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.

Still Fighting over Dolls: MGA Refiles its Claim Against Mattel in Cal. State Court, Claiming UTSA Violation

In the latest chapter of this saga, MGA Entertainment filed a $1 billion suit against Mattel in a California state court claiming that Mattel engaged in willful and deceptive business practices regarding the Bratz line of dolls. The complaint alleges that for over fifteen years, Mattel employees snuck into trade shows in order to steal advertising lists, price lists and new product concepts. One year ago, a Ninth Circuit panel threw out a $170 million jury award in favor of MGA on grounds that MGA's counterclaim was not properly before that jury; the Ninth Circuit left the door open for MGA to refile.

Trade Secrets Trolls

by Glenn Schieck, Alexander Goldman, and Tom Bengera

Summary: We have identified several cases in which trade secrets law is being invoked for no competitive purpose. It is being used to protect information that, if known, would lower the value of the product to consumers. In light of this trend, it may be time to reexamine the requirements of what constitutes a trade secret worthy of judicial protection. If trade secret trolls can use the protection of this law not to protect innovation, but to withhold unpopular information from the public, the law is being used for a purpose that is not justified, and we all seem to lose. The bulk of trade secrets law is state law. We hope that courts will act to identify and to remedy the problem by using the tools of statutory construction. If they do not or cannot, then legislatures may need to act.

Introduction

The Uniform Trade Secrets Act (UTSA), § 1(4)(i), requires that a trade secret “derive[] independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use. . . .” This provision makes clear that trade secret protection is intended to protect information from reaching the hands of specific competitors. Of course, trade secret law achieves this goal by secreting the information from everyone. From a practical standpoint, this overly protective approach makes sense. Even though most consumers would not start producing their own Coca-Cola if they knew the recipe, it is impossible to determine who would use the information and who would not, and there is usually little to no harm resulting from such overprotection. For example, most people haven’t lost sleep wondering just how curlicue fries are made. See Lamb-Weston, Inc. v. McCain, 941 F.2d 970 (9th Cir. 1991).

But what happens when harm does result from this overprotection? In an age of increased transparency and access to information, trade secret law appears to be emerging as a powerful tool for companies to keep information secret from the general public. So long as there is at least one ostensible competitor who could “obtain economic value from [the information]’s disclosure or use,” trade secret protection offers blanket protect of that information, in most cases for an unlimited amount of time. People who abuse trade secrets law in this way can only be known as trade secrets trolls.

The word "troll" is convenient because it is familiar in the context of patent law. Both patent trolls and trade secrets trolls abuse intellectual property law in order to protect an interest that is not justified by the policy of the law. But there are significant differences between patent trolls and trade secrets trolls. Patent trolls extract a fee from inventors by using the law in a manner that is outside the justification of the patent contract between the inventor and the state. Patent trolls hope to never have their claims tested in court and in order to avoid court, they ask for a significant sum of money from each victim that is less than the amount it would cost each victim to litigate their case. In contrast, trade secrets trolls use the law to hide embarrassing information. Unlike patent trolls, trade secrets trolls do not make money from their use of the law. Trade secrets trolls expect to litigate their secrecy claims. They expect to win because each case will turn on the letter of the law and not reach the policy behind it.

All intellectual property trolls may benefit from a trend in case law and statute that increasingly sees intellectual property as analogous to tangible property. See, e.g. Mark A. Lemley, Property, Intellectual Property, and Free Riding, 83 Tex. L. Rev. 1031 (2005). Lemley notes, for example, that Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1010-20 (1984) held "that trade secret laws confer a property right that cannot be 'taken' by government disclosure of the secret unless the government pays just compensation." Id. at 1036, n.11. Trade secrets trolls may benefit from this trend if courts are so blinded by the property analogy that they fail to require that the trade secrets plaintiff prove that the defendants will "obtain economic value from its disclosure or use." UTSA § 1(4)(i).

A hypothetical may help to illustrate the point. Imagine that a non-profit consumer rights organization obtains a casino company’s internal customer list from one of the company’s former employees. The list contains the names and addresses of people the company considers to be highly susceptible customers. The consumer rights organization wants to publish the list to alert the customers that they are on this list. The company could likely invoke trade secret protection to enjoin the disclosure of the list, even though the real purpose in protecting the information is not to protect the contents of the list from competitors (as required by the UTSA), but is instead to prevent the customers from learning that they are on the list.

