Further refinement of the pleading standard for trade secret misappropriation claims

Eastman Chemical Company is a manufacturer of fibers, plastics and other chemicals. In March 2008, Eastman and the defendants, subsidiaries of Indorama, entered into a licensing agreement covering some of Eastman’s PET technology. (PET is a thermoplastic polymer resin used in synthetic fibers, liquid containers for beverage manufacturing, and other engineering applications.) Under the terms of this agreement, Eastman licensed its PET technology, and transferred assets and employees, to Indorama, an EU-based manufacturer. The employees at issue allegedly had knowledge of both the licensed PET technology, and of an unlicensed melt-to-resin PET technology also owned by Eastman, “IntegRex.” The agreement authorized Indorama to make PET only in its EU facilities. Certain Eastman trade secrets, related to the composition and manufacture of PET, were also licensed, and as alleged in the complaint, “with a few exceptions,” their use was “restricted” to the EU plants. Later, Indorama set up a plant in Alabama, where its subsidiary AlphaPet operated a “melt-to-resin PET manufacturing process.”

Eastman’s Complaint

Eastman filed a complaint in the United States District Court for the District of Delaware in December 2009, against Indorama companies located in the United States, Europe, and Thailand, alleging unauthorized use of IntegRex PET manufacturing technology. The complaint alleged patent infringement, breach of contract, and trade secret misappropriation. The patent infringement claims relate to three Eastman patents that “encompass PET manufacturing technology.” The breach of contract and trade secret claims arise from Indorama’s “unauthorized disclosure and use of information covered by a license agreement between Eastman and several European Indorama entities.”

The Complaint alleged “on information and belief” that former Eastman employees disclosed trade secrets “relating to the manufacture of PET during the design, start-up and/or operation” of the AlphaPet plant in Alabama. It was not pleaded whether the allegedly infringed patents were licensed or not, or whether any of the pleaded patents cover the Eastman IntegRex technology.

These facts raise several issues related to the elements of trade secrets claims. First, proving that an employee or licensee acquired the trade secret by “improper means” may be difficult. The Uniform Trade Secrets Act refers to acquisition by one “who knows or has reason to know that the trade secret was acquired by improper means,” which it defines to include “breach of a duty to maintain secrecy.” This can be difficult to show for an employee who allegedly breach an agreement or duty of confidentiality, especially when the recipient of the trade secret was a licensee - a license can sometimes provide a complete defense.

The patent infringement claim further complicates the claim of trade secret misappropriation. Whatever the patent makes publicly known can no longer be a trade secret. If the patents that “encompass PET manufacturing technology” teach the technology transferred to the licensee or otherwise disclose the trade secrets, the claim for misappropriation may fail the “secrecy” prong.

Motion to dismiss for failure to state a claim of trade secret misappropriation

In its amended complaint, Eastman again alleged that its former employees had improperly disclosed Eastman’s “confidential, proprietary, and trade secret information” related to the manufacture of certain products in violation of a technology license agreement. AlphaPet and various other Indorama subsidiaries, named as defendants, moved to dismiss, arguing that the claim for trade secret misappropriation failed to state a claim; the complaint did not contain sufficient factual information to provide adequate notice of the plausible grounds for Eastman’s misappropriation claim under the Twombly/Iqbal standard.

In general, there is no heightened pleading standard for trade secret cases after Twombly/Iqbal; a plaintiff is not required “to plead all of the relevant facts in detail.” However, a plaintiff can’t simply point to an area of technology or refer generally to information or business methods. The goal of the pleading standard is to provide notice to defendants of the substance claims against them. In the context of claims for trade secret misappropriation, this goal must be balanced with the need to maintain secrecy. Disclosure of the actual trade secret is not required, simply because that would controvert the secrecy requirement.

Here, the defendants argued that Eastman’s claim for trade secret misappropriation failed to satisfy the pleading standard of Rule 8 in three primary ways.
First, the defendants argued that the amended complaint failed to identify which of the defendants allegedly obtained Eastman’s trade secrets, and which individual employees were involved in the allegedly illicit disclosure and use of that information.
The court rejected defendants’ proposition, based on Spear Pharm. v. Blair, that the identity of the individual alleged to have disclosed confidential information is “core information” under the Twombly analysis. Instead, it noted that, in their complaint, plaintiffs had focused on a “finite universe” of (1) individuals who were transferred from Eastman to Defendants, who also (2) worked on the IntegRex technology in connection with Eastman’s South Carolina facility, and who also (3) traveled to Alabama as part of the development of AlphaPet’s Alabama facility. It concluded that a reliance on these inferential steps to identify the allegedly responsible individuals was not grounds to dismiss the complaint for failure to state a claim.

