In a sweeping 70-page opinion issued late yesterday, U.S. District Court Judge Robert Payne imposed a breathtaking injunction against Kolon in its long-running and contentious trade secret dispute with DuPont, barring Kolon from making Heracron, the synthetic fiber that DuPont contended was inextricably built with its trade secrets for the fiber Kevlar, for 20 years.  The opinion is significant not only because of its breadth and scope, but also because of its reasoning, reasoning that could make it significantly easier for trade secret claimants to secure permanent injunctive relief compared to patent, copyright and trademark claimants.  (A PDF copy of the opinion can be found below).
 
Background:  DuPont secured a $920 million jury verdict last September against Kolon, a South Korean competitor, for stealing its trade secrets.  According to DuPont, Kolon had failed to come up with a synthetic fiber that could compete against DuPont’s Kevlar, a para-aramid technology that is used in, among other things, law enforcement and military body armor.  In his opinion, Judge Payne found that, having failed to develop or perfect Heracron, Kolon set upon a deliberate path to steal DuPont’s trade secrets, and did so by approaching a number of former DuPont employees, including Michael Mitchell, to gather and forward DuPont’s trade secrets to Kolon.  Mitchell later pleaded guilty to the theft of DuPont’s trade secrets and admitted to serving as a conduit for the theft of those secrets from other DuPont employees.
 
After DuPont sued Kolon, it discovered a number of screenshots that indicated that managers and other employees in South Korea had deliberately deleted, overwrote or destroyed a substantial number of documents regarding the development of Heracron and communications with Mitchell and others.  Judge Payne ultimately found that Kolon’s employees intentionally destroyed approximately 17,000 email files and documents and he sanctioned Kolon by providing an adverse inference instruction to the jury that they could find that this was done to conceal damaging evidence.  After the jury’s verdict, he awarded $350,000 in punitive damages to DuPont as well as its attorneys fees and denied Kolon’s motions to set aside the verdict.
 
Key Holdings in Judge Payne’s Opinion:
 
1.  The U.S. Supreme Court’s decision in eBay does not apply to trade secret injunctions.  As many readers know, in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006), the U.S. Supreme Court found that irreparable injury had to be proven in a request for a permanent injunction in post-trial proceedings involving a patent.  Irreparable injury is the critical element in any request for an injunction and it generally means that a party must show that it needs relief that it could not secure through a traditional money damages dispute (i.e., damages are difficult to measure, the injury cannot be cured by money, the defendant cannot satisfy a money judgment).  In eBay, the Supreme Court emphasized that patent cases are no different than any other federal civil claim and that there should be no presumption of irreparable injury, even though a jury or judge may have found patent infringement.  The eBay decision has since been applied to trademark and copyright injunctions and it is generally believed that decision has caused a marked decrease in the number of permanent injunctions for those types of intellectual property.

Judge Payne was apparently troubled by the issue of whether DuPont was still being irreparably harmed, and as a result, whether the U.S. Supreme Court’s decision would apply or whether Virginia law should apply, since DuPont’s trade secrets claim arose under Virginia’s Uniform Trade Secrets Act (UTSA).  Frankly, I am not quite sure why he was so concerned about this issue, as he ultimately found  that the elements of irreparable injury were present later in his opinion. Nevertheless, in an exhaustive analysis of case law and academic articles as to which law should apply, Judge Payne found that eBay only applied to federal statutes (patent, trademark and copyright) and that Virginia’s version of the UTSA should govern. 

After deciding that the Virginia UTSA applied, Judge Payne then proceeded to find that DuPont was irreparably damaged when he balanced the harm that any injunction might have against Kolon against the harm to DuPont if it was not granted.  He rejected Kolon’s argument that DuPont had been made whole by the $920 million judgment since Kolon had acknowledged it might not be able to satisfy that judgment and that it was having difficulty securing a bond in support of its appeal from that judgment.  Judge Payne also held that discerning the trade secrets’ value might still be difficult.  Both of these rulings are consistent with traditional findings associated with irreparable injury.  Finally, he was troubled by Kolon’s continued ability to benefit from the fruits of its crime, particularly since that injury could impact the next generation of para-aramid technology.
 
2.  Kolon’s misconduct and Judge Payne’s distrust of Kolon played a critical role.  As noted above, the theft of trade secrets and destruction of evidence had a profound effect upon Judge Payne’s decision on the scope of the injunction.  Judge Payne considered, and rejected, an injunction barring Kolon from simply using the trade secrets.  He emphasized that Kolon had demonstrated that it could not be trusted and that it could evade a “use” injunction without detection by the court.  Judge Payne emphasized one fact on several occasions:  that Kolon had surreptitiously copied the contents of Mitchell’s computer during a lunch recess when he was debriefing them on what he had collected.  In other words, Kolon stole trade secrets from the consultant that it engaged to steal trade secrets from DuPont. 

Judge Payne therefore concluded that the only way that DuPont could be sure that its stolen trade secrets were not used was imposing a ban on the production of body armor products.  He noted that DuPont had presented “persuasive evidence obtained from inspection of Kolon’s manufacturing facilities and from Kolon’s own documents that showed how Kolon had incorporated the stolen DuPont trade secrets into Kolon’s own operations, including evidence that Kolon even had copied machine configurations that DuPont had used solely because of its need to fit machinery into limited space in its plant.”  As a result, he found that the use of the stolen trade secrets was integral and essential to Kolon’s manufacture of Heracron.

In addition, Judge Payne ruled that Kolon would have to return any information regarding those trade secrets, under his supervision.  While the order is not specific about how that will be implemented, given the contentious history of this case, and Kolon’s poor relationship with Judge Payne (it requested that he step aside earlier this year), there will certainly be fireworks during that process.

3.  How did he come up with the 20 years?  Judge Payne noted that Kolon had unsuccessfully tried to develop Heracron over a period of 20 years and that it was only as a result of the theft of DuPont trade secrets that it was able to refine and perfect that fiber.  Using that time estimate as a baseline, Judge Payne imposed a 20 year ban.

