Speculative Damages Are Not Recoverable for Misappropriation

Imagine that a managerial-level employee decided that he would like to compete with his employer and, to do so, this required him copying a bunch of information that his employer maintains concerning the costs of starting up and running the business, procuring supplies, servicing customers, and other financial estimates. Imagine, too, that the managerial-level employee's plan is to build a plant to make these competitive products. Imagine further that the managerial-level employee even typed his business plan up to get financing for that idea in furtherance of this misappropriation scheme. Last, imagine he got caught before he could get the plan in motion - before he could build the plant or manufacture the competitive product. Accepting that the aforementioned conduct constitutes a misappropriation of trade secrets, was the former employer damaged such that they could recover money in their suit against the former employee?

That's the issue the United States Court of Appeal for the Fifth Circuit addressed in a case called Carbo Ceramics, Inc. v. Keefe, 2006 WL 197340 (5th Cir., January 26, 2006). Carbo Ceramics proved everything above in the underlying trial. Carbo even had an expert economist come in to court and testify that from Mr. Keefe's own documented prospectus and estimates, Mr. Keefe was going to have revenues in the new business of $238,500,000.00 over ten years - or the estimated life of the manufacturing process trade secret. The expert then estimated that a good portion of that revenue would be attributable to use of the trade secret and that this percentage, reduced to present value, resulted in a present value damage claim of $3.9 million.

What's the problem? Problem is that Mr. Keefe never built the plant or produced a single competitive product by the time of trial. On appeal, Carbo Ceramics argued this didn't matter. The Fifth Circuit, though, disagreed. The Court noted that "any damage model based on speculative revenues and operating profit from an unbuilt plant, is in and of itself, inherently speculative." Thus, Mr. Keefe wins that matter on appeal.

THE LESSON? There are some legal wrongs (theft of a trade secret) that do not result in any remedy from the legal system except for injunctive remedies. You must be able to prove actual damages to obtain actual damages. In other words, betting the farm on an expensive piece of litigation designed to recover money from the other side is not always a wise bet. Perhaps the better course is to keep the farm and bet on the value of an injunction from the court stopping the competition prospectively. It is never unwise to consider alternatives to money damages in these matters.

Your Economic Espionage Act at Work for You in Ohio

From the Akron Beacon Journal, the story of the arrest of a man from Ohio accused of sending his employer's trade secrets including price lists, cost lists, copies of internal e-mail, customer trip reports, purchase specifications and supplier information to a competitor in the hydraulic gear pump industry, Dosco GPM Holdings of South Africa. The man, Jack Buffin, was employed by a company named Permco of Streetsboro, Ohio.

Buffin's attorney, Larry Zuckerman of Cleveland, declined comment except to say a "plea agreement" has been filed. But Assistant U.S. Attorney Justin J. Roberts said he could not confirm that.

Court Date Set in Google Trade Secrets Dispute

Slashdot.com reports that Google's attempt to limit the government's subpoena regarding its search records -- which Google claims are trade secrets -- will be heard in San Jose, California federal court on February before U.S. District Judge James Ware. Judge Ware is an appointee of Bush I and a 15-year veteran of the federal bench.

In the meantime, expect Congress to hold hearings on the issue and for the public debate to continue.

FBI Helping Businesses Protect Trade Secrets

From the Birmingham (Ala.) Business Journal, an article on a new FBI initiative to help U.S. businesses and universities prevent foreigners from stealing sensitive technology and trade secrets. The article quotes Kevin Favreau, chief of the FBI's domain support section, who is heading up an effort by the FBI "to help businesses and universities assess their vulnerability to intellectual property theft and then take action to plug any potential leaks."

As might be expected, "the agency's top priority is protecting new weapons systems and other technology with national security implications," but the program appears to go beyond that. According to the article, "businesses of any type or size can contact their local FBI field office and get a self-assessment tool that can pinpoint where they're vulnerable."