In recent months, several real life examples of this trend have been playing out around the country, situations where individuals and companies claim to be protecting business information from their competitors, but where the real goal is to prevent public access to information.

Fracking Regulation

Hydraulic fracturing (fracking) involves injecting a mixture of sand, chemicals, and water into the ground in order to release oil deposits located beneath rock formations. As states grapple with how to properly regulate fracking, many oil companies have stated that the recipe for the mixture pumped into the ground constitutes trade secrets, and that this should prevent public disclosure.

States have enacted a hodgepodge of approaches to determining whether the information at issue constitutes trade secrets. This chart, details a state-by-state breakdown of how states apply trade secret protection to fracking recipes. While some states require full public disclosure of the chemicals used in the process, setting a high hurdle for trade secret protection, other states only require oil companies to disclose the use of those chemicals deemed hazardous by OSHA. This article at JD Supra gives a nice rundown of the “tug of war” this patchwork of regulation has created.

The claim that these fracking recipes need to be protected against competitors as trade secrets should be met with some skepticism. While new competitors have steadily entered the fracking market, three large and highly sophisticated companies, Halliburton, Schlumberger, and Baker Hughes, still account for over 60% of the fracking activity in the country. Further, an oil company fracking in multiple states is only protected by the lowest common denominator of state level protection offered. Put differently, what purpose is served by allowing an oil company to maintain secrecy in one state, while requiring full disclosure in another state?

It seems much more likely that these recipes are being deemed trade secrets to prevent their disclosure to the public through government regulatory agencies, in order to stem the almost certainly negative publicity that would result for these companies. And if this is the case, these oil companies are trade secrets trolls.

Obamacare in North Carolina

When a government entity invokes trade secret protection, it usually does so to protect companies that have submitted confidential information to it. The North Carolina Department of Insurance (NCDoI) recently declared that health care premiums are a trade secret.

The NCDoI said that it could not release the rates until they were final. "The three insurers who will be on the North Carolina exchange, one of 33 to be run by the federal government, say that their rates are not final until the feds sign off on the plans. Until then, they consider it a competitive secret." NCDoI's claim was unusual because the secrecy was to last for only a few weeks.

Could the state have done more to release the information? In Minnesota, the state could not publish the rates until the "effective date" of the policy. "So state officials have asked insurers who will offer plans on the exchange to change the effective date to Sept. 6, from Oct. 1, so residents can get access to the information before the exchanges open."

Minnesota's solution to the trade secrets problem makes sense — if your goal is to provide information to the public. If North Carolina's officials called the data a secret in order to hinder that state's healthcare exchange, then they are using trade secrets laws for political purposes. If North Carolina's officials are using trade secrets laws for political purposes, that would make them trade secrets trolls.

Voting Booth and Election Technology: Behind the Curtain

Recently, litigants have tried but failed to persuade a court to require companies that make voting machines to disclose their proprietary software. Of particular interest is a Florida case in which the court highlighted the value of maintaining transparency throughout the voting process, but nevertheless allowed the election company litigant to shield their source code during discovery. Jennings v. Elections Canvassing Comm’n, 958 So. 2d 1083 (Fla. Dist. Ct. App. 1st Dist. 2007) (the voting machines were made by Election Systems & Software, Inc.) (for commentary, see Jessica Ring Amunson & Sam Hirsch, The Case of the Disappearing Votes: Lessons from the Jennings v. Buchanan Congressional Election Contest, 17 Wm. & Mary Bill Rts. J. 397 (2008)).

The absence of a specific competitor seems once again to run afoul of UTSA § 1(4)(i). If election companies are using trade secret protection as a shield to protect flawed software from public scrutiny, then the election companies are trade secrets trolls.

Safety Protocols at Sea World

SeaWorld is trying to prevent the Occupational Safety and Health Administration (OSHA) from publishing its killer whale show safety protocols. A SeaWorld trainer was killed by a killer whale in 2010. Tilikum, the whale that killed the trainer, had killed another trainer in 1991 in Canada. The case has received renewed attention with the release of the film "Blackfish," which describes the story of Tilikum. One review of the film called the trainer's death "inevitable."

