate Court’s decision which held that the former employees of FLIR couldn’t sue FLIR’s former counsel, Latham & Watkins, for malicious prosecution because the trial court had denied the former employees’ summary judgment motion during the threatened trade secret misappropriation litigation.

In the underlying action, FLIR sued two of its former employees for threatened trade secret misappropriation because FLIR alleged a business plan that the two former employees authored and intended to carry to fruition could not be successful unless the former employees used trade secrets stolen from FLIR. FLIR was able to defeat the former employees’ summary judgment motion despite the former employees’ proof that they had submitted the same business plan to another company before working for FLIR. FLIR offered expert testimony at the summary judgment stage that purported to prove that no company other than FLIR had the technology necessary for the success of the former employees’ business plan. At trial, it was revealed that the expert opinions used to defeat the summary judgment motion were based on incomplete information and therefore could not prove that in order for the former employees’ business plan to be a success they would need to use trade secrets stolen from FLIR.

In addition to finding in favor of the former employees, the trial court also held that FLIR initiated and continued the action in bad faith and for anti-competitive motives. The former employees subsequently brought an action against Latham & Watkins for malicious prosecution, but Latham was able to defeat this claim by invoking California anti-SLAPP law. The Second District Court of Appeal affirmed this decision in June. Commentators who advocate for malicious prosecution claims point out that lawyers should not be able to use litigation as an intimidation tactic to deter defendants from moving for summary judgment. If the California Supreme Court affirms the Second District’s decision, it can effectively give a “free pass to lawyers for any decisions made after clearing the summary-judgment hurdle.”

For more information on the history of this litigation see here and here.

May 8, 2015 | United States Court of Appeals for the district of Columbia Circuit
FCC Can't Require Merger Applicants to Disclose Trade Secrets to Non-Parties

The D.C. Circuit’s decision in CBS indicates that federal courts acknowledge the critical implications of trade secret disclosure and trade secret law’s increasing significance in the protection of business practices. The D.C. Circuit held that it was improper for the Federal Communications Commission (FCC) to require merger applicants to submit proprietary documents for review and make them available for examination by industry participants not a party to the action, on an expedited basis.

Typically when reviewing cable company mergers, the FCC requires disclosure of information including key affiliate contracts and negotiation documents. Within the cable industry, these documents are kept highly confidential. The disclosure of these documents would expose not only the cable company parties involved in the merger, but also the content providers which they do business with. The Plaintiffs in this case, a group of content providers, utilized the Trade Secret Act to resist disclosure of their proprietary information to third party examiners. The Trade Secret Act prohibits disclosing sensitive business information unless “authorized by law.” The Plaintiffs successfully argued that this disclosure of sensitive business information was not authorized by the law because the Commission’s own regulations and internal policies did not authorize the disclosure which the FCC sought. The FCC’s internal policies provide that “a persuasive showing as to the reasons for inspection will be required [for disclosure]” and that the underlying documents must be “necessary” to the review process. The D.C. Circuit held that the affiliate contracts and negotiation documents were merely relevant, but not necessary to the FCC’s merger review. Thus, the required disclosure of proprietary documents involving third party content providers was not authorized by law and prohibited by the Trade Secrets Act.

April 2, 2015 | 4th Circuit, United States District Court - Eastern District of Virginia
Kolon Pays $360 Million in Settlement to DuPont for Trade Secret Misappropriation

On April 30, 2015, Kolon Industries Inc. ("Kolon"), a South Korean company, agreed to pay $360 million to E.I. du Pont de Nemours and Co. ("DuPont") after a lengthy trade secrets dispute over Kevlar technology.

On September 21, 2009, DuPont sued Kolon in the U.S. District Court for the Eastern District of Virginia. Subsequently, Judge Robert Payne issued a spoilation-of-evidence order, adverse-inference jury instruction and attorneys fees for DuPont in response to Kolon's intentional destruction of evidence. In 2011, the jury awarded $919 to DuPont. In 2014, the Fourth Circuit overturned the jury verdict on the ground that Kolon was wrongly prevented from presenting trial evidence and assigned the case to a new judge.

Meanwhile, two former DuPont employees plead guilty to the involvement with the trade secret misappropriation in 2009 and 2014, and five former Kolon executives and employees where charged in 2012. Kolon finally started settlement talks with DuPont in light of the parallel jury trials in both civil and criminal courts.

Kolon pled guilty to conspiracy for stealing the Kevlar trade secrets. In turn, the company was sentenced to pay $85 million in criminal fines and $275 million in restitution damages in Eastern District of Virginia court. This was a land mark case for the U.S. Department of Justice as the first instance where a foreign corporation without direct presence in the United States was directly served with a U.S. criminal process based on an international treaty.