Twenty years.  To put that in context, my three year old will be in graduate school (hopefully) by the time Kolon can begin any effort to re-enter this market.  Simply put, this injunction effectively puts Kolon so far behind DuPont that it amounts to a permanent ban on the development of any body armor product.

Why is this opinion potentially very important?  Leaving aside the fact that it is an extraordinary injunction in one of the highest profile trade secret cases in recent memory, this opinion could have tremendous implications throughout the U.S. and worldwide.  Let me explain. 

Like every state except Massachusetts, New York and Texas, Virginia is a Uniform Trade Secrets Act jurisdiction, meaning that states adopting the UTSA have done so for, among other reasons, uniformity.  Consequently, to the extent that the highest court in a state has not spoken on this issue, courts in other states who are considering this question under their versions of the UTSA are likely to look for guidance from this thorough and well-reasoned opinion. 

In addition, this decision has important extra-territorial implications.  Even though the misappropriation took place overseas, Judge Payne found that it had a substantial impact on a company based in the U.S.  Judge Payne noted that in the existing global economy, some foreign actors have not respected the IP rights of American companies and that it might be necessary to impose an injunction to protect those rights here in the U.S.  He also noted that foreign companies that submit to jurisdiction in the U.S. and cause injury to American companies can and should be subject to the laws of the U.S.

In sum, this means that in the context of a permanent injunction, courts applying the law of the 47 states that have adopted the UTSA may elect to dispense with the requirement of irreparable injury and could impose a ban on the manufacture of the production of competing products overseas.  This is a significant advantage, as many federal courts that have applied eBay have found that an underlying money award is adequate relief and have therefore declined to find irreparable injury and grant a permanent injunction.  This decision provides a substantial advantage in favor of trade secret protection, and is yet another sign that trade secret protection may be preferable to patent protection for some IP.

DuPont v. Kolon Permanent Injunction.pdf (2.35 mb)

08282012If you have been involved in as many trade secret and non-compete disputes as I have, and if you follow the cases as I do, you sometimes feel like you are watching a variation of the Direct TV advertisements admonishing “Don’t attend your own funeral.”  The warning that goes ignored all too often?  Departing employees making the same mistakes (or bad decisions) in case, after case, after case. 
 
A lot of my posts focus on protecting companies, inventors and individuals who believe someone else has taken their trade secrets or or violated a non-compete. However, the other side of the coin is just as important — namely, what an individual and his new employer should do to avoid being sued for allegedly breaching an agreement or stealing trade secrets. Given these recurring problems, I thought it would be worthwhile to outline what an employee should consider not doing when he or she leaves a job to join a competitor (see my disclaimer on the side of this post: this is NOT legal advice!). 

Switching jobs is stressful enough without taking unnecessary chances that put an employee and his/her family at risk, and I have outlined the mistakes and bad decisions that seem to reoccur time and time again. So without further ado, I present the Trade Secret Litigator’s Seven Deadly Sins of Departing Employees:
 
Rule No. 1: First and foremost, do NOT — I repeat do NOT — take or copy anything without your employer’s written consent. There is no worse piece of evidence than proof that someone walked out with a box of important company files, forwarded sensitive files to a personal email account, copied customer information on a thumb drive, or photocopied relevant documents before he/she left. It makes the employee look dirty, untrustworthy and unethical. It takes away the former employee’s strongest weapon if he/she is sued: their ability to present themselves as the chaste David bullied by the over-reaching Goliath. 
 
Taking or copying this information also doesn’t get the employee anywhere because its removal can be easily discovered by the former employer. Most likely under the terms of the agreement, it is probably not the employee’s to begin with, so the employee doesn’t have any right to take it, and a court will order it returned anyway. If you believe under the circumstances of your relationship that you have some ownership or right to those materials, raise it with your employer upfront, in advance, and in writing. Take the high road and you will be better off for having done so.
 
Rule No. 2: Tell your new employer about any agreements that you might have during the interview process. If you are not restricted from doing so, share a copy of the agreement with that prospective employer. No one likes surprises and by failing to inform that new employer, you are exposing it to the risk that it will be accused of interfering with any non-compete, non-solicitation or confidentiality agreement without giving it the opportunity to weigh that risk before hiring you. You are also opening yourself up to potential termination for misrepresentation by not disclosing that agreement. 
 
Rule No. 3: Do not contact or solicit any customers or fellow employees BEFORE you leave. In Ohio, for example, as well as in many other states, you have a duty of loyalty to your employer while you are still receiving a paycheck. While the law likely recognizes your right to interview with new employers, form a new company or take some other steps in anticipation of leaving, most courts frown upon any solicitation of clients or fellow employees while you are employed. Any effort to solicit or recruit customers or employees is like pouring gasoline on a fire, inflaming a potentially volatile departure to a competitor.  

Rule No. 4: Do not delete or erase anything. The cover-up is always worse than the crime. Generally, most employers won’t discover this until later but if they do, it will make you look even worse than if you took copies of anything. If the other side discovers you erased or deleted a relevant file, you can refer to rule No. 1 for how bad it makes you appear.
 
Rule No. 5: Don’t send anything to your personal email account during your final days. Even if the email is innocent or forwarding uncontroversial information, it simply looks bad. You can bet that your former employer’s lawyer will attach a sinister motive to whatever is sent.
 
Rule No. 6: Don’t back anything up. Former employees frequently claim that they need to preserve their own personal information (i.e., insurance, banking or other matters). However, other company information invariably gets copied (see No. 5 above).
 
Rule No. 7: Don’t go without legal advice. You can bet your former employer will lawyer up, so it is critical to consult with a lawyer well-versed with the law of non-competes or trade secrets in your state. Yes, this could be construed as a shameless shill for my profession but the consequences of failing to do so can be dire — simply put, if you bungle this, you could find yourself out of work for one or two years. Fortune favors the prepared and no breadwinner can afford to be out of work long today.
 
This process can be stressful but courts are more favorable to the plight of employees looking for greener pastures than in years past. A tough economy and the flexibility given to courts to be equitable have tipped the balance in favor of employees who have played by the rules.