An OSHA administrative law judge issued a preliminary ruling that the safety protocols are not secret because they would be obvious to anyone attending a SeaWorld killer whale show, but the judge's ruling is pending, subject to review by the agency. If the safety measures are obvious to tourists, why is SeaWorld arguing that they are secret? What if SeaWorld is not invoking trade secrets law to protect innovation, but instead to protect itself from the negative media attention that would ensue from releasing its safety protocols? What if SeaWorld's killer whale trainer safety is embarrassingly inadequate, and that is why SeaWorld does not want OSHA to publish its safety protocols? That would make SeaWorld a trade secrets troll.

Conclusion

The question in these cases is whether the mere existence of a competitor should be enough to allow a company to invoke trade secret protection. Trade secrets law is traditionally based on two justifications: a property right in the secret, enforced by law against anyone who misappropriates it and uses it to compete unfairly against the inventor of the secret; and a right established by the relationship between the parties requiring the party to whom the trade secret has been disclosed to keep it confidential. Justice Holmes preferred the relational tort, writing, "[t]he property may be denied, but the confidence cannot be." E. I. Du Pont De Nemours Powder Co. v. Masland, 244 U.S. 100 (1917). Justice Blackmun later used the property justification (in a takings case in which Monsanto claimed that the EPA had taken its trade secret pesticide data, cited by Lemley supra), writing "[t]he value of a trade secret lies in the competitive advantage it gives its owner over competitors." Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1020, n. 15 (1984). Justice Blackmun limited the property justification by explaining, "[i]f, however, a public disclosure of data reveals, for example, the harmful side effects of the submitter's product and causes the submitter to suffer a decline in the potential profits from sales of the product, that decline in profits stems from a decrease in the value of the pesticide to consumers, rather than from the destruction of an edge the submitter had over its competitors, and cannot constitute the taking of a trade secret." Id.

Trade secrets law protects innovation. Like most intellectual property laws, it gives a right to an inventor in order to incent innovation. Society pays a cost in terms of the free flow of information, and expects a benefit: more innovation. When trade secrets law is used for other purposes, society not only receives no benefit; society may be harmed.

We have identified several cases in which trade secrets law is being invoked for no competitive purpose. It is being used to protect information that, if known, would lower the value of the product to consumers, in the manner described by Justice Blackmun. In light of this trend, it may be time to reexamine the requirements of what constitutes a trade secret worthy of judicial protection. If trade secret trolls can use the protection of this law not to protect innovation, but to withhold unpopular information from the public, the law is being used for a purpose that is not justified, and we all seem to lose. The bulk of trade secrets law is state law. We hope that courts will act to identify and to remedy the problem by using the tools of statutory construction. If they do not or cannot, then legislatures may need to act.

Trade Secret Laws Are Not Intended To Extend Protection After Patents Expire, Says New Jersey Court

On August 27, 2013, a three-judge panel of the New Jersey Superior Court, Appellate Division affirmed the long held notion that the content of an expired patent passes into the public domain and is thus outside the boundary of trade secret law.

In UCB Mfg, Inc. v. Tris Pharma, Inc., plaintiff employer alleged that defendant former employees used plaintiff’s confidential information to create a generic version of plaintiff’s cough medicine, Tussionex®. In addition to finding the noncompetition agreement between the parties unenforceable, the court emphasized that “all the confidential information alleged to have been divulged was in the public domain and not entitled to protection.”

On appeal, UCB dropped its trade secret misappropriation claim and pursued a theory of breach of contract and unfair competition. The court held that UCB’s breach of contract claims could not stand “[w]here trade secrets are not demonstrably involved . . .” The court found that trade secrets did not exist because after UCB’s patent had expired, “the knowledge of the invention inures to the people, who are thus enabled without restriction to practice it and profit by its use.”

Events Media Network, Inc. v. The Weather Channel Interactive

On July 12, 2013, a federal judge denied a motion filed by The Weather Channel Interactive to dismiss a number of trade secret misappropriation claims brought by Events Media Network, Inc. The judge held that the plaintiff had alleged sufficient facts to make out a claim under the Georgia Trade Secrets Act.

