Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week:  Noteworthy Trade Secret and Non-Compete Posts and Cases:
  • Former L3 Communications employee Sixing Liu was convicted of stealing trade secrets by a Newark, New Jersey jury last week. Liu was convicted of taking restricted military data and presenting them at two conferences in China the previous fall. Prosecutors argued the technology was proprietary and could be used for target locators and other military applications. 
  • “Chinese Smuggler Tried to Sneak Carbon Fiber for Fighter Jets, Feds Claim,” reports Wired.
  • In a panel discussion moderated by the U.S. Trade Representatives, the primary complaint, shockingly, was the theft of valuable U.S. trade secrets by Chinese nationals from within, and without, U.S. corporations, reports Todd Sullivan for his Sullivan’s Trade Secrets & Employee Defections Blog. 
  • Kenneth Vanko has a post on yet another bad faith trade secret case, this time out of Cook County, Illinois.  In Portola Packaging, Inc. v. Logoplaste USA, Inc., Kenneth notes how the trial court, at the end of this case, went back over the evidence and compared it to what the allegations of the complaintrevealed. In addition, the court was influenced by emails that suggested improper intent, as the plaintiff considered a litigation strategy because “new suppliers that are caught up in litigation can scare potential customers.” 
  • A recent California trade secret case appears to have applied a more relaxed showing of particularity of the trade secrets, reports The Software Intellectual Property Report. In VasoNovo v. Grunwald, the court rejected a claim that the plaintiff had not adequately identified the trade secrets in question (which a former employee had used for a patent application), reasoning that at the pleading stage, the “trade secret designation is to be liberally construed, and reasonable doubts regarding its adequacy are to be resolved in favor of allowing discovery to go forward.” 
  • AvidAir Helicopter Supply has lost its bid to have the U.S. Supreme Court review its appeal of the Eighth Circuit’s finding that it misappropriated the trade secrets of Rolls Royce, reports Law360. The Eighth Circuit had found that the repair operation misappropriated Rolls Royce’s trade secrets by using purportedly confidential overhaul specifications, and ordered that the technical documents be returned. For more on the case, see my post on the Eighth Circuit’s decision last year.
  • Are you a lawyer in Massachusetts who has been asked to signed a non-compete? Then you may want to consult Brian Bialas’ post in Foley & Hoag’s Massachusetts Non-Compete Law Blog. For more on lawyers and non-competes, see my earlier posts here and here. 
  • In need of a short primer on Tennessee trade secrets law? Then check out John Paul Nefflen’s post for Burr & Forman’s Trade Secrets & Non-Compete Blog, which concerns the recent trade secrets battle between professional wrestling associations TNA Entertainment and World Wrestling Entertainment. 
  • Looking to avoid living in your own private Idaho? Then you better consult Kim Stanger’s report for Law360, “Unclear Standards for for Idaho’s Restrictive Covenants.” 
  • Worried that the new employee you’re hiring might have a non-compete? Seyfarth Shaw’s Molly Joyce has a practical post in the Trading Secrets Blog on the steps an employer should take to avoid that entanglement. 
Computer Fraud and Abuse Act Posts and Articles: 
  • Nick Akerman’s Computer Fraud/Data Protection Blog has a fine post, “High Court May Rule on Computer Law Question,” in which he looks at the recent decisions by the Ninth Circuit in U.S. v. Nosal and the Fourth Circuit in WEC Carolina v. Miller narrowly applying the CFAA and predicts that if the Supreme Court takes the case, it will adopt the broader view of “accessing without authorization” applied by the Fifth, Seventh, Eighth and Eleventh Circuits. 
Cybersecurity Posts and Articles: 
  • A front-page article in last Friday’s edition of The Washington Post, “In cyberattacks, hacking humans is highly effective way to access systems,” makes clear that the easiest way for cyberthieves to hack into a system is through a company’s employees. 
  • For those representing banks and other financial institutions, check out “Hack Attack: U.S. Financial Institutions in the Cross-Hairs” by Mintz Levin lawyers Amy Malone and Cynthia Marose. 
News You Can Use: 
  • “Why We Are So Rude Online,” answers Elizabeth Bernstein for The Wall Street Journal.

Among the big stories in legal circles last week was the kerfuffle over a memo circulated by Yahoo’s General Counsel Ron Bell reminding Yahoo employees that they are not to leak or disclose confidential information. The story should serve as an important lesson of the challenges a company faces in building, or in this case, rebuilding, a culture of confidentiality so important to preserving trade secrets.

The story first appeared on September 24, when All Things Digital’s Kara Swisher wrote about the memo. The “Leaks Uncool” memo is generally believed to have been triggered by a recent leak concerning internal communications about Yahoo’s sale of a portion of its stake in the Alibaba Group before it was final. Swisher quoted the following parts: 
 
“It’s never OK to share information in an internal memo EVEN if the company issues public communications about the same subject . . . We will fire employees who leak company confidential information and we will avail ourselves of all other legal remedies to protect those confidences.”

Bell’s memo also added the following line, which has caused the most controversy: “If you do it, you can go to jail and face a very large fine.” 