08272012An important but often overlooked provision in many researcher and programmer employment agreements is what is commonly known as an inventorship assignment provision — a provision that ensures that any discoveries or inventions by an employee on company time are assigned to and owned by his or her employer.  There have been a number of decisions issued by courts this year involving disputes over these provisions and last month, the U.S. Court of Appeals for the Federal Circuit issued an opinion that re-affirmed the importance of these provisions, especially for future inventions.

In Preston v. Marathon Oil Co.,Case No. 2011-1013, -1026, slip op. (Fed. Cir. July 10, 2012), the Federal Circuit held that an employee agreement in which an employee  “assigns” all intellectual property to his or her employer, if properly drafted, will cover future inventions.  The case is a reminder that companies and their attorneys should make sure that their employee agreements include a similar express assignment of intellectual property consistent with the law of their state.  (A PDF copy of the opinion is attached below). 

The Facts: Yale Preston, an employee of Marathon Oil’s subsidiary, Pennaco Energy, signed two agreements that required him to assign any inventions or discoveries that (1) related to the present or reasonably anticipated business of the Marathon or (2) were made or conceived with the use of Confidential Information or any equipment, supplies, or facilities of Marathon.  The agreements provided that any invention made or conceived by Preston within one year after his departure would be presumed to have been made or conceived while he was employed with Marathon.

Marathon’s agreements allowed Preston to carve out any previous “unpatented inventions and unpublished writings” as his own property.  Under this previous inventions and writings provision, Preston simply wrote “CH4 Resonating Manifold.”  CH4 is the chemical formula for methane. Throughout the case, the parties disputed whether “CH4 Resonating Manifold” referred to the claimed inventions in the two patents that were later issued in the case.

The disputed technology concerned a system used to extract methane gas from water-saturated coal in a coal bed methane gas well.  At trial, the parties disputed whether Preston had developed the system before working for Marathon.  While Preston offered inconsistent testimony as to when he first thought of the idea, there was no dispute that Preston never “made” the invention (i.e., physically constructed the system) before joining Marathon.  Preston testified that he drew a handful of sketches before joining Marathon but claimed that he misplaced these hand-drawn sketches.

Marathon installed Preston’s system in several wells beginning in 2003 and Preston was personally involved in some of the installations.  Soon after installation of Preston’s system, Preston learned that the invention was going through Marathon’s internal patenting process.  About two months after Preston left Marathon in 2003, Preston filed his own patent application covering the system, the patent for which issued in November 2005.  In 2004, Marathon also filed its own patent application covering the system, which ultimately issued in April 2007.

The Federal Circuit’s Holding:  After protracted litigation in different forums and a certified question to the Wyoming Supreme Court, the district court found that the system was the property of Marathon.  On appeal, the Federal Circuit agreed, focusing on three questions.  First, the Federal Circuit focused on whether the provision was enforceable and supported by consideration under Wyoming law.  Noting that the Wyoming Supreme Court had found that Marathon did not have to supply any consideration beyond continued employment to Preston to support the agreements (and thus distinguishing inventorship agreements from non-compete agreements, which do require consideration in Wyoming), the Federal Circuit found the agreements were enforceable.

Second, the Federal Circuit emphasized the importance of the district court’s findings that Preston was not credible — in essence, affirming the trial court’s conclusion that he could not be believed.  Finally, under the language of the employment agreements, the Federal Circuit found that even assuming that Preston had “conceived” of the invention prior to joining Marathon, he still had not “reduced it to practice” before joining Marathon — in other words, he had not built or made the invention, which the agreements required.  It therefore rejected his claim that he had carved out the system from his employment agreements, and affirmed the trial court’s finding that Preston “had, at most, little more than a vague idea before his employment with Marathon began.”

The Takeaway:  Inventorship provisions are important provisions and may prove even more critical as courts increasingly grow wary of trade secret and confidentiality disputes.  As a result, these provisions have been the subject of a fair amount of litigation as of late.  Kenneth Vanko reported recently on the South Carolina Supreme Court’s recent decision in Milliken & Co. v. Morin, which affirmed the validity of these provisions in South Carolina.  Likewise, Brian Bialas wrote earlier this month about a Massachusetts court that enforced a hospital’s IP policy and held that a staff physician’s invention for voice training was the property of the hospital.  And earlier this year, the U.S. District Court for the Northern District of Illinois issued an important decision in a trade secret dispute between Motorola and a number of its former employees enforcing the IP ownership provisions in their employment agreements.

While companies frequently focus on trade secret claims and the contractual provisions in employment agreements that support those claims, they should not lose sight of inventorship provisions, particularly to protect themselves in disputes with researchers or programmers.  If a company has a research and development department or if its employees assist it in improving or innovating its products, those employees should have these provisions in their agreements.  Of course, the agreements need to confirm with the law of your state (California, in particular, has a specific statute addressing these provisions), so it is important that you consult counsel when adding these provisions.

For more on the Preston decision, see the articles by Foley & Lardner’s Courtenay Brinckerhoff and Hunton & William’s Daniel Vivarelli.