Events Media Network, Inc. (EMNI) and The Weather Channel Interactive (TWCI) entered into a license agreement under which EMNI provided TWCI access to a database of upcoming events and attractions. EMNI continually updated the database with event information drawn from publicly available sources. The license agreement allowed TWCI to use the database to serve local event listings to its website viewers.

EMNI alleged that its database was a trade secret under the Georgia Trade Secrets Act, and that TWCI had misappropriated this trade secret by using the database for purposes not included in the license agreement, such as building maps and developing new weather services. After the case was removed to federal court, EMNI filed an amended complaint and TWCI moved to dismiss the trade secret misappropriation claims on February 25, 2013.

TWCI asserted two main arguments in support of its motion to dismiss. First, it contended that EMNI’s database was not a trade secret because the information contained therein was publicly available. Second, TWCI argued that EMNI did not take reasonable efforts under the circumstances to protect the database’s secrecy. On July 12, 2013, Judge Robert Kugler in the United States District Court for the District of New Jersey denied the motion to dismiss, addressing both of TWCI’s arguments.

Value derived from secrecy:
Even though individual event listings contained in the database were publicly available, the court held that the database could still derive benefit from its secrecy. The court noted that EMNI “has created a business out of compiling public information into easy-to-use databases that it licenses to others for a fee,” and that demonstrating the success of this business model was sufficient to show that the database derived economic value from its secrecy.

Reasonable Efforts:

Although no individual TWCI employees had signed confidentiality agreements with EMNI, a provision of the license agreement required general confidentiality between the parties, and required TWCI to report any improper use of the database to EMNI. The court held that these provisions were reasonable efforts under the circumstances for EMNI to maintain the secrecy of its database.

Takeaways:

While this case only addresses a motion to dismiss, the decision provides strong support for companies that make a business of compiling and licensing access to otherwise public information. The court re-asserted that a combination of wholly public elements can still constitute a trade secret if there is value in the compilation, and that a general license agreement between companies can constitute a reasonable way to keep information secret.

Case Report: Smith & Nephew, Inc. v. Northwest Ortho Plus, Inc.

Background. On December 18, 2012, the Honorable Jon Phipps McCalla, sitting in the Western District of Tennessee, decided a motion for preliminary injunction submitted by the plaintiff, Smith & Nephew, Inc. (“Smith”). The motion sought to prevent defendants, Andrew Corbett (“Corbett”), Emory Barrett Downs (“Downs”), James Joseph Workland (“Workland”), Brian Craig Kym (“Kym”), and Michael Jay Barr (“Barr”) from “directly or indirectly calling upon, soliciting, or initiating efforts to divert,” in any way, approximately one hundred customers from Smith. Smith & Nephew, Inc. v. Northwest Ortho Plus, Inc., No. 2:12 cv 02476 JPM dkv, 2012 WL 6607289 at *1 (W.D. Tenn. Dec. 18, 2012). The court held in favor of Smith, and granted the preliminary injunction. Id.

Relevant Facts. Plaintiff Smith manufactures and distributes medical devices. Corbett and Downs, acting as guarantors of the entity Northwest Ortho Plus, Inc., signed a Sales Representative Agreement (“SRA”) with Smith in May of 2010. The SRA specified that Corbett and Downs would act as sales representatives until December 31, 2015. In addition, Smith could terminate the contract for cause, in which case it could enforce the contract’s non-compete clause for one year. Defendants Workland, Kym and Barr signed similar SRAs on the basis of Corbett’s and Downs’ warning that Smith would terminate anyone who did not sign it. Corbett and Downs received a $150,000 payment that was contingent upon Workland, Kym, and Barr signing the SRAs. Id.
In April 2012, Workland, Kym, and Barr signed contracts to be sales reps for A1A, Inc., which distributes products of Smith’s competitor, DePuy Orthopaedics, Inc. (“DePuy”). In that same month, Corbett and Downs signed contracts with Avenue Medical Products, LLC, and MD Systems, LLC. Their contracts with MD Systems specified that they were also under contract with Smith’s competitor DePuy. Corbett and Downs notified Smith of their intention to resign from Smith, after signing contracts with Avenue Medical and MD Systems. Id. at *2.

