Judge Karas: "Inadvertent Disclosