Secrecy at Apple

As some of you know, the Wall Street Journal ran a recent piece on the hyper-tight secrecy that Apple maintains at its facilities and in connection with new product launches. We thought you'd like to see a piece in the Mac Observer regarding their take on Apple's tight-lip strategy. We know this - Apple's efforts places it in much better standing before a court of law in misappropriation cases in being able to proffer evidence of using "reasonable efforts to maintain the information's secrecy." Secrecy comes at a cost but Apple is paying that cost and doing it well.

Have a great weekend.

More From Our Canadian Friends

From Reuters, via the Scotsman (which bills itself as the National Newspaper of Scotland), another article concerning the latest annual report of the Canadian Security Intelligence Service (CSIS) claiming that "foreign countries are seeking to manipulate Canada's large immigrant populations to obtain intelligence and technological secrets."

According to the Report, "countries enlist or coerce the cooperation of their citizens who are visiting Canada, such as students and scientists, exchange personnel, members of delegations, employees of state-owned corporations, and business people."

Canada, the Report says, is particularly vulnerable because it is one of the few developed nations still seeking to attract immigrants and has significant ethnic minorities from China, India, Italy, Ukraine, Russia and Britain among others. The U.S., it would seem, is in a similar boat.

Although China is not singled out, the implications are clear.

The question continues to be is Canada overstating the threat of trade secrets theft from immigrants and foreign nationals or is the U.S. the country with its head in the sand?

DOJ's 2006 Progress Report on Efforts to Protect Intellectual Property Rights

United States Attorney General Alberto Gonzalez published a progress report on June 20, 2006 highlighting the DOJ's efforts in investigating and prosecuting instances of intellectual property theft of U.S.-based intellectual property assets. You can find the synopsis of the progress report in the link provided above and the actual progress report in that document.

Department of Justice's Cybercrime Outline

We've commented, and written published articles, in the past about the federal criminalization of trade secret theft and other cybercrimes but thought it would be interesting for some of you to see the United States Department of Justice's position paper and outline on these issues. This published outline is chock full of interesting information and makes an interesting and informative read.

http://www.usdoj.gov/criminal/cybercrime/ipmanual/08ipma.htm

Stealing the Secrets of the Maple Leafers

Canada, the United States' favorite neighbor, is experiencing and examining new threats of economic espionage from foreign trading partners. This is a blurb from Friday's (June 23, 2006) "Globe and Mail" online edition:

Both traditionally hostile and ostensibly friendly governments have engaged in such activity in Canada," CSIS says in a public report tabled in Parliament.
The document avoids pointing the finger directly at any one foreign power, but government sources have said that China is one of the biggest culprits, and that Beijing attempts to use expatriates, visiting scholars and business delegations to obtain economic intelligence and trade secrets.
The CSIS report says, "Despite strong warnings from the government of Canada, certain countries continue to use their intelligence services to manipulate and exploit expatriate communities in Canada."

We're relieved they're not reporting that they suspect the U.S. of stealing the NHL trade secret of winning The Stanley Cup as only U.S. teams have won the Cup since 1993. That secret is currently maintained in a locked vault in Raleigh, North Carolina.

Hope you're all having a good Monday.

Getting Loaded in Georgia . . . .

Insight Technology, Inc. ("Insight") runs an internet-based freight load matching service it started in 1996 which allows independent truckers or small trucking companies to search online for available hauling jobs. Insight formerly employed Darren Brewer as its president.

In 1998, Insight expanded its business to include freight factoring - in other words, paying truckers immediately on hauling invoices and then collecting payment from the payors and assuming for itself the risk of nonpayment or slow payment. Truckers liked this because Insight paid them up front and they were willing to pay a fee for this right to immediate payment without the headaches of collection lag time.

Patrick Hull started a competitive company with Insight called GetLoaded.com, LLC in 1999. Brewer, Insight's president, met Hull, GetLoaded's "managing member, in 1999. Brewer was trying to get Hull to accept an ad for the freight factoring business Insight was running on GetLoaded.com's website. Brewer and Hull didn't come to an agreement on the ad but they DID start talking about a new internet factoring business that they might own and run together. At the time they started their discussions, Brewer was a 20% shareholder in Insight AND had created a website, drafted forms, designed procedures for evaluating creditworthiness or shippers, and even helped make design modifications to Insight's software to improve the performance of its factoring business.

Ultimately, without Insight's knowledge, Brewer and Hull created a company called FreightCheck in late 2001 - all while Brewer was still serving as Insight's president. At the time FreightCheck was created, freight factoring represented 98% of Insight's revenue. FreightCheck also kicked off its business with Insight's customized software program Brewer had developed while at Insight and even had "satisfied customer" testmonials that were identical to those for Insight's freight factoring business. Brewer even filed for copyright protection of of the customized software program he had worked on for Insight and then licensed that software afterward to his existing employer, Insight, and Freightcheck, too.

You know where this is going.

After Brewer suggested to Insight's largest shareholder and founder that he should sell Insight to Hull and GetLoaded, Insight's largest shareholder and founder received word of Brewer's involvement with FreightCheck and that company's relationship to GetLoaded. That made him unhappy and Insight sued - and sued everybody mentioned above. One of the claims Insight brought, of course, was that the customized software program was its trade secret. The trial court didn't like that claim and granted summary judgment to the defendants on it. The Court of Appeals of Georgia, however, reversed that decision saying there was evidence that a jury could find that the customized software program WAS an Insight trade secret and that Hull, GetLoaded, and FreightCheck had acquired the trade secret through improper means. That claim, therefore, is going to a jury.

This decision is chock full of fun stuff and the story-line reads like a Scott Turow novel. The case can be cited as Insight Technology, Inc. v. Freightcheck, LLC, et al., 2006 WL 1679391 (June 20, 2006, Ga. App.).

He Took Our Trade Secrets, Where's Our Injunction?

Lots of courts apply a relaxed - some might say lax - standard in determining whether to grant a preliminary injunction in a trade secrets case. Not so for federal Judge Ed Kinkeade of the Northern District of Texas.

In Watchguard Technologies, Inc. v. Valentine, 2006 WL 1644332 (N.D.Tex. June 9, 2006), Judge Kinkeade refused to accept an argument that a trade secrets claim automatically meant plaintiff was entitled to a preliminary injunction. Instead, the court scrupulously applied the regular Rule 65 standards.

First, he ruled that he would "look not to the magnitude of the harm allegedly suffered by [the plaintiff], but the irreparability of it." Next, he ruled that if the plaintiff "could possibly be sufficiently compensated at a later date during the course of the case, the Court will weigh this heavily against a conclusion the party suffered irreparable harm."

The court then went on to conclude that there was no irreparable harm.

No Trade Secret Here - Carolina Hurricanes Win The Cup!!!

The authors of this trade secrets blog live in Raleigh, North Carolina. This is now the home of the Stanley Cup - professional sports' version of climbing Mount Everest. We just wanted you all to know how proud we are of the Hurricanes and its great fans. It should not be a secret of any type - we're the 2005-06 Stanley Cup Champions!!!

Memphis Computer Fraud and Abuse Act Blues

Inventory Locator Service, LLC ("ILS") has accused Partsbase, Inc. of obtaining unlawful access to ILS's computerized database. Partsbase has counterclaimed accusing ILS of the same thing. Kind of like that old Reese's Peanut Butter Cup ad - "you got your peanut butter in my chocolate . . . ." "no, you got your chocolate in my peanut butter."

