Recent Decisions and Case Developments

June 24, 2014 | United States District Court for the Northern District of California
Man sentenced for theft of Trade Secrets from DuPont

Walter Liew was sentenced to 15 years in prison, and fined $28 million following his conviction under the Economic Espionage Act. The conviction arose from the theft of trade secrets from DuPont, particularly information and documents pertaining to the production process of a white pigment, titanium dioxide (TiO2). The pigment is what DuPont uses to achieve its whitest whites in everything from cars to paper.

Judge White, writing in the Northern District of California on a post-conviction motion for acquittal, explained that the evidence demonstrating the intent to injure Dupont, and intent to benefit a foreign government was sufficient for a rational juror to find Liew guilty. It was also noted that the money was tracked to various accounts in Singapore and China, but could not be recovered.

May 13, 2014 | California Court of Appeal Third Appellate District
California Courts Affirms Attorneys' Fees for Defendants

As a reminder that attorneys’ fees can be awarded to a defendant under the uniform trade secrets act, where a misappropriation claim is brought in bad faith, a California appellate court, in an unpublished opinion, affirmed such an award on May 13, 2014. The attorney's fees were the sole issue on appeal in a case that had proceeded through two trials, and dates back to 2007. In the second trial, the court awarded defendants attorneys fees and a "lodestar" multiplier of 1.33 even though attorney Peter Scott agreed to represent defendants free of charge in order to settle a malpractice claim by defendants.

May 9, 2014 | N.J. Super. Ct. Ch. Div.
The Employee Who Was Allowed to Compete from His Garage

This case starts with an unusual employment agreement, which allowed Felix Ferrer to operate a business called FNA out of his garage while working for his employer, SAS Stressteel. Ferrer is an experienced construction engineer who was an important sales manager for his previous employer, DYWIDAG-Systems International, with 31 years' experience, when SAS hired him in 2001.

The agreement gave Ferrer 10% of the company, a guaranteed salary and benefits, and contained a non-solicitation provision but no non-compete.

SAS did not learn until 2012 that FNA was earning over $1 million per year, that FNA was using SAS equipment and personnel, and that Ferrer also owned 40% of Retech, a major SAS customer.

SAS tried to acquire FNA but Ferrer decided instead to sell his interest in FNA and then several SAS employees joined FNA. SAS sued.

The court denied a preliminary injunction, finding no irreparable harm, but allowed the case to proceed on several issues. The case will be interesting to practitioners for two reasons: 1) the agreement allowing for competition but not solicitation presents interesting lessons and 2) the case contains a concise and well-written analysis, under New Jersey's UTSA, of the plaintiff's burden for proving misappropriation of trade secrets.

May 9, 2014 | Cal. Super. Ct.
Guardsmark Wins Noncompete Order in California

In a settlement, former employees of Guardsmark and their current employer agreed to not solicit Guardsmark's customers and to not use Guardsmark's trade secrets for a period of one year. Guardsmark sued Derick Bowman, the former manager of its San Francisco branch for founding a competing security company. The settlement agreement, published in May, came after the court granted Guardsmark a preliminary injunction in February.

May 1, 2014 | United States District Court for the Western District of Pennsylvania (Pittsburgh)
U.S. Government Files Charges Against Chinese Officials for Cybertheft of Trade Secrets

In the first time charges have ever been brought against a state actor for cyber-espionage including theft of trade secrets, the U.S. government has alleged that five Chinese Officials stole valuable information from a number of U.S. companies. The indictment, filed in the Western District of Pennsylvania, enumerates the alleged conduct, including: stealing confidential and proprietary technical and design specifications for pipes, pipe supports, and pipe routing for a Westinghouse Power Plant; stealing confidential information from SolarWorld regarding their cash flow, manufacturing metrics, production line, and costs; installing malware on U.S. Steel computers in an attempt to identify and exploit vulnerable servers; stealing network credentials for nearly every ATI employee; stealing e-mails from senior USW employees containing sensitive information about USW strategies related to pending trade disputes with China; and stealing emails from Alcoa pertaining to an agreement between Alcoa and a Chinese State Owned Enterprise.

