Recent Decisions and Case Developments

Thomas A. Lamont, L.O.G. Energy Development, Ltd., Rosendo A. Carranco and Montecristo Energy II, Ltd. V. Vaquillas Energy Lopeno, Ltd., LLP And Job Energy Partners II, Ltd.
March 13, 2015 | Supreme Court of Texas
"Treasure Map" Misappropriation Award Upheld in Texas

On March 13, 2015, the Texas Supreme Court denied review of Lamont et al v. Vaquillas Energy Lopeno, Ltd. et al, thereby upholding a $4.9 million jury award for Vaquillas in its trade secret misappropriation suit. At the center of the dispute is the seismic map of oil and gas prospects that Ricochet Energy, Inc. generated pursuant to an agreement with Vaquillas in 2003 and 2004. The seismic map, or “treasure map” as both parties had referred to it, had identified a lucrative prospect – a gas reservoir containing natural gas estimated as much as $60 million.

The instant controversy began when Thomas Lamont, a co-owner of Ricochet, separated from Ricochet in 2006, and then formed a new entity, Montecristo II, with another oil and gas investor, Rosendo Carranco in 2007. Because Lamont had continued to own a working interest in the gas prospect, after Lamont’s separation, Ricochet shared the treasure map with Lamont as a potential investor, without signing any confidentiality agreements. Montecristo II then outbid Ricochet to lease property adjacent to the gas reservoir, and depleted it, foreclosing any opportunity for Ricochet to withdraw any gas.

On appeal from the jury’s verdict in favor of Vaquillas, Lamont argued that the trade secret’s status was destroyed when Ricochet shared the treasure map with Lamont after his effective resignation date. However, the court noted that the disclosure to Lamont was in his role as a potential investor, and as such, the limited disclosure did not destroy its trade secret status. The disclosure was never meant to enable a potential investor to compete directly against Ricochet, but instead, to work with them in an investment opportunity. Further, the court noted that Ricochet took proper means to protect its trade secret, by keeping it a secret from its employees, competitors, and the public. Next, the appellate court concluded there was sufficient evidence to support a finding that Lamont and Carranco’s actions fell below the generally accepted standards of commercial morality, because they used improper means to locate the gas reservoir when they misused the map. Notably, Lamont and Carranco had never conducted any independent research, indicating their reliance on the map, which they used to enrich themselves off of Ricochet’s work and investment.

While Texas adopted a version of the Uniform Trade Secrets Act, it only took effect on September 1, 2013, and does not apply to prior misappropriation. As such, in the instant case, the appellate court relied heavily on the 3rd Restatement of Unfair Competition, which notably, is aligned with the Act. Therefore, this case is still persuasive in situations where a company must rely on common law to protect its trade secrets if it is in a state where the UTSA, or any version of the model Act, has not been adopted. Further, and more significantly, this case demonstrates that companies which did not employ confidentially or non-disclosure agreements, may still be protected in the scenario a potential business investor misuses their secrets. While certainly helpful in situations where negotiations could be stalled for such agreements, it is always better to employ these agreements, if for no other reason than it may define the scope of litigation.

Texas Advanced Optoelectronic Solutions, Inc. v. Intersil Corporation
March 6, 2015 | United States District Court for the Eastern District of Texas
Texas Jury Awards $58 Million for Breach of Confidentiality Agreement

On March 6, 2015, the jury awarded Texas Advanced Optoelectronic Solutions Inc. (TAOS) $58 million dollars for its trade secret misappropriation suit against Intersil after seven years of litigation in the Eastern District of Texas.

TAOS patented technology that empowers flat panel video displays to adjust brightness based on different light exposures. Intersil approached TAOS in 2004 to negotiate a potential merger to enter the light sensor market. During the course of negotiations, both parties signed confidentiality agreements to protect TAOS’ technology and competitive trade secrets – including vendor information.

Then after what TAOS characterized as an unreasonable offer, Intersil severed all ties with TAOS and soon introduced a competing light-sensor product. TAOS demonstrated that Intersil used its patented technology to create this competing product. Additionally, TAOS also demonstrated how Intersil secured supply contracts with Apple by using trade secrets procured from the failed negotiations.