Favreau will appear with Joan Myers, president and CEO of the North Carolina Technology Association, at an upcoming security conference in Wilmington, N.C.

We'll try to get more information on that conference and the FBI's self-assessment tool.

More on Google's Trade Secrets Concerns

From Adam Liptak and the New York Times (registration req'd), an article concerning why the Google flap with the government relates less to the privacy of Google users and more Google's concerns about its trade secrets. According to article, "the case itself, according to people involved in it and scholars who are following it, has almost nothing to do with privacy. It will turn, instead, on serious but relatively routine questions about trade secrets and civil procedure."

Google's main argument in objecting to the government's subpoena was that its "highly proprietary" trade secrets could be jeopardized.

There's still very little information about what trade secrets are at issue or even what categories of trade secrets may be involved.

Trade Secrets and Tennis Shoes? (Pacer Req'd)

A new case from the federal court in the Southern District of Indiana, The Finish Line, Inc. v. Foot Locker, Inc., 2006 WL 146633 (Jan. 18, 2006), concerned trade secrets claims in the context of a dispute between two athletic shoe retailers and their on-going battle for talented managerial personnel. In the dispute, Finish Line claimed that Foot Locker misappropriated a district manager contact list and a "Rolling Operating Forecast." In both cases, the court ruled, Finish Line's claim was deficient.

With respect to the manager list, the court held it was not a trade secret because it contained "nothing more than the district managers' names, addresses and telephone numbers." That information, in addition to be "readily ascertainable through proper means," was not the subject of reasonable means to ensure its secrecy. Among other things, it was not marked confidential and an outside vendor was on the distribution list.

The claim regarding the Rolling Operating Forecast fared no better. The court ruled that it was insufficiently detailed to have independent economic value and, like the manager, was not appropriately protected.

Let the free market in $180 sneakers reign.

Business Liability Insurance and Trade Secrets Claims - Are You Covered?

When a new employer gets sued for trade secret misappropriation and employee raiding the allegations of the complaint often recite that "Defendants targeted, solicited and sought the patronage of Plaintiff's customers while using competitively sensitive information misappropriated from the Plaintiff." If the new employer has a general liability policy covering its business, that same policy often has a provision covering "advertising injury" that the business may be accused of or responsible for.

Query then: if the new employer stands accused in civil litigation of "targeting, soliciting or seeking the patronage" of the former employer's customers, does their "advertising injury" clause kick in and entitle them to a defense and indemnity in the trade secrets misappropriation case?

That was the issue the United States District Court for the District of Minnesota considered on January 19, 2006 in its opinion captioned Imaging Alliance Group, LLC v. American Economy Insurance Company, 2006 WL 145428 (D. Minn.). Seems Imaging Alliance recruited twelve of IKON Office Solutions' employees and then went after IKON's customers after hiring the twelve. After that "employee raid," IKON sued Imaging Alliance and the twelve for, among other things, trade secret misappropriation. And IKON alleged, as the former employers usually do, that the effort included "targeting, soliciting and otherwise seeking the patronage of" IKON's customers. Although the insurance company originally "tendered a defense" to Imaging Alliance, about a month and a half into the IKON litigation the insurance company advised Imaging Alliance "we don't think there is coverage here" and denied further defense to Imaging Alliance. The new employer incurred about $175,000 in legal fees defending itself, settled the case with IKON, and then sued the insurance company for refusing to defend and indemnify them under the "advertising injury" clause of the policy.

Both Imaging Alliance and the insurance company moved for summary judgment. The Court, apparently not agreeing with Imaging Alliance that "soliciting" and "advertising" mean the same thing, granted summary judgment to the insurance company. We'd bet this one still smarts for Imaging Alliance - but you have to hand it to their attorneys, as this was a creative claim to get an insurance company on the hook for what was allegedly some competitively suspect misdeeds.