Second, the description of the trade secrets allegedly used or disclosed was “so broad as to be meaningless,” argued the defendants.
The court found fourteen references in the complaint to Eastman’s IntegRex technology, the specific “information relating to the manufacture of PET” that was at issue in the complaint. It compared that level of specificity to the reference to “business methodologies, formulas, devices, and compilations of information” that was found to be insufficiently specific or clear in Medafor. The court cited precedent in the Third Circuit for the proposition that misappropriation claims should not be dismissed when trade secrets are identified by reference to a trade name, such as IntegRex here.

Third, defendants contended that “Eastman failed to adequately plead that any particular defendant actually used or disclosed” any trade secrets.
The complaint alleged a specific illicit pathway, involving its former employees, through which confidential information flowed, and alleged the time period and a set of relevant events (the mid-2009 start-up of the Alabama plant) that was the impetus for the alleged wrongful disclosure and use. The court found that the plain language of the complaint clearly alleged both use and disclosure of trade secret information relating to the IntegRex technology, and that it did so with “sufficient specificity in light of the other allegations in the Amended Complaint” to meet the Twombly/Iqbal standard; it was not necessary to identify by name the specific individuals who allegedly leaked the prohibited information, due to the totality of the information provided by plaintiffs.

Altogether, after considering the Uniform Trade Secrets Act and decisions from other states applying it, the Magistrate Judge found that the misappropriation claim should not be dismissed; the defendants had been given sufficient factual information to provide adequate notice of the plausible grounds for the plaintiffs’ misappropriation claim under the Twombly/Iqbal standard.

November 10, 2011: Motion to Dismiss Granted Only as to Breach of Contract Claims

The Hon. Christopher Burke entered a Report and Recommendation regarding the defendants’ motion to dismiss. The Magistrate Judge recommended that the claims of breach of implied contract be dismissed against all defendants, the breach of contract claim against one of two defendants be dismissed, but that the motion be denied as to the patent infringement and trade secret misappropriation claims as to all defendants. This recommendation was adopted by the District Court.

This suggests that pleadings for trade secret misappropriation claims need not be absolutely granular. Identifying a finite group of employee-defendants, without specifying which among the named defendants or employees had allegedly used or disclosed the secrets, was sufficient to meet Rule 8 standards. Similarly, using a trade name to refer to an alleged trade secret, and setting forth a timeline of events during which that trade secret was allegedly used or disclosed, set forth a plausible claim for trade secrets misappropriation.

To be continued: Plaintiffs filed a second, amended complaint

Plaintiffs removed the breach of contract claims but retained the patent infringement claims against two defendants and the trade secret misappropriation claims against all defendants and filed an amended complaint on December 16, 2011.

Trends in Trade Secret Enforcement

By Lillian Tan ’12

Trade secret protection, normally left to the jurisdiction of states, has become a growing concern of the federal government. Over the last several months, the federal government’s prosecution of trade secrets theft under the Economic Espionage Act (“EEA) (18 U.S.C. §1831 et. seq.) spiked, and it has found other means of enforcement such as Computer Fraud and Abuse Act (“CFAA”) (18 U.S.C. §1030 et seq.) and even Section 337 of the Tariff Act of 1930 (19 U.S.C. §1337(a)(1)(A)).

In the last three years alone, U.S. Attorneys have used the EEA in a number of trade secrets theft cases. Two cases, United States v. Yang and United States v. Pu, were brought to the U.S. Attorneys’ attention by companies. This highlights the fact that companies are capitalizing on the EEA and cooperating with federal law enforcement to protect trade secrets. In Yang, a former senior software engineer for CME Group was indicted for misappropriating over 1,000 source code files from a secure computer system to his personal computer with the intent to use the source code as the backbone for his future company’s system. In Pu, a quantitative financial engineer for Citadel, LLC was arrested for misappropriating proprietary trading strategies that he planned to use to develop his own hedge fund in China. In October 2011, Congress proposed an amendment to §1836 of the EEA that would create a private right of action for companies for trade secret theft under §1832. If the amendment is passed, federal prosecution of trade secret theft under the EEA would become a more readily available option of enforcement for companies.

Additionally, two cases, United States v. Chung and United States v. Huang, were brought under the §1831 of the EEA, a provision that criminalizes misappropriation of trade secrets for the benefit of a foreign government. This section of the law has been rarely used since the EEA was enacted fifteen years ago. In Chung, a Boeing employee faced charges for stealing and distributing Boeing technical documents by hiding them between pages of Chinese newspapers that he left out for trash collection. And most recently, a defendant in Huang pled guilty to exporting $300 million worth of stolen trade secrets to China and Germany and was sentenced to seven years and three months in prison.

This series of EEA prosecutions invites speculation as to why there has been an uptick in enforcement against trade secret theft and why most defendants have been Chinese individuals. In October 2011, the Office of the National Counterintelligence Executive published a report to Congress that identifies the Chinese as being the “world’s most active and persistent perpetrators of economic espionage.” The report does not explicitly state that the rise of EEA prosecutions against Chinese individuals is correlated to reducing or countering a “pervasive threat” of economic espionage. However, the content of the report suggests that trade secret theft, or economic espionage, most likely has become a priority for U.S. Attorneys.