As Swisher’s article notes, Yahoo has had significant problems in the past containing leaks (indeed, in 2009, Yahoo’s then-CEO Carol Bartz went so far as to offer a $1,000 bounty for information on leakers), and she even suggests that past management may have encouraged some of those leaks. Not surprisingly, therefore, as Marissa Mayer and other members of the new management team attempt to steady and rebuild Yahoo, one of the critical tasks they face is rebuilding a culture of security and incrementally moving their employees to fully appreciating and respecting its importance. 

Did Bell over overreact? According to Swisher and some commentators quoted in Corporate Counsel, he did. But not in the Trade Secret Litigator’s view.  Executives and lawyers will always face a no-win battle with the media, who in this age of shrinking budgets are increasingly dependent on disgruntled employees or rivals looking to settle a score for their sources. (Witness the recent article “How EA’s legal team keeps one eye on former employees” criticizing EA for (gasp) reminding departing employees that they should remember they signed NDAs and should abide by them in their new job).
 
While you cannot (and should not) completely tune out media criticism, the fact remains that Yahoo, as a technology company, has to reinforce a culture of confidentiality or it will inevitably atrophy. As I have written before, creating a culture of confidentiality and security is the first and most important step in protecting sensitive information. (If you don’t think a culture of confidentiality is important, then you should look at Apple). Unfortunately, to change a company that has been complacent about security some times requires a big stick, or the threat of a big stick, to get people’s attention.

Leave aside all the potential issues relating to regulatory and securities laws that can result from a lax culture of confidentiality. Also set aside, for the moment, all of the issues relating to protection of trade secrets or other intellectual property. A culture of confidentiality remains critical today because of the ever-growing threat posed by hacking and cybertheft. 

Friday’s edition of The Washington Post ran a front-page article entitled “In cyberattacks, hacking humans is highly effective way to access systems.” In other words, perhaps the best target for cyberthieves and other malevolent cyber forces may be employees who are careless or uninformed about the risks to which they can subject their employer online. 

Reinforcing a culture of confidence therefore serves to protect a company on multiple fronts and if the carrot doesn’t work, then you should not hesitate to use the stick.  

What do you do after your federal conviction for stealing trade secrets from your former employer is thrown out on a technicality but another prosecutor charges you for theft under state law? Why you sue the employer from whom you allegedly stole the trade secrets in the first place to cover your legal expenses, of course. Welcome to America, Sergey Aleynikov.

This is the latest salvo in the never-ending saga involving ex-Goldman Sachs programmer Sergey Aleynikov, who filed a lawsuit in New Jersey this week against his former employer Goldman Sachs demanding that the federal court order Goldman Sachs to pay his $2.4 million in attorneys fees and indemnify him for his future attorneys fees for the latest criminal proceedings. (A hat tip to Kenneth Vanko for his post on this case yesterday aptly entitled, “This Move Takes . . . Guts;” a PDF copy of Aleynikov’s complaint can be found below).

Background: For those not following the case, Aleynikov was responsible for developing Goldman’s high frequency trading (HFT) computer programs for various commodities and equities markets. In April 2009, Aleynikov resigned from Goldman and accepted a job at Teza Technologies to help develop that firm’s own version of a computer platform that would allow Teza to engage in HFT. On his last day, Aleynikov transferred thousands of computer files, including source code to the HFT trading system, to a server in Germany that was not blocked by Goldman’s firewall. That evening, at his home, Aleynikov downloaded the material from the German server to his personal computer and then to his laptop and a thumb drive so that he could make it available to Teza.

In December 2010, a federal jury in New York convicted Aleynikov of stealing that source code under the Economic Espionage Act (EEA), but on appeal, the U.S. Court of Appeals for the Second Circuit reversed the conviction in February 2012. In my view and the view of other commentators, the Second Circuit erroneously applied a strained view of the types of trade secrets covered by that provision of the EEA. In August, Manhattan District Attorney Cyrus Vance, Jr. brought a criminal action against Aleynikov for the unlawful use of secret scientific material and duplication of computer-related material, both felonies under New York State law, for essentially the same conduct that was the subject of the reversed federal conviction.

Aleynikov’s Lawsuit for His Defense and Attorneys Fees: The lawsuit brought by Aleynikov cites certain bylaws of Goldman that require the defense and indemnification of officers charged with a crime, a bylaw which is not uncommon in the corporate world. According to The New York Times, Goldman Sachs has paid a large portion of the legal fees for former director, Rajat K. Gupta, who was convicted of leaking boardroom talks to hedge fund magnate Raj Rajaratnam, as well as for Fabrice Tourre, who faces a securities fraud law lawsuit by the SEC. Of course, neither of those Goldman Sachs officers were alleged to have stolen from Goldman Sachs. 

The bylaws in question cover officers who were “made party to a criminal action by reason of the fact that such person was an officer of the company.”   However, it doesn’t seem that Aleynikov was prosecuted by virtue of the fact that he was an officer, or for anything he did in connection with his duties and responsibilities as an officer. To the contrary, he was prosecuted because he was to alleged to have stolen from the company for his position at his new company Teza; the fact that he was a Goldman officer really does not appear to have had any thing to do with his prosecution, other than it provided him with access to the trade secrets in question. Moreover, the alleged misconduct took place after his resignation from Goldman.