Ninth Circuit Clarifies Trade Secrets Damages Law

In a recent unpublished decision, B. Braun Medical, Inc. v. Rogers, 2006 WL 92879 (9th Cir. Jan. 13, 2006), the Court of Appeals for the Ninth Circuit clarified the law of damages under the California Uniform Trade Secrets Act. The court, in reversing the trial court's reduction of compensatory damages awarded by the jury, ruled that California allowed a trade secrets plaintiff to recover both its actual damages and the defendant's unjust enrichment "as long as there is no double counting." Moreover, the defendant's unjust enrichment -- generally considered its profits from the misappropriation -- need not be entirely traceable to the misappropriation providing there is a causal nexus between the profits and the use of the trade secrets.

Only when a plaintiff can demonstrate niether actual damages nor unjust enrichment does the California act provide for a third form of recovery based on a "reasonable royalty."

The ruling by the Ninth Circuit clarifies that the way is open to significant recoveries using two different types of calculation. Because the California Uniform Trade Secrets Act is similar to Acts adopted in many other states, this ruling may have traction outside California.

Google Resists Justice Dep't Subpoena on Trade Secrets Grounds

From the Pittsburgh Post Gazette, an article on how Google's decision to resist a Justice Department subpoena for data on what people search for on the Web puts the company in a contrary position to its biggest competitors, Yahoo, AOL and MSN. On the one hand, the company is contending that compliance would reveal its trade secrets. On the other hand, the article contends, Google is trying to create a perception among its users that it won't simply turn over their personal information regarding searches to the government.

One Internet marketing consultant is quoted as saying that the company might be using the decision as a publicity ploy, holding out until the government changes the wording enough on its request to allow Google to claim to protect user data while still handing it over.

Surfboards and Trade Secrets?

From I-Newswire.com, Power Ski International, Corp., the developer of the PowerSki Jetboard announces that it has filed a lawsuit against competitor Nova Communications, Ltd. and others in California state court alleging numerous causes of action, including misappropriation of trade secrets and RICO violations.

The complaint alleges that Nova, its former CEO, its current CEO, and others, including former Power Ski employees, conspired and used stolen proprietary information to design a substantially similar competing surf board known as the "X-Board." The company is seeking "damages no less than $112 million." Big money, dude.

The Press & Trade Secrets -- The New York Times Wants Yours

According to Reuters, the New York Times is suing in state court in Texas to get confidential documents of medical device maker Guidant. That company faces numerous product liability lawsuits related to a July 2005 recall of its defibrillators.

The action seeking the disclosure was announced by a Texas attorney who represents two plaintiffs in product liability cases against Guidant.

He claims that "these documents are not trade secrets, only evil secrets."

Although it's not entirely clear from the context of the article, it appears that this may be another case where the press -- if not working directly in league with plaintiffs' attorneys -- is at least serving their purpose by seeking disclosure of trade secrets.

Former Corning Employee Pleads Guilty to Selling Trade Secrets to Taiwanese Competitor

From Newsday: A former Corning Inc. employee pleaded guilty Tuesday to stealing trade secrets for making ultrathin glass used in flat-panel televisions and computers and selling them to a rival business in Taiwan, PicVue Electronics Ltd.

The employee, Jonathan Sanders, 37, worked at a Corning glassmaking plant in Harrodsburg, Ky. He pleaded guilty to a felony charge of conspiring to commit trade secret theft, which carries a maximum penalty of nine years in prison. He will be sentened on April 18.

The matter came to light when a potential vendor for PicVue recognized the blueprints as Corning's and referred the matter to the FBI.

Employment Contract's Attorney's Fee Provision - No Damage But Big Fees

The Supreme Court of Virginia just considered an interesting question - can a party to an employment agreement allowing attorney's fees in litigation "relating to" the employment agreement be awarded substantial attorney's fees if the jury awards them NO DAMAGES after finding the other party only technically breached the agreement? In the case of Ulloa v. QSP, Inc., --- S.E.2d ----, 2006 WL 69203 (Va.), Virginia's high court held yes. This case should send some shivers down the spines of employees who don't read their employment agreements closely.