While Intersil states that it will appeal the verdict, the case is a good example for the necessity of employing confidentiality agreements in preliminary negotiations where trade secrets are at stake. In the event a party breaches the agreement, it goes a long way to demonstrate fraud, malice and gross negligence.

Ascension Ins. Holdings, LLC v. Underwood
February 28, 2015 | Court of Chancery of Delaware
Court of Chancery Finds Choice of Law Clause Void

On January 28, 2015, the Delaware Court of Chancery released an opinion finding that a choice of law clause in a noncompete contract, designating Delaware as the venue and choice of law for dispute resolution, did not govern the dispute because the state of California had a materially greater interest in the issue. The parties here engaged in an employee investment agreement (“EIA”) in July of 2008, in which Defendant Underwood agreed not to compete with Ascension or its parent for two years after leaving his position at Ascension. Plaintiff Ascension sought to enforce the non-compete clause in the EIA and the Court of Chancery was presented with the question of whether California’s employee friendly statute or Delaware’s contract-friendly policies should govern the validity of the non-compete clause.

In the EIA both parties agreed to Delaware venue as well as Delaware choice of law. However, the court found that California was the state with the strongest contacts to the contract because the EIA was entered between a California resident and a Delaware limited liability company that now has its principal place of business in California, the non-compete clause was negotiated in California, and but for the choice-of-law provision, California law would apply to the EIA. Additionally, California’s interest in its employee-friendly public policy is greater than Delaware’s interest in the sanctity of a contract.

This decision is significant because the Chancery Court, which is historically corporate-friendly, took a strong stance against allowing corporations to contract around unfavorable state laws. The court emphasized that California’s public policy against non-compete clauses is so fundamental that it would prevail over a contracted to term which goes against this policy. This decision empowers employees and ensures that they will be able to rely on his or her state’s employee protection policies as long as he or she is engaging in the employment relationship in his or her state. Even if an employee agrees to a choice-of-law clause, applicable state policies will still be able to protect him or her. In the future, this decision should cause corporations to investigate the state policies on non-compete clauses in the states in which it engages in employee relationships.

Roquette Freres SA v. Solazyme Inc.
February 26, 2015 | United States District Court for the District of Delaware
Solazyme Counter-Claims Trade Secret Misappropriation

Solazyme is alleging that Roquette Freres SA misappropriated its trade secrets regarding algae-based nutritional products.

The companies agreed to a research and development joint venture in November 2010 on microalgae-derived products. After the agreement fell apart, a subsequent arbitration between the parties held that Solazyme was entitled to all of the improvements made to the intellectual property it brought to the agreement.

Roquette sued in the federal court of Delaware in November 28, 2014 to vacate the arbitration order and for a declaration of joint ownership of the algae Intellectual Property rights. Solazyme answered on February 26, 2015 that Roquette agreed to the secrecy of Solazyme's IP under the agreement and violated the agreement by filing patent applications on the IP material.

The case is Roquette Freres SA v. Solazyme Inc., 14-cv-01442, U.S. District Court, District of Delaware (Wilmington). https://www.pacermonitor.com/public/case/5370069/Roquette_Freres_SA_v_So...

Nanomech, Inc. v. Arunya Suresh
February 6, 2015 | United States Court of Appeals for the Eighth Circuit
8th Circuit Finds Global Noncompete to be Overbroad

On February 6, the 8th Circuit released an opinion finding that a Global Noncompete Agreement was overbroad, and therefore unenforceable. Arunya Suresh began working at NanoMech in 2010, agreeing to the noncompete which was for two years following termination with or without cause, and would have prevented Suresh from working or consulting with any business that competes with NanoMech. The agreement did not state a geographic limitation, and so was presumably enforceable anywhere in the world.