Because Goldman Sachs remains a lightning rod for many and is perceived as pulling the strings behind the prosecutions, Aleynikov has achieved almost folk hero status.  In addition, some in the media seem increasingly troubled by the fact that he is being charged again for the same crime, even though double jeopardy apparently does not bar the state court proceedings. As a result, The Wall Street Journal ran a somewhat sympathetic piece on Friday entitled “Programmer’s Case Is Matter of (Legal) Code” (The New York Times article cited above was equally uncritical as was another article on Friday). 

The Trade Secret Litigator will continue to monitor this unusual proceeding and keep you posted on future developments.

Aleynikov v. Goldman Sachs.pdf (2.10 mb)

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as perhaps one or two that I missed over the past few weeks: Noteworthy Trade Secret and Non-Compete Posts and Cases:
  • Fuhu, Inc., a child-focused software developer has sued Toys “R” Us Inc. in federal court in San Diego, claiming the retailer stole its strategy for selling an Android-powered computer tablet for kids, reports The Wall Street Journal.  Toys “R” Us has announced plans to sell a proprietary tablet for children called the Tabeo, a product Fuhu alleges closely resembles its own device, the Nabi.  Each product features a Wi-Fi-enabled tablet with a soft protective frame.  It is unclear exactly what trade secrets were stolen, however, and it appears that Fuhu is peeved that it had a marketing agreement with Toys “R” Us that was ignored for a year while it decided to launch its own competitive product.  Both Todd Sullivan and Poyner Spruill’s new Under Lock & Key Blog have posts about the recent filing.
  • The malicious trade secret prosecution case brought against Latham & Watkins earlier this year has been dismissed as untimely, Law360 is reporting.  In June 2008, a Santa Barbara judge ruled that a trade secrets case filed by Latham on behalf of Flir Systems Inc. against former employees William Parrish and Timothy Fitzgibbons was brought in bad faith for an anti-competitive motive.  The court in the second case against Latham concluded that the statute for malicious prosecution was one year and that the time to bring the claim expired in August 2010.
  • Georgia’s Supreme Court has issued an important preemption decision under the Georgia Uniform Trade Secrets Act, advises Neil Wienrich in Berman Fink Van Horn’s Georgia Non-Compete & Trade Secret News Blog.  In Robbins v. Supermarket Equipment Sales, LLC, 290 Ga. 462, 722 S.E.2d 55 (2012), the court found that a general injunction arising out of the same facts as a dismised claim under Georgia’s UTSA was preempted by that statute, and that in the absence of a trade secret claim, the injunction was improper.
  • Todd Sullivan is reporting that a split panel for the U.S. Court of Appeals for the Fourth Circuit has stayed Judge Payne’s twenty-year injunction forbidding Kolon from manufacturing Heracron.  In its motion seeking a stay of the injunction, Kolon argued, among other things, that the injunction would effectively kill Kolon’s Heracron business, forcing it to shut down production lines and cease sales across the globe.  Law360 quotes Kolon as having argued that “The district court took nearly a year to decide whether to issue a permanent injunction. A comparable stay to allow for this court’s orderly consideration of the appeal is clearly warranted.  The alternative would be the death knell for Kolon’s Heracron business, even if Kolon ultimately prevails on appeal.”
  • A new sheriff is in town, reports Corporate Counsel, as Yahoo’s General Counsel Ron Bell is making clear to employees that leaking confidential information is not only “uncool” but a violation that can get an employee fired and even prosecuted. 
  • Morgan Stanley must pay Fidelity in a solicitation dispute, reports Reuters.  In a recent FINRA arbitration, Morgan Stanley and two brokers it hired from Fidelity were ordered to pay over $500,000 in damages and attorneys fees, including nearly $82,000 in punitive damages.
  • “Access to Courts: Federal Circuit Issues Preliminary Rejection of Judge Koh’s Stance on Open Access to Trial Documents” notes a post in the Patently-O Blog.
  • “Hiring an Employee Who Has a Non-Compete: Proceed With Caution!” warns Neal Buethe for Minnesota Employer.com.
  • Poyner Spruill’s has launched its new trade secrets blog, Under Lock & Key.  The new blog has plenty of new posts that range from practical advice concerning NDAs to breaking news (as detailed above) about new trade secret filings.  I would encourage readers to bookmark it.
Computer Fraud and Abuse Act Posts and Articles:
  • Shawn Tuma’s Computer Data Privacy and Social Media Law Blog reports on a case out of the U.S. District Court for the Southern District of Ohio, Freedom Banc Mortgage Services, Inc. v. O’Harra, 2:11-cv-01073 (S.D. Ohio Sept. 5, 2012), applying some straightforward rules under the CFAA.  Most notably, U.S. District Court Judge Gregory Frost held that observing data constitutes “obtaining data” under the statute.  Brian Hall, writing for Porter Wright Morris & Arthur’s Employer Law Report Blog, also has a post on the decision.
Cybersecurity Posts and Articles:
  • The Steptoe Cyberblog has a thought-provoking post on cybersecurity, positing that the best defense is a good offense.  In “Rethinking Cybersecurity, Retribution and the Role of the Private Sector,” Stewart Baker persuasively argues that a defense-based strategy is doomed to fail and that the best approach is one focused on identifying and punishing the culprits.
  • “Chinese-made laptops’ latest feature: Pre-installed viruses” warns RT.
  • “Insider threat behavior not just actions” writes Dan Velez, director of defense programs for Raytheon Oakley Systems, for SC Magazine. Dan advises that improved security technology provides an illusory sense of accomplishment, and that until companies fully understand the human component (motivation, behavior, etc.), their approach to security will remain flawed and incomplete.
  • “10 Recommended Steps for Reducing Cyber Risk” from Reed Smith’s Global Regulatory Enforcement Blog.
News You Can Use:
  • “For the Absent-Minded, a Few Forget-Me-Nots” from The New York Times Personal Tech Blog.