ILS has moved to strike Partsbase's counterclaim and has proffered a computer forensic expert's testimony that concludes Partsbase's logs were altered to reflect incursions into Partsbase's system by ILS that never occurred - in other words, a fraud on the court. And this case is in federal court in Tennessee too - a fraud on a federal court can land someone in federal prison for criminal contempt. ILS is asking for the appointment of a special master under federal rule of civil procedure 53(a) and the court says in its decision and order: "Rarely does a party allege that another party has fabricated evidence and submitted it to a court of law. When such allegations are made and are supported by expert analysis, this court has an obligation to pursue them at the earliest possible opportunity. Nothing is more basic to the administration of justice then the integrity of the judicial process. Because of the enormous amount of data and the gravity of ILS's allegations, the court concludes that the prompt appointment of a special master is warranted."

So now, a neutral computer expert is going to be agreed on by the parties and their findings will be a recommendation to the district court as to how to handle this allegation. If we were Partsbase, we'd be taking this allegation very seriously. Computer guys just don't look good in stripes. The case is cited as Inventory Locator Service, LLC v. Partsbase, Inc., 2006 WL 1646091 (June 14, 2006 W.D. Tenn.).

More on California Chip Trade Secrets Case

From the New York Sun, a much more complete recounting of the California chip case so far. To recap, two California men, one a Chinese national, were arrested after a grand jury charged them with stealing trade secrets from their former employer, Net-Logic Microsystems, a California chip maker.

The Sun says that "China's effort to acquire secrets from Silicon Valley's high-tech industry is facing renewed scrutiny after federal prosecutors filed new charges of economic espionage in the high-stakes race to improve microchip design."
In the words of the US Attorney: "A tremendous amount of resources go into producing the chips and software that are designated as trade secrets, and we are committed to the prosecution of individuals who steal those trade secrets in an attempt to get an unfair advantage in the technology industry."

The new piece of the puzzle is that one of the defendant's home computer contained a contract for an investment from a company in the People's Republic.

Expect to see more scrutiny on the Chinese and heightened concerns about economic espionage in the US.

Spanning the Globe -- Trade Secrets in Jordan?

If you're free next week, you might want to consider attending the Arab Society for Intellectual Property (ASIP) program, "Patents of Inventions and Trade Secrets." The course will begin June 25, 2006 at Talal Abu-Ghazaleh College of Business in Amman.

The program aims to provide an easier understanding of modern principles that govern IP, as well as access to knowledge and international developments, so that Arab practitioners may be able to provide their services in line with international standards.

In seriousness, ASIP is a specialized Arab professional body. Its main objective is to enhance and develop the protection of intellectual property system through various means of awareness and education.

Progressive practitioners throughout the world recognize that countries need to get their IP regimes in line with world standards, particularly with regard to trade secrets. They should be commended.

Trade Secrets Arrest in Chip Case

From UPI, what did we tell you about stealing trade secrets in the Northern District of California? Don't do it!

Yesterday, federal agents arrested two men who allegedly used stolen trade secrets to start their own Silicon Valley semiconductor company.

The U.S. Attorney's office said Lan Li of Palo Alto and Yuefei Ge of San Jose were charged with five counts of theft of trade secrets and conspiracy to steal trade secrets from their former employers -- NetLogics Microsystems and Taiwan Semiconductor Manufacturing Corp. -- and used it to establish their own company, SICO Microsystems.

The trade secrets in question were allegedly related to chip design and development. The new company was allegedly formed to develop and market products derived from the stolen data.

AT&T Accuses Wired News of Leaking Trade Secrets

The federal wiretapping case against AT&T continues to get uglier. After Wired News sought to intervene to unseal certain documents, AT&T turned the tables and now "accuses Wired News of misappropriating and 'leaking' trade secrets by publishing the evidence. The telecommunications giant also accuses Wired News of violating the judge's order that the plaintiffs in the case not distribute the documents further." AT&T's filing is here.

Wired News had earlier published an account of an AT&T whistleblower who accused the company of setting up a secret room near its San Francisco switch, presumably so the government would have easy access for listening in on calls.
Wired News claims the documents aren't trade secrets at all.

