Following what it described as a three year “one-man legal circus,” a Seventh Circuit panel recently affirmed a sanction award of over $440,000 in a trade secret misappropriation case, after finding that the defendant, Raj Shekar, “demonstrated nothing but disrespect, deceit, and flat-out hostility[.]” Teledyne Technologies Incorporated v. Raj Shekar, No. 17-2171, 2018 U.S. App. LEXIS 17153, at *13 (7th Cir. June 25, 2018).

Shekar worked at Teledyne Technologies as a marketing and sales manager from June 2013 until he was fired less than two years later. Following his termination, Teledyne sued him for allegedly stealing trade secrets, among other common law and statutory claims. The district court granted a temporary restraining order and a preliminary injunction, ordering Shekar to turn over all of his electronic devices for inspection. Shekar did not comply with any of the court’s orders, and even produced what the court found to be a “fake” hard drive that appeared “totally blank” and “fresh from the electronics store.” As a result, the district court found Shekar in civil contempt and, when Shekar failed to purge himself of contempt, the district court ultimately issued a default judgment and awarded attorneys’ fees and damages totaling more than $441,000.

The Seventh Circuit found the sanction award appropriate, and acknowledged that the large amount determined was “due solely to Shekar’s decision to drag opposing counsel (not to mention the court) through a disingenuous legal battle rather than comply with the court’s clear order.” The panel found no abuse of discretion in the district court’s calculation of attorney’s fees or in the amount of damages awarded.

In so ruling, the court sent a very strong message that attempting to abuse the judicial system in an effort to stall or prolong litigation may result in costly consequences. Parties who face obstructionist behavior during trade secret litigation may want to consider raising a motion for sanctions when appropriate.

Jim Flynn, an attorney in Epstein Becker & Green’s Newark, New Jersey office, recently addressed in separate forums the delicate balance that trade secret owners and their counsel must strike when litigating over trade secrets and confidential information. First, Mr. Flynn moderated a panel discussion among trade secret litigators (including one from Beijing) at the American Intellectual Property Law Association (“AIPLA”) Spring Meeting in Seattle, Washington. His May 16th AIPLA session was entitled “A Litigator’s Guide to Protecting Trade Secrets During Litigation,” and program materials included his written paper on the Catch-22 aspects noted above. Additionally, Mr. Flynn published on May 23, 2018 an International Lawyers Network IP Insider article entitled The Catch-22 Of Litigating Your Trade Secrets Case Without Revealing The Secrets Themselves that addressed these topics in further detail.   As he pointed out in that article:

“You mean there’s a catch?”

“Sure there’s a catch,” Doc Daneeka replied. “Catch-22. Anyone who wants to get out of combat duty isn’t really crazy.”

There was only one catch and that was Catch-22, which specified that a concern for one’s own safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn’t, but if he was sane, he had to fly them. If he flew them, he was crazy and didn’t have to; but if he didn’t want to, he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle.

[Heller, Catch-22, at 52 (1999, S &S Classics Edition))]

Trade secret litigators (and especially trade secret trial attorneys) and their clients let out a similar whistle often—Because “trade-secret litigation” is an oxymoron in many ways. The very desire to protect one’s trade secrets, i.e. to keep them secret, requires disclosing them to a certain extent in certain ways to certain people (in other words making them less secret). Thus, the whistle is usually more regretful than respectful, as those forced to litigate to defend their trade secrets face a classic Catch-22 scenario. Rather than whistling a happy tune to overcome the fear of losing one’s trade secret protection, these litigants and litigators are whistling past the graveyard, knowing that all manner of frights, scares, and dangers—real and imagined—lurk in the pleading, discovery, motion and trial phases of such litigation. The goal here is give such litigants and litigators a few hints for making that a safer trip.

Read the full article here.

A recent decision from an Arkansas appellate court raises two important issues of enforceability of non-competition agreements: (1) the enforceability of a non-compete after expiration of the contractual non-compete period and (2) the applicable standard for determining whether a valid protectable interest exists.

In Bud Anderson Heating & Cooling, Inc. v. Neil, the plaintiff Bud Anderson Heating and Cooling, Inc. (“BAHC”), a HVAC vendor and service provider, appealed a lower court’s denial of BAHC’s petition for a one-year prospective injunction seeking to enforce an expired non-compete agreement with defendant Neil, which was allegedly violated when Neil joined a competitor located within BAHC’s territory and subsequently successfully solicited a BAHC customer.  Before addressing the merits of BAHC’s complaint, the appellate court considered—and ultimately rejected—Neil’s argument that BAHC’s appeal was moot since the injunction sought extended beyond the contract’s one-year-from-date-of-termination period.  In so holding, the court relied on (1) caselaw from other jurisdictions finding that extension of a noncompetition period is within a court’s broad equitable powers and (2) application of the “capable-of-repetition-yet-evading-review exception to the mootness doctrine,” previously unapplied in this context.