Mr. Ulloa was apparently a successful salesperson for QSP. He was subject to an employment agreement with QSP that contained restrictive covenants including 12-month confidentiality covenants, non-solicitation covenants, and non-compete covenants. After his employment terminated, QSP alleged he violated the restrictive covenants by leaking confidential customer information to his new employer and also targeted those customers with solicitations prohibited by the agreement. The agreement also provided for attorney-fee shifting to Ulloa "by reason of any action relating to this Agreement." Yikes! After significant litigation that appears to have generated huge attorney's fees, the parties submitted their issues to the jury, one of which was "did Ulloa breach the employment agreement?" QSP had other claims that were not breach of contract claims, including a misappropriation of trade secrets claim and a business conspiracy claim. The jury found that Mr. Ulloa HAD breached his employment agreement's restrictive covenants but found as well that QSP was not damaged by these breaches. Regardless, QSP asked the court to award it it's attorney's fees - of $691,099.15! In a move that surely left Mr. Ulloa gasping, the trial court granted them to QSP and Mr. Ulloa took an appeal.

When the Supreme Court of Virginia got ahold of the case it was asked to review the propriety of the award of almost $700,000 against Mr. Ulloa. This court split the baby in its decision but it is clear that QSP got the better half of the baby - the court held that QSP was entitled to its attorney's fees from Mr. Ulloa that related to the breach of contract claims, regardless of the jury's determination that QSP wasn't damaged. The court also noted, however, that not all of the $691,099.15 related to the breach of contract claims and that some must have went toward proving the misappropriation of trade secrets claim and the business conspiracy claims. Thus, the court kicked the case back down to the trial court to determine what amount of those fees actually went to work done to prosecute the breach of contract action.

This must be a major-league blow to Mr. Ulloa and his attorneys. They wanted to argue "hey, this isn't fair, they didn't even prevail" but that was not the standard set by the agreement to trigger attorney's fees shifting to Mr. Ulloa. The agreement provided that if Mr. Ulloa "breached the agreement" then he would be responsible for QSP's attorney's fees "in any action relating to the agreement." As you can see, the agreement didn't say QSP had to win damages - and it only implies that QSP actually had to prove that Mr. Ulloa breached the agreement.

THE LESSON? Employees really have to scour these attorney's fee shifting provisions and review them with counsel. We'd bet Mr. Ulloa had no idea he was on the hook for these fees. We'd also bet he would've gladly traded the couple thousand dollars in attorney review and advice costs at the negotiation stage of that agreement for his ultimate predicament - having to pay $700,000 to his former employer's attorneys and maybe just as much to his own. We have no idea whether this decision will bankrupt Mr. Ulloa but those numbers are not chump change for even the highest of the high paid operators. An ounce of prevention was surely worth a pound of cure.

Trade Secrets and the Professor

From the Hartford Courant, a story about a company's lawsuit against a former University of Connecticut professor claiming that he improperly disclosed company trade secrets concerning research he did for it on "a compound that prevents a slimy, protective film from forming over bacteria."

According to the Courant, "Sequoia Sciences Inc. of San Diego alleges that Thomas K. Wood, a professor of chemical engineering, disclosed confidential information about the compound at conferences in violation of an agreement it had with the University of Connecticut."

Wood, now a professor at Texas A&M, is being represented by the Texas Attorney General which is first seeking to dismiss the claim on venue grounds.

Wood claims that the information was inadvertently disclosed at a conference in a footnote he overlooked that was left un-redacted.

As with the conflicts arising between trade secrets law and public disclosure laws, there is also always the prospect of conflicts between trade secrets law and academics' need (or desire) to publish the results of their research and, even more broadly, with academic freedom.

Expect more news on this story.