In July, Senators Herb Kohl (WI), Chris Coons (DE) and Sheldon Whitehouse (RI) introduced the Protecting American Trade Secrets and Innovation Act of 2012 (PATSIA), to the applause of many in the trade secret community, including yours truly. One of PATSIA’s notable provisions proposed is an ex parte seizure order that would enable a trade secret claimant to seize evidence or product relating to misappropriated trade secrets that might otherwise be destroyed or improperly used. Does this seizure provision, however, go too far?

Recap of the Proposed Seizure Order:  PATSIA provides for an ex parte proceeding that authorizes the seizure of materials (1) used in connection with the alleged misappropriation (including computers) or (2) for the preservation of evidence. A federal court can approve the seizure order if the claimant presents clear and convincing evidence of irreparable harm (not a terribly high standard, since that is the standard required for any injunction) without notice to the other side. While short in duration (the seizure can last no longer than 72 hours), the categories of information subject to seizure are very broad. 

Once the products or computers are seized, however, there is no provision addressing how the information should be stored or protected, who will actually gather it, and who will have access to it. Instead, the proposed statute simply says an “appropriate” protective order should be included to protect disclosure or misuse of the information seized. (A link to the proposed statute and seizure order can be found here).

“I was for it before I was against it”: After some reflection and gentle chiding from a colleague concerned about the potential for the seizure order’s abuse, I now think this provision has to be modified. As presently proposed, what would prevent a judge who was not on top of his game that morning from granting an ex parte seizure allowing a competitor to misuse the order to seize and review high level trade secrets for its own benefit?  Before you harrumph and say “impossible!”, think about the number of bad faith trade secret actions in the news over the past six months (ACS v. Leadscope, SASCO v. Rosendin Elec., etc.). One would hope there would be severe consequences if a court improvidently granted such an ex parte request, but the damage from the disclosure would be done.

How best to narrow the provision but still keep it effective? I think there are three changes that would significantly reduce, if not eliminate, this potential problem with the seizure provision. 

First, the ex parte seizure provision should be aligned to the primary goal of PATSIA — namely, the protection of U.S. trade secrets from foreign misappropriation. A review of of a press release by Senator Kohl for a previous amendment to the Economic Espionage Act virtually identical to this bill made clear foreign misappropriation was the primary concern, so why not confine this powerful tool to that perceived problem?   

Second, the material or evidence that was seized would have to be kept in a secure escrow or location where the party bringing the claim could not inadvertently or intentionally access that information during the pendency of the seizure order and any challenge to the seizure order.  This would serve the purpose of preservation and segregation but remove the danger of misappropriation. Make the statute clear that the claimant cannot access the information or evidence until a court has the opportunity to hear from the other side.

Third, there should be mandatory and severe penalties for any abuse of the seizure order. While the provision authorizes claims for compensatory damages, punitive damages and attorneys fees for a bad faith seizure order, that is not enough. Penalties should be directed at the lawyer as well as the client. Have the lead lawyer certify why this order needs to be done in an ex parte fashion.  This would ensure that a claimant and his counsel would be on the hook if they were not careful in considering their request or acted improperly during the seizure process. 

Another Necessary Fix: And while this amendment is being made, Congress should take the opportunity to undo the damage caused by the U.S. Court of Appeals for the Second Circuit in U.S. v. Aleynikov. Readers of this blog will remember that the Second Circuit bobbled the ball when it imposed an unduly narrow construction of the categories of trade secrets covered under section 1832 of the Economic Espionage Act to only those trade secrets that are included in products that are ultimately sold within the stream of commerce. This too needs to be fixed as a broad category of trade secrets would be left unprotected under the statute’s present language, which tracks the language of section 1832.