Turning to the merits of the appeal, the appellate court found that the trial court should have applied an “able to use,” not an “actual use” standard in determining whether to grant BAHC’s injunction. Under an “able to use standard,” a petitioner need only demonstrate the ability of a former employee to use the former employer’s proprietary information to obtain an unfair competitive advantage; proof that the employee actually used such information is not required.

The Bud Anderson decision is noteworthy in two respects.  First, Arkansas employers may be able to enforce non-competes after expiration of the non-compete period, thereby achieving longer non-compete periods that would ordinarily be deemed by courts unreasonable and invalid.  Second, Arkansas employers seeking to enforce non-competes can take advantage of an “able to use” standard, which is easier to meet than an “actual use” standard.  However, given that the Bud Anderson decision presents not one but two issues of first impression, it would not be surprising if the case were to ultimately end up before the Arkansas Supreme Court.

Notwithstanding these developments in Arkansas, employers should note that other courts have reached different conclusions on both of these issues. As always, it is critical to know the state-specific law in the applicable jurisdiction.

A recent decision from the Northern District of California, Magic Leap, Inc. v. Bradski et. al., shows that employers must meet a high standard when filing a California Code of Civil Procedure Section 2019.210 disclosure statement under the California Uniform Trade Secrets Act (“CUTSA”). See California Civil Code § 3426 et seq. The disclosure statement, which does not have a counterpart in the federal Defend Trade Secrets Act, requires a plaintiff to “identify the trade secret with reasonable particularity” before it can conduct discovery of the defendants’ evidence. See California Code of Civil Procedure § 2019.210. The sufficiency of these disclosure statements is often hotly contested in litigations under CUTSA.

While there is no bright-line rule governing how much specificity should be in a Section 2019.210 disclosure statement, courts have explained that the trade secret must be described with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons who are skilled in the trade, and to permit the defendant and the court to ascertain the boundaries within which the secret lies. See Altavion, Inc. v. Konica Minolta Systems Laboratory, Inc. (2014) 226 Cal.App.4th 26, 43-44. The Northern District’s Magic Leap decision reinforces the importance of emphasizing a trade secret’s novelty in a Section 2019.210 disclosure statement under the CUTSA.

As described in its pleading, Magic Leap is a start-up that is developing a “head-mounted virtual retinal display, which superimposes 3D computer-generated imagery over real world objects.” It brought suit against two former high-level employees and their venture, alleging misappropriation of its trade secrets, among other claims. When Magic Leap submitted its latest Section 2019.210 disclosure, defendants Adrian Kaehler and Robotics Actual, Inc. moved to strike, contending that Magic Leap provided only vague, conceptual descriptions of its technology, and merely described well-known, well-studied, and obvious issues in highly technical fields. Magic Leap argued that, among other things, the defendants confused Section 2019.210’s disclosure requirement with litigating the ultimate merits of the case. It also argued that the defendants confused trade secrets with patents, which must be novel and inventive.

On June 9, 2017, a California federal magistrate judge granted the defendants’ motion to strike, ruling that Magic Leap’s disclosures “in totality fail to disclose the asserted trade secrets with ‘reasonable particularity.’” The judge allowed Magic Leap to amend its disclosures in order to identify its asserted trade secrets with greater specificity.

Although at this time the magistrate judge’s reasoning in Magic Leap is not public record, the ruling is another example of a court requiring a more exacting level of particularity from plaintiffs bringing a CUTSA claim. The ruling also emphasizes that, even if extensive measures are taken to protect information, the novelty of the underlying trade secret may affect a court’s analysis of the viability of a CUTSA claim. Tips for employers to prevent and protect against trade secret misappropriation in California were recently discussed in EBG’s Take 5 Newsletter.

Consider the following scenario that was the premise of the book Charlie and the Chocolate Factory (1964), and later adapted into the classic film Willy Wonka & the Chocolate Factory (1971): your company (Willy Wonka Chocolates) is in the candy business and develops an idea for an everlasting gobstopper (a sucking candy that never gets smaller).  Anticipating substantial profits from the product, the company designates the everlasting gobstopper formula as a trade secret.  As in the book and film, a rival chocolate company (Slugworth Chocolates) seeks to steal the trade secret formula in order to develop and market a competing gobstopper.

While Charlie and the Chocolate Factory is premised on a local competitor seeking to steal trade secrets for its own business, this post focuses on an adaptation to the story based in today’s global economy, and more specifically, the actions a company may take within the United States and abroad to protect against trade secret misappropriation.

Most U.S. companies are now aware of the protections afforded by the Defend Trade Secrets Act of 2016, 18 U.S.C. §§ 1836, et seq. (the “DTSA”).  Of most importance is that the DTSA created a uniform legislation that provides companies with a private civil cause of action for trade secret misappropriation.  As a result of enactment of the DTSA, a company that is the victim of trade secret theft has standing to file a civil suit in federal court.  The company may also report the theft to the United States Department of Justice because, in certain cases, the theft of trade secrets constitutes a crime under the federal Economic Espionage Act, 18 U.S.C. §§ 1831, et seq. (the “EEA”).