Trade Secrets Protection for an RFP? (Pacer Req’d)

A recent case from the Southern District of Ohio, Curcio Webb LLC v. National Benefit Programs Agency, Inc., deals with the issue of trade secrets protection for an unlikely classification of material, an RFP. The case concerned competing employee benefits consultants. The plaintiff submitted its RFP’s to numerous providers with both a confidentiality provision and a copyright notice. The RFP at issue fell into the hands of its competitor, the defendant, which then used it as the basis of an RFP it later prepared.

Plaintiff brought a complaint on multiple grounds including copyright infringement, false designation of origin under the Lanham Act, misappropriation of trade secrets under the Ohio Act and under the common law, and unfair competition and misappropriation of proprietary and confidential business information under the Lanham Act and the common law.

With regard to trade secrets, the court ruled first that the common law trade secrets claim was preempted by the Ohio act. The court next refused to grant summary judgment for either party on the statutory trade secrets claim. Concerning plaintiff’s contentions, the court held that the claim that the RFP derived independent economic value from the RFP was not backed up by sufficient evidence at the summary judgment phase to prove that fact successfully.

In addition, the Court identified a factual issue as to whether Plaintiff made reasonable efforts to maintain the secrecy of its RFP. The question of whether the provisions in the RFP, and specifically the language restricting a recipient-provider's use and disclosure of the document, constituted a valid unilateral contract could not be resolved at the summary judgment stage.

Judge Posner on Trade Secrets

A new case from the Seventh Circuit, Confold Pacific, Inc. v. Polaris Industries, Inc., gives Judge Posner a crack at trade secrets jurisprudence.

The case concerned defendant's alleged copying of plaintiff's container design. The district court ruled that plaintiff took no steps to protect its design by contract and plaintiff was forced to concede that its designs were not trade secrets.

Even though the case did not turn on the issue of trade secrets, Judge Posner was able to analyze the term and its underlying concepts in his usual trenchant way:

"ConFold believes mistakenly that a trade secret is a property right in the same sense in which a person has a property right in his mattress. A property right in the latter sense is a right good against the whole world, which a trade secret is not, because it is perfectly lawful to 'steal' a firm's trade secret by reverse engineering."

Instead,

"A trade secret is really just a piece of information (such as a customer list, or a method of production, or a secret formula for a soft drink) that the holder tries to keep secret by executing confidentiality agreements with employees and others and by hiding the information from outsiders by means of fences, safes, encryption, and other means of concealment, so that the only way the secret can be unmasked is by a breach of contract or a tort."

Thus,

"In general, if information is not a trade secret and is not protected by patent, copyright, or some other body of law that creates a broader intellectual property right than trade secrecy does, anyone is free to use the information without liability."

Expect to find these quotations showing up in defendant's briefs and court opinions for years to come.

Stricter Prima Facie Case for Showing Use of Trade Secrets

From Mondaq (free registration required) and Irene Kushner, a lawyer at McDermott Will Emery, a discussion of the recent Sixth Circuit decision in Stratienko v. Cordis Corp., and the requirment that more than access and similarity must be shown to establish that a defendant used trade secrets.

In the case, plaintiff claimed unsuccesfully that defendant's device used his trade secrets.

Departing Employees Who "Prepare" a Little Too Well to Compete

Those of you who consider trade secret issues and the departing employee situation know that a good number of states provide departing employees with a limited privilege to make preparations to compete while they are still employed - assuming they do so on their own time and doing so does not force them to enter into actual competition with their employer while they are still working. Some common examples of the limited privilege include signing a lease agreement, setting up a corporation or partnership, arranging for phone service and business cards, etc. This privilege, though, is limited and misappropriation of confidential or trade secret information belonging to the employer is not privileged activity.