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well one or two that I missed over the past few weeks: Noteworthy Trade Secret and Non-Compete Posts and Cases:
  • A former programmer for futures exchange operator CME Group has pleaded guilty to stealing trade secrets in connection with plans to improve a trading platform in China, according to a report by The Wall Street Journal this morning.  Chunlai Yang, a senior software engineer who worked at CME for 11 years, admitted to downloading more than 10,000 files from CME computers, and planned to offer improved technology to the Zhangjiagang Exchange.
  • Executives of Chinese telecom companies Huawei and ZTE were grilled by the U.S. House Intelligence Committee over allegations that Huawei stole Cisco and Motorola’s trade secrets, reports Todd Sullivan in his Sullivan’s Trade Secrets & Employee Defections Blog. Mike Rogers, the House Intelligence Committee Chairman expressed concern that “Huawei and ZTE provide a wealth of opportunities for Chinese intelligence agencies to insert malicious hardware or software implants into critical telecommunications components and systems.” Congressman Rogers further noted that “under Chinese law, ZTE and Huawei would likely be required to co-operate with any request by the Chinese government to use their systems or access for malicious purposes.” For more on the hearings, The New York Times and The Wall Street Journal’s articles can be found here and here. 
  • For those in Kentucky, Kenneth Vanko, Robert W. Milligan and Russell Beck all have posts on an important opinion laying out the six factors that a court should apply when deciding whether to enforce, not enforce or narrow a covenant not to compete. In Charles T. Creech, Inc. v. Brown, 2012 Ky. App. LEXIS 142 (Ky. Ct. App. Aug. 17, 2012), the court of appeals provided various “guiding principles” for the considerations underlying each of those six factors.
  • The U.S. International Trade Commission will review a finding that a former Twin-Star International Inc. employee violated the Tariff Act when he used stolen proprietary information to start a rival fireplace manufacturer in China, reports Law360. In July, an administrative law judge had found that former Twin-Star employee Yue Qiu Sheng violated a confidentiality agreement by stealing plans for an electric fireplace prototype as well as customer and supplier lists to launch his own company, Shenzhen Reliap Industrial Co. Ltd.
  • Have a trade secret case that is going to trial in Florida? Then you should read a recent post by Peter Vilmos in Burr & Forman’s Non-Compete & Trade Secrets Blog about the importance of jury instructions under Florida’s version of the Uniform Trade Secrets Act.
  • Want “A Look At 16 Years Of EEA Prosecutions”? Check out Peter Toren’s fine summary for Law360.
  • Mark Terman provides “A Litigator’s perspective on trade secret protection plans” for Inside Counsel.
  • “Do Maids Have to Sign Non-Compete Clauses?” wonders John Kelly of The Washington Post.
  • The big trade secrets news this week was the Ohio Supreme Court’s decision in American Chemical Society v. Leadscope, a decision that at least one Ohio commentator described as the most eagerly awaited case of the year. The ACS case held that a claim of unfair competition could be based on a theory of malicious litigation by a competitor and it announced the legal standard for that claim. However, the ACS case also provides a cautionary tale for litigators in high profile trade secret cases — namely, the potential of a defamation claim against lawyers for statements about the litigation to the media. In ACS, Leadscope alleged that one of ACS’s lawyers defamed it by stating “Our motivation in filing suit is to acquire back the protected information that they took from us” to a local business paper, Business First. The Supreme Court ultimately dismissed the defamation claim, reasoning that the article as a whole simply provided an accurate summary of the legal proceedings (both sides were quoted about the litigation and made substantive statements about their positions). For a very thorough analysis of the opinion and its key components, check out former Appellate Court Judge Marianna Brown Bettman’s post in her Legally Speaking Ohio Blog. 
Computer Fraud and Abuse Act Posts and Articles: 
  • Seyfarth Shaw’s Trading Secrets Blog has two posts about two recent federal decisions out of California. Daniel Joshua Salinas details a ruling denying reconsideration of an important ruling that allowed CFAA case to proceed despite the recent decision in U.S. v. Nosal as well as a case out of the Northern District of California dismissing a CFAA claim for “click fraud” because the plaintiff failed to provide adequate factual basis for that claim.
Cybersecurity Posts and Articles: 
  • In need of a comprehensive summary of the various pieces of cybersecurity legislation and executive orders? Check out “An Analysis of Proposed Federal Cybersecurity Legislation” by Todd Taylor for Corporate Counsel.
  • “Senator Presses On Cybersecurity” reports The Wall Street Journal. 
  • “Never trust a stranger: Secure social networking” warns Rob Rachwald for SC Magazine.
  • “Your smartphone will (eventually) be hacked” predicts David Goldman for CNNMoney. 
News You Can Use: 
  • “Extra Security for Gmail” from The New York Times Personal Tech Blog.

The Ohio Supreme Court issued a significant opinion this morning affirming in large part a Columbus, Ohio jury’s award of $26.5 million to a small company and its founders who claimed that a trade secret case brought against them by their former employer was brought to disrupt or destroy their business. In American Chemical Society v. Leadscope, Inc., the Ohio Supreme Court found that Leadscope and its founders had properly asserted a claim for unfair competition arising out of malicious litigation. A link to the opinion, which is lengthy, can be found here.
 
Factual Background:  In 2002, American Chemical Society (ACS) sued several former employees and their company, Leadscope, for allegedly stealing technology from ACS. Two of the former employees, Paul E. Blower Jr., Ph.D. and Glen J. Myatt, Ph.D., had worked to develop a software tool named Pathfinder that was intended to improve the ability of researchers to access and organize the voluminous information available in ACS’s databases. ACS suspended the Pathfinder project in 1997 to the disappointment of Blower and Myatt, who later left to form Leadscope and to develop a software product to aid in exploring and displaying chemical compounds.
 
