Recent Decisions and Case Developments

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.

March 5, 2014 | Delaware Chancery Court
Remedies available for Employer Despite Lack of Non-Compete Agreement or Misappropriation of Trade Secrets

On March 5, 2014, the Delaware Chancery Court awarded damages to an employer against a former employee who, using the employer’s information, had started to compete directly with the employer, despite the absence of any non-compete agreement or any finding of trade secret misappropriation. Wayman Fire Protection (Wayman) brought suit against former employee Weitzel and others. Wayman alleged that after being fired by Wayman, Weitzel started competing directly with Wayman by bringing Wayman employees to his firm, and that those employees had taken with them Wayman’s proprietary information. The complaint alleged that, using this information, Weitzel won a bidding war against his prior employer.

After dismissing Wayman’s claims for tortious interference and misappropriation of trade secrets, the Chancery Court went on to find that Weitzel had indeed violated the Delaware Misuse of Computer System Information Act, and had also violated his fiduciary duty to Wayman. In addition, the court found Premium Fire liable as a conspirator, resulting in joint and several liability, and awarded Wayman over $85,000 in damages as well as attorney’s fees.

Thus, the court found that even absent a non-compete agreement or misappropriation of trade secrets, Wayman was still entitled to relief. This creative damages award suggests that new avenues for relief may be available for plaintiff employers seeking recovery from past employees, even in cases that fall short of trade secret misappropriation, and even where the company has failed to obtain a non-compete agreement from the employee at issue.

March 4, 2014 | Court of Appeals of the State of Washington, Div. II
Attorney Obtains Rival's Prices and Customer List

Vincent Gresham, a securities attorney in Atlanta, prevailed in Washington State's Court of Appeals, Division 2, winning access to prices and customer lists of securities law firm Robbins, Geller, Rudman & Dowd. Robbins, Geller had provided the information to the State of Washington's Attorney General's Office (AGO) as part of a bid to represent the Washington State Insurance Board in litigation.

The trial court had permanently enjoined the state's attorney general from releasing the information. Gresham prevailed in his argument that the trial court wrongly decided that the information was a trade secret under Washington's UTSA. If the information were a trade secret, then under the state's Public Records Act (PRA), the state could not release the information.

The court found that the information was partially disclosed; that Robbins, Geller had agreed to the release of the information under the PRA when it made its bid; that Robbins, Geller had failed to take reasonable precautions to protect the secrecy of the information; and that Robbins, Geller had not proven that it would be harmed by the release of the information.

March 3, 2014 | S.D.N.Y.
DuPont Wins Complex Case on Summary Judgment

Big Vision Private, Ltd. (Big Vision), a company based in Mumbai, India, lost its trade secrets case against E.I. DuPont de Nemours & Co. (DuPont) on a motion for summary judgment. The case will be of interest both to practitioners of trade secrets and of patent law. Big Vision claimed that DuPont had filed a U.S. patent on a manufacturing process for which Big Vision already had a patent in India.

Both the claims and the history were complex. The two companies had worked together in trials. As for the claims, the case has several hundred exhibits and the court notes, in footnote 1, "the parties have submitted two separate 56.1 statements, two 56.1 counterstatements (resulting in 223 paragraphs of fact, nearly 200 of which were contested to some extent), 227 exhibits, and thousands of pages of deposition transcripts."

Big Vision appears to have made several fundamental mistakes in crafting its trade secrets case. For example, the court found that its definition of its own trade secret changed. Big Vision also made mistakes in the details of its claim. Big Vision claimed that no other company had a "cost-competitive" product, but failed to offer any pricing evidence.

Big Vision had failed to describe its trade secret with particularity, a rule that is common in most Courts of Appeals, even though "the Second Circuit has not explicitly adopted this requirement."

Big Vision did not have a trade secret. "[T]he evidence shows that Big Vision disclosed either the 'recipe' it obtained from another company’s patent, or variations of a formulation derived from structures tested at the First and Second Trials, to at least 16 different third parties."

Finally, the court also found no misappropriation by DuPont.

February 25, 2014 | Federal District Court for the District of Arizona
Court Rejects Continuing Breach Theory in Trade Secrets Misappropriation Case

On February 25, 2014, a federal district court judge granted summary judgment in favor of Raytheon Missile Systems (Raytheon) finding that nine of ten counts brought by Ordnance Technologies, Inc. (Ordnance) were barred by statute of limitations, and that the continuing breach theory was not applicable in such misappropriation cases.

Ordnance alleged in its complaint that Raytheon had misappropriated Ordnance’s proprietary trade secrets during a partnership between the companies dating back to the early 1990s, and that Raytheon had subsequently used this information to solicit government contracts for warhead systems. Ordnance originally informed Raytheon of its suspicions via letter in January 2009, to which Raytheon replied in March 2009. Ordnance replied nearly a year later in April 2010, and subsequently filed this action in May 2012. In its answer, Raytheon raised statute of limitations as an affirmative defense, arguing that the action had been filed over three years after Ordnance’s initial letter to Raytheon, violating the 3-year statute of limitations for nine of the ten claims asserted.

