Cases from Southern District of New York

Southern District of New York
Injunction to enforce non-competition agreement denied in managerial transfer - Disclosure of trade secrets not inevitable at new job

The 2nd Circuit Court of Appeals, on November 3, 2011, affirmed the Southern District’s denial of a preliminary injunction for IBM, citing the lower court’s “thoughtful and well-reasoned opinion” in finding no evidence of abuse of discretion.

On Jan. 19, 2011, Giovanni Visentin, a senior executive at International Business Machines Inc. (IBM), announced his intention to leave IBM to become senior vice-president at Hewlett-Packard Company (HP). On Jan. 20, IBM filed a complaint alleging breach of contract and misappropriation of trade secrets, and moved for a preliminary injunction in the U.S. District Court for the Southern District of New York. Visentin had signed two non-competition agreements with IBM, one in 2009 and one in 2008, in which he agreed not to work for a competitor for the first year after the termination of his employment. IBM alleged that Visentin was in possession of trade secrets including “highly confidential and commercially sensitive information about the strategic plans and financial performance of the business he is leaving, competitive bidding strategies, internal price and cost models, new client opportunities and targets for 2011, perceived gaps in IBM’s products and services, and the proprietary tools processes and methods IBM uses to win client contracts…” The requested preliminary injunction would be to enforce the non-competition agreements as written.

A primary basis for IBM's trade secrets claim was the inevitable disclosure doctrine, which protects against misappropriation of knowledge when an individual changes employers and it is found to be "inevitable" that the individual will use the knowledge in his or her new position.

On Feb. 16, 2011, the court denied IBM's motion, finding that Visentin's position at IBM required general managerial expertise as opposed to highly technical, secret, or proprietary knowledge and that the likelihood that Visentin would disclose IBM's proprietary information to HP was minimal.

The doctrine of inevitable disclosure provides a three-factor test as to whether or not trade secrets will inevitably be disclosed after a change in employment: Whether (1) the employers in question are direct competitors providing the same or very similar products or services; (2) the employee's new position is nearly identical to his old one, such that he could not reasonably be expected to fulfill his new job responsibilities without utilizing the trade secrets of his former employer; and (3) the trade secrets at issue are highly valuable to both employers. See Finding of Fact and Conclusions of Law at 41-42. In addition, the nature of the industry and the trade secrets at issue should be considered on a case-by-case basis. Id. at 42.

The court, evaluating these factors, noted that while the first prong is satisfied in that IBM and HP are direct competitors dealing in similar products and that the industry tends to produce many trade secrets, the second two factors “heavily weigh[ed]” in favor of Mr. Visentin. Id. at 43.

First, the scope of Mr. Visentin’s position was found to far exceed his previous post at IBM and included many geographic responsibilities that he didn’t have at IBM. While some overlap did exist, the court was confident that the non-competition agreement’s restrictions on working with former clients dealt with this satisfactorily.

Second, the trade secrets were not of such value to HP that Visentin would inevitably disclose them to HP. While IBM contended that Visentin would be eventually so pressured by HP that he would disclose the trade secrets, despite being legally bound not to do so, the court disagreed. His knowledge of IBM’s desired profit margins would not be so useful because he did not have any detailed documentation and could not possibly remember every detail. Additionally, his knowledge of pending deals would be marginally useful at best as his team was responsible for between 5000 and 9000 deals a quarter and therefore he was not in possession of many of the pertinent details.

Accordingly, the court denied IBM’s request for a preliminary injunction.

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.

Southern District of New York
New York Office of the Chief Medical Examiner moves for summary judgment in a suit filed by Gene Godes Forensics for improper sharing of trade secrets

Gene Codes Forensics, Inc. (GCF), a Michigan-based company, has accused the New York Office of the Chief Medical Examiner (OCME) of improperly sharing proprietary information about its software with the FBI. The software, named Mass-Fatality Identification System (M-FISys) was used to help identify victims of the September 11, 2001 (9/11) attacks. According to GCF, OCME employees were extracting information from M-FISys software in order to help the FBI develop its own software. In response, the city claims that 1) it obtained a "perpetual, royalty-free" license to use the M-FISys software for noncommercial purposes; 2) it helped developed the software; and 3) had some ownership rights. The court is currently deciding the defendant's motion for summary judgment.

Southern District of New York
Conviction of former Goldman Sachs programmer for trade secrets theft is reversed by the Second Circuit

In 2011, Sergey Aleynikov was sentenced to more than eight years in prison for the theft of trade secrets under the Economic Espionage Act and transportation of stolen property in interstate commerce under the National Stolen Property Act (NSPA). This case marked the first instance of federal prosecutors using the Economic Espionage Act (EEA) to police the misuse of source code related to high frequency trading. The trade secrets at issue are segments of computer source code from Goldman Sachs & Co. (Goldman) that are used in its high frequency trading platform.

In February 2012, the court reversed Aleynikov's conviction of trade secrets theft in a one-page order. In an opinion published April 11, 2012, the Second Circuit held that Sergey Aleynikov was wrongly charged with theft of property because the code did not qualify as a physical object under a federal theft statute. The court held that "because Aleynikov did not ‘assume physical control’ over anything when he took the source code, and because he did not thereby ‘deprive [Goldman] of its use,’ Aleynikov did not violate the [National Stolen Property Act]." It also ruled that Aleynikov was wrongly charged with espionage, since the code was not a product designed for interstate or foreign commerce. The decision called into question the government's ability to prosecute theft of internal trading systems or other internal financial instruments under the Economic Espionage Act.

Southern District of New York
Hilton and Starwood Hotels reach settlement in suit alleging theft of trade secrets and use of secrets to develop competing luxury brand of hotels

The court consented to the settlement reached in January, 2011 between Starwood and Hilton Hotels in the trade secrets case initiated by Starwood in 2009. The suit filed in the U.S. District Court for the Southern District of New York in 2009, related to the defection of two senior executives from Starwood to Hilton. In April 2009, Ross Klein and Amar Lalvani moved to Hilton, taking hundreds of thousands of electronic documents which were essentially the blueprints for the beginning of a hotel brand. The settlement included a $75 million cash payment to Starwood and a permanent injunction which prohibits Hilton from opening any new “luxury and lifestyle” hotels for two years.

Status: A federal grand jury in Manhattan continues to investigate whether Hilton and its former executives should face criminal charges.

Complaint filed Apr. 16, 2009
Permanent injunction issued Dec. 22, 2010.

Southern District of New York
Alleged exploitation of "technological resources" by Oracle competitor

Oracle Systems Corporation, formerly Passlogix (a wholly owned subsidiary of Oracle Corporation that has since dissolved), sued 2FA Technology, LLC. alleging that 2FA threatened illegitimate legal action, breached contractual obligations, exploited Passlogix’s resources, and sought to injure Passlogix's competitive position and reputation. Oracle Systems Corp. filed a motion for partial summary judgment, which is currently pending before the court.

This case is related to 2FA Technology, LLC v. Oracle Corp. (10-cv-9648), a later-filed case by the defendant in this action, currently stayed pending the disposition of the summary judgment motion here.