Smith then filed a complaint for injunctive relief, alleging that Corbett, Downs, Workland, Kym, and Barr violated their non-compete agreements with Smith by working for A1A, Avenue Medical, and MD Systems. Id.

Chief Judge McCalla’s Order:
In considering the granting of a preliminary injunction, the district court applied a four-factor balancing regime. The only factor at issue was whether Smith had a strong likelihood of success on the merits. In making that determination, the Court considered whether Plaintiff could demonstrate a strong likelihood that the defendants were violating the non-compete clauses in their respective SRAs and whether the non-compete clauses were enforceable under Tennessee law.
The Court found that Smith had a strong likelihood of proving Corbett and Downs violated their non-compete clause in the SRA, because Smith proved that the non-compete clause could be enforced. In Tennessee, although they are not favored, non-compete agreements may be enforced if there is a legitimate business interest to be protected and the time and territorial limitations are reasonable. The court acknowledged that the non-compete clause in the SRA: protects a legitimate business interest, is reasonable, and imposes time and territorial limits that are no greater than necessary. Id. at *16-18. The Court also found that Smith proved that there is a strong likelihood that it will be able to prove Corbett and Downs were terminated for cause. The Court acknowledged that Smith can prove termination for not exercising best efforts constitutes termination for cause, and that Corbett and Downs did not exercise best efforts during their term of the SRA. The Court also, found that Smith demonstrated a strong likelihood that it can prove Corbett and downs violated their non-compete clause. The Court acknowledged that Corbett and Downs: intended to circumvent their non-compete agreements with Smith, had financial incentives to violate their non-compete agreements with Smith, and are likely violating their non-compete agreements by using Workland, Kym, and Barr to initiate efforts to divert former customers to DePuy products.

The Court then looked to the issue of whether Workland, Kym and Barr violated non-compete clauses. The waiver letters that the defendants signed were not officially approved by Smith, and the defendants admitted that they were selling competing products to customers they served for Smith. It found that since, in Tennessee, continued employment is sufficient consideration for a non-compete agreement, there is a strong likelihood that Smith will prove that Workland, Kym, and Barr violated their non-compete clauses in their SRAs. Id. at *24-25.

The Takeaway. This ruling elucidated that, under Tennessee law, non-compete clauses in sales representative agreements may be enforced to protect legitimate business interests, such as protecting the goodwill and reputation of the employing entity. The Court showed its concern about protecting employers from former employees who retain their confidential information and are not honest about their intentions.

Microsoft Corp. v. Motorola, Inc. et al.

In Microsoft Corp. v. Motorola Inc. et al.,, Microsoft Corp. (“Microsoft”) alleges that Defendants (collectively “Motorola”) breached commitments made to the Institute of Electrical and Electronics Engineers Standards Association (“IEEE-SA”) and International Telecommunications Union (“ITU”), as well as those organizations’ members and affiliates, by failing to offer licenses to Motorola’s “essential” patents in the areas of wireless and video-coding technologies, as required by Motorola’s participation in the two organizations, respectively. On November 12, 2012, the court decided a number of motions filed by both parties (as well as some non-parties), seeking Protective Orders to seal various trial exhibits on the basis that the exhibits contained confidential information, the disclosure of which would put the parties at a competitive disadvantage. The court granted in part and denied in part the various motions.

In discussing the applicable legal standard for deciding a motion to seal, the court cited to Kamakana v. City & Cnty. of Honolulu, 447 F.3d 1172, 1178 (9th Cir. 2006) to explain that while “a strong presumption in favor of [public] access is the starting point,” this presumption can be overcome in cases where “court files might . . . become a vehicle for improper purposes, such as [releasing] trade secrets.” For purposes of deciding motions to seal, the 9th Circuit relies on the Restatement’s definition of a trade secret. However, information need not rise to the level of a trade secret to enjoy protection. The court found that sealing was also appropriate “to prevent judicial documents from being used as sources of business information that might harm a litigant's competitive standing.” The court proceeded to apply this legal standard to the different types of exhibits that each side sought to seal.