Preston v. Marathon Oil.pdf (189.24 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 (better late than never):  Noteworthy Trade Secret and Non-Compete Posts and Cases: 
  • CBS has dismissed its trade secret and copyright lawsuit against ABC over the “Glass House” reality show. Readers of this blog will recall U.S. District Court Gary Feess denied CBS’ request for a TRO back in June. CBS announced its decision last week and said the lawsuit was no longer necessary because its “Big Brother” show had trumped “Glass House” where it counted, in the battle for ratings.
  • Interested in the dark side of trade secrets? Set your DVR or watch Crime, Inc.’s episode on corporate espionage tonight at 9:00 p.m. on CNBC. (Thanks to Josh Durham for the reminder.)
  • “How to Protect Your IP in China? Don’t Hire Anyone,” recommends Dan Harris in his always-interesting China Law Blog. 
  • Texas federal courts are divided over whether to extend a non-compete’s duration when an employee has violated the non-compete, reports Paul Freehling in Seyfarth Shaw’s Trading Places Blog.
  • For those in Missouri, Robert Milligan has an important post in Seyfarth’s Trading Secrets Blog about the Missouri Supreme Court’s recent opinion reaffirming the enforceability of non-competes in that state. 
  • The U.S. District Court for the District of South Carolina has reaffirmed that a compilation of information can qualify as a trade secret, according to Parker Poe’s Trade Secret & Unfair Competition Reporter Blog. 
  • Burr & Forman’s Non-Compete & Trade Secrets Blog has a nice primer on the Inevitable Disclosure doctrine. 
  • “Trade Secrets: Your Secret Weapon under Patent Reform” argues Nixon Peabody’s R. Mark Halligan and Stout Risius & Ross’ David A. Haas.
  • Kenneth Vanko’s Legal Developments in Non-Competition Agreements Blog has a fine wrap-up of some noteworthy posts and articles. 
Computer Fraud and Abuse Act Posts: 
  • Yet another district court has adopted the reasoning of U.S. v. Nosal and WEC Carolina v. Miller, reports Littler’s Unfair Competition & Trade Secrets Blog. In International Airport Centers, LLC v. Citrin, U.S. District Court for the District of Minnesota Patrick Schlitz dismissed the agency’s CFAA claim, reasoning that had Congress “meant to so vastly expand the jurisdiction of the federal courts, Congress would have been much more explicit.” 
Cybersecurity Posts and Articles: 
  • “Are smart buildings the next cyber-threat?” asks TechnoLlama. 
  • “Cybersecurity Is Top of Mind for General Counsel and Co. Directors” writes Molly McDonough for the ABAJournal.
  • “Is An International Cyber Regulatory Agency Needed?” asks Richard Stiener in an article for Forbes.
  • “The Business BYO Craze: Has It Gone Too Far?” asks the HR Bartender Blog.
  • “Are Lawyers Safe Up in the Cloud? asks Martin Scarinci for the Martindale.com Blog. 
News You Can Use:
  • “Ten Tips and Tricks Every iPhone and iPad User Should Know” offers The Wall Street Journal.
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 (better late than never):   Noteworthy Trade Secret and Non-Compete Posts and Cases: 
  • Manhattan District Attorney Cyrus Vance has arrested ex-Goldman Sachs programmer Sergey Aleynikov for the alleged theft of Goldman’s proprietary code for its high frequency trading program.  Aleynikov was previously convicted by a Manhattan jury under the Economic Espionage Act but that verdict was overturned by the U.S. Court of Appeals for the Second Circuit in February.  (My take on the Second Circuit’s opinion (hint:  I didn’t agree) can be found here).  The New York Times quotes Vance as follows:  “This code is so highly confidential that it is known in the industry as the firm’s ‘secret sauce.’ Employees who exploit their access to sensitive information should expect to face criminal prosecution in New York State.  According to The Times, Vance charged Aleynikov with the unlawful use of secret scientific material and duplication of computer-related material, both felonies under New York State law. If convicted, he could serve 1 to 4 years in prison.
  • In the final chapter of another noteworthy criminal trade secret proceeding, former-Intel engineer Biswamohan Pani was sentenced to a 3 year prison term after pleading guilty to stealing Intel’s computer chip manufacturing and design secrets.  Prosecutors say the 36-year-old Pani downloaded secret documents from Intel in May 2008, shortly after he announced he was leaving to join rival Advanced Micro Devices.  Intel valued those documents at between $200 million and $400 million. 
  • And in yet another criminal trade secrets case, a former Bridgestone scientist, Xiaorong Wang, has pleaded not guilty to charges that he stole trade secrets from his former employer in Akron and then lied to federal investigators.  Wang’s trial is set for September 25, 2012. 
  • If you are advising companies in the healthcare industry, you will want to read an article by Kathryn Hacket King of Snell & Wilner about the “Enforceability and interpretation of agreements prohibiting ‘direct and indirect’ solicitation of health care employees.”  In ProTherapy & Associates, LLC v. AFS of Bastian, Inc., the Fourth Circuit not only upheld the non-solicitation provisions in question but enforced a liquidated damages clause as well. 
  • “Avoiding Trade Secret Litigation in the Life Sciences” by Choate Hall & Stewart LLP’s Eric J. Marandett and Margaret E. Ives provides some sound tips when negotiating collaboration agreements with potential partners. 
  • “Mergers & Acquisitions: Don’t Forget About Employee Compliance with Nondisclosure Agreements” advises The Michigan Employment Law Advisor. 
  • And speaking of mergers and non-disclosure agreements, the Delaware Supreme Court has issued its formal opinion affirming the Chancery Court’s injunction against Martin Marietta for breaching its NDA and using confidential information in its hostile bid for Vulcan Materials.  The Delaware Corporate & Commercial Law Blog has a post about the decision and link to the opinion.  (For more on this case, see my posts here and here). 
Computer Fraud and Abuse Act Posts 
  • Confusion over the scope of the Computer Fraud and Abuse Act continues, as there is now a split within the First Circuit according to Foley & Hoag’s Massachusetts Noncompete Blog.  The U.S. District Court for the District of New Hampshire has recently adopted the narrow reasoning of U.S. v. Nosal, thus separating itself from an earlier decision by the U.S. District Court for the District of Massachusetts, which had applied the broader rule permitting the use of the CFAA for violations of computer-use policies. 
Cybersecurity Posts and Articles 
  • “Cybersecurity Becoming No. 1 Concern for GCs and Directors” notes Catherine Dunn forCorporate Counsel. 
  • “Why It Pays to Submit to Hackers” explains Wired. 
  • “How To Create and Remember Strong Passwords” advises Larry Magid for Forbes. 
  • “Don’t forget these 5 security issues in your BYOD policy” reminds Jon Hyman’s Ohio Employer’s Law Blog. 
News You Can Use:
  • “How to make your lost phone findable” by David Pogue of The New York Times.