Due to jurisdictional limitations, however, the DTSA and EEA may not provide adequate protection when there has been a misappropriation of trade secrets in the international arena. Companies should, therefore, be aware of other methods to protect against trade secret misappropriation abroad.  One method is through the United States International Trade Commission (the “ITC”), an independent, quasi-judicial federal agency with broad investigative responsibilities on matters of trade. Pursuant to the Smoot-Hawley Tariff Act of 1930 (the “Act”), the ITC has jurisdiction to investigate and can render unlawful, the importation of goods stemming from “unfair methods of competition and unfair acts in the importations of articles … in the United States.”  The ITC has determined that trade secret misappropriation is a form of unfair competition that is protected under Section 337 of the Act, and the United States Courts of Appeals for the Federal Circuit has affirmed this interpretation in two separate cases. See Sino Legend Chemical Co. v. ITC, 623 Fed. Appx. 1016 (Fed. Cir. 2015), cert. denied, 196 L. Ed. 2d 517 (2017); TianRui Group Co. Ltd. v. ITC, 661 F.3d 1322, 1327 (Fed. Cir. 2011).

In Sino Legend Chemical Co., employees had been working for a U.S.-based company at a facility in China.  The employees stole trade secrets from the company and brought them to Sino Legend Chemical Co., a competitive Chinese company that began developing a competitive product and sought to sell it in the United States.  The U.S. company filed a complaint with the ITC, and after investigation, the ITC instituted a 10-year ban on the importation of products resulting from trade secret misappropriation that had occurred entirely outside the United States.  On appeal, Sino Legend urged the Federal Circuit to overturn the ITC’s decision, arguing that Section 337 of the Act should not apply because the trade secret misappropriation occurred entirely outside the United States.  The Federal Circuit disagreed and affirmed the 10-year ban instituted by the ITC, and in 2017, the United States Supreme Court declined review.

A company should be aware that even if a theft of trade secrets occurs abroad, the company may seek relief through the ITC to prevent the importation of competitive products into the United States that are developed as a result of the stolen trade secrets. Of course, relief through the ITC is limited because the ITC cannot stop the offending company that stole the trade secrets from marketing a competitive product in countries outside the U.S.  There remain, however, other methods to protect against the misappropriation of trade secrets abroad.

Similar to the DTSA, the European Union (“EU”) enacted its own framework for the protection of trade secrets via a directive that went into effect on June 8, 2016. The EU directive provides protection of “undisclosed know-how and business information against their unlawful acquisition, use and disclosure.”  Although the EU directive does not establish criminal sanctions, it does provide for civil means through which victims of trade secret misappropriation can seek protections, such as: (i) allowing for temporary restraining orders and injunctive relief; (ii) removal from the market of goods manufactured based on stolen trade secrets, and (iii) monetary damages.  Pursuant to the EU directive, each member country must incorporate the required provisions into its laws by June 9, 2018.  Importantly, the EU directive contains only the minimum requirements for the protection of trade secrets; however, each EU member country may elect to enact stronger protections.  It remains to be seen whether the EU countries will enact provisions more stringent than the EU directive.

Companies need to protect themselves from the Slugworths of the world. In Charlie and the Chocolate Factory, Slugworth was a local competitor that sought to steal Willy Wonka’s trade secrets, but in today’s global economy, Slugworth can steal trade secrets from anywhere and can also market competitive products throughout the globe.  As a result, companies need to be well versed in the various global protections against misappropriation of trade secrets.  Use of counsel knowledgeable of these various protections is critical to ensure that all avenues of relief are considered.

With the law’s first anniversary in the rear view mirror, defendants have established a viable defense to claims arising under the Defend Trade Secrets Act (“DTSA”) – a plaintiff may be precluded from bringing a claim under DTSA if it only alleges facts that show acts of misappropriation occurring prior to May 11, 2016 (the date of DTSA’s enactment).   In the last few months, four different courts have tackled this “timing defense,” and defendants raising it in motions to dismiss DTSA claims have encountered mixed results.

In Brand Energy & Infrastructure Servs. v. Irex Contr. Grp., No. 16-cv-2499, 2017 U.S. Dist. LEXIS 43497 (E.D. Pa. Mar. 23, 2017), a Pennsylvania federal court rejected the defendants’ attempt to invoke the timing defense because the plaintiff’s amended complaint alleged various times after the enactment of the DTSA that the defendants “used” the plaintiff’s alleged trade secrets.  The court also noted the plaintiff’s inclusion of allegations in the amended complaint showing that “to this day, the defendants continue to ‘obtain access to [its] confidential and proprietary business information ….”  Based on this pleading, the court held that the plaintiff could pursue its DTSA claim.  Similarly, in AllCells, LLC v. Zhai, Case No. 16-cv-07323, 2017 U.S. Dist. LEXIS 44808 (N.D. Cal. Mar. 27, 2017), a California federal court denied the defendants’ motion to dismiss a DTSA claim because “even if [defendants] copied and thus acquired the alleged trade secrets before May 11, 2016, [the plaintiff] has sufficiently alleged that there was at least use of the trade secrets after that date.  Hence, the Act applies.”