Confidential Source Code: The court found that documents containing Microsoft’s confidential source code should be sealed, first because “source code is undoubtedly a trade secret,” and second because the confidential source code had little to do with the underlying issue of the case.

Confidential Settlement Negotiations: The court agreed to seal settlement negotiations between the two parties, based on the strong evidentiary policy against publicizing such agreements, and also because the negotiations had little relation to the underlying issue of the trial.

Technical Product Specifications: Microsoft moved to seal information related to the design and function of computer chips used in the Microsoft Xbox. While not explicitly deeming the information a trade secret, the court explained that the “chips are supplied to Microsoft by a non-party company that considers the design and operation of these chips confidential and proprietary,” and the manufacturer requires a signed non-disclosure agreement in order to access the specification documents. Further the court noted that this information had little relation to the underlying issue of the case.

Confidential Patent License Agreements: Both Microsoft and Motorola, as well as a number of non-parties including IBM and Research in Motion moved to seal patent license agreements between Microsoft, Motorola, and various companies. The movants argued that disclosure of the agreements would erode the companies’ bargaining position in future negotiations. Unlike the previously discussed categories, the court recognized that these agreements relate directly to the central issue of the case, namely the determination of a reasonable royalty rate. To balance the public interest in disclosure of this information against Motorola and Microsoft’s proprietary interest in sealing the record, the court compromised by provisionally sealing these records.
While the settlement agreements will not be broadcast on the courtroom televisions, if witness testimony reveals details of the agreements, or if the court relies on a given license agreement as a basis for its final decision, the agreement (or portions of the agreement) will necessarily be made public. Although the court did not explicitly consider whether the agreements constituted trade secrets, it seems that the court weighed the competitive disadvantage posed by disclosure against the “public’s understanding of the judicial process,” in attempting to craft an intermediate solution.

Strategic Product Planning Documents and Financial Information: Both Microsoft and Motorola moved to seal past and projected future revenue data. While the court found the forward looking projections more worthy of protection—perhaps because of Washington’s reliance on the Restatement definition of trade secrets, which include a use requirement—the court ultimately decided to provisionally seal both future and past revenue forecasts. In applying the same provisional seal as it used for the patent license agreements, the court recognized that this information could help to determine a reasonable royalty rate by shedding light on Microsoft’s actual and forecasted sales of products that relied on patents licensed from Motorola.

Testimonial Evidence: Motorola moved to seal various testimonial statements, on the grounds that the statements include details of otherwise sealed patent agreement negotiations. The court applied the same provisional seal to this information, and noted that any record sealed in a related case would be subject to review again in the present case.

This decision is significant in that it shows that companies can go to court to enforce their rights without necessarily losing trade secret protection in the process. The fact that the court was willing to seal many documents that did not rise to the level of trade secrets shows the willingness of courts to compromise in order to protect sensitive company information. That said, litigation certainly comes with the risk of disclosing at least some of a company’s trade secrets and confidential information, as seen here by through the court’s use of a provisional seal.

National Football Scouting v. Rang

National Football Scouting Inc. (“National”) brought action against Robert Rang, a sports writer, and Sports Xchange (collectively “Rang”), a sports website, alleging claims of copyright infringement and misappropriation of trade secrets based on Rang’s publication of player grades from National’s proprietary scouting reports.

Each year, National compiles scouting reports for National Football League (“NFL”) clubs for use during the player draft. These reports include a lengthy analysis on each player, along with a letter grade representing the player’s likelihood of success in the NFL. The scouting reports are proprietary and shared only with member clubs. Rang published eight articles, which disclosed the grades of eighteen players. These articles included National’s assigned grade, along with Rang’s original commentary on the players and his personal opinion of their draft prospects. Rang argued that the grades themselves were not copyrightable, and that even if they were, his actions were protected under the “fair-use” doctrine. In addition, Rang argued that National’s subjective opinions (as expressed through grade assignment) were not entitled to protection as a trade secret.