Last week, I wrote about the media’s scrutiny of Apple’s many trade secrets and the special challenges for any party trying to protect its trade secrets in a public proceeding, especially a high profile one generating media coverage. As my post noted, there were several media reports of preliminary rulings by U.S. District Court Judge Lucy Koh on some of the trade secrets questions raised by the parties and by Reuters, which had sought the release of some of that data. Reuters had intervened in the lawsuit and challenged a number of the parties and third parties’ claims of trade secrecy. Late last Thursday, Judge Koh issued a 29-page opinion and order formally addressing the various trade secrets claims of Apple and Samsung, as well as those of non-parties Intel, Qualcomm, IBM, Nokia and Microsoft. (A copy of the opinion is attached as a PDF below).

Judge Koh’s opinion strikes the right balance on the many trade secrets presented. Her analysis notes the historic right of public access to court documents and records and the strong presumption in favor of access unless a particular court record is traditionally kept secret. Her opinion emphasized the public’s interest in this trial and the importance of certain data being publicly available to assist in the public’s understanding of the eventual outcome. 

While her analysis is sound, the opinion avoids any bold pronouncements about the importance of trade secrets or forceful rulings regarding the intersection of trade secrets and public proceedings. As a result, her fact-based opinion, while highly visible, probably won’t have far-reaching consequences because her holdings are strongly rooted in the arguments and facts before her. Frankly, this was probably the right approach given the myriad of claims, arguments and facts at issue in this very complex dispute.
 
Apple and Samsung’s Trade Secrets: As to Apple’s many trade secrecy claims, Judge Koh ordered that evidence of Apple’s profits and other financial data would not be placed under seal. Judge Koh was unpersuaded by Apple’s claims that evidence of past profits and unit sales data could be used to meaningfully predict its future business plans that might benefit competitors. Perhaps more significantly, Judge Koh noted that Apple’s request for $2.5 billion in damages, the extreme importance of the public’s understanding of the eventual outcome and the extraordinary public interest that this trial had generated strongly weighed in favor of disclosure of this data.
 
Apple was able to preserve the trade secrecy of some information. Judge Koh did place information regarding Apple’s production and supply capacity, its source code, its licensing information and some of its marketing survey data under seal. She applied the same analysis and rationale to Samsung, which made similar requests for its confidential financial information and trade secrets.  
 
Third Parties’ Trade Secrets: Not surprisingly, Judge Koh was more sympathetic to the claims of third parties such as Intel, Qualcomm, IBM, Nokia and Microsoft, who sought to prevent disclosure of the terms of their licensing agreements to the public. She found that the “public release of such information would place these third-parties in a weakened bargaining position in future negotiations, thereby giving their customers and competitors a significant advantage.” She, therefore, sealed all information related to the pricing terms, royalty rates and payments of all current and past licensing agreements.

One interesting issue: IBM and Reuters appear to have sparred over the publication of its licensing agreement, as Reuters threatened to publish it because the agreement had been served as an exhibit on all parties. While IBM was apparently unsuccessful in getting a TRO barring its publication, Judge Koh rejected Reuters’ waiver argument, reasoning that none of the information had been publicly disseminated and that “such limited disclosure does not strip IBM’s information of its trade secret status. She firmly warned Reuters that if it did publish that information, it would be in direct violation of her order.

The Takeaway? Judge Koh’s opinion may provide some support down the road for parties trying to protect public disclosure of their trade secrets at trial, but her fact-based opinion will have limited presidential value. 

For that reason, Magistrate Clifford Shirley’s opinion in the high profile trade secret prosecution of Wycko employees convicted of stealing Goodyear’s trade secrets in 2010 probably provides the best guidance, particularly for trade secret claimants. In U.S. v. Roberts, 2010 U.S. Dist. LEXIS 25236 (D. Tenn. March 17,2010), Magistrate Shirley not only struck the right balance between the competing needs for public access and trade secrecy, but provided a template for future courts confronted with similar questions. Observing the “flat absurdity  for the trial judge to compel [Goodyear] to publicly disclose its processes in the act of protecting them from disclosure,” Magistrate Shirley balanced the needs of the criminal defendants, the public’s right to access and Goodyear’s trade secrets by limiting disclosure of the trade secrets — illicit photographs taken of Goodyear’s manufacturing operations — to display of the photos to the jury alone.

Apple v. Samsung.pdf (144.98 kb)

