Employer Granted Injunctive Relief After Accessing Former Employee's Facebook

At issue here is whether a former employer that suspects trade secrets theft has taken place can log in to the former employee’s personal social media account to search for the potentially incriminating evidence. While the initial reaction for many would be a resounding “no”, in Scherer Design Group v. Ahead Engineering LLC, the Third Circuit held that the unclean hands doctrine did not bar an employer’s claims against its former employee for trade secret misappropriation even though the employer had previously installed and used software that allowed for the monitoring prior to the termination of employment.
It must be decided how far an employer can go to protect their potentially misappropriated trade secret and where the line may be drawn. Here, Chad Schwartz, a senior direction of engineering at Scherer Design Group, left the company following a failed plan to obtain partial ownership. Schwartz made it clear that if he was not made an owner, he would start his own competing company. Scherer requested that Schwartz sign a noncompete agreement to which Schwartz declined and left to begin his own companies – Ahead Engineering LLC and Far Field Telecom LLC – and hired others from Scherer to join him.
After his, and his co-workers including David Hernandez, departure from Scherer, a network administrator from his former employer inspected Hernandez’s company laptop where he was able to gain access to Hernandez’s Facebook account that had allegedly been left signed-in. While this allegation is debated, it is undisputed that Scherer installed a monitoring device on Hernandez’s company-issued laptop and was able to uncover alleged plans to steal client information and intellectual property to bring to their next company.
Scherer brought suit against the former employees claiming trade secret misappropriation under state and federal law. Defendants argued that injunctive relief was inappropriate because of the doctrine of unclean hands and was a violation of Hernandez’s privacy.
The U.S. District Court for the District of New Jersey granted the preliminary injunction against the defendants which prevented them from contacting Scherer’s clients and the Third Circuit agreed. In order to invoke the unclean hands doctrine, the party must establish that the opposing party committed an “unconscionable act”, and the act is related to the claim in which equitable relief is sought. The unclean hands doctrine was one of many factors that the court must consider when deciding on injunctive relief. The Third Circuit decided “on balance” that they would not be allowing for the continued misappropriation.
In Judge Ambro’s dissent, he wrote that this was a clear violation of New Jersey’s privacy law, arguing that the company “went on an external fishing expedition rather than merely conducting a review of activity on its own physical assets.” This strong dissent further called into question the completeness of the analysis by the majority of the unclean hands doctrine.

Qualcomm Quarrels with Apple Over Trade Secret Allegations

Apple is no stranger to legal disputes involving their innovative products. Recently, Apple was the subject of controversy as it was alleged to have stolen trade secrets from Qualcomm and shared them with Intel Corporation after Qualcomm allowed Apple access to its source code and tools for LTE modem chipsets. Qualcomm is claiming Apple misappropriated their trade secrets in an attempt to preserve the quality of the chips Apple purchases, but change the supplier of the chips from Qualcomm to Intel Corporation for their new iPhones.

A complaint was initially filed in November by Qualcomm claiming that Apple breached a software-licensing contract by sharing confidential details regarding Qualcomm’s chips with engineers at Intel Corporation. A motion to amend the complaint filed on Monday accuses Apple of stealing trade secrets “for the purpose of improving lower-quality modem chipsets, including those manufactured by Intel, a competitor of Qualcomm, to render such chipsets useable in Apple devices with the ultimate goal of diverting Qualcomm’s Apple-based business.”

While the lawsuit is scheduled to be heard in April 2019, the proposal of an amended complaint might push back the anticipated date.

See link to Qualcomm complaint filed yesterday in California Superior Court below.
Qualcomm Complaint

TSI-Symposim-FEB15-2017

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Watch the Trade Secrets Institute Symposium – Working Knowledge: Managing Employee Trade Secrets

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Aleynikov Conviction Tossed, Again

On Monday July 6, 2015 Judge Conviser of the New York State Supreme Court acquitted Sergey Aleynikov. This marks the second acquittal Aleynikov has received since his initial arrest in July 2009. It was then that Aleynikov was accused of stealing software code that could be used to unfairly manipulate stock prices. Aleynikov was convicted of, and sentenced to eight years in prison for, violating the National Stolen Property Act and the Economic Espionage Act. Aleynikov had only spent one year in a federal prison at the time that the Second Circuit Court of Appeals overturned his conviction.

The appellate court ruled that federal prosecutors misapplied the corporate espionage laws. In their opinion, the court highlighted that the Economic Espionage Act contained two operative provisions. The first, 18 U.S.C. §1831(a), which broadly expresses that “[w]hoever, intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent, knowingly … without authorization … downloads, uploads, … transmits, …. or conveys a trade secret” is guilty of a federal offense, and may be imprisoned for up to 15 years. See 18 U.S.C. §1831(a).