In Molon Motor & Coil Corp. v. Nidec Motor Corp., No. 16-cv-03545, 2017 U.S. Dist. LEXIS 71700 (N.D. Ill. May 11, 2017), a plaintiff’s DTSA claim survived dismissal, overcoming the defendant’s argument that “no acts occurred after the effective date of the Act.”  The court held that the plaintiff’s allegations regarding the inevitable post-enactment disclosure of its trade secrets to the defendant by its former employee were sufficient to state a plausible DTSA claim:  “[i]f it is plausible that some of the alleged trade secrets maintain their value today, then it is also plausible that [defendant] would be continuing to use them.”  The court noted, however, that further discovery would be needed to determine whether post-enactment disclosure of the trade secrets was in fact inevitable.

By contrast, a California federal court granted a defendant’s motion to dismiss where a complaint lacked sufficient allegations regarding the timing of the alleged appropriation in Cave Consulting Grp., Inc. v. Truven Health Analytics Inc., No. 15-cv-02177, 2017 U.S. Dist. LEXIS 62109 (N.D. Cal. Apr. 24, 2017).  In Cave, the plaintiff alleged that the defendant acquired trade secrets and used them in a 2014 client meeting, but that conduct predated the enactment of the DTSA.  The court held that plaintiff had failed to make any “specific allegations that defendant used the alleged trade secrets after the DTSA’s May 11, 2016 enactment.”  Because the plaintiff failed to allege that any “postenactment use occurred,” the plaintiff had not stated a plausible DTSA claim.

These decisions illustrate that the likelihood of success of the timing defense largely is a matter of drafting, and provide an important takeaway for both sides of a trade secrets dispute. A plaintiff should be mindful in drafting its pleading to include factual allegations showing that the defendant’s misappropriation occurred (or inevitably will occur) after DTSA’s enactment.  The defendant, on the other hand, should carefully scrutinize the complaint to determine whether a timing defense applies.

NuScience Corporation is a California corporation that researches, develops and distributes health and beauty products, including nutritional supplements. In 2009, NuScience obtained by default a permanent injunction in a California federal court against Robert and Michael Henkel, the nephew of a woman from whom NuScience purchased the formula for a nutritional supplement, prohibiting them from selling or marketing NuScience’s trade secrets. Before the federal court injunction was entered, NuScience terminated the employment of David McKinney, NuScience Vice President of sales and marketing. McKinney signed a separation agreement wherein he agreed to maintain the confidentiality of certain NuScience-related matters. What followed might be good book material.

In June 2010, NuScience received an email from a third-party which included an email string between Robert Henkel and McKinney that caused NuScience to conclude Robert Henkel was violating the federal court injunction. Based on the emails, NuScience sued McKinney and Robert Henkel in California Superior Court for misappropriation of trade secrets, among other claims. (“NuScience I”) Robert Henkel again did not appear and the court entered a default against him in March 2011.

McKinney appeared in the state court action and was represented by Stephen E. Abraham. McKinney filed a motion to compel further discovery responses from NuScience and a motion for sanctions against NuScience which NuScience initially opposed. But before the motion was heard, NuScience filed a request for dismissal without prejudice. McKinney responded to the NuScience voluntary dismissal with a motion for attorney’s fees and costs under the Uniform Trade Secrets Act, California Civil Code Section 3426 et seq. (“UTSA”). The trial court granted the motion for attorney’s fees, concluded the record showed subjective bad faith on NuScience’s part, and awarded McKinney the $32,842.81 he requested.

NuScience moved for reconsideration contending that after it took Henkel’s default, Henkel called NuScience’s attorney and said NuScience “better back off and leave [them] alone” and that Henkels thereafter began posting threats to publish NuScience’s trade secret formula on the Internet. NuScience’s attorney reported the threat to the FBI, which informed him that it had assigned an agent to investigate and the pending investigation should remain confidential. NuScience asserted that Henkel then told NuScience’s attorney that he “would release NuScience’s formula to the world unless [NuScience] dismissed this lawsuit” and “cease all enforcement of the federal judgment against the Henkels.” NuScience asserted that only later did the FBI “reluctantly acquiesce[ ]” and allowed NuScience to discuss the investigation.

The court denied the motion for reconsideration.

NuScience appealed the attorney’s fees award and the Court of Appeal reversed the decision of the lower court. The Appellate Court found that the email exchange between McKinney and Henkel on which NuScience I was premised was evidence that they were engaged in internal experimentation with NuScience’s trade secret formula and further stated McKinney had been using the samples. The court found this was sufficient evidence of actual or threatened misappropriation under the UTSA. The court further found that the email exchange was evidence that McKinney intended to use the NuScience customer list to market to buyers in Asia and that since McKinney was unlikely to have derived information about customers interested in the formula other than through his employment with NuScience, a trier of fact could conclude McKinney intended to use the information he derived from NuScience’s customer list to compete.