The court first considered whether a valid copyright existed over the player grades. Emphasizing that “numeric expression of a professional opinion can be copyrightable,” the court determined that the grades were “compilations of data chosen and weighed with creativity and judgment.” National Football Scouting v. Rang, 2012 WL 6444226, at *3, (W.D. Wash. 2012) (citations omitted). Thus, the court concluded that the creativity in forming the grades was sufficient to warrant the grades copyrightable.

Turning to Rang’s fair-use defense, the court determined that three out of four factors under Section 107 of the Copyright Act favored a finding of fair use.

In considering the purpose and character of the use, the court found that the highly transformative nature of Rang’s use of the player grades weighed strongly in favor of a fair use finding. The court applied the three-factor test that the Ninth Circuit articulated in Monge v. Maya Magazines Inc., which focused on (1) news reporting; (2) transformation; and (3) commercialism. Although it was undisputed that Rang’s articles had commercial purposes, the court found that the addition of Rang’s original thoughts created original commentary on the players. This was sufficient to determine that Rang’s articles were highly transformative and this factor weighed in favor of fair use.

Acknowledging that the player grades were minimally creative and entitled to protection as unpublished works, the court found the unpublished nature of the reports weighed in National's favor.

Although both parties agreed that Rang used only a small portion of the reports, National contended that Rang used its most valuable parts. Agreeing that the use was both small and valuable, the court nonetheless found that Rang had merely used the grades as a jumping off point, and emphasized Rang’s addition of original commentary. This factor weighed slightly in Rang’s favor.

Finally, considering the importance of market effect, the court found that Rang’s articles and National’s reports occupied two separate markets. In addition, “even if the Scouting Reports and articles were in the same market, the articles are not in any meaningful sense ‘a market substitute’ or ‘market replacement.’” Rang, 2012 WL 6444226 at *7. Since Rang’s articles did not decrease the market value of the reports, this factor weighed in Rang’s favor as well.

While the unpublished nature of the reports weighed in National’s favor, the court determined that this was insufficient to overcome the other factors and found that Rang had proven fair use.

On the trade secrets claim, Rang argued that National’s grades did not qualify as “information”; claiming that the grades were merely subjective opinions that cannot be protected under trade secret law. National responded that, “although the grades are subjective opinions, what grade National ultimately assigns to college players is itself a fact with independent significance.” The court focused on the statutory definition of trade secret as “information, including a formula, pattern, compilation, program, device, method, or technique.” Rev. Wash. Code. § 19.108.010(4).

Whether an opinion held by a business could be “information” under the Uniform Trade Secrets Act was a novel issue for the court. While Washington had adopted the Uniform Trade Secrets Act, the Washington courts continue to consider the Restatement (Third) of Unfair Competition for guidance. Focusing on the plain meaning of the statute, the court determined that National’s player grades were “information” under the statute and rejected Rang’s contention that the grades were mere ideas or opinions. The court emphasized, without elaborating, that the fact that National assigned a player grade to a certain player was not an idea or opinion.

Given that National’s player grades constituted “information” under the statute, the court determined that whether the grades were protected as a trade secret was an issue for a jury. The court noted that a factual dispute existed over whether National had made reasonable attempts to preserve the secrecy of the information and whether the grades received economic value from not being generally known.

Ultimately, the court did not directly address the novel question of whether an opinion can be a protectable trade secret. The court determined that it did not need to address this issue since National was not arguing that the grades themselves were trade secrets, but rather the fact that National had assigned player grades in the first place.

CASE REPORT: WEC Carolina Energy Solutions, LLC v. Miller et al.

Background and Facts:

The CFAA is primarily a criminal statute enacted to protect government computer hacking. However, it also provides a civil remedy for the wrongful use of a computer, including accessing a computer without authority or exceeding authorized access and thereby obtaining information. Bringing a CFAA claim confers federal subject matter jurisdiction, enabling a suit to proceed in federal court, whereas a trade secret claim arises under state law and normally must be brought in state court, absent diversity.