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well one or two that I missed from the previous week: Noteworthy Trade Secret and Non-Compete Articles, Cases and Posts:
  • A San Jose jury has awarded $112 million to networking equipment supplier Brocade Communications Systems Inc., finding that A10 Networks Inc. stole its trade secrets and infringed its intellectual property to start a competing business with ex-Brocade workers, reports Law360. Brocade’s press release also indicated that Brocade had asserted claims for patent and copyright infringement that covered all of A10’s AX Series load balancing server products.
  • In a high profile healthcare dispute, Renown Heath has reached an agreement with the Federal Trade Commission and the Nevada Attorney General’s office over its non-competes with 10 staff cardiologists it formerly employed in Nevada. Renown had cornered about 97% of the cardiology market and its acquisition of previously independent cardiology groups was perceived as likely to result in price increases to health plans and individuals paying for cardiology services in the area. The settlements will allow those cardiologists to join competing practices without penalty.
  • Many settlement agreements and consent decrees have non-disparagement provisions, but are those provisions enforceable? According to Berman Fink Van Horns’ Georgia Non-Compete and Trade Secret News Blog, they may not. In Sesolinc Group, Inc. v. Metal-con Inc., 2012 WL 2119768 (S.D. Ga. June 11, 2012), a Georgia federal court declined to approve a consent decree presented by the parties because it might entangle the court in First Amendment issues such as potentially enforcing an order forbidding constitutionally-protected commercial speech. 
  • What are holdover clauses and are they enforceable? Kenneth Vanko answers both questions in his recent post on the South Carolina Supreme Court’s decision in Milliken & Co. v. Morin upholding the enforceability of these provisions, which are designed to protect the ownership and assignability of inventions created with an employer’s confidential information after an employee’s departure.
  • Another court has signalled that circumstantial evidence of misappropriation is insufficient to overcome an employee’s denials, advises Epstein Becker’s Trade Secrets & Noncompete Blog.  In a Georgia appellate decision, Contract Furniture Refinishing & Maintenance Corp. of Georgia d/b/a The Refinishing Touch v. Remanufacturing & Design Group, the court ruled that while the plaintiff TRT produced strong circumstantial evidence that the defendant Deutsch may have misappropriated or disclosed its trade secrets, the “evidence is also consistent with the direct evidence that Deutsch did not in fact do so. The circumstantial evidence therefore has no probative value, and TRT cannot demonstrate a genuine issue of fact with regard to its misappropriation of trade secrets claim.”
  • Indiana businesses better have reasonable time, subject matter and geographic limitations in their confidentiality agreements or they may not be enforceable, warns Seyfarth Shaw’s Trading Secrets Blog. 
  • If you have clients in the financial and investment communities, you should read “For some firms, brokerage-hiring protocol no longer holds value” by Dan Jamieson for Investment News.
  • Interested in the “State of Texas Non-Competes”? Consult Rob Radcliffe’s Smooth Transitions Blog, where he has posted an article he recently wrote on the matter (the news is good for employers).
  • E. Patrick Ellisen and Daniel T. McCloskey have advice for “Protecting Confidential Information and IP Amid Employee Mobility” in an article for Corporate Counsel.
  • At long last, something upon which members of Congress can agree. Last week, the U.S. House of Representatives voted to approve H.R. 6029, the Foreign and Economic Espionage Penalty Enhancement Act of 2012, which increases the penalties under the Economic Espionage Act from the statutory maximum for economic espionage and the theft of trade secrets for the benefit of a foreign entity to 20 years from 15, raises the fine that can be imposed to a maximum of $5 million from $500,000, and adds criminal penalties for passing trade secret information that would benefit a foreign government.  A companion bill, S. 678, with similar language is under review by the Senate.
Computer Fraud and Abuse Act Posts:
  • Foley & Lardner’s Privacy & Security Source Blog is not happy about the recent decisions in Nosal and WEC Carolina in its post “De-CFAA-nating Federal Law: Recent Appeals Courts Decisions Weaken Statutory Protections Against Unauthorized Use of Electronic Data.” For the views of other trade secrets blogs on the WEC Carolina decision, see Seyfarth Shaw’s post, Fisher & Phillips’ post, Epstein Becker’s post and Littler’s post (my take can be found here). 
  • A California federal court has allowed a CFAA claim arising out of the violation of a computer use policy to go forward because the policy limited the access of the former employee, reports Eric Goldman in his Technology & Marketing Law Blog. In Weingand v. Harland Financial Solutions, C 11 3109 EMC (N.D. Cal.; June 19, 2012), the Northern District found that the reasoning in U.S. v. Nosal did not apply because the policy in question prohibited the access at issue.
Cybersecurity Posts and Articles:
  • For those interested in finding out what sank the Cybersecurity Act of 2012, there are plenty of opinions from which to choose. Steptoe & Johnson’s Cyberblog and Peter S. Vogel share their thoughts. Shockingly, The New York Times blames the Republicans while The Wall Street Journal blames the Democrats. And, as always, Catherine Dunn of Corporate Counsel has a fine piece entitled, “A Long, Hot Summer for Corporate Cybersecurity.”
  • “Protect your IP: hashing your passwords” counsels Scott Flaherty of Briggs and Morgan.
  • “‘Spearphishing’ Fraud Hooks More Victims: How cybercriminals disguise themselves as your bank, your boss, or even the IRS” advises Jen Weiczner of SmartMoney.
News You Can Use:
  • And The New York Times Bits Blog provides some advice on “What You Can Do to Better Protect Your Apple Account.”

The Apple v. Samsung case in the U.S. District Court for the Northern District of California is poised to become the intellectual property equivalent of the O.J. Simpson trial, as it is easily one of most widely followed IP dispute in years. The intense media coverage has brought an important issue to the forefront — namely, how to handle sensitive information that is bound to be included in this type of dispute. 

Apple is famously secretive, having gone so far as to build an offsite, employees-only-restaurant so competitors could not eavesdrop on its employees. As a result, one of the issues that has received the most attention is the degree to which some of Apple’s trade secrets have been disclosed at trial. Apple’s experience provides a number of lessons to companies about the challenges of protecting trade secrets in open court, especially in a high profile case. 

On Saturday, The Wall Street Journal ran an article, “Apple’s Secrets Revealed at Trial,” that was its most popular online article over the weekend. The article detailed, for example, the testimony of Phil Schiller, Apple’s senior VP of world-wide marketing, who revealed how much Apple spends on marketing the devices at issue. Schiller testified that Apple had spent $647 million advertising the iPhone in the U.S., from its release in 2007 through its fiscal year 2011. For the iPad, which was first sold in 2010, he estimated $457.2 was spent.

Some of the trade secrets disclosed ran counter to Apple’s professed marketing and business strategy. For example, The Journal described the testimony of Scott Forstall, a senior VP who oversees the software for Apple’s mobile devices, who was forced to admit that as early as January 2011, an Apple executive advocated that Apple build a tablet with a 7-inch screen. (Apple has generally disputed the appeal of devices smaller than its 9.7-inch iPad, although The Journal says there are reports that Apple is developing a smaller model). According to The Journal, Forstall described “locking down” one floor of Apple’s buildings with cameras and keycard readers to strengthen security and he admitted that Apple employees put a sign up on the front door with the words Fight Club written on it, referring to the hit movie in which characters are told that the first rule of Fight Club is not to talk about Fight Club. (For more, check out The New York Times article, “At Its Trial, Apple Spills Some Trade Secrets.”)

Apple has won some and lost some trade secret battles in the case. It tried to limit the admissibility of a marketing survey of its customers, arguing that parts of it were a trade secret, but U.S. District Court Judge Lucy Koh disagreed. In addition, Apple has attempted, with mixed success, to seal sales documents that Samsung wished to use in cross-examination. Indeed, the issue of Apple’s trade secrets has long been a pressure point in this case, as Samsung unsuccessfully sought other trade secrets of Apple in a discovery dispute last year.