The day after the trial court awarded fees under the UTSA in NuScience I, McKinney filed a malicious prosecution action against NuScience and was represented again by Stephen Abraham (“NuScience II”). NuScience filed a motion to strike under California’s Anti-SLAPP (Strategic Litigation Against Public Policy) statute. The trial court granted the motion, and rejected McKinney’s claim that the dismissal prior to the hearing on the discovery motion was a favorable determination on the merits, noting “undisputed evidence… that the case was dismissed in response to extortionist threats.” The court awarded NuScience attorney’s fees of $129,938.75. The order was affirmed on appeal.

NuScience then filed an action against McKinney, Abraham and his law firm, and two other individuals in March 2014 alleging malicious prosecution and intentional interference with contractual relations against Abraham. Abraham responded with special motions to strike the causes of action.

Abraham attacked the intentional interference cause of action under the California Anti-SLAPP statute on the grounds that the conduct Abraham was alleged to have engaged in – the filing of declarations in federal and state court lawsuits that were signed by McKinney – is protected conduct. The trial court, and subsequently the Court of Appeal, concluded there could be no breach of contract absent a disclosure or public disparagement and the disclosure/disparagement NuScience alleged was Abraham’s public filing of McKinney’s declarations. As such, it was protected activity.

The trial court also granted Abraham’s SLAPP back action in the malicious prosecution claim. The Court of Appeal agreed, finding that NuScience had not demonstrated that the underlying malicious prosecution claim was initiated with malice because, in part, the malicious prosecution was alleged against a former adversary’s attorney, and not the former adversary. The court held that malice harbored by an adversary may not be attributed to its attorney. NuScience tried to identify additional evidence of Abraham’s own malice on appeal asserting, in part, that Abraham “told NuScience that he intends to destroy NuScience,” but the court pointed out that the actual evidence stated “NuScience will be out of business in six months” and “NuScience will be done in six months,” which the court stated suggested, at most, that Abraham believed that litigation would be successful and that NuScience’s demise was imminent, “not that he intended to cause its demise.” The Court of Appeal affirmed the order dismissing the claims against Abraham and affirmed the award of Abraham’s attorney’s fees of $99,595.00.

While the initial trade secret dispute between the parties here was relatively straightforward, this case is worth highlighting because of the extensive litigation that followed. Despite the company’s legitimate interest in protecting its threatened trade secrets, there were certainly unintended consequences as a result of the company’s vigorous advocacy to protect its interests. NuScience became embroiled in litigation spanning the course of the next eight years, itself even becoming the defendant to a lawsuit. This serves as a cautionary tale and a reminder of the inherent risk to engaging in litigation.

The case is NuScience Corp. v. Abraham, B264334 (Ca. Ct. of App. 2/1/17).

Before the Defend Trade Secrets Act (“DTSA”) became federal law in the spring of 2016, Supreme Court watchers would likely care little about prospective justices’ approach to trade secrets matters.  Such matters were the province of state law, and the phrase “trade secret” might be avoided, even in passing, in the opinions of the Supreme Court for entire terms or more.  But with DTSA cases being reported with increasing regularity, differences in interpretation are beginning to emerge.  Supreme Court attention may follow.

Because DTSA says that “misappropriation of a trade secret” can involve unlawful acquisition of a trade secret, or improper disclosure of a trade secret, or unauthorized use of a trade secret, the impact of the statute’s May 11, 2016 “effective date” has been the subject of some debate.  For instance, should the act apply to a trade secret unlawfully acquired on May 10, 2016 but improperly used or disclosed on May 12, 2016 or thereafter?  Likewise, what if a trade secret unlawfully acquired and used before May 10, 2016 is used again after May 11, 2016?  These issues have come up in cases in March and January 2017 in the Northern District of California, in March 2017 in the Eastern District of Pennsylvania, and earlier in the Middle District of Florida.  The answers and analysis found in these opinions is not always entirely consistent, which suggests that this issue under DTSA  as well as others will continue to be litigated.

Should differences arise between circuits, the Supreme Court might be called upon to interpret the reach of DTSA. In that vein, one might wish to look at the Court’s newest member, Neil Gorsuch, and his opinions while a 10th Circuit judge in Storagecraft Technology Corp. v. Kirby, 744 F. 3d 1183 (10th Circuit 2014), and in Russo v. Ballard Medical Products, 550 F. 3d 1004 (10th Circuit 2008). Each reveal interesting elements of Judge — now Justice — Gorsuch’s approach to trade secrets matters.

Storagecraft proves interesting opinion on several levels.  That case involved the Utah trade secrets act in a case coming to the 10th Circuit after being brought in the federal district court as a matter of diversity jurisdiction.  In addressing one of the appealing defendant’s arguments, the Gorsuch opinion rejected the notion that one need show that a defendant facilitated another’s commercial gain to recover under the statute:

Continue Reading Court’s Newest Member Has Trade Secret Protecting Track Record

Two recent decisions by the Fifth Circuit Court of Appeals clarify the intersection between federal copyright law and state trade secret shapiro law. In GlobeRanger Corp. v. Software AG United States of America, Inc., 836 F.3d 477 (5th Cir. Sep. 7, 2016), the Fifth Circuit rejected an appeal in which the defendant argued that a plaintiff’s trade secret misappropriation claim was preempted by federal copyright law. Just four months later, in Ultraflo Corp. v. Pelican Tank Parts, Inc., No. 15-20084, 2017 U.S. App. LEXIS 509 (5th Cir. Jan. 11, 2017), the Fifth Circuit upheld a district court’s dismissal of a plaintiff’s state law claim of unfair competition by misappropriation, holding that the state law claim was preempted by federal copyright law.   What accounts for these seemingly inconsistent conclusions over two strikingly similar state law claims? The difference lies in the elements needed to establish each state law claim.