However, Aleynikov was charged with violating a second provision, 18 U.S.C. §1832(a) which imposes a limitation that “[w]hoever, with intent to convert a trade secret, that is related to or included in a product that is placed in interstate or foreign commerce, to the economic benefit of anyone other than the owner…” 18 U.S.C. §1832(a) (emphasis added). The court held that Goldman’s HFT system was neither ‘produced for’ nor ‘placed in’ interstate or foreign commerce. Goldman had no intention of selling its HFT system of licensing it to anyone. U.S. v. Aleynikov 676 F.3d 71, 81 (2d. Cir. 2012)(citing United States v. Aleynikov, 737 F.Supp. 2d 173, 175 (S.D.N.Y 2010)). The court further stated that Goldman went to great lengths to maintain the secrecy of the system and that it was not decided to enter or pass in commerce. Therefore, the theft of the source code relating to the system was not an offense under the Economic Espionage Act. Aleynikov 676 F.3d at 81.

Shortly after his release from federal prison, Aleynikov was arrested again and charged in New York State court. In May 2015, a jury convicted Aleynikov. However in his opinion, Judge Conviser stated that in order to find Aleynikov guilty under the charges the prosecution needed to establish that Aleynikov made a “tangible reproduction” of Goldman’s source code for its high-frequency trading business, and that he intended to claim most of the code’s economic value for himself. The prosecution failed to prove either and the jury verdict had to be overturned.

This case has highlighted just how far the legislature is behind technology. Laws have not been updated to keep up with advances in technology. After Aleynikov’s initial acquittal Congress amended the Economic Espionage Act of 1996. Judge Conviser implored that District Attorney Vance make a similar appeal to New York legislators in regard to the state law under which Aleynikov was charged.

On the flip side, it has been raised that this trial from the beginning has been a “civil dispute masquerading as a criminal case,” and that regardless of the antiquated statutes under which Aleynikov was charged this case should simply not be criminal. However, Goldman Sachs may not like their position on a civil claim for trade secrets misappropriation. It is not clear that the source code was even a trade secret. Goldman admitted that part of the code was based on open source code, and therefore was a conglomeration of code based on open source information, some proprietary information, and other sources in the public domain.

The case is People v. Aleynikov, New York State Supreme Court, New York County, No. 60353/2012

Additional information on United States v. Aleynikov can be found here

Vanity Fair's 2013 story profiling Aleynikov can be found here

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.

Rethinking Patents vs. Secrecy

by Paul Fraulo

Recently there have been many articles discussing the choice between protecting technology as a trade secret as opposed to seeking a patent. While patent law arguably provides stronger protection for an invention, one of the major advantages of protecting technology as a Trade Secret is that it does not have to meet the strict requirements of patentability that companies face in the patent process, such as novelty and non-obviousness. Recently though, the patent process has become even more tricky, and the advantages of safekeeping information as a trade secret have grown. The legal industry has devoted a great deal of attention to three things in particular as they pertain to the relationship between patents and trade secrets, 1) the America Invents Act (AIA), 2) the ruling in CLS v. Alice, and 3) the increased likelihood of a federal cause of action for trade secret misappropriation. Gradually, as lawyers and businesses begin rethinking their approach to protecting their technology, trade secrets are being recognized as a more viable option in many situations.

The once rote calculus of deciding whether to file a patent or protect technology as a trade secret first started to evolve with the America Invents Act (AIA) coming into effect in late 2012. Before the AIA, protecting your tech as a trade secret meant you ran the risk of somebody else obtaining a patent that covers your technology. While there was always a defense of prior use, the AIA expanded the defense to cover even secret prior use, making secrecy a somewhat more attractive option. The impact of AIA and Alice are both discussed in this article by law firm Robins, Kaplan, Miller, and Ciresi (RKMC).

The Federal Circuit's decision in Alice made it substantially more difficult to obtain a software patent. RKMC explains that although software patents may still be obtainable, Alice made it clear that an inventive concept beyond the computer implementation of an otherwise abstract idea is not enough to avoid a 101 rejection. Just how much more is needed, is as yet difficult to say, and thus this increased uncertainty has scared off would-be patent applicants who are instead opting to protect their software as a trade secret. At the symposium TSI hosted last month in October 2014, this concern was solidified as an important consideration by one of the panelists, Jeffrey Schwab, who explained that his advice to software companies is far more pro-secrecy now than ever before in the wake of Alice.

Most recently, there has been a stronger push to create a federal cause of action in Trade Secret misappropriation. While the impact is somewhat uncertain, it is clear that a congressional act with no pre-emption creating a federal cause of action can only increase a company's options, and therefore strengthen the protection of trade secrets. Dennis Crouch explains how this shift in the law may impact not just how companies choose to protect their intellectual property, but also how companies opting out of patent protection means less disclosure of technology to the public. Crouch's article reviewed a study by three economists which purports to show that this decrease in disclosure, also decreases the liquidity of companies that are now opting to keep their technology secret. The link between disclosure and liquidity here results from asymmetric information between the company and the public. To put it simply, a person is less likely to want to trade stock in companies that are not disclosing their technology to the public, because they cannot assess the value of the company without knowing what technology they have.