Suresh left NanoMech in May 2012, stating she was going to pursue her doctorate degree. However, NanoMech discovered she had actually accepted a position as a chemist at competitor BASF. At the district court level, NanoMech was unsuccessful in obtaining an injunction against Suresh, and ultimately the 8th Circuit Court upheld the decision.

This sort of global noncompete is frowned upon by most courts, and will often not stand up to the three-part test used in Arkansas (but fairly typical elsewhere), that looks at 1) whether the employer has a valid interest to protect, 2) whether the geographical restriction is overly broad, and 3) whether the time limit imposed is reasonable. In this case, the court ruled the combination of the broad restriction on the things Suresh could not do, considered together with the complete lack of geographic limitation, renders the noncompete overbroad and unenforceable. In the court's words, the lack of geographic limitation was particularly oppressive because the agreement "prohibits her from working in any capacity for any business that competes with the company."

This decision is interesting since Arkansas affords trade secrets particularly strong protection. In fact, Arkansas has previously upheld certain global noncompetes, but as the court pointed out, the restrictions in those cases were far more narrowly tailored as to the prohibited conduct. In both cases discussed, the employees simply couldn't solicit clients with whom they had contact with while employed by their respective former employers. It was this very narrow limitation on what conduct they could not do do that the courts found to justify a lack of geographic limitation in the noncompete agreements.

Moncrief Oil International v. OAO Gazprom
February 5, 2015 | Texas District Court
Fake Evidence Leads to Dismissal with Prejudice

One month into a complex case involving energy production in post-Soviet Russia, Moncrief Oil International abruptly dropped its $1.37 billion lawsuit that included a trade secret misappropriation claim against Gazprom after the Fort Worth company was accused of producing a falsified key document in the case. The company’s lawsuit hinged upon the allegation it had shared with Gazprom the secret details of an LNG plant it wanted to build with Occidental Petroleum in Ingleside, Texas in 2004.

State District Judge Melody Wilkinson dismissed the case with prejudice at the request of attorneys representing Moncrief Oil, which was suing the Moscow-based energy company for backing out of a deal for rights to develop a natural gas field in Siberia. During the trial last week, a document prepared by an accountant at Moncrief Oil International was found to include a key error, making it impossible to continue with the case

By dismissing the case with prejudice, Wilkinson prevents Moncrief Oil from continuing with any lawsuit on the same claims. This case shows the necessity of following all rules, both ethical and procedural, whilst litigating such claimes.

TSG Finishing v. Bollinger
December 31, 2014 | Court of Appeals of North Carolina
Assignability of Non-Competes

The Court of Appeals of North Carolina overturned a trial court's ruling that an assigned non-compete was unenforceable.

TSG is a company that specializes in "fabric finishing," or the use of chemicals to effect the color and textures of various textiles. Former employee Bollinger had signed a non-compete agreement with TSG in 2007, and TSG subsequently filed for bankruptcy, and transferred its assets to a subsidiary corporation with a similar name. While Bollinger's job remained the same, he technically now worked for a different company, who had been assigned his employment contract including the non-compete agreement. When Bollinger decided to go work for American Custom Finishing, a competitor located just 5 miles down the road, TSG sued to enjoin him from doing so based on the non-compete agreement. The trial court, however, decided that the agreement was unenforceable, primarily because there was no explicit assignability clause in the non-compete, and the trial court found that a balancing of the equities weighed against enforcement.

The Appellate Court disagreed with the trial court's approach. The Court explained that the case relied on by the trial court, Hess v. Gebhard & Co., 808 A.2d 912 (PA 2002), was different from the present case in that the assignor and the assignee were basically strangers, while here the assignment was just part of a restructuring following a bankruptcy. Thus the non-compete is being enforced by TSG who is certainly not a "stranger to the original undertaking," as was the case in Hess, and so the requirement that there be an assignability clause is substantially relaxed. Further, the fact that Bollinger was given an annual raise of $1,300 and a signing bonus of $3,500 for signing the non-compete, and that he left abruptly after 27 years of service at TSG to work at a competitor 5 miles down the road, both weigh strongly in favor of enforcing the non-compete. While the trial court was persuaded by Bollinger's argument that he is unemployable outside the textile industry, and so enforcing the non-compete would be particularly burdensome on him, the Appellate Court was far less sympathetic.