In its September 2016 GlobeRanger decision, the Fifth Circuit heard an appeal after a jury awarded plaintiff GlobeRanger a $15 million jury verdict following a trial in the United States District Court for the Northern District of Texas on its state trade secret misappropriation claim. The central allegation in that case was that competitor Software AG misappropriated GlobeRanger’s radio frequency identification (RFID) technology – most commonly used in electronic readers in tollbooths, like EZ-Pass – after it had taken over Software AG’s subcontract with the U.S. Navy to implement the technology.  Following the verdict, Software AG appealed, contending that federal copyright law preempted GlobeRanger’s state trade secret claim.

The Fifth Circuit explained in GlobeRanger that the different spheres of intellectual property can sometimes overlap and, as the software code at issue illustrates, the same intellectual property can be protectable under copyright laws or subject to trade secret protection.  If the creator of the IP seeks copyright protection, it obtains the exclusive right to make copies of the work for decades but must publicly register the work before enforcing that right through a lawsuit.  The supremacy of federal copyright law means, however, that state protection of copyrightable subject matter must sometimes defer to its federal counterpart.  As the Fifth Circuit explained, two conditions must be met in order for the Copyright Act to preempt a state law claim. First, “the work in which the right is asserted must come within the subject matter of copyright.” Second, “the right that the author seeks to protect . . . [is] equivalent to any of the exclusive rights within the general scope of copyright.”  This inquiry asks whether the state law is protecting the same rights that the Copyright Act seeks to vindicate or against other types of interference. “If state law offers the same protection, then the state law claim is preempted and must be dismissed.”

Applying this articulated two-part test to the facts in GlobeRanger, the Fifth Circuit found that the first condition was satisfied (because Software AG conceded its software code was copyrightable) but the second condition was not.  This is because while federal copyright law and Texas trade secret misappropriation both involve copying, trade secret misappropriation involves an extra element:  the state law prevents any improper acquisition through a breach of a confidential relationship or improper means.  Accordingly, the Fifth Circuit ruled that GlobeRanger’s trade secret claim was not preempted because it was required to establish an “extra element” in order to establish a copyright violation:  that its “protected information was taken via improper means or breach of a confidential relationship.”  Significantly, the Fifth Circuit noted, ten other circuit courts that have considered this issue agreed that trade secret misappropriation claims are not preempted by the Copyright Act for this same reason.

Revisiting the issue of preemption just four months later in Ultraflo, the Fifth Circuit reached the opposite result when faced with a different state law cause of action.  In this case, Ultraflo asserted an unfair competition by misappropriation claim under Texas law alleging that competitor Pelican stole its drawings showing how to design butterfly valves used in the transportation industry and then used them to make duplicate valves.  The United States District Court for the Southern District of Texas dismissed Ultraflo’s Texas state law claim, finding that the general scope of federal copyright law preempts the claim.  Ultraflo appealed, challenging the ruling.  As it did in GlobeRanger, the Fifth Circuit utilized the two-part test to determine whether the Copyright Act preempted the state law cause of action. First, it found that Ultraflo’s design drawings were “undoubtedly” within the scope of federal copyright, as were the valve designs themselves even though they were not actually protectable under the Copyright Act. Second, unlike in GlobeRanger, the Fifth Circuit found that the second condition was met because Texas’s unfair competition by misappropriation cause of action does not afford protection materially different from federal copyright law.  The elements of Texas’s unfair competition by misappropriation claim are: (1) the creation by a plaintiff of a product through extensive time, labor, skill, and money; (2) the use of that product by defendant in competition with plaintiff; and (3) commercial damage to the plaintiff. In other words, unlike the traditional trade secret misappropriation claim asserted in GlobeRanger, the unfair competition by misappropriation claim asserted in Ultraflo lacks the “extra element” necessary to bring it out of the general scope of copyright.  Therefore, the claim was preempted.

These two Fifth Circuit decisions demonstrate that parties should pay attention to the possible application of copyright preemption to claims involving alleged theft of information or unfair competition. While most such claims will not be preempted, Ultraflo illustrates that some will be.