Now, in addition to the usual tension between open courts and claims of trade secrets, we've also got national security claims raising their heads.

Expect a ruling soon.

Haberdashery Trade Secrets?

What happens when a retail salesman moves from one high-end to another one? How would a plaintiff-store calculate damages?

The Virginia Supreme Court dealt with this issue in Saks Fifth Avenue, Inc. v. James, Ltd. The case concerned Saks hiring away from James a long-time retail employee, Thompson, to work in the Saks store at the same mall.
The former employer raised a litany of claims including breach of fiduciary duty, intentional interference with contractual relations, intentional interference with prospective business and contractual relations, violation of Uniform Trade Secrets Act, violation of Computer Crimes Act, and conspiracy to injure another in a business, trade or profession.

Plaintiff's expert, one Dubinsky, provided a lost profits calculation which formed the basis of a damages judgment for over $1.6 million after a bench trial . (The damages claim with respect to trade secrets was earlier thrown out by the trial judge.)

The Supreme Court, though, tossed that judgment on the grounds that the expert "failed to connect the lost profits he claimed James incurred after Thompson's departure to anything other than the mere fact that Thompson was no longer working at James. This fact alone cannot be a basis for recovering damages, however, because Thompson was an at will employee who was free to stop working at James at any time."

According to the court, "Dubinsky's opinion on damages was solely based on Thompson having ceased employment with James, not the wrongful acts of the Defendants. Thus, Dubinsky's opinion did not establish the necessary factor of proximate causation between Defendants' conduct and the damages claimed by James. The trial court thus erred in denying the motion to strike James' evidence."

Updates from Recent Trade Secrets Stories

From MacWorld, a tough opinion piece taking issue with the ruling by the California appellate court in Apple's case against the bloggers who posted information which Apple contended were its trade secrets.

According to the piece, "the court committed so many errors in logic that they’re hard to count."

The conclusion: "it’s difficult to imagine Apple not appealing the trade secrets and some of the shield questions to the California Supreme Court. The precedent is just too awful to let stand unchallenged, and only Apple has standing at present to challenge it."

A somewhat more measured (but still negative take) from the blog of Seattle Post-Intelligencer's Senior Online Producer Brian Chin can be found here.

And, more on the recent conviction of a former Lightwave employee in the Northern District of California on trade secrets theft charges can be found here and here.

Someone's Gotta Dye . . . .

North Carolina is still home to lots of textile companies and suppliers who sell to them. Thortex, Inc. is a chemical dye and sales company which developed a formulation and method of manufacturing black dye for use by KM Fabrics. Thortex used some other companies to manufacture the dye for them for ultimate sale to KM Fabrics. Employees of those other companies routinely learned Thortex's formulation and method of manufacturing black dye. Some of those employees went out and started their own company and offered KM Fabrics the opportunity to buy the black dye from them. Let's call those people the "defendants" for the time being.

Thortex didn't like losing the KM Fabrics account to the defendants. So they sued them - that's why we call them the "defendants." They alleged, among other things, misappropriation of trade secrets. The defendants moved to dismiss this claim against them - and they won that argument too. The lower court and Court of Appeals noted "Plaintiffs appear to find themselves in the unfortunate situation of failing to require the manufacturers they used and their employees to enter into a confidentiality agreement. The allegations do tend to show that over the course of time, numerous manufacturers gained knowledge of the dye formulation and production methods and that in fact two employees with this knowledge formed their own manufacturing companies who subsequently became manufacturers of Thortex (the black dye) as well." The lower court and appellate court found that Thortex had NOT used reasonable means to maintain the black dye's formulation a secret. And those courts were right, of course.

We bet Thortex wished they would've called their attorneys and negotiated a simple NDA for use with their manufacturers way back when. Cat's outta the bag now. Call your next case. The case can be cited as Thortex, Inc. v. Standard Dyes, Inc., 2006 WL 1532136 (June 6, 2006, N.C. Ct.App.).