Likewise, U.S. Attorneys have also attended and monitored the civil litigation Oracle Corporation v. SAP AG in which Oracle alleged that that a SAP subsidiary downloaded and copied without authorization Oracle’s software. Following the jury’s $1.3 billion judgment against SAP, the U.S. Attorneys then charged SAP with eleven counts of unauthorized access to an Oracle computer in violation of the CFAA.

It is also important to note that criminal prosecution is not the only area where federal trade secret protection is expanding. In TianRui Group Company, Ltd. v. International Trade Commission, the Federal Circuit held that the United States International Trade Commission has the authority, pursuant to §337 of the Tariff Act of 1930, to ban importation of goods manufactured using “unfair methods of competition,” including misappropriation of trade secrets, where the importation could harm a domestic company.

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Baden Sports, Inc. v. Wilson Sporting Goods Co.

Docket Number: 
2:11-cv-00603
Headline: 
Baden Sports, Inc. claims Wilson Sporting Goods Co. misappropriated secrets behind its ball inflation technology

Wilson Sporting Goods Co., one of the world's leading manufacturers of sports equipment, has been sued by a competitor, Baden Sports Inc., for patent infringement, unfair trade practices, and misappropriation of trade secrets. At issue in this case is Baden's inflation table, which is used to inflate and package inflatable balls. Baden claims that Wilson solicited confidential and proprietary information from a retired Baden employee regarding Baden’s inflation table and basketball products. According to Baden’s complaint, Wilson used the information to develop a “soft”-feel basketball that is manufactured with a cellular sponge layer. Baden claims that the product infringes its patent covering cushion-control technology.

On May 23, 2011, Wilson moved to dismiss the complaint for failure to state a claim. It argues that Baden failed to show a plausible trade secret since Baden’s method of ball inflation is common among manufacturers. Additionally, Wilson requests the court to bar Baden’s common law unfair competition claim, arguing that it is preempted by the Washington Uniform Trade Secrets Act. Wilson argues that the underlying facts of Baden’s unfair competition claim are the same as those giving rise to its trade secrets claim.

On July 26, 2011 the court granted Wilson's second claim in the earlier motion to dismiss, combating the allegations that defendant contacted a former employee and offered him consulting fees, causing subsequent disclosure of information about the operation and design of Baden’s inflation table. Importantly, the court dismissed Baden's claim of trade secret misappropriation in finding that Baden's inflation table did not constitute a valid trade secret under Washington Uniform Trade Secret law. The court further contended that the allegedly novel inflation table was not described with enough accuracy or detail so as to highlight any trade secret components or features. Thus, in failing to plead any details about inflation table that make it a trade secret, Baden did not meet the pleading requirements for the claim of trade secret misappropriation, dismissing Baden's third claim of unfair competition as well. Both claims were dismissed without prejudice, while the court gave leave for Wilson to eventually amend it's complaint on September 7, 2011.

With Baden's October 19th answer, the basketball inflation table litigation entered a discovery and deposition phase, with both parties trading opening briefs and filing declarations with the court. In late July, 2012 Baden Sports filed its motion for summary judgment on the pleadings and limited discovery, countered by Wilson's own motion for summary judgment days later. Wilson replied in late August 2012 to Baden's motion for summary judgment, and on September 6, 2012 a stipulation and order was entered for extension of ongoing mediation proceedings by the parties. This stipulation was granted and the mediation deadline was extended until October 4, 2012 to the parties to reach a potential mediated settlement.

Filing Date: 
June 26, 2011
Recent filing or decision?: 
Recently Filed Case
Date of Last Decision: 
2012-09-06

Case Report: United States v. Aleynikov

Introduction

In 2011, Sergey Aleynikov had been 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.

In December 2010, Aleynikov, a former computer programmer for Goldman Sachs, had been found guilty of stealing proprietary source code from the bank’s high-frequency trading platform. According to the charges, Aleynikov copied hundreds of thousands of lines of code related to Goldman Sachs' high-frequency trading business and relied on the stolen data to develop plans for a similar high-frequency trading platform at a fledgling firm named Teza Techologies. Aleynikov maintains that he merely took publicly available open-source code.

Facts of the Case

Goldman presented the U.S. Attorney’s Office with evidence of Sergey Aleynikov’s (Aleynikov) theft of segments of code and contended that misuse of this platform could disrupt the financial markets. Acting on Goldman’s tip, on July 3, 2009, the FBI arrested Aleynikov at Newark Airport after he returned from a trip to Chicago to visit his new employer Teza Technologies, LLC (Teza).