LightsWhether you are a young child missing teeth, or a grown-up taking account of her life, or Santa Claus himself checking up on everyone else’s life, many of us make lists at holiday time.  They can be lists of gifts we want, or those we need to get, or people we wish to see or write to, or things we need or want to do before the end of the year.  Sometimes they are just lists of things that happened this year or that we want to happen next year.  Certainly there are lots of “Top Ten” holiday lists.  This one may be neither an exception nor exceptional, but here is a “Top Ten List of Holiday-Related Trade Secret/Non-Compete Cases”:

  1. “It may be better to be naughty than nice”—In Ivy Mar Co., Inc. v. CR Seasons Ltd., 907 F. Supp. 547 (EDNY 1995), the Court denied plaintiff a preliminary injunction in a non-compete/trade secret case in large part because of plaintiff’s months-long delay in bringing the action. This occurred notwithstanding plaintiff’s claim that it only delayed filing the action so as not to ruin Christmas—“they delayed bringing this motion because they feared defendant Jetmax would not ship goods to its customers during the Christmas season,” or so they claimed.
  2. “Or maybe not.”—In Agero Inc. v. Rubin et al., an appellate court in Massachusetts affirmed dismissal of plaintiff’s claims, holding that Agero failed to establish that two of the defendants, Timothy Schneider and Matthew Capozzi, owed Agero a duty of loyalty.  Though the Court when on at some length as to the reasons it had for affirming the result against Agero, what was perhaps most telling was the Court’s taking the time to express a reason that it was not relying on:
    • We need not comment on the defendants’ suggestion that Agero brought this complaint against them, despite Agero’s size and apparent lack of interest in pursuing ViewPoint, to send a message to other Agero employees who might entertain thoughts of leaving and lawfully competing. That Agero reportedly sued Schneider on Christmas Eve, when Schneider’s oldest child was five years old, might lend credence to the charge. However, we do reiterate that noncompetition agreements would be the better practice to achieve that goal. Based on the record before us, Agero’s claims were properly dismissed.
  3. “Check your list twice”—If you think departing employees had accomplices or other help, don’t just add a bunch of John Does to your complaint without defining and describing who those co-conspirators are.  Otherwise you run the risk of having those claims dismissed and those avenues of discovery shut down in your non-compete or trade secret case just as happens in other types of cases, such as Southwest Materials Handling Co. v. Nissan Motor Co., 2000 U.S. Dist. LEXIS 16275 (N.D. Tex. 2000), where the court said, with respect to civil conspiracy allegations against John Doe defendants, that “[t]his Court is not in the position of channeling or divining potential co-conspirators who are presently as tangible as Santa Claus, the Easter [B]unny or the Tooth Fairy.”  I guess the court did not find the testimony of Frank Church credible.
  4. “What is the secret to making a good snowman?”—Though there is now a patent on for an apparatus for facilitating the construction of a snow man/woman out of snow, making snowman holiday decorations has also spawned litigation like the case of  Gemmy Industries Corporation v. Chrisha Creations Limited, Dist. Court, SD New York 2004. In Gemmy, plaintiff claimed that defendant’s marketing of an inflatable snow man, among other causes of action, violated plaintiff’s trade secrets, especially after defendant hired plaintiff’s former sales representative.  But the court concluded that even plaintiff did not treat the snowman and its marketing as involving trade secrets since plaintiff “did not request and [the sales representative] did not execute any non-disclosure agreement, non-compete agreement or confidentiality agreement prior to acting as a sales representative for [plaintiff].”
  5. “‘It was always said of him, that he knew how to keep Christmas well, if any man alive possessed the knowledge.’”—Dickens’ closing words in A Christmas Carol were a celebration of the Christmas spirit, and sharing but not everyone wants to share the knowledge they have about Christmas traditions.  While some have asked, we think tongue in cheek, whether Christmas may be patented, it does appear that at least some aspects of our Christmas traditions can be protected as trade secrets.  In the case of IPI, INC. v. Monaghan, 2008 Ohio 975 (Court of Appeals, 6th Appellate Dist. 2008), an Ohio Court found that plaintiff had stated a claim for relief, and could proceed to trial, on a claim that plaintiff’s unique methods of “‘event’ photography” such as involved in its “Santa Claus programs” could involve protectable trade secrets under the Ohio Trade Secrets Act, where plaintiff had alleged that “it developed, inter alia, ‘confidential and specialized techniques for event photography, a business marketing plan for its franchisees, a training program, and proprietary and confidential software that it makes available to its franchise systems’” and that “appellees/cross-appellants misappropriated these systems, techniques, etc., that is, its alleged trade secrets. If it is shown that these are truly trade secrets and that appellees/cross-appellants misappropriated the same, IPI would be directly injured by that misappropriation.”