Estimating the cost of cyber-espionage on the U.S. economy is quite tricky, but some economists have claimed the damages are on the order of tens of billions of dollars. Over the past year, the U.S. has made it clear that they will intensify their efforts to put an end to the theft. John Carlin, the Assistant A.G. for National Security, stated that “State actors engaged in cyber espionage for economic advantage are not immune from the law just because they hack under the shadow of their country’s flag.”

April 14, 2014 | Washington Superior Court, King County
Washington Trial Court Refuses to Invoke Inevitable Disclosure Doctrine

On March 5, 2014, Errol Samuelson was hired by Zillow. He had worked at Move, Inc. for over a decade and most recently was its Chief Strategy Officer, a position that resembled head of sales with the added responsibility of running newly acquired business units.

The Washington state trial court found no evidence of actual trade secret misappropriation. It refused to grant an injunction under the inevitable disclosure doctrine, but did not explain why.

The case continues. Samuelson's attorneys have asked the court to grant them access to the trade secrets that Samuelson allegedly misappropriated.

April 3, 2014 | US District Court for the Eastern District of Virginia
Fourth Circuit temporarily lifts injunction against competing DuPont Kevlar™ manufacturer

In a February 2009 compliant, DuPont (US) outlined a proprietary “para-amid fiber” manufacturing process for their Kevlar™ product, unique for its durability and strength and utilized notably in police, military and even in sports equipment throughout the US. DuPont alleged that competitor Kolon Industries (South Korea) engaged in purposeful and deliberate theft of the proprietary and trade secret information integral to successfully manufacturing para-amid fiber material as Kevlar™ is processed. DuPont alleged that Kolon executives recruited DuPont employees to reveal information, even paying cash in direct exchange for the specifications of DuPont’s Kevlar™ technology. Of those with access or knowledge of the Kevlar™ product, the complaint specifically alleged misappropriation of information related to the trade secret Kevlar™ manufacturing process by former DuPont Kevlar™ developer Michael Mitchell, sought out by Kolon soon after his termination. Mitchell ostensibly provided paper documents, electronic files and data, and personal knowledge to Kolon, intending to address the company’s difficulties in quality control and production of para-amid fiber products in the US market.

After over two years of litigation, a September 2011 jury issued a verdict in favor of DuPont, finding Kolon liable for misappropriation of trade secrets. On August 30, 2012, Justice Payne assessed a remarkable $919M in compensatory damages against Kolon, an additional $350,000 in punitive damages, and enjoined Kolon from selling para-amid fiber products in the U.S. for twenty years.

The district court also issued a permanent injunction against any further use or disclosure of DuPont trade secrets used in their Kevlar™ product. Kolon filed an emergency motion to stay the injunction pending appeal the following day, which was granted by the Fourth Circuit on August 31, and so-ordered by the District Court on October 5. The matter was then timely appealed.

On April 3, 2014 the Fourth Circuit overturned the jury verdict in which DuPont had been awarded significant damages against a defendant and competitor – Kolon – which had allegedly misappropriated DuPont’s proprietary manufacturing process for Kevlar. In its opinion, the Fourth Circuit ruled that “the district court abused its discretion, to Kolon’s prejudice, when it granted one of DuPont’s pre-trial motions in limine and thereby excluded relevant evidence material to Kolon’s defense.” At issue, was evidence offered by Kolon which it hoped would show that many of the alleged trade secrets at issue were publicly available, specifically that they had been the subject of previous litigation and were thus part of the public domain. Rule 403 of the Federal Rules of Evidence is clear that the probative value must be “substantially outweighed by the danger of confusion …. or of misleading the jury” and that this “standard [was] not satisfied on this record.” Since DuPont’s motion to exclude was highly prejudicial to the defendant, the Fourth Circuit has vacated and remanded the case back to the district court.