Aleynikov held the title of Vice President in Goldman’s Equities Division for two years. He was a member of a team of computer programmers who were responsible for developing and improving portions of the code for Goldman’s high frequency trading platform. Teza approached Aleynikov and offered him the position of Executive Vice President, Platform Engineering at triple his $400,000 salary in order to develop its own high frequency trading business. On June 5, 2009, the eve of his departure from Goldman, Aleynikov copied thousands of lines of code and uploaded them to a German code repository. Aleynikov then covered his tracks by deleting the history of his most recent computer commands. Aleynikov subsequently accessed the code repository and copied the Goldman code to his home computer and then to two other home computers and a flash drive. On his trip to Chicago, Aleynikov brought with him a laptop computer and flash drive containing Goldman’s source code, including some of the code he had copied and uploaded on June 5th. Although Aleynikov admitted that he breached Goldman’s confidentiality provisions, he maintained that he only copied sections of open source code which he had produced.

Criminal Charges and Procedural History

On February 11, 2010, Aleynikov was indicted in the Southern District of New York, on three counts: theft of trade secrets under the Economic Espionage Act 18 U.S.C. § 1832(a)(2) & (4), transportation of stolen property in interstate commerce under the National Stolen Property Act (NSPA) 18 U.S.C. § 2314, and unauthorized computer access and exceeding authorized access under the Computer Fraud and Abuse Act (CFAA) 18 U.S.C. § 1030(a)(2)(C). The case was assigned to the Honorable Denise Cote.

On July 16, 2010, Aleynikov moved to dismiss the case under Rule 12(b)(3)(B) on the basis that the indictment failed to invoke the court’s jurisdiction or state an offense. The motion was fully submitted on Aug. 13, 2010. On Sept. 3, 2010, the court granted in part and denied in part the defendant’s motion to dismiss, maintaining the charges under the EEA and NSPA, but dismissing the charges under the CFAA. United States v. Aleynikov, 737 F. Supp. 2d 173 (S.D.N.Y. 2010). After a two week long trial, the jury unanimously convicted Sergey Aleynikov both remaining counts, under the EEA and NSPA, on Dec. 10, 2010.

On Dec. 23, 2010, Aleynikov filed a motion for acquittal or new trial. The government’s opposition was filed on Jan. 21, 2011 and Aleynikov filed a subsequent reply on Jan. 28, 2011. On Feb. 24, 2011, the court revoked Aleynikov’s bail and remanded him to the custody of the U.S. Marshal’s Service. On Feb. 25, 2011, Aleynikov filed an interlocutory Notice of Appeal to the Second Circuit regarding the revocation of his bail. On March 14, 2011, Judge Cote denied Aleynikov’s motion for acquittal or a new trial. He was held until his sentencing on March 18, 2011, where he was sentenced to a little over 8 years, followed by 3 years of supervised release, and a $12,500 fine. Aleynikov faced a maximum of 10 years of imprisonment 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. On March 23, 2011, Aleynikov filed a notice of appeal of his conviction to the Second Circuit.

The Decisions Below and On Appeal

The court, in its Sept. 3, 2010 opinion, rejected Aleynikov’s argument that source code for Goldman’s trading system is not a “product” that is “produced for or placed in interstate and foreign commerce” under the EEA. In maintaining the EEA charge against Aleynikov, the court clarified the meaning of “product” and “produced for interstate commerce” and explained how the source code that comprised Goldman’s Trading System fell within the ordinary meaning of the terms.

The court concluded that the EEA does not define the term “product” and defined the term according to its “ordinary meaning” and held that “[t]he ordinary meaning of “product” is something that is the result of human or mechanical effort or some natural process.” Aleynikov, 737 F. Supp. 2d at 178. Specifically, the court rejected arguments that the word “product” only pertained to tangible items and held that it was inappropriate to use a definition from products liability for a statute created to protect intellectual property. The court held that Goldman’s trading system fell within the ordinary meaning of product, and further that Goldman’s lack of intent to sell or license the trading system did not alter its definition as a “product” under the EEA. Addressing the term “produced for . . . interstate commerce,” the court held that the very purpose of creating the Trading System was to engage in interstate and foreign commerce. The court supported its holding with the legislative history of the EEA, which showed that the purpose of the EEA was to protect “intangible assets” such as trade secrets in the “high-technology, information age.”

Additionally, the court rejected Aleynikov’s contention that the scope of protection under the EEA differed based on the recipient of the stolen trade secret. Aleynikov presented the argument that theft of a trade secret to benefit “anyone other than the owner thereof” under 18 U.S.C. § 1832 has narrower protection than a trade secret stolen to benefit a “foreign government, foreign instrumentality, or foreign agent” under 18 U.S.C. § 1831. The court noted that although violations under § 1831 and § 1832 bear different penalties, they criminalize identical specified acts.

In February 2012, the Second Circuit reversed Aleynikov's conviction of trade secrets theft in a one-page order. In an opinion published on April 11, 2012, the court 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. There, 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.