    • Not all courts, however, are willing to give litigants credit for the alleged uniqueness of their holiday-related ideas. This can be seen in Oxenhandler v. Dime Sav. Bank of Brooklyn, 33 Misc. 2d 626 (NY Supreme Court 1962), where plaintiff was denied relief in his trade secret/business information claims against the financial institution to which he had suggested “a ‘Chanukah Savings Plan’ which could be made available to [the bank’s] Jewish depositors in the same manner that a Christmas Club had been available to the general public.”  In fact, the Court concluded that “plaintiff’s idea was neither new, novel, original nor concrete,” and that the Court “cannot perceive how plaintiff on any theory in law can succeed in this action.”  New settings for Christmas Savings Clubs faired no better as alleged trade secrets or protectable ideas either, as seen in Moore v. Ford Motor Co., 43 F. 2d 685 (2nd Cir. 1930). There, plaintiff Moore sought to protect the idea of Christmas Club accounts as a way to save for down payments on automobiles.  The Court concluded that there was nothing secret or unique about such a plan, and that “idea was old in Christmas Savings clubs” for some time.
  6. Beware the office Christmas party.”—Normally this is a phrase you see in HR guides, but it can also hold true in the non-compete area of the law as seen in Plastic Surgery Associates Of Kingsport Inc. v. Pastrick, a 2015 decision of the Tennessee Court Of Appeals 2015. In this case, the court held that the defendant was indeed an employee and an owner of the plaintiff medical practice, and subject to the express terms of his employment agreement (including its non-compete provisions) and liable as an owner for a portion of the practice’s debts.  The court rested its conclusions of ownership on three key facts, one of which was that defendant “hosted a Christmas party at his home that was billed to the company.”  Unless that party was epic, it probably would have been cheaper to pay for the punch and appetizers out of his own pocket.  It would have eliminated that troublesome fact and helped him avoid the necessity of disgorging $246,633.00.
  7. Christmas cards, why bother?”—In Vizant Technologies, LLC v. Whitchurch, 97 F. Supp. 3d 618 (ED Pa. 2015), plaintiff brought a ten-count complaint against defendant alleging misappropriation of trade secrets in violation of the Delaware Uniform Trade Secrets Act (“DUTSA”) as well as two violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), breach of contract, defamation, tortious interference with existing and prospective relationships, abuse of process, conversion, fraud, and civil conspiracy. Finding that defendant was using confidential information and otherwise acting tortiously in contacting plaintiff’s (i.e. her former employer’s) employees, officers, and directors, and with their family members, and in interfering with plaintiff’s business with customers.  This resulted in Whitchurch’s being enjoined from carrying through on her stated “intention to send a ‘Christmas card direct mail piece’” out further criticizing Vizant and its principals to that same audience.
  8. New Year’s resolutions should be thought out.”—Many times, employees will decide to leave for new employment after the upcoming holidays pass.  So it was in Alexander & Alexander v. Wohlman, 578 P. 2d 530 (Wash: Court of Appeals, 1st Div. 1978), where “[b]etween Christmas 1975 and New Year’s Day 1976, the defendants decided to leave the employment of A&A.”   The problem was not their resolve to leave, but the things that they did before they left:
    • On Friday afternoon, January 16, 1976, after Mr. Maier, the manager of the Seattle office, had left for the weekend, they submitted their letters of resignation and took with them personal possessions and certain schedule books for use as forms in the conduct of their business. Between January 12 and 16, 1976, each of the defendants personally contacted clients of theirs to inform them of their decision to leave A&A and the formation of the new firm, Wohlman & Sargent, Inc. On January 17 and 19 defendants sent letters to clients requesting broker-of-record letters.
    • The appeals court found that such conduct did violate their legal obligations to A&A, and found them liable for damages.
  9. Sometimes you get coal in your stocking.”—Courts often work through the holidays, despite the general impression to the contrary. For instance, in Direx Israel, Ltd. v. Breakthrough Medical Corp., 952 F. 2d 802 (4th Cir. 1991), plaintiff obtained a preliminary injunction from the District Court against the defendant who, when he was discharged, illegally appropriated and exploited the plaintiffs’ trade secrets, and were using such trade secrets to manufacture, with intent to market, a machine competitive with the plaintiffs’ product.  The 4th Circuit reversed the grant of the preliminary injunction, but did so “without prejudice to the right of the plaintiffs to renew such motion on the basis of any new or additional facts that may have occurred since the grant under review.”  The appellate court’s decision issued on December 24th.  Likewise, in Viad Corp. v. Cordial, 299 F. Supp. 2d 466 (WD Pa. 2003), the Court issued a Christmas Eve denial of a preliminary injunction request in case in which Defendants Cordial and Hellberg were alleged to have violated their employment contracts, which prohibited them from competing with plaintiff directly or indirectly, or aiding its competitors, for a period of one year following the termination of their employment, though in the holiday spirit the Court pointed out that plaintiff and defendants had been “represented by counsel who tried the matter skillfully and efficiently.”
  10. Sometimes, though, you get what you asked for.”—In Devos Ltd. v. Record, Dist. Court, ED New York 2015, on the other hand, the court issued on Christmas Eve a wide ranging injunction against defendants in a trade secret misappropriation and unfair competition case even though the plaintiff had been indicted and had been placed on a federal exclusion list that meant that no federal agency can do business with plaintiff and that any pharmaceutical distributor who receives federal funding, including Medicare and Medicaid (which includes almost every distributor of pharmaceuticals), also cannot do business with plaintiff. Concluding that an indictment was just an accusation of being naughty rather than a finding of same, the court issued the injunction.  There was no mention of where Santa had come out when double checking Devos’ placement on his list.

Happy holidays.