ACS came to learn of Leadscope’s development of its software, carefully monitored its progress from afar, and ultimately claimed in the lawsuit that it was concerned that Leadscope had misappropriated its Pathfinder technology. In the spring of 2002, ACS demanded that Leadscope turn over its patent for its new software and pay ACS $1 million. When those negotiations broke down, ACS brought suit, made it known that the technology was in dispute, and made statements to others that Leadscope had improperly taken that technology from ACS. All of these actions substantially impacted Leadscope’s ability to get financing and run its business.
 
The inpidual defendants and Leadscope counterclaimed, arguing that ACS had brought the litigation in bad faith as part of a larger plan to disrupt, if not destroy, their new business. A jury awarded over $26.5 million in compensatory and punitive damages to Leadscope and the former employees, as well as attorneys fees, which has now swelled to over $40 million due to additional attorneys fees and prejudment interest. The Tenth District Court of Appeals affirmed the jury’s verdict and agreed the trial court had properly applied a subjective “bad faith” standard, as opposed an objectively baseless standard, in finding that a claim for malicious prosecution existed. The Tenth District also found that the award of attorneys fees was proper under Ohio’s Uniform Trade Secret Act because of the jury’s finding that the trade secret claims were in bad faith.
 
The Ohio Supreme Court’s Holding: The Supreme Court grappled with the issue of whether a claim for unfair competition could include a theory of malicious litigation, a contention that had sufficiently troubled the State of Ohio enough that the Ohio Attorney General’s Office had filed an amicus brief and appeared and argued in support of ACS’s position. 
 
As an initial matter, the Supreme Court disagreed with the application of the “bad faith” standard by the trial court and Tenth District, reasoning that a party had to show that the legal action is objectively baseless and that the opposing party had the subjective intent to injure the party’s ability to be competitive. In applying that “objectively baseless” standard, the Supreme Court found that the claims against ACS remained viable and that there was no evidence in the record to support ACS’s supposed trade secret claims. For example, the Supreme Court noted that ACS had failed to provide any support for its claims of misappropriation and emphasized the gaps in the testimony of the witnesses that ACS had called. On this point, the Supreme Court summarized that “ACS presented a theory, but offered no concrete evidence that Leadscope stole its product.”
 
As for the issue of ACS’s subjective intent, the Supreme Court found ample support for the jury’s finding that ACS had the  intent to injure Leadscope and its founders. It noted that ACS’s president had closely monitored Leadscope and had even sent out an email to then-Ohio-Governor Robert Taft to abort a visit by the governor to Leadscope’s offices. ACS’s former information technology director also provided damaging testimony documenting ACS’s president’s hostility towards Leadscope. In addition, ACS took actions or made statements that interfered with Leadscope’s ability to get funding (for example, by dissuading an venture capitalist interested in investing in Leadscope by telling him that there were legal issues with Leadscope’s technology) and took actions in the litigation to disrupt Leadscope’s ability to get insurance coverage for the dispute.
 
The Takeaway? As numerous other high profile cases have been brought recently against law firms and former employers for allegedly bringing trade secret actions in bad faith, this case may prove to be a bellwether opinion. The ACS case provides a lesson in the dangers of potentially overreaching in a weak trade secrets case, as well as on the power of the “David v. Goliath” theme for juries. Seemingly innocent or unrelated actions were woven together very effectively to show malice and an intent to destroy or disrupt a promising business, but those facts would have been of no value if ACS had been able to objectively demonstrate that it had a trade secret claim in the first place.
 
Further Thoughts (Sept. 19, 2012):  One of the challenges in blogging is the importance of posting timely and concisely.  In my zeal to get this post up about a very important case here in Ohio, there were two other points that in retrospect that I should have made: 

(1) There was a defamation claim premised on some of the statements made to the local press and in a company-wide email that the Supreme Court dismissed; this too was an important issue and claim and I will cover it in a future post. The dismissal of the defamation claim will probably lead to a substantial reduction in the award, although it is unclear how much from the face of the majority opinion; and

(2) There are a number of interesting procedural issues presented by this 4-3 ruling (especially for Ohio lawyers).  In particular, the Supreme Court’s decision to affirm after reviewing the “voluminous” record rather than to remand it back for another trial, despite its imposition of a new legal standard on the unfair competition claim, appears to be highly unusual and will be talked about by lawyers here in Ohio for some time to come.

A number of commentators (including the Trade Secret Litigator) have opined about the potential impact that the new America Invents Act (AIA) may have on the increased use of trade secrets, primarily focusing on the newly-expanded “prior commercial use” defense under the AIA. However, my colleague Robert T. S. Latta recently brought another potential benefit that may arise under the AIA for trade secret owners to my attention, and he was kind enough to commit his thoughts to this post. According to Rob, the legislative history of another recent amendment of the AIA suggests that a trade secret owner may essentially be provided with a potential mulligan in the form of a subsequent patent should he or she lose his or her trade secret protection. 

Under current patent law, if an inventor maintains his invention as a trade secret and commercially profits from that invention for more than one year, the inventor forfeits the right to patent that invention. As Justice Learned Hand wrote long ago, “it is a condition upon an inventor’s right to a patent that he shall not exploit his discovery competitively after it is ready for patenting; he must content himself with either secrecy, or legal monopoly.” Metallizing Engineering Co. v. Kenyon Bearing and Auto Parts Co., 153 F.2d 516 (2d Cir. 1946).