March 12, 2014 | Supreme Court of the State of Wyoming
Wyoming Supreme Court Orders Reconsideration of Trade Secret Protection for Fracking Chemicals

On March 12, the Wyoming Supreme Court reignited the debate between green groups and energy companies regarding trade secret protections and disclosure of fracking chemicals. This case, Powder River Basin Resource Council et al. v. Wyoming Oil and Gas Conservation Commission, calls upon a lower Wyoming court to determine whether state public records laws are at odds with recent trade secret protection grants to Halliburton Energy Services and other entities for their fracking chemical recipes. According to the suit, the Wyoming Oil and Gas Commission (WOGC) has been protecting large energy companies at the expense of transparency and public good, using trade secret laws as a disguise to effectuate these protections, and had granted over fifty such trade secret protection orders in recent years.

Procedurally, this case was originally struck down since they mistakenly relied on the Administrative Procedure Act instead of the Wyoming Public Records Act. When this case is eventually presented at trial, Wyoming will have to set state law precedent on whether fracking chemicals constitute a trade secret under state law. Luckily, the Wyoming Supreme Court provided some guidance to the lower court in construing the breadth of available trade secret protection, directing the lower court to use the narrow definition of trade secret associated with the Freedom of Information Act (FoIA).

March 11, 2014 | Court of Appeals for the Tenth Circuit
Tenth Circuit Upholds Reasonable Royalty Award Regardless of Defendant's Motivation

On March 11, 2014, The Tenth Circuit held that a plaintiff may recover damages under a reasonable royalty theory, even in cases where the defendant had not profited financially from the misappropriation.

StorageCraft Technology Corp. (StorageCraft), a developer of data storage and recovery software, brought suit against James Kirby, a former officer and director who was also one of the company’s original founders. The complaint alleged that Kirby had misappropriated StorageCraft’s trade secrets, and had subsequently shared this information with NetJapan, one of StorageCraft’s main competitors. The complaint did not allege that Kirby had profited financially from the misappropriation. A jury awarded StorageCraft $2.92 million in damages based on the estimate of what would constitute a reasonable royalty for use of the misappropriated trade secrets. Kirby appealed, arguing that the award was excessive because he had not profited from the misappropriation.

The Tenth Circuit rejected Kirby’s argument and affirmed the award, noting that the Utah Uniform Trade Secrets Act “doesn’t distinguish between a misappropriator’s venial motives.” While reasonable royalty damages are commonly sought in cases where the defendant has profited financially from the misappropriation of the plaintiff’s trade secrets, this decision makes clear that, at least in Utah, such damages are available regardless of the defendant’s motive in the misappropriation.

March 5, 2014 | U.S. District Court California Northern District (San Francisco)
Federal Jury Convicts On Espionage Act Charges Regarding Theft of Oreo Whitening Recipe

On March 5th, 2014, a federal jury convicted Walter Lian-Heen Liew and Maegerle of economic espionage, theft of trade secrets and other charges for theft of a coveted recipe developed by DuPont which is used to whiten the cream inside Oreos. This recipe for titanium dioxide (TiO2), which can also be used for the manufacture of paper and plastic products as well, had been a closely guarded DuPont secret despite longstanding efforts by Chinese to acquire a similar recipe. This process, which uses chloride, is highly regarded as a cleaner and more efficient process than the standard industry practice of using sulfates in the manufacturing process. Historically, DuPont has taken great measures to keep this formula as a trade secret.
According to testimony from trial, Mr. Maegerle, an engineer who had been with DuPont for 35 years, disclosed the recipe to Mr. Liew who had set up a California company with the intention of producing TiO2 and selling it to the Chinese. Mr. Liew had entered into contracts with Chinese state-owned entities regarding projects which involved the use of this TiO2 technology for manufacturing purposes. After obtaining the trade secret, the defendants sold it for over $20 million.
This is the first federal jury conviction under the Espionage Act of 1996 which provides no private cause of action, but offers the government a powerful weapon in protecting intellectual property interests in the U.S. Sentencing for these individuals is scheduled for June 10, 2014 and it will be interesting to follow since there is no precedent.