Posts Tagged: "trade secret"

Trade secrets in the United States have a fascinating history, during which courts shaped the common law tort as a way to enforce confidential relationships. Now the legal framework is statutory, with some version of the Uniform Trade Secrets Act (UTSA) in effect in every state except New York, and with uniformity in the federal system thanks to the Defend Trade Secrets Act of 2016 (DTSA). Nevertheless, the law continues to evolve much as it did a century ago—that is, through the opinions of judges deciding individual cases on their facts. What follows is a selection of those decisions, along with other resources, which have come out during the past year and which I believe provide helpful guideposts about important aspects of trade secret law and practice.

On July 20, the U.S. Court of Appeals for the Federal Circuit (CAFC) issued a non-precedential decision in Siegler v. Sorrento Therapeutics, Inc. in which the appellate court affirmed a series of rulings on motions in a copyright and trade secret lawsuit filed in the Southern District of California. Although the Federal Circuit panel in the case “[understood] that Siegler feels unfairly treated as a result of the events she outlines, she was treated more than fairly by the district court,” said the CAFC, and the court did not err or abuse its discretion in reaching decisions to deny several motions for default judgment and reconsideration, as well as dismissing a pair of amended complaints filed by Siegler.

On May 11, 2016, President Obama signed into the law the Defend Trade Secrets Act (DTSA) which extended the Economic Espionage Act of 1996 (EEA), which provides a broad basis for civil federal jurisdiction for the theft of trade secret thefts. Thus, trade secret owners can sue in federal court so long as there is a connection between the trade secret and interstate or foreign commerce. However, the DTSA does not preempt states laws and parties can still bring an action under a state’s version of the Uniform Trade Secret Law. Two recent reports highlight a number of significant findings that are relevant to companies looking to protect and defend their trade secrets: In April 2020, finance consulting firm Stout Risius Ross, LLC published its 2020 “Trends in Trade Secret Litigation Report (the SR) and Lex Machina released its 2020 Trade Secret Litigation Report (LMR), in which it summarized data from the past decade and compared it against data from the previous year’s report.

In a precedential opinion, Intellisoft v. Acer, the Court of Appeals for the Federal Circuit (CAFC), in a decision authored by Judge Dyk, held that the United States District Court for the Northern District of California (the district court) erred in refusing to remand a case where removal was improper under 28 U.S.C. § 1441 and §1454… Despite Acer’s contentions, the CAFC found that Intellisoft’s trade secret misappropriation claim did not “necessarily” raise patent law issues that would result in district court original jurisdiction. The CAFC first noted that ownership of a trade secret under state law does not require proof of patent ownership.

Under normal circumstances, infringement and misappropriation of the intellectual property (IP) rights of others are subject to civil liability under U.S. federal (and some states’) law; the remedies for those whose rights have been violated typically include money damages or some form of equitable relief, such as an injunction. However, sometimes the conduct of offenders is so egregious and the remedies so inadequate that pursuit of a private cause of action is insufficient to make IP owners whole. To make matters worse, civil remedies do little to deter further infringement or misappropriation on the part of individuals and entities with more than enough money to game the system. Known as efficient infringers, according to some IP practitioners, they have mastered the business practice of paying out as little in damages as possible and refusing to negotiate licenses with IP owners, all the while bullying IP owners into spending their much smaller fortunes in order to defend their IP rights or to forfeit them—the end result sometimes being the invalidation or cancellation of their IP. Accordingly, lawmakers have enacted legislation with the goal of creating true deterrents against infringement and misappropriation by imposing criminal sanctions on a narrow set of conditions associated with infringement and misappropriation. However, the law does not criminally punish infringement of a particular type of IP: patents.

Although every case had its own special facts reflecting unique personalities, technologies and business models, one necessary element was present in every single case. Somebody had done something stupid. And they still do. Sometimes it’s about what people do when getting ready to leave their job and go into competition. They brazenly solicit customers or foment discontent among the staff they want to recruit. They use the company’s computer system to research and prepare their business plan. They download thousands of confidential files they’re not supposed to have anyway, and then try to cover their tracks by using specialized software – I’m not making this up– called “Evidence Destroyer.”

It’s football season, so of course we should be talking about beer. Specifically, beer secrets. For fourteen years James Clark had an enviable job at Anheuser-Busch, where he had access to the brewer’s confidential recipes. For unexplained reasons he resigned. Instead of joining a competitor, he went to see a lawyer about planning a class action against his former employer for “intentionally overstating the alcohol content” of the company’s “malt beverages.”… Anheuser-Busch sued him for misappropriation of its secrets for making beer.

Andy Bitter, a former sports journalist covering the travails and triumphs of the Virginia Tech football team, was sued last month by his former employer, a local newspaper, for trade secret theft. According to the plaintiff Roanoke Times he was obligated by the company’s employee handbook to turn over all company property, and this necessarily included the Twitter account he had used to stay in touch with his 17,000+ followers… In spite of the mess it created, the Roanoke Times has reminded us of some important questions for industry in the information age. Who owns social media accounts? What role do they play in building competitive advantage? And how should companies manage their use?

Trade secret holders must take reasonable precautions to maintain the secrecy of their secrets, such as keeping such information on a “need-to-know” basis. Companies should have clear IP, confidentiality, and employment agreements describing which types of information are considered trade secrets. These agreements should also describe an employee’s responsibility for maintaining the secrecy of such information. In spite of reasonable precautions by a trade secret holder, bad actors may maliciously misappropriate trade secrets.

Sinovel encouraged him to leave AMSC, promising to pay him a million dollars over five years (along with an apartment, and, reportedly, a prostitute). His advance was only 15,000 euros, but it did the trick. Karabasevic resigned, but his supervisor asked him to stay on for a while, with full access to the company’s systems. This allowed him time to create a bootleg version of the AMSC controller software, and to transfer it to his future employer in China. This was the software that evaded the AMSC technicians’ diagnostic tools and allowed the windmills to keep turning when they should have turned off. It would be some months before the company learned about their former employee’s treachery, but in the meantime it had lost almost 90% of its revenue, shed a billion dollars in shareholder equity, and had to lay off 700 employees.

The Lex Machina report supports the notion that trade secret litigation has ramped up in U.S. district courts in the time since the passage of the DTSA. Between 2009 and 2016, trade secret suit filings generally remained within a range of 860 cases per year and 930 cases per year. In 2017, however, U.S. trade secret case filings saw an increase up to 1,134 cases filed. Through the first half of 2018, 581 trade secret cases have been filed, putting this year on pace to slightly exceed the number of trade secret cases filed in 2017.

Generally, a breach of confidence under English law does not give rise to criminal liability (and the recently implemented Trade Secrets Directive only addresses civil remedies for misappropriation of trade secrets). Sometimes the conduct giving rise to the breach may constitute an offense in its own right (for example an offense under the Computer Misuse Act 1990) but in the absence of such a scenario sanctions will be limited to inter partes remedies. However, as recently seen, if an order for inter partes relief is breached, criminal sanctions may still be imposed following a finding of contempt of court.

This is where the drama begins its teaching. Title Source believed its own narrative, in which it was a victim of HouseCanary’s breach… Why didn’t Title Source see the potential disaster when deciding whether to sue? The answer almost certainly lies in the emotional content of disputes where information has been shared between companies. The relationship starts, as it must, with declarations of trust on both sides. So when things start to go downhill, disappointment morphs into loathing and a sense of victimhood. Each side, anxious to see its own behavior as fully justified, develops a committed perspective.