The trial has also involved the possible disclosure of trade secrets of third parties. Intel and Qualcomm have both filed motions to protect information contained in their licensing agreements and have battled with Reuters over the degree of disclosure that should be provided to the media. This of course places additional pressures on Apple, as important customer or vendor relationships may be frayed as they are drawn into the litigation.

What are the lessons for a business trying to protect its trade secrets in open court?  The Apple v. Samsung dispute highlights a number of important challenges in any trial, but especially in a trade secrets trial. Here are some facts every company needs to face: 

1.  Accept that the standard is against you. Courts, especially federal courts, are generally reluctant to seal the court room and very sensitive to the need for open proceedings.  However, simply because a company seeks to protect its trade secrets does not mean it has to disclose the very trade secrets it seeks to protect, let alone other trade secrets. For an excellent analysis of the balancing that every court should apply, see Knoxville U.S. Magistrate Clifford Shirley’s opinion in U.S. v. Roberts, a high profile criminal case that involved the theft of Goodyear’s trade secrets.

2.  Be prepared to battle the media. In a high profile case, this is almost a certainty. As newspaper budgets have shrunk, a high profile trial is fertile ground for local or national coverage. However, even efforts to seal what your client might think is a low profile dispute may raise the media’s ire and provoke a battle over a protective order. Consequently, have a brief ready to go that anticipates the First Amendment issues and the need to protect trade secrecy.

3.  Choose Your Battles Wisely. Given the realities outlined above, don’t squander your credibility and resources fighting over lower level trade secrets or confidential information. Know what trade secrets are truly important and be prepared to battle over them as they arise in the case. Also, insist on an order that any confidential documents will be presented to the court first before the opposing party tries to use them in open court so that you are not closing the proverbial barn door after the horse has escaped.

U.S. Solicitor General, Donald B. Verrilli, Jr., has announced that his office has decided not to appeal from the U.S. Court of Appeals for the Ninth Circuit’s 9-2 en banc decision narrowing the scope of the Computer Fraud and Abuse Act (CFAA) in U.S. v. Nosal (for more on that announcement, see Seyfarth Shaw’s post yesterday detailing that decision). I had promised to do a recap of what others in the trade secret community and other interested commentators had to say about the decision, as well as my own take on the decision after having had the opportunity to more carefully review it and its construction of the CFAA. And, unfortunately for employers in the Ninth Circuit and especially those in California, I have concluded the Ninth Circuit dropped the ball on this one.

First a quick recap of Nosal. The federal government indicted David Nosal, a former employee of AON, for violating the CFAA because after his resignation, he persuaded other former colleagues at AON to access their computers and gather information that would be helpful to his new venture. AON had a policy forbidding the use of company computers for anything other than company business, so the government argued that Nosal and those employees had exceeded their authorized access of the protected computers in question by violating those polices. 

The district court rejected that argument and dismissed the CFAA claim. The first panel of the Ninth Circuit reversed the trial court, finding that violating a computer use policy was sufficient grounds for exceeding authorized access in April 2011. The Ninth Circuit then agreed to reconsider the panel en banc and then issued its 9-2 ruling on April 10.

What Other Commentators Think: No surprises here. Bloggers and commentators who represent employers were generally disappointed with the decision, while academics, privacy advocates and the media were generally enthusiastic about it. Of all of the fine commentary on both sides of the holding, I especially liked Kenneth Vanko’s take on the decision.  

The Trade Secret Litigator’s Take: When I first read the Nosal decision, I wanted to agree with Chief Judge Kozinski and the majority for primarily three reasons. First, like others, I was troubled by the potential for Internet Service Providers or companies like Facebook, Google and others to use their “Terms and Conditions” (i.e., the fine print accompanying each application, license or grant of access to use their site) to convert every garden-variety breach of contract action into a CFAA case. 

Second, like Kenneth Vanko, I thought that in the context of trade secret litigation, the CFAA was arguably redundant. Most employers and companies already have plenty of legal remedies under state trade secret laws, through breach of contract remedies such as breach of a non-compete or non-disclosure agreement, and under common law claims of breach of fiduciary duty and conversion.   

Third, there has also been mounting criticism of federal prosecutors for criminalizing trivial things like inadvertently scavenging for arrowheads in a national park (take a look at The Wall Street Journal’s series of articles on these and other prosecutions), and the CFAA could present yet another opportunity for an overzealous prosecutor. In that respect, the Nosal majority’s concern was not “chimercal” as Judge Kozinski noted.

Despite these leanings, when one applies a plain reading to the language of the statute, the Nosal majority simply got it wrong on two counts. (I have attached a link to the statute for everyone to see for themselves). 

There are two key provisions of the CFAA at issue. First, subsection 1030(a)(4) reads as follows:

“[Whoever] knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value, unless the object of the fraud and the thing obtained consists only of the use of the computer and the value of such use is not more than $5,000 in any 1-year period.”

The second relevant provision is 1030(e)(6) which defines the critical terms “exceeded authorized access.” It defines those words to mean “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.”

First, the underlined language “knowingly and with intent to defraud” and “by means of such conduct furthers the intended fraud . . .” obviates the majority’s concern that the statute could be used to criminalize or expose an employee for checking out ESPN at work, as such a frolic could not credibly be equated with an intent to defraud. The minority correctly criticized the majority for setting up “straw men” arguments because of the existence of that limiting language.

Second, the majority punted on the plain meaning of the language “exceeded authorization access.” When faced with prosecutor’s arguments that it would be rendering some of the language of the definition superfluous if it adopted Nosal’s interpretation (in particular, it would be ignoring the word “so”), the majority resorted to arguing that the government’s interpretation would render other provisions of the CFAA superfluous (in particular subsection 1030(a)(4)). However, as the minority pointed out, that issue or subsection was not before the majority, and the Ninth Circuit erred in entertaining these hypothetical positions to interpret what was otherwise straightforward language before it.