Relevance of Decision

This case was the first of several prosecutions for the theft of high frequency trading source code under the EEA. The prosecution of Aleynikov was swiftly followed with the April 19, 2010 arrest of Samarth Agrawal, a former Société Générale SA trader for theft of trade secrets related to high frequency trading under the EEA. See United States v. Agrawal, No. 10-00417 (S.D.N.Y. May 13, 2010). Although Agrawal was arrested approximately nine months after Aleynikov, he was convicted by a jury and sentenced to only three years. United States v. Agrawal, No. 10-00417 (S.D.N.Y. Feb. 27, 2011). By comparison, Aleynikov was sentenced to approximately 8 years.
The February 2012 reversal of Aleynikov's conviction of trade secrets theft - especially the Second Circuit’s ruling that Aleynikov was wrongly charged with espionage, since the code was not a product designed for interstate or foreign commerce - called into question the government's ability to prosecute theft of internal trading systems or other internal financial instruments under the Economic Espionage Act.

Case Report: Liberty Power Corp., LLC v. Katz et al

Clarifying the Preliminary Injunction Standard

On January 26, 2011, the Honorable Nicholas Garaufis, sitting in the Eastern District of New York, decided a motion for preliminary injunction submitted by the plaintiff, Liberty Power Corp., LLC (“LPC”). Liberty Power Corp., LLC v. Stuart Katz, Stuart A. Katz, inc. & Foundation Energy Services, LLC, No. 10-CV-1938, 2011 WL 256216 (E.D.N.Y. Jan. 26, 2011). The motion sought to prevent defendants, Stuart Katz, Stuart A. Katz, inc. (“SAK”), and Foundation Energy Services, LLC (“FES”) (collectively “Defendants”) from using LPC’s proprietary information to solicit its customers. Though the Judge found a likelihood of success on the merits, he did not foresee irreparable harm occurring in the absence of an injunction and therefore denied LPC’s motion.

Relevant Facts

LPC provides electricity for a range of customers in states with deregulated energy markets, such as New York. It solicits business through both in-house sales staff and through independent brokers or contractors, referred to as “sales channels.” SAK and FES, both owned by Stuart Katz, contracted with LPC to become sales channels from 2006-2010 and 2008-2010, respectively. Contracts for both defendants contained specific provisions protecting the confidentiality of LPC’s customer information, though only the contract with FES required that it not compete with LPC “in any manner whatsoever.” Id. at 2. Additionally, Stuart Katz signed two separate agreements on his own, promising not to disclose proprietary information regarding LPC’s business.

LPC maintains that trade secret protection should be granted for its information regarding: (1) contact information of customers; (2) customer’s order history; (3) customer rates; (4) types of products purchased by customers; (5) customer contract renewal dates; and (6) data on customers' annual electricity consumption. LPC employs several measures to ensure the confidentiality of its proprietary information, including nondisclosure agreements with employees, a data classification system in which highly confidential information is disclosed solely on a “need to know” basis, and unique, password protected accounts for each employee, allowing LPC to control the level of access granted to different users.

LPC alleges that over an eighteen month period from 2008-2010, the Defendants paid two different in-house sales staff to intentionally misappropriate proprietary information about thousands of LPC customers. This information, LPC contends, was in turn used by the Defendants to sign customers already being handled by other sales channels, thus collecting a commission, and to bring customers to rival power companies. LPC filed a complaint against the Defendants for misappropriation of trade secrets and unfair competition and then filed for a preliminary injunction to prevent further misappropriation of this information.

The Court’s Decision

In ruling on the motion for preliminary injunction, the court looked to see if LPC established both a likelihood of success on the merits and irreparable harm in the absence of the injunction. Applying New York common law to the first prong, Judge Garaufis focused on whether LPC established a valid trade secret and misappropriation of that information. In finding protectable trade secrets, the Court noted the significant investment of time and resources, the value of the information both to LPC and to its competitors, and the extensive security protocols used by LPC. Further, the Defendants’ argument that the information is readily ascertainable was deemed unrealistic because independently obtaining this information would “require a Herculean effort by an army of improbably persuasive telemarketers.” Id. at 6.

The court further acknowledged that the Defendants likely misappropriated these trade secrets by bribing at least one LPC employee to obtain the information, an improper means of acquiring a trade secret under both the Restatement (Third) of Unfair Competition and the Restatement (First) of Torts. The court also suggested in a footnote that the alleged conduct is not only improper, but may also be criminal. Thus, the court found a likelihood of success on the merits that the Defendants misappropriated LPC’s trade secrets.