ABB Turbo Systems, AG v. TurboUSA, Inc.
December 14, 2014 | United States Court of Appeals for the Federal Circuit
Surviving A Motion to Dismiss in Trade Secret Cases

The Federal Circuit held that the dismissal of a trade secrets complaint for failure to state a justiciable claim was not warranted solely because the misconduct allegedly involved a number of wrongdoers and began many years before the complaint was filed. Remanded for further proceedings, ABB Turbo Systems, AG v. TurboUSA, Inc., Case No. 2014-1356 (Fed. Cir., Dec. 17, 2014) ABB’s pleading alleged various actions the company took to protect its trade secrets.

The trial court inferred that ABB’s efforts to protect secrecy probably would be deemed insufficient but the federal circuit held that only “reasonable” care is required, and “the complaint stage is not well-suited to determining what precautions are reasonable in a given context.”

Seeking the best chance for surviving a Rule 12(b)(6) motion, a complaint which alleges the relevant facts as the pleader understands them, and which aligns those factual allegations with the operative legal principles as ABB seemingly did in this case, is recommended. On appeal, ABB’s pleading was found to satisfy those minimum standards. Going forward, the parties will have an opportunity to perform some discovery before the trial court decides whether further litigation would be futile. Stay tuned for developments.

In re Microbilt Corp.
December 10, 2014 | United States Court of Appeals for the Third Circuit
Florida's Litigation Privilege Bars Misappropriation Claims Under the FUTSA

On December 10, the 3rd Circuit upheld a district court decision dismissing Microbilt Corporation's claims for misappropriation of trade secrets under the Florida Uniform Trade Secrets Act ("FUTSA"). Microbilt claimed that Gunster violated the FUTSA when they attached copies of invoices from customers of a Microbilt subsidiary as an exhibit in a complaint alleging breach of contract, filed in the Middle District of Florida.

On appeal, the 3rd Circuit explained that it is "well-settled under Florida law that the absolute litigation privilege applies to statements in pleadings filed with the court." Thus the court reasoned, foreign state exceptions to the privilege, relied on by Microbilt, are irrelevant to the case at present. Further, since the privilege is settled law, the court need not submit it as a certified question to Florida Supreme Court.

Cronimet Holdings, Inc. v. Keywell Metals, LLC
November 7, 2014 | N.D. Ill.
Common Law Misappropriation of Confidential Information Preempted Under ITSA Even if Information is Not A Statutory "Trade Secret"

The Northern District of Illinois held on November 7 that the Illinois Trade Secrets Act (ITSA) preempted the common law claims of misappropriation of confidential information, unfair competition, and unjust enrichment. The court additionally noted that such claims are preempted even if the information in question would not qualify as trade secrets under the Act.

Defendant Keywell Metals, LLC ("Keywell Metals") acquired the assets of Keywell, LLC ("Keywell"). Prior to the sale, Keywell had approached Plaintiff Cronimet Holdings Inc. ("Cronimet") with Cronimet as a potential purchaser of Keywell. Keywell and Cronimet entered into a Non-Disclosure Agreement ("NDA"), terms of which restricted Cronimet from hiring any Keywell employees it met during the negotiations for a period of 24 months.

Cronimet initiated this action against Keywell Metals, seeking a declaratory relief against enforcement of the employment restrictions and arguing that the acquisition extinguished the terms of the NDA. Keywell Metals responded with ten counterclaims including violation of the ITSA, misappropriation of confidential information, unfair competition and unjust enrichment. Cronimet moved for dismissal of the common law claims, arguing that the claims were preempted by the ITSA. Keywell Metals contended that the ITSA's preemption provision is inapplicable since the confidential information at issue does not rise to the level of a statutory trade secret. After reviewing its case law, the Court decided that common law claims that are "dependent on the existence of confidential information" are preempted by ITSA, even if such information does not meet the statutory definition of a trade secret.