In granting summary judgment on those claims, the Federal District Court for the District of Arizona found that the causes of action had accrued in January 2009 when Ordnance informed Raytheon of the suspected misappropriation, and that as a result the complaint fell outside the three year statute of limitations. Ordnance argued that the cause of action had not yet accrued under the continuing breach theory, which suggests that a defendant’s continuing breach (in this case continued misuse of the propriety information) may delay the accrual of a cause of action, even after the plaintiff has discovered the breach. The court rejected this argument, finding that under Arizona law, “once the misappropriation is discovered, it does not matter if it is ongoing, the period begins to run when it is discovered.”

February 18, 2014 | New York County, Supreme Court of the State of New York
Plaintiffs Claim Idea for Huffington Post Was Stolen From Them

Plaintiffs filed this action against Arianna Huffington and the HuffingtonPost.Com, Inc. to recover what they felt was unjust enrichment and fraudulant activity on the part of defendants. Plaintiffs contend that the idea for the democratic-leaning news and blogging site was theirs originally and that they communicated this idea to defendants, who then went ahead and created TheHuffingtonPost without any attribution to plaintiffs.

February 11, 2014 | 8th Circuit
Distinguishing Between Misappropriation and Breach of Contract

Loftness Specialized Farm Equipment, Inc. (“Loftness”) brought a declaratory judgment action againt three defendants (Terry Twiestmeyer; Steven Hood; and Twiestmeyer & Associates, Inc.) (collectively, "Twiestmeyer"), arguing that it had satisfied an agreement with Twistmeyer regarding grain bagging equipment design secrets. Defendants allege that they shared this confidential information with Loftness in 2007, that these conversations eventually led to Loftness’s decision to enter this market, and that this information was shared with Loftness under the protection of a twenty-year Non-Disclosure Agreement (“NDA”) which the parties signed before their meeting. Thereafter, the parties agreed to an additional agreement in which defendant would be paid a percentage of the revenue generated from the sale of this equipment for two years.

Twiestmeyer received payments for more than two years, but the parties were unable to negotiate a new deal to govern the remaining time covered by the NDA, after which Loftness brought this action. Twiestmeyer subsequently countersued for unjust enrichment and breach of the two contracts.

The district court dismissed the unjust enrichment claim and granted Loftness’s summary judgment motion on the breach of contract.

In the section of the opinion most relevant to trade secret practitioners, the Court of Appeals determined that the district judge had erred in applying the test for the tort of misappropriation and that, instead, the claim was based on a breach of contract. Because the district court had failed to analyze the NDA, the court remanded the case so that the district court could examine the NDA.

February 4, 2014 | D.C. Cir.
Dog Breeders Lose Reverse FOIA Suit

Missouri dog breeders sued the U.S. Department of Agriculture (USDA) to prevent the release of business information to the Humane Society. The Humane Society had filed a Freedom of Information Act (FOIA) request in 2009 and the USDA made the decision to release the information in March, 2011. At that point, the Missouri dog breeders sued in a reverse FOIA action to prevent the release of the information.

The business information (known as block 8 from the form in which it is filed with the USDA) consists of: "(1) the total number of animals purchased and sold in the last year; (2) the gross revenue from regulated activities; and (3) for dealers that are not breeders, the difference between the purchase price and sale price of the animals sold."

The only trade secrets issue raised was 5 U.S.C.A. § 552b(c)(4) (West), which forbids an agency from releasing information that is "trade secrets and commercial or financial information obtained from a person that is privileged or confidential." This exemption is broader than the definition of trade secrets under UTSA or the common law. But once the USDA had determined that it could release the information, the agency's decision was subject only to arbitrary or capricious review by the court. The court noted that 1) Humane Society is not a competitor of the dog breeders, 2) that the information was stale and incomplete, and 3) that release would not significantly assist competitors in gauging the scale of a licensee’s operation because similar information was already in the public domain.

January 15, 2014 | E.D. Cal.
Court Finds CUTSA Preemption Issue Must be Raised at Summary Judgment, not Motion to Dismiss

U.S. Legal Support, Inc., a provider of court reporting services, sued two of its former employees and their new employer for misappropriating its customer lists in order to set up a competing business in the area of Northern California.

In a decision that may be reviewed by the circuit court, the E.D. Cal found that defendants' motion to dismiss some claims based on the pre-emption of common law trade secrets claims by California's Uniform Trade Secrets Act (CUTSA) was premature. The court said that the question turned in part on whether plaintiffs had succeeded in showing that defendants had violated a common law property right that was based "on grounds that are qualitatively different from the grounds upon which trade secrets are considered property" (citing Bryant v. Mattel, Inc., No. CV 04–9049 DOC (RNBx), 2010 WL 3705668 at *22 (C.D. Cal. Aug. 2, 2010)). Because this was a question of fact rather than law, "[d]efendants can determine in discovery whether Plaintiff’s contentions have any merit, and when appropriate, bring a summary judgment motion as to the issue of supersession."