The United States District Court for the District of the District of Columbia in a case captioned PM Services Co. v. Odoi Associates, Inc., 2006 WL 20382 (D.D.C. January 4, 2006) acknowledged some of these limitations on this privilege in its decision denying summary judgment to both plaintiff and defendants. Seems there was some evidence that the departing employees may have come close to violating their duty of loyalty to PM Services in their copying and retention of information relating to their soon-to-be-former employer and this evidence was sufficient to let the case go to a jury. In an upcoming post we will identify some reported cases that address what information courts say departing employees can, and cannot, take with them on their way out the door.

Wal-Mart Trade Secrets Breach Leads to Jail

From the Benton County (AK) Daily Record: News of an action by Wal-Mart and EMC against a former employee of a contractor who was working on a data storage and movement project for Wal-Mart. Wal-Mart claims the contractor sent data to e-mail addresses which are believed to be his home e-mail address.

The suit accuses the employee of sending at least 20 separate emails between Dec. 17 to Dec. 23 to those addresses. The emails contained information and data file attachments that are allegedly proprietary and confidential Wal-Mart information and also contained software scripts and other files that are allegedly proprietary to EMC and trade secrets.

The contractor was jailed on Thursday, January 5 for failure to turn over his computer as ordered by the court.

The lesson: Don't mess with Wal-Mart in Circuit Court in Bentonville, Arkansas.

More on Prior Restraint of Publication of Trade Secrets

From the San Jose Mercury News: More on the prior restraint story published here yesterday. The two sides are now looking to reach an "amicable settlement," probably as a result of the plaintiff recognizing that the order preventing publication of the alleged trade secrets overreaches on First Amendment grounds.

California Court Bars Publication of Trade Secrets

From the Associated Press: Into the already volatile conflict between trade secrets and public records law, a California court has lobbed in the First Amendment and prior restraint. A San Diego Superior Court issued an ex parte temporary order barring the San Diego Reader, a free weekly, from publishing details about a synthetic blood substitute product being developed and tested by Northfield Laboratories Inc. of Evanston, Illinois on the grounds that the information in question constituted trade secrets.

In the lawsuit, the company said it "would lose considerable competitive advantage gained at the expense of 20 years of research and development" if its trade secrets were disclosed.

The paper had obtained the information from a local hospital at which trials of the product were being conducted.

Orders forbidding publication – so called "prior restraints" – are extremely rare and disfavored by courts attuned to First Amendment considerations. Expect this order not to be the last one issued in this case.

Banjo Pickin' Trade Secrets

Okay, we lied. Bela Fleck is a great banjo picker and one of this blog's editors is a mediocre banjo picker and it seems to the latter that the former has some kind of trade secret. Mr. Fleck provides an interesting interview, too - no trade secrets revealed but you can discern some of the ingredients to his success in his interesting responses.

Illinois Court: Trade Secrets Must Receive Heightened Protection (Pacer Req’d)

In Exhibit Works, Inc. v. Inspired Exhibits, Inc., federal Judge Holderman of the Northern District of Illinois ruled on December 21, 2005 that information downloaded by a departing employee who later set up a competing business did not qualify as trade secrets under the Illinois Trade Secrets Act.

The information at issue, which included customer information, invoicing policies, labor rates, design charges and other things, was password protected on plaintiff's computers but received no greater protection than any other information – including some information publicly-available – on those computers. For that reason, the court held, plaintiff failed to present evidence that it took reasonable steps to protect the information, and, the court said, the failure to provide any heightened protection discredited the claim that the information was trade secret information at all.

Further Details in California Criminal Trade Secrets Case

More details on a criminal case reported last month regarding an employee who left Marvell and went to work for a competitor, Broadcom. According to Linux hardware news site, LinuxElectrons, the indictment alleges that the employee committed computer fraud by downloading dozens of files from Marvell's extranet containing proprietary and trade secret information about Marvell's switches and transceiver products. On two later occasions, he downloaded even more containing confidential and trade secret information about Marvell's products.

If nothing else, the indictment demonstrates the importance of controlling access to company extranets containing trade secrets information.