Former Employee Gets a Little Salty About Losing Her New Job

Put this one in the category of disgruntled former employee. Cross Sales & Engineering Company markets electronic and automation components for industrial machinery. Kathleen White used to work for Cross as a customer service representative in the Raleigh/Durham North Carolina area. Ms. White signed a noncompete and confidential information agreement with Cross that restricted her future employment options.

Ms. White resigned from Cross in May of 2002 and during her exit interview refused to tell Cross where she was going to work. When asked specifically if she was going to work for Control Corporation of America, a direct competitor of Cross, she gave it the old "no comment." Cross did as they should and reminded her of the noncompete/confidentiality agreement and off she went.

Later in May, 2002 she was working for the direct competitor. Cross's president sent a letter to the president of the direct competitor that the latter failed to respond to. Cross's attorneys then sent the nasty-gram that alleged the direct competitor knowingly was violating the noncompete/confidentiality agreement and was in independent violation of the North Carolina Trade Secrets Protection Act. After Cross got no response to that one, they sued on July 8, 2002. The direct competitor got sued, too. They didn't like that. So they sent Ms. White a nastier-gram that said she was being terminated from her new job.

In January of 2004, the jobless Ms. White sued Cross saying her former employer had tortiously (read: wrongfully) interfered with her job at Control Corporation of America - which she also sued. Anyway, the lower court granted summary judgment to Cross and Ms. White appealed. The Court of Appeals of North Carolina noted that the motives of Cross were that it wanted to protect its trade secrets and other confidential information and wanted to limit the unfair competition that it would face at the hands of Ms. White. In other words, it was trying to protect its own interests and not simply to cause harm to Ms. White. This is important because one of the elements of a tortious interference claim is that the party interfering was "acting without justification." The Court of Appeals said, rightfully in our view, that Cross WAS JUSTIFIED in threatening and suing the new employer and Ms. White.

Case closed. We bet Ms. White would like to turn the hands of time backward. The case is cited as White v. Cross Sales & Engineering Company, 2006 WL 1526912 (June 6, 2006 N.C. Ct. App.).

FBI Appoints Economic Espionage Agent as New Special Agent in Charge of DC Office

From the FBI Press Room, a report concerning the appointment of Kevin Favreau as the new Special Agent in Charge of the DC Field Office. That office covers the District of Columbia and 13 counties of Northern Virginia, many of which are home to some of the most important and sensitive government and defense contractors.

Most interesting is Agent Favreau's recent background since November 2004 as the Chief of the Counterespionage Section at FBI Headquarters where he coordinated all FBI espionage and economic espionage investigations with the U.S. Intelligence Community and the private sector.

Does his new appointment mean a greater emphasis on economic espionage and trade secrets theft investigations in and around Washington and especially in Northern Virginia?

Time, presumably, will tell.

More on Trade Secrets in the Workplace

From the Louisville (KY) Courier-Journal, more on Professor Hannah's study of trade secrets in the workplace, discussed here earlier.

The article points out one of Professor Hannah's important findings:

"Even if they are asked during orientation to sign something acknowledging they will protect trade secrets, employees invariably just consider that another form they have to deal with to get the job. When they leave the company, employees often are not reminded to keep proprietary information to themselves."

Two words: exit interview.

And, as if on cue, from the Bad Apple Department, a story from the San Jose Mercury News about an employee sentenced to two years in prison for stealing his former employer's trade secrets and attempting to sell them to JDS-Uniphase.

Software Engineer Looking at Prison for Trade Secrets Theft

From the Bay City (CA) News Wire, a report of concerning a San Jose software engineer who pleaded guilty yesterday to a federal charge of trade secrets theft and admitted stealing from his former employer in an effort to start his own company.