The court then looked to the issue of irreparable harm in the absence of an injunction and rejected LPC’s reliance on dicta from the Second Circuit, which suggested that in certain circumstances a rebuttable presumption of harm arises upon determination of trade secret misappropriation. Faiveley Transport Malmo AB v. Wabtec Corp., 559 F.3d 110, 116 (2d Cir. 2009). Instead, the court looked to a recent Second Circuit copyright case, which in extending a Supreme Court preliminary injunction ruling in a patent infringement case, repudiated the use of categorical or general rules in assessing injunctions for any type of case. Salinger v. Colting, 607 F.3d 68, 80 (2d Cir. 2010) (quoting eBay, Inc. v. MercExchange, LLC, 547 U.S. 388, 391 (2006)). Thus, the court held that plaintiffs in a trade secret case must establish an actual or imminent risk of irreparable harm on a case-by-case basis. This seemingly heightened burden removes the possibility of reliance on any categorical presumption of harm and requires more detailed pleading by the plaintiff.

The court found LPC’s arguments in this regard inadequate. LPC alleged that the harm it sought to prevent was the possibility that the Defendants would use the trade secrets to undercut contracts with certain customers and move them to competing companies, harm it argued was unquantifiable. However, regardless of the potential imminence of this outcome, the court held that because the complaint centers on information for a finite number of customers, any harm that results will be easily measurable and compensable through an award of damages after trial.

The court thus found that LPC failed to carry its burden in showing that it would be irreparably harmed in the absence of an injunction, thereby denying the motion. LPC filed for reconsideration of the motion but has since withdrawn this motion. The case continues to move towards trial.

The Takeaway

In light of this ruling, it is now clear that when bringing a motion for an injunction, whether preliminary or permanent, plaintiffs in a trade secrets case must not rely on a categorical rule or presumption of harm. Instead, they must be prepared to prove an actual or imminent risk of irreparable harm in order to be successful.

Case Report: Spring Design, Inc. v. Barnesandnoble.com, LLC

On March 2, 2011, Barnes & Noble and Spring Design, Inc., an electronic reader (or “eReader”) development company, announced a settlement in a lawsuit over the companies' competing eReaders. In the lawsuit, filed in November of 2009, Spring Design accused Barnes & Noble of misappropriating its trade secrets to create the NOOK eReader device. The settlement comes after a December 27, 2010 order, in which a federal judge in the United States District Court for the Northern District of California denied motions for summary judgment and ruled that the case could proceed to trial.

Under the settlement, Spring Design will grant Barnes & Noble a non-exclusive, royalty-free license for use of the entire portfolio of Spring Design patents and patent applications. The other terms of the settlement have not been disclosed.

Relevant Facts

This case concerned eReaders, which are portable electronic devices that allow an individual to download, store, and read digital books. The trade secret at issue was the combination of product features of Spring Design’s dual-screen eReader, known as the “Alex.” In 2006, Spring Design developed the patent pending, dual-screen “Alex” design, featuring one screen for reading and a second screen for Web browsing, the Android operating system, WiFi and 3G connectivity, and a Micro SD slot, allowing a user to increase the device’s memory. According to Spring Design, the design gave it a significant competitive advantage over its competitors. However, Barnes & Noble has characterized these features as commonplace and well-known in the industry.

Back in 2008, Barnes & Noble expressed interest in meeting with Spring Design and exploring the dual-screen design in order to compete with the Kindle, a top-selling eReader sold by Amazon.com. On February 12, 2009, the two companies entered into a non-disclosure agreement in which they agreed not to disclose, reproduce, transmit or use each other's confidential information. In October of 2009, after eight months of discussions - and without notice to Spring Design - Barnes & Noble independently launched the NOOK eReader, which featured dual screens, Android, WiFi and 3G connectivity, and a Micro SD slot, much like the Alex design. The NOOK’s release led Spring Design to file the now settled action for misappropriation of trade secrets, breach of the non-disclosure agreement, and unfair competition. The defendant named by Spring Design was the bookseller's e-commerce and digital media division, Barnesandnoble.com, LLC.

The Parties’ Motions

Spring Design’s attempt to stop sales of the NOOK failed when its motion for a preliminary injunction was denied in December 2009. In October of 2010, both parties filed cross-motions for summary judgment, which were addressed in the December 2010 order. In its motion, Barnes & Noble argued that Spring Design's information did not qualify for trade secret protection because (1) the information at issue was publicly available through Spring Design’s own patent applications, (2) other publicly available eReader devices incorporated all of Spring Design’s alleged trade secrets, and (3) Spring Design could not show that the information had independent economic value.

The court addressed each of Barnes & Noble’s claims in turn. In a sealed filing, Spring Design had delineated four categories of trade secrets. The court found that Spring Design had disclosed all of the elements of its first trade secret in one of its provisional patent applications, but that issues of fact existed as to the disclosure of trade secrets numbered two through four which precluded summary judgment. In regards to the claim that other publicly available eReaders incorporated all of Spring Design’s trade secrets, the court found disputed issues of fact. Finally, in response to Barnes & Noble’s third claim that the trade secrets did not have independent economic value, the Court again found that material issues of fact existed. Accordingly, the Court granted in part and denied in part Barnes & Noble’s motion. Since the Court found that there were significant factual issues as to whether Barnes & Noble breached the parties’ non-disclosure agreement, Spring Design’s motion for summary judgment was denied.