Interestingly, Professor Christopher Seaman also recognized the potential impact decreased disclosure may have in a more pro-secrecy environment. In his article in PatentlyO assessing the impact of federalizing trade secrecy, Professor Seaman explains that decreased disclosure can hurt innovation, because in a patent-friendly regime disclosure is "used by others to improve upon the invention and to practice it after the patent’s expiration." Professor Seaman discussed this issue along with various other aspects of the debate over federalizing trade secret law at TSI's symposium last month, reviewed here by Alexander Goldman.

Ongoing Trade Secret Litigation - Mattel and MGA

Months ago, we reported on the ongoing saga between Mattel and MGA. Now, a California state court judge tentatively rejected Mattel Inc.'s bid to toss MGA Entertainment Inc.'s $1 billion suit alleging Mattel stole Bratz doll trade secrets, claiming the 2011 dismissal of MGA's racketeering claims in federal court does not preclude the current suit at issue. We will keep an eye on this developing matter.

Brooklyn Law School Trade Secrets Symposium

Part 1: Proposed Federal Trade Secrets Law
by Alexander Goldman '14

Congress is considering a Federal trade secrets law to solve a very specific problem: the possibility that an employee of a U.S. company will be at an airport with a thumb drive full of trade secrets before the company can act. This first session of the Trade Secrets Symposium at Brooklyn Law School was moderated by Trade Secrets Fellow Paul Fraulo '15.

Ted Schroeder, Chief Counselor to U.S. Senator Coons (D-DE), told the symposium to take a close look at the case of Gore, Inc., the company that makes Gore-Tex. Kwang Seoung Jeon did not have one thumb drive full of company documents — he had three of them when he was arrested — and a one-way ticket to his native South Korea.

But Professor Christopher Seaman of the Washington and Lee University School of Law said that federalizing trade secret law will not necessarily simplify trade secrets litigation because the federal law, as currently written, explicitly does not preempt state law. Seaman said that the provision is vital in order to avoid the creation of a body of federal common law separate from the states, a situation that existed before the famous 1938 Supreme Court case Erie Railroad Co. v. Tompkins. Seaman added that experimentation at the state level is a strength of the U.S. legal system, not a weakness.

Schroeder replied that antitrust and consumer protection are both under a system of interlocking state and federal legal systems.

Ira Levy '88, partner at Goodwin Procter LLP, suggested that preemption might have been sacrificed in order to ensure the bill passed. He added that practitioners need courts to act quickly because "the value of a trade secret is lost the moment that it is no longer a secret." He suggested that a federal court might act faster because of a provision in the proposed federal law that provides an ex parte process for the seizure of trade secrets.

Seaman asked why the federal law needs the ex parte process. Schroeder replied that, for the most valuable trade secrets, the ex parte process is critical.

During the question and answer period, Professor David S. Levine of Elon University School of Law (currently visiting researcher at Princeton), warned that the ex parte process would have substantial chilling effects. "Google can defend itself, but can a startup," he asked. "What about the cloud? Can you seize a Drop Box or a Google Drive?"

U.S. v. China: When Sovereign Sues Sovereign

by Alexander Goldman

In a case that may just be the first of many, the United States filed charges against five men who are accused of conducting cyber espionage attacks for the government of China against targets in the United States. Wang Dong, Sun Kailiang, Wen Xinyu, Huang Zhenyu, and Gu Chunhui have been indicted by a federal grand jury in Pennsylvania on 31 counts of espionage for activities over the nine years from 2006 to 2014 (inclusive). The defendants were officers in the notorious Unit 61398 of the Chinese People’s Liberation Army (PLA). The U.S. government named six corporate victims of the attacks: Westinghouse, SolarWorld, U.S. Steel, ATI, USW, and Alcoa.

Because any judgment in a U.S. court is unlikely to be enforced in China, the suit is not likely to result in any direct consequences for the defendants.

SolarWorld and USW were involved in trade disputes against Chinese solar energy equipment manufacturers, according to the indictment. Other victims may be U.S. Companies with military ties, who are under constant attack but should be protected by a relatively new and nascent federal program called the Defense Industrial Base.

The case has complex diplomatic ramifications. It will certainly affect relations between the United States and China. Its effect on relations between parties and nonparties is difficult to forecast. Will other nations view the U.S. as sympathetic if they, too, realize they have been victims of state sponsored trade secret theft by Unit 61398?

The message is complicated by the extensive activities of the NSA. The United States is telling the world that espionage for the purposes of national security is legitimate, but that espionage for the purposes of trade secrets theft is not. That message, in turn, is complicated by allegations that the NSA's program included economic targets such as Petrobras (Brazil's national petroleum company), Huawei (a Chinese telecommunications equipment manufacturer), and others.

The Guardian quotes James Lewis, a cybersecurity expert at the Center for Strategic and International Studies, as saying that the practical effect of the case will be "intangible" but that it will send a "strong message" to the government of China.

China does have its own trade secrets laws but obtaining enforcement of them in China can be difficult.

Potential Trade Secrets Troll in West Virgnia

A few weeks ago we introduced the idea of the trade secrets troll, loosely defined as a company or individual that invokes trade secret protection to avoid public disclosure of unfavorable information, while claiming that such protection is needed to protect the information from competitors. A recent news story suggests that every day may bring a new trade secrets troll, the latest in West Virginia.

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