Patrick J. Murphy, 45, admitted stealing trade secrets regarding wireless computer networks from Silicon Wave Corp. of San Diego. He then attempted to use the secrets to start his own company.

Murphy faces a maximum possible penalty of 10 years in prison and a $250,000 fine. He'll be sentenced in September by U.S. District Court Judge Ronald White in San Jose.

Specify Your Trade Secrets (or Suffer the Consequences)

From the United States District Court for the District of Minnesota, an opinion on what happens when a plaintiff fails to specify just what its trade secrets are.

In SL Montevideo Technology, Inc. v. Eaton Aerospace, LLC, 2006 WL 1472860 (D.Minn. May 26, 2006), the court dealt with defendant's Rule 50 motion for judgment as a matter of law after two weeks of testimony in a trade secrets case. Plaintiff contended that its motor design, as whole, was a trade secret and copied by defendant. It also contended that certain individual aspects contained in the motors were trade secrets as well.

Plaintiff argued that the performance specifications of the two motors were so close that defendant's motor must have been copied from plaintiff's. The court cited the Minnesota Supreme Court which had ruled that "[s]imply to assert a trade secret resides in some combination of otherwise known data is not sufficient, as the combination itself must be delineated with some particularity in establishing its trade secret status." The court ruled that plaintiff had failed to identify the dimensions of the "guts" of the motor or how the specific component parts of the motor make up a trade secret when taken together.

Judgment for defendant.

Damages and More Damages for Trade Secrets Misappropriation

From the Fayetteville (AK) Morning News, a story about a trial court's reconsideration of damages in a trade secrets case after remand of the case from the Arkansas Supreme Court. The case is reportedly the Arkansas Supreme Court's first consideration of a trade secrets.

The case arose from a dispute between a nurse placement and its former employees who went to work for a competitor. The trial court initially found damages in the amount of $262,303 based on the alleged value of the misappropriated trade secrets. The Supreme Court first ruled that damages had to be limited to defendants' profits earned by use of the trade secrets. The court later reversed itself saying that the value of the trade secrets could be an additional component of damages.

The case is now back before the trial court.

The Arkansas Supreme Court's opinion can be found here.

Economic Espionage -- A Neverending Problem

From San Vaknin writing in Global Politician, a lengthy and comprehensive discussion of economic espionage that deals with both particular cases and broader concepts. He quotes figures from the American Society for Industrial Security, albeit somewhat old figures, estimating the damage caused by economic or commercial espionage to American industry of around $63 billion over a three-year period in the nineties. That number has not likely gone down.

Vaknin's conclusion:

"As foreign corporate ownership becomes widespread, as multinationals expand, as nation-states dissolve into regions and coalesce into supranational states - the classic, exclusionary, and dichotomous view of the world ("we" versus "they") will fade. But the notion of 'proprietary information' is here to stay. And theft will never cease as long as there is profit to be had."

Meanwhile, if you had any doubts at all, check out this sobering piece from a Heritage Foundation fellow on townhall.com concerning economic espionage, originally published in the New York Post. The conclusion: American high-tech industries are key targets and 140 (or 191) nations have spies in the U.S.

The biggest threat according to the author? China.

Trade Secrets and Trial Secrets?

From CIO.com writer, Al Sacco, a story concerning the litigation in federal court in Delaware between microprocessor manufacturers AMD and Intel. The plaintiff, AMD, subpoenaed information from numerous non-party computer manufacturers and retailers in an effort to show that Intel was using its market power to muscle AMD out of the market.

The computer manufacturers and retailers were not happy at the prospect of laying out their competitive information -- such as manufacturing processes and capacity -- in open court. The parties have attempted to craft a solution that will allow the courtroom to be closed during what could be long stretches of the trial testimony.

This is another instance of trade secrets policy clashing with the age-old policy of open courts.

It will be interesting to see what the court is prepared to live with, irrespective of what the parties can agree upon.