Significance of Decision

In allowing the case to proceed, the court appeared to indicate that it wanted to take a closer look at the interactions and discussions between these two companies. This highlights an important feature of trade secrets law, which is that it is relational. The use of trade secrets often involves confidentiality or non-disclosure agreements or an employee’s duty implied by law to keep its employer’s trade secrets confidential. A court usually wants to determine the obligations of a party to whom information was disclosed and make sure that both parties acted with proper business ethics. Here, the judge essentially said that there was insufficient information in the summary judgment briefs to guarantee that Barnes & Noble’s actions did not violate California law and, thus, disputed issues of fact.

Furthermore, this case exemplifies the use of trade secrets in the digital age, which is characterized by an exceedingly fast pace of technological development. In the instant case, Barnes & Noble claimed that the design features claimed as trade secrets by Spring Design were well known in the industry and simply represented a progression to the next generation of eReader products. In a period where companies are scrambling to launch the next big product and dominate the market, one company may independently (and innocently) develop another company’s alleged trade secret within a relatively short period of time through the process of innovation. Since trade secrets law offers no protection against independent development by others, the effectiveness and value of protecting the design of an electronic product through trade secret law is debatable.

Case Report: Starwood Hotels & Resorts Worldwide v. Hilton Hotels Corporation

Hilton and Starwood Hotels agreed to a settlement on December 22, 2010, putting an end to the ongoing case involving the alleged theft of confidential information and company trade secrets filed by Starwood in April, 2009. Starwood Hotels & Resorts Worldwide v. Hilton Hotels Corporation, No. 09-cv- 03862 (S.D.N.Y. Apr. 16, 2009). The settlement awarded $75 Million to Starwood Hotels, and places a two-year ban on further development of Hilton’s “Denizen” line of hotels, or any other high-end “lifestyle” hotels during that time period.

The suit arose when two of Starwood’s senior executives, Ross Klein, and Amar Lalvani, left Starwood to join Hilton in 2008, and allegedly took over one hundred thousand electronic files containing confidential corporate information and company trade secrets. The former Starwood execs had been involved in the development of Starwood’s “W” hotel brand, and were allegedly hired away to assist Hilton in developing its own competing luxury brand of hotels known as “Denizen.” The complaint alleged that at least five members of Hilton’s Executive Committee knew of Hilton’s possession of Starwood’s confidential information, and that Hilton used this information to bring a competing luxury hotel brand to market without expending the time and money typically required to do so. Along with a claim for the Misappropriation of Trade Secrets, the complaint also alleged claims for Breach of Contract based on Starwood’s Non-Solicitation, Confidentiality and Intellectual Property Agreements, Fraud, Unfair Competition, Conversion, Breach of Fiduciary Duty, Unjust Enrichment, and the Violation of the Computer Fraud and Abuse Act, among others. Due to the Parties’ settlement, the court never directly addressed these claims.

The Settlement Terms

Along with the $75 Million paid to Starwood and two year injunction consented to by the court, the settlement agreement includes a number of other stipulations, including the appointment of two independent monitors that Hilton must hire to oversee their activities and ensure compliance with the mandates of the injunction. Further, the agreement prohibits Hilton from engaging in any substantive business communications or relationships with any hotels or properties currently occupying the “lifestyle hotel” or “branded boutique space” industry that directly compete with Starwood’s “W” Hotel line. The agreement prohibits Hilton’s acquisition of or merger with a hotel chain in this industry, and forbids the repositioning or rebranding of Hilton’s Brand into this industry. Finally, the agreement prohibits Klein and Lalvani from employment by any hotel chain directly competing with Starwood’s “W” hotels.

Potential Criminal Investigation

Although the civil case has been settled, an ongoing criminal investigation against Klein and Lalvani continues. The United States Attorney for the Southern District of New York initiated an investigation into the allegations made by Starwood shortly after the complaint was filed, with potential criminal sanctions under Title 18 of the U.S. Code for Conspiracy, Fraud, Theft of Trade Secrets, and Interstate Transportation of Stolen Goods. During the civil proceedings, the United States Government applied for and was awarded permission to intervene in the case and to stay discovery in order to continue its investigation unhindered. Although no official charges have yet been brought against Klein and Lalvani, such charges seem likely, because the Government rarely moves to stay a civil action unless it is seriously considering filing criminal charges, and the Government’s motion suggested there may be a number of witnesses who agreed to cooperate or plead guilty. Klein and Lalvani could face a maximum sentence of 10 years imprisonment for the Theft of Trade Secrets allegations alone.