However, new language in the AIA may change that settled precedent. The revised § 102(a)(1), which comes into effect on March 16, 2013, permits a patent unless “the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention.” (Emphasis added). If it was not available to the public (as any trade secret would not be), it would be patentable under the new §102(a)(1).

The legislative history supports this view. Senator Jon Kyl, on the day the AIA was enacted, explained “public uses and sales are prior art only if they make the invention available to the public.” Congressional Record, Senate, Sept. 8, 2011 at S5431. Furthermore, the day after the enactment of the AIA, Senator Patrick Leahy advised that §102(a)(1) “was drafted in part to do away with precedent under current law that private offers for sale or private uses or secret processes practiced in the United States that result in a product or service that is then made public may be deemed patent-defeating prior art.” He stated that prior art must meet the “the public accessibility standard that is well-settled in current law, especially case law of the Federal Circuit.” Congressional Record Volume 157, Number 35 (Wednesday, March 9, 2011), Senate, S1496-S1497.

If §102(a)(1) is indeed interpreted, as suggested by this legislative history, to overturn current precedent, then an inventor will no longer forfeit his or her U.S. patent rights for maintaining his or her invention as trade secrets for a period longer than one year. The inventor will be free to practice that invention for commercial gain as a trade secret until such time as the inventor finds it necessary to patent it (providing another has not already patented the invention). Further, if someone has patented the invention, the prior secret user would still have the prior commercial use defense to patent infringement under §273.

Is the new language in §102(a)(1) simply a “catch-all” phrase?  Some (most notably, Sughrue Mion LLP, in an article  attached as a PDF below) interpret “or otherwise available to the public” as nothing more than a catch-all language, capturing unspecified types of disclosure. Under this interpretation, the current case law regarding secret uses and/or sales would remain unaltered. These commentators have argued that this interpretation of §102(a)(1) maintains harmony of this section of U.S. patent law with that of the patent laws of other countries, a stated purpose of the AIA. (See comments of Senator Hatch, Congressional Record (January 25, 2011), Senate, S142 (“If enacted the Patent Reform Act of 2011 would move the United States to a first-inventor-to-file system, which will bring greater harmony and improve our competitiveness.”)). 

This “catch-all” interpretation of § 102(a)(1) might also fall in line with the statutory rule of construction that when Congress intends such a dramatic shift in the law, it does so explicitly. Bd. of Trustees of Leland Stanford Jr. Univ. v. Roche Molecular Sys., Inc., __ U.S. __, 09-1159 (June 6, 2011) (“Congress has in the past divested inventors of their rights in inventions by providing unambiguously that inventions created pursuant to specified federal contracts become the property of the United States … Such language is notably absent from the Bayh-Dole Act”).

That being said, however, as Robert Maier of Baker & Botts argues in his article “The Big Secret of the America Invents Act” for IP Today, the legislative history of the AIA suggests that a “catch-all” in §102(a)(1) was not the intent of at least some lawmakers. In the humble view of the Trade Secret Litigator, this certainly does not look like “catch all” language, and on its face, this relatively straightforward language would seem to include trade secrets which are by definition not publicly available.

Until a court considers this issue under §102(a)(1) of the AIA, this will remain a subject of debate. However, it may be worthwhile for a trade secret owner whose trade secret has lost one or more of its trade secret elements to test this proposition before a court.

Sughrue AIA Article.pdf (175.08 kb)

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well one or two that I missed over the past few weeks: 
 
