Cases from J.

United States Court of Appeals for the Seventh Circuit
7th Circuit Overturns Trade Secret Theft Damages Calculation

The 7th circuit vacated a $760,000 restitution penalty and three-year prison sentence against Yihao Pu. Pu allegedly used two employers’ proprietary stock trading programs for personal trading and lost $40,000.The U.S. Sentencing Commission’s guidelines permit district courts to determine the “intended loss” to the victim of trade secret theft when no “actual loss” occurs. However, on February 24, 2016, the 7th Circuit held that if a district court holds that the “intended loss” holds the same value as the cost of development of the trade secret, the court must have evidence that the defendant “intended to cause a loss to the victims that equaled the cost of development. On remand, the district court will have to reconsider Pu’s evidence that the loss to his employers was at most, $2,000. The 7th Circuit also held that the district court could consider Pu’s gains in determining an “intended loss” figure, but here it appeared that Pu did not have any financial gains from the use of the software.

Part of the original $760,000 included costs incurred to conduct an internal investigation to uncover Pu’s theft, including attorney’s fees for over 300 hours of work by lawyers, paralegals and legal assistance, 1,818 hours of forensic analyst work, as well as divers to retrieve hard drives from a canal. The Circuit court also held that plaintiff Citadel failed to give a complete accounting to support these figures used to calculate the $760,000 restitution. Without giving a further explanation through evidence “of how each professional’s time was spent investigating the data breach,” Citadel will not be awarded the full $760,000 restitution. For more details, read the full decision below.

Supreme Court of the State of Delaware
Delaware Supreme Court Says Trade Secret Violation Can Be A Valid Business Judgment

When DuPont wasn’t able to create a product that could compete with “Roundup Ready,” it created a product that combined its own technology with that of Monsanto, the original “Roundup Ready” manufacturer. Monsanto sued DuPont for patent infringement, resulting in a settlement in which DuPont agreed to pay Monsanto $1.7 billion over ten years in exchange for a licensing agreement. One of DuPont’s stockholders, a Pennsylvania pension fund, brought a derivative suit against DuPont for breach of fiduciary duty in connection with DuPont’s “combined technology” product. In May 2015, the Delaware Chancery Court dismissed the derivative lawsuit, but another investor attempted to revive the derivative suit. The Chancery Court said the investor failed to show that the board’s refusal to take legal action was an invalid exercise of business judgment. On January 28, 2016, the Chancery Court affirmed the dismissal of the derivative suit.

New Castle County Superior Court
Delaware Superior Court Denies Exemplary Damages

In this case during a twelve day trial, the jury found that Plaintiff, Professional Investigating & Consulting Agency, Inc.’s (“PICA”) Channel Management Program, was a trade secret and that Defendant, Hewlett-Packard Company (“HP”) wilfully and maliciously misappropriated the Channel Management Proposal. On the Channel Management Proposal misappropriation claim, the jury awarded PICA $300,000 in damages for out of pocket expenses and lost profits as well $700,000 for HP’s unjust enrichment.

On March 23, 2015, the New Castle County Delaware Superior Court decided on the parties’ post-trial motions. The court granted in part and denied in part PICA’s motions for exemplary damages and attorneys’ fees, attorneys’ fees and expenses, and costs and interest. The court also denied HP’s motion for a new trial or remittitur and renewed motion for judgment as a matter of law. Regarding the trade secret misappropriation verdict, HP argued that PICA did not present evidence that it derived any economic value from the Channel Management Program not being generally well-known because “every aspect of PICA’s proposal was generally known”, and that PICA attempted to keep the program confidential. The court, however, applied Delaware’s Uniform Trade Secret Act (“DUSTA”) and found that PICA provided extensive evidence at trial that though some of the components of PICA’s program was a trade secret, the program as a whole was a trade secret and that the jury’s damage award was not duplicative.

The court also applied the DUSTA when it granted in part and denied in part PICA’s motion for exemplary damages and attorneys’ fees. Although PICA moved for the court to grant two million dollars in exemplary damages (the maximum amount allowed under the DUSTA), the court followed the guidance of Agilent Technologies, Inc. v. Kirkland and denied exemplary damages. Agilent took the approach of making the plaintiff “whole and to deprive [the defendant] of unjust rewards.” The court here analogized this case to Agilent, where further punishment through exemplary damages were unnecessary because the court had already granted a “stringent remedy that [would] sufficiently vindicate the interests of [the plaintiff] and those more generally protected by the Delaware Uniform Trade Secrets Act.” In the current case, the court held that “the jury’s $1 million award reasonably compensates PICA for misappropriation of its trade secrets… [and] in light of the total jury verdict, the Court decline[d] to impose an additional amount for exemplary damages for punitive purposes.”
This case is significant because the court demonstrates that though the DUTSA permits a court to award exemplary damages in cases where wilful and malicious misappropriation exists, the bar for granting exemplary damages will be set high in cases where the total jury verdict already reasonably compensates the plaintiff for the misappropriation. Though the bar is set high for exemplary damages, this wasn’t much of a total loss for the plaintiff because the court granted the plaintiff’s requested 75% of attorneys’ fees for the entire litigation of the Channel Management Program misappropriation claim as well as 75% of attorneys’ fees and expenses incurred by PICA since July 29, 2013 due to HP’s bad faith throughout the discovery process. Although PICA was not able to obtain exemplary damages, the court did grant PICA to recover for most of the costs incurred with the claims which it prevailed on.

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.

United States District Court Central District of California
LinkedIn Contacts May Be Trade Secrets

Operating under the California Uniform Trade Secrets Act, the Central District of California denied summary judgment in favor of the defendant and found that there was a material issue of fact regarding whether LinkedIn contacts that a former employee made while working for Cellular Accessories For Less (“Cellular”) are Cellular’s protectable trade secrets. The defendant argued that the LinkedIn contacts are not a trade secret because “Cellular encouraged its employees to create and use LinkedIn accounts, and [the defendant’s] LinkedIn contacts would have been ‘viewable to any other contact he has on LinkedIn.’” On the other hand, Plaintiff argued that the LinkedIn contacts are only available “to the degree that the user chooses to share it.”

The Central District found that the parties’ statements did not make it sufficiently clear whether and to what degree defendant’s LinkedIn contacts were public and if so, whether this was done with Cellular’s explicit or implicit permission. The court held that this dispute regarding the publicity of LinkedIn contacts was an issue of fact which a jury must decide.

For a primer on the development of social media and trade secrets click here.

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.

United States District Court for the District of Arizona
Arizona Requires Specificity in Trade Secret Description

The United States District Court for the District of Arizona applied Arizona’s Uniform Trade Secrets Act legislation to grant Tuscon Embedded Systems Inc.’s ("TES") motion for summary judgment on April 8, 2016. TES sued Turbine Powered Technology for Turbine’s alleged failure to pay TES for parts used to modify Turbine’s engine product into a one-megawatt generator. Turbine counter-sued, claiming that TES had stolen its trade secrets, including “parameters and settings, including timing, temperatures, flow rates, horsepower settings, pressures” and instructions on making and operating the modified engines. The court granted TES’s summary judgment motion because Turbine’s description of the trade secrets were not legally sufficient.

The court noted that when describing claimed trade secrets, “catchall phrases” typically can’t reach the level of specificity required to establish the substance of a legally protectable secret and survive a summary judgment motion. This decision is in line with the U.S. Court of Appeals for the 9th Circuit’s decision in Imax Corp. v. Cinema Techs., Inc., 152 F.3d 1161 (9th Cir. 1998), which held that “dimensions and tolerances” are too vague to clearly establish the substance of the trade secret.