Case Report: Carter Bryant v. Mattel, Inc.

This case being litigated in the Central District of California involves the intellectual property rights in Bratz, a girls’ fashion doll brand worth $400 million per year at the height of its popularity. The original idea for Bratz came from designer Carter Bryant, a former employee of Mattel, Inc. (Mattel) who left and began working for MGA Entertainment, Inc. (MGA) in late 2000, around the same time as his conception of the Bratz dolls. Mattel sued Bryant and MGA claiming copyright infringement and theft of trade secrets, and in 2008 a federal jury found that Bryant developed the concept for the dolls while working for Mattel before pitching it to MGA, awarding Mattel $100 million. However, the verdict was overturned on appeal and sent back for retrial. Also at issue in this case is Mattel’s claim against MGA for trade secrets allegedly misappropriated by nine former employees who were also recruited by MGA.

The Court Battle
On January 5, 2011, the district court issued an Amended Order on the Parties’ Motions for Summary Judgment (superseding its December 27, 2010 decision). The extensive, 163-page ruling addressed claims based in trade secrets, copyright, trademark, breach of fiduciary duty, conspiracy, and racketeering. With regard to the trade secrets claims centered around Bryant, the court found many genuine issues of material fact to be in dispute: 1) the interpretation of Bryant’s inventions assignment agreement with Mattel, including whether it was unconscionable or contrary to a reasonable employee’s expectations; 2) the timing of Bryant’s conception of the Bratz dolls in relation to his leaving Mattel; and 3) whether the doll concept, or the names “Bratz” and “Jade”, qualify as trade secrets.

With regard to the trade secrets claims based on the conduct of the other nine former Mattel employees, the court individually analyzed the value and secrecy elements of each alleged trade secret and the misappropriation allegations against each former employee. The court found genuine issues of material fact as to: 1) whether Mattel’s unreleased product plan for a line of dolls with interchangeable heads and fashions qualified as a trade secret; 2) whether various files and computer programs regarding Mattel’s sales projections, inventory and distribution systems, and market analysis tools qualified as trade secrets; and 3) whether the alleged acts by the nine former Mattel employees constituted misappropriation. Consequently, the parties’ motions for summary judgment were denied on all but a few of these issues, leaving the vast majority of the issues in the trade secrets claims to be decided by the jury. The decision also held that the trade secrets claims, governed by California’s Uniform Trade Secrets Act, were not preempted by the federal Copyright Act.

On January 1, 2011, MGA moved for reconsideration of the court’s ruling on copyright preemption, arguing 1) that new facts and law had come to light after the court’s decision, and 2) that the ruling was “legally erroneous” on the preemption issue. With regard to the latter, MGA argues that Mattel’s trade secrets claims cover the same material and involve the same rights as the copyright claims.. MGA also notes that the “secrecy” element of Mattel’s trade secrets claim does not distinguish it from the copyright claim because a copyright holder has a right to maintain the secrecy of his work.

In its reply, Mattel argues that there is no basis for reconsideration of the court’s ruling, as the “new facts” that MGA refer to were available to the court before its ruling, and “new law” MGA points to is the very decision they wish to have reconsidered. Furthermore, Mattel argues that the state law trade secrets claims are not preempted because, in accordance with the Ninth Circuit test for preemption, the state law claim includes an “extra element” not required by the federal claim. While secrecy is permitted in copyright law, it is not a required element of a claim for copyright infringement. Thus, Mattel argues, copyright law does not preempt the trade secrets claims.

The Jury Verdict
On April 21, 2011, an eight-person jury returned a verdict against Mattel. Specifically, the jury found that Mattel did not own a copyright in the creative designs behind the dolls. It also found that the ideas, designs and name of the doll collection were not Mattel’s trade secrets and, generally, MGA did not misappropriate any of Mattel’s trade secrets. The jury, however, found that Mattel misappropriated 26 of MGA’s trade secrets, awarding MGA $3.4 million for each misappropriated trade secret for a total of $88.5 million.

Mattel moved for judgment as a matter of law (JNOV) regarding parts of the jury verdict and for a new trial. On August 4, 2011, the District Court denied Mattel's motions for JNOV and for a new trial. It found the factual record supported the jury's conclusion that MGA used reasonable efforts to maintain its trade secrets, which Mattel had misappropriated by misrepresentation. The District Court also remitted MGA's damages award from $88.5 million to $85 million. However, it ordered Mattel to pay an additional $139.9 million in attorneys' fees and costs, for a total payment of $310 million to MGA.

Most recently, Mattel asked a federal court of appeals in San Francisco to reverse the $310 million in damages and attorneys' fees. In particular, Mattel challenged the $17.25 million that MGA won on its counterclaims for trade secrets misappropriation by Mattel. It argued that the claims were time-barred. It added that MGA also failed to prove that its alleged trade secrets were really trade secrets.

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