Defendant Mike Miller was employed as a project manager at WEC Carolina Energy Solutions, Inc. (“WEC”) until his resignation on April 30, 2010. As part of Miller’s employment, he was issued a company cell phone, a company laptop and had access to WEC’s intranet and computer servers, including the confidential information and trade secrets stored on those servers. WEC established various security policies in order to prohibit using confidential information without authorization or downloading such information to a personal computer. Prior to Miller’s resignation, he communicated with WEC’s competitor, Arc Energy (“Arc”). Either by himself or with the help of Miller’s assistant, Defendant Emily Kelley, Miller downloaded numerous confidential documents and trade secrets from WEC’s computer servers to a personal computer, and also e-mailed them to Miller’s personal email address. Twenty days after Miller’s resignation from WEC, Miller used the downloaded information to make a presentation on behalf of Arc to a potential WEC customer. The customer subsequently awarded two projects to Arc.

In October 2010, WEC sued Miller, Kelley, and Arc in the United States District Court for the District of South Carolina Rock Hill Division, alleging nine state-law causes of action and a violation of the CFAA. WEC claimed that Defendants violated §§ 1030(a)(2)(C), (a)(4), (a)(5)(B), and (a)(5)(C) of the CFAA, each of which require that a party either access a computer “without authorization” or “exceed authorized access.” Specifically WEC maintained that Miller and Kelley violated the Act by abusing WEC’s policies prohibiting downloads of confidential information to a personal computer, therefore breaching their fiduciary duties to WEC, and through this breach, they either (1) lost all authorization to access the confidential information or (2) exceeded their authorization. In February 2011, the United States District Court for the District of South Carolina Rock Hill Division held that WEC failed to state a claim for which the CFAA provided relief, dismissing the CFAA claim and declining to exercise jurisdiction over the remaining state-law claims. WEC appealed to the United States Court of Appeals for the Fourth Circuit.

Fourth Circuit Opinion:

In July 2012, the United States Court of Appeals for the Fourth Circuit affirmed the District Court decision. In determining whether the CFAA applied to this case, the Court examined the scope and meaning of “without authorization” and “exceeds authorized access,” (the “Terms”) to determine whether the Terms applied to violations of policies regarding the use of a computer or information on a computer to which a defendant otherwise has access. The Court looked to prior interpretations of the Terms by the Seventh and Ninth Circuit courts.

The Seventh Circuit’s view, argued by WEC, broadly defined the meaning of these Terms, holding that once the duty of loyalty has been breached by an employee accessing a work computer or information on that computer in advance of his own interests and in a manner adverse to his employer’s interests, it turns previously authorized access of computer files into unauthorized access under the CFAA.

The Ninth Circuit’s view, followed by the District Court here, established a narrow interpretation of the Terms, which limited the Terms' application to situations where an individual accesses a computer, or information on it, without permission.

In view of these two schools of thought, the Court looked to the congressional intent of the statute. The Court’s first determination was that an employee accesses a computer “without authorization” when he gains admission to a computer without approval from his employer. Similarly, an employee “exceeds authorized access” when he has approval to access the computer, but uses his access in a way that falls outside the limits of his approved access. The Court clarified that neither of these definitions extended to the improper use of information validly accessed. The Court went even further to discuss two plausible interpretations of the Terms. The first, which was the Ninth Circuit interpretation, maintained that the relevant CFAA provisions referred to improper means of obtaining information. However, the Court refused to adopt this interpretation, reasoning that Congress would not want to penalize every individual that obtained information in an unauthorized manner. The Court gave an example of an employee downloading his work to a personal computer in order to be able to work from home. If an employer had a policy against downloading information to personal computers, such as WEC, it would be unfair to hold this employee liable. Instead, yielding to the rule of lenity, the Court adopted a second interpretation, which criminalized obtaining or altering information that an individual lacked authorization to obtain or alter. In adopting this interpretation, the Court also rejected the Seventh Circuit’s interpretation of CFAA liability. Finding that Miller’s access to the computer and its servers was authorized by WEC and that Miller had authorization to obtain the confidential documents on WEC’s servers, the Court held that although the Defendants may have misappropriated the information, their misuse of the information did not violate the CFAA.

Relevance:

What constitutes “authorization” has been unsettled and discrepancies in interpretation have resulted in a circuit split. Between the Seventh Circuit’s broad construction and the Ninth and Fourth Circuit’s narrow yet differing interpretations, the proper application of the relevant CFAA provisions remain undefined.

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