Noteworthy Trade Secret and Non-Compete Posts and Cases: 
  • A former American Airlines employee has agreed not to publish trade secrets and confidential information on his websites that he learned while he worked at American. According to Law360, American sued Gailen David, who runs several websites including The Sky Steward and AAGossip.com, in April after David published flight information about American’s board members and former executives, including their itineraries and seat assignments, and alleged that American bumps paying passengers from flights to accommodate those executives. Epstein Becker’s Trade Secrets & Noncompete Blog has a write-up on the case as well.
  • The University of Iowa has sued a former professor to enforce a non-compete prohibiting him from practicing medicine within a 50-mile radius of the university. Bogdan Cherascu, a clinical assistant professor in UI’s Internal Medicine department. Cherascu is now working for the Physician’s Clinic of Iowa, which is located in Cedar Rapids. Given the high profile of non-competes in the healthcare community, this one should be interesting to watch.
  • LG is expected to issue an apology to Samsung soon in connection with allegations that LG’s employees stole Samsung’s organic light-emitting diode (OLED) screens. In Sullivan’s Trade Secrets & Employee Defections Blog, Todd Sullivan reports that Samsung recently submitted  documents to the Seoul Central District Court for 18 confidential technologies for its OLED screens and 21 other relevant details, demanding 1 billion won (US$880,514) from LG Display in compensation for each case of LG’s usage of the cited technologies or making public the information to a third party. OLED panels, which feature slimmer and more vivid screens than common liquid crystal display screens, are much sought after by tech companies around the world. In July, 11 people, including former or current researchers at Samsung Mobile, were indicted in South Korea on charges of leaking core display technology from Samsung to LG.
  • Seyfarth Shaw’s Trading Secrets Blog has an interesting post, “When Everything Becomes Software, How Does That Affect IP Strategy?” by Joren De Wachter.
  • “Don’t Sound The Death Knell Just Yet: Trade Secrets Are Still Alive in North Carolina” advises Poyner Spruill’s Josh Durham. 
  • Have a trade secret dispute in Taiwan? The International Techology Law Blog has a primer on “Trade Secret Litigation in Taiwan.” 
  • Former DuPont security chief Ray Mislock Jr. offers “8 keys to starting a trade secret protection plan” for the Security InfoWatch Blog.
  • The International Trade Association’s tradeology blog has a post “The Secret Is Out! Learn More About the Value of Trade Secrets to the U.S. Economy.”
  • “Dealing With IP and Trade Secret Theft by Employees” counsels Kris Haworth and Mindy Morton for Corporate Counsel.
Procedural Issues (for the litigators): 
  • Concerned about whether you can assert personal jurisdiction over a foreign party? See Alison Frankel’s report in her On The Case Blog about recent rulings against Chinese drywall manufacturer Taishan Gypsum Co. holding it could be haled into a U.S. court. 
Cybersecurity Posts and Articles: 
  • “Businesses Beware: Heavy-Handed Tactics Planned for Cybersecurity” warns Jody Westby in an article about the Obama administration’s possible executive action for Forbes.
  • Looking for sample BYOD policies?  Peter S. Vogel’s Internet, Information Technology & e-Discovery Blog has several. 
  • “Federal CIO Council Releases BYOD Toolkit” announces the InformationLawGroup Blog. 
  • “Cloud Computing: Some Practical Suggestions for Resolving Issues” in two installments by Osler Insights Blog. 
News You Can Use: 
  • “Three Tips for Better Google Searching” from The New York Times’ Gadgetwise Blog.

A curious decision out of Connecticut highlights the Hobson’s choice that some employers in that state might face if they do not secure covenants not to compete from all of their employees.   In Creative Dimensions, Inc. v. LaBerge, the Connecticut Superior Court rejected enforcement of an 18 month non-compete and non-solicitation agreement against two former owners of the company, reasoning that the absence of non-competes with other employees rendered the agreement unfair under Connecticut law.  Daniel Schwartz’s Connecticut Employment Law Blog has a fine write up on this case as well.

Creative Dimensions, Inc. (CDI) purchased the business from Daniel LaBerge and William Miller in 2005 and secured 18 month covenants not to compete and non-solicitation agreements from each of them as part of that transaction. As part of the deal, LaBerge and Miller relocated to Connecticut. In 2009, they left to join a competitor and CDI moved to enforce their non-competes. It is unclear why CDI waited until 2012 to commence the action.

The Superior Court declined to enforce the non-competes after applying a five-factor test under Connecticut law that focuses on the (1) length of time of the covenant; (2) geographic scope of the covenant; (3) fairness of the protection accorded to the employer; (4) extent of the restraint on the employee’s opportunity to pursue an occupation; and (5) extent of interference with the public interest.  The court rejected the covenants under the third prong, essentially reasoning that the absence of any non-competes with other current and former sales employees was persuasive evidence that there was no protectible interest justifying the non-competes.

The Superior Court rejected any notion that the two former owners should be treated any differently from any other employee. In the court’s view, in the context of the sale of the business, the non-compete may have been reasonable during the first three years of their relationship since LaBerge and Miller were critical to the transition of the new business to its new owners.  However, after three years, the court found that LaBerge and Miller were now like any other at-will employee and, therefore, the absence of any non-compete with other employees became more relevant.

The court also emphasized the absence of any proof of any trade secrets or confidential information that would justify the non-competes and rejected efforts to justify customer lists, since the identity of CDI’s customers was readily available.  When CDI tried to counter by arguing that LaBerge and Miller were “very entrepreneurial,” the court said that argument was undermined by the fact that CDI also outsourced some of its work from to time to established competitors without any restrictions.

How should an employer respond?  This argument is made frequently in non-compete litigation but is rarely embraced, which makes this decision unusual.  Courts generally confine themselves to the agreement at issue and make the decision on the circumstances before them.  From a litigation standpoint, it should serve as reminder to employers of the importance of being prepared to justify the legitimate need for the non-compete by presenting evidence of trade secrets or relationships with important customers.

This decision is also curious because it involved a non-compete that accompanied a sale of a business.  Courts are generally more deferential to non-competes in this setting because (1) the non-compete has been negotiated at arms’ length between sophisticated parties with the assistance of counsel; (2) courts recognize that the transfer of goodwill critical to the business naturally accompanies and supports the non-compete; and (3) the former owners are generally paid a tidy sum in exchange for the sale of the business.  The Superior Court seems to have rather cavalierly dismissed these considerations (or perhaps CDI did not emphasize them forcefully enough) when it found that these interests were no longer present after three years.

For Connecticut employers, and particularly those acquiring a business, this decision could prove to be problematic because it could force those employers to secure non-competes with other employees from whom they might not otherwise seek non-competes.  For employers outside Connecticut, the decision should be of less concern, since its reasoning was highly fact-specific and was rooted in Connecticut’s law governing non-competes.