The decision’s impact? In the four months since Nosal was issued, its reasoning has rippled well beyond the Ninth Circuit. Two district courts in Michigan and the U.S. Court of Appeals for the Fourth Circuit in WEC Carolina Energy v. Miller, have adopted some or all of Nosal’s reasoning and have refused to extended the CFAA to computer usage policies. As I noted earlier this week, there is now a full-blown split between the circuit (the reasoning of the Fifth, Seventh and Eleventh Circuits was rejected in Nosal and in WEC Carolina). For this reason, it is disappointing that the Solicitor General did not throw his considerable weight behind an appeal to see that this split was resolved.

Nosal’s impact will be felt greatest in California, which rarely enforces non-competes. As a result, I think employers in California will feel Nosal’s brunt most because they are pretty much now limited to California’s version of the Uniform Trade Secret Act.

What can employers do? As I mentioned on Monday, the Fourth Circuit found that the policy in question in WEC Carolina only addressed “use” and did not forbid “accessing” the computer for any improper purpose. Consequently, tailoring your client’s computer use policies to forbid accessing files for any purpose beyond the employer’s business or interests could salvage a CFAA claim, at least for those in the Fourth Circuit.

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week: Noteworthy Trade Secret and Non-Compete Posts and Cases: 
  • Mitsubishi Electric & Electronics USA Inc. has persuaded a trial court to set aside a $124 million jury verdict against it arising from Grail Semiconductor Inc.’s claims that Mitsubishi breached a non-disclosure agreement by disclosing confidential information for a memory chip to an affiliate, Mitsubishi-Japan and a jointly owned Japanese company, Renesas.  Bloomberg is reporting that Santa Clara Superior Court Judge Kenneth Barnum concluded that the jury’s damages analysis was flawed but that he upheld the jury’s findings of liability.  The verdict was the 13th largest jury verdict in the U.S. so far in 2012.
  • In yet another bad faith case, Judge Jane Magnus-Stinson of the U.S. District Court for the Southern District of Indiana has imposed attorneys fees and costs against a plaintiff and its lead counsel, finding that the action was “essentially a vendetta” against the former employees “designed . . . to litigate them to death, rather than out of a genuine concern about protecting intellectual property.”  In Loparex, LLC v. MPI Release, LLC, Judge Magnus-Stinson was influenced by the fact that Loparex had filed, but quickly dismissed, an action against one of the former employees in Illinois, after warnings from the Illinois court about its concerns about Loparex’s ability to identify its trade secrets, and then refiled that action before her.  (A PDF copy of the opinion can be found below).
  • Non-competes do not violate the Texas Deceptive Trade Secrets Act, reports Gray Plant Moody.  The article details the recent decision by the U.S. District Court for the Northern District of Texas in Mary Kay, Inc. v. Amy Dunlap, 2012 U.S. Dist. LEXIS 86499 (N.D. Tex. June 21, 2012), which also rejected a challenge under the Sherman Act.
  • For those in Illinois, the Illinois Fourth Appellate District has recently applied the new analysis supplied under Reliable Fire Equip. v. Arrendondo to enforce a non-compete, reports DeBlasio Donnell’s Litigation Blog.  In Zabaneh Franchises, LLC v. Walker, the Fourth Appellate District reversed the trial court’s decision not to uphold the covenant not to compete, reasoning that the employee was only restricted from soliciting customers that she had serviced for her former employer. 
  • Oklahoma companies and attorneys interested in “Dissecting the Oklahoma Non-Compete Statute Phrase by Phrase” should consult Shawn J. Roberts’ post. 
  • For a good summary of the pending In re Certain Rubber Resins trade secret case before the International Trade Commission, see Brian Vogel’s article at Inside Counsel. 
  • Interested in finding out more about the Protecting American Trade Secrets and Innovation Act of 2012? Check out Crowell & Moring’s Mark Klapow’s article, “The Latest Attempt to Federalize Trade Secret Law,” in Law360.
  • If you are thinking of sending a cease and desist letter, you might want to consider the approach used in Jack Daniels’ splended letter, which has gone viral (it was even commented upon in The Atlantic). You will be sure to avoid the ridicule that came from the clever response to the Hopasaurus Rex cease and desist letter.
Cybersecurity Posts and Articles: 
  • If you are looking for the latest on the pending cybersecurity legislation, there is plenty to sink your teeth into. Foley & Hoag’s Security, Privacy and The Internet Blog reports on the Obama administration’s decision to throw its weight behind Senator Joseph Lieberman’s Cybersecurity Act of 2012. 
  • Also check out  The New York Times two articles, “Senators Force Weaker Safeguards Against Cyberattacks” and “Again, Wrangling Over Surveillance in the Cybersecurity Bill.”
  • For Baker & Hostetler’s Data Privacy Monitor Blog’s take on the Cybersecurity Legislation, check out its posts asking “Can National Security Trump Politics This Close to the Election?”
  • Steptoe & Johnson’s Sally Abertazzie’s E-Commerce Law Week shares her thoughts on the legislation, as well as a nice summary of the First Circuit’s recent decision in  Patco Construction Company v. People’s United Bank holding that a bank’s security was commercially unreasonable in connection with a claim over cybertheft of a customer’s funds.
  • Finally, The Washington Post weighed in last week on the legislation with its editorial entitled “Stockpiling arms against cyberattacks” and appears convinced the threat is real and that our private and public bodies need to take some action.
  • “Smartphones are becoming top targets for cyber attacks” reports MoneyWeb, particularly because they are expected to become the equivalent of wallets, replacing credit cards and cash.
News You Can Use: 
  • The Wall Street Journal’s Digits Blog cautions that “Do You Use Free Wi-Fi? It May Be Legal to Sniff All Your Data.” 
  • And for the highly paranoid, Forbes’ Andy Greenberg advises “How To Bust Your Boss Or Loved One For Installing Spyware On Your Phone.”
Loparex Order 07.31.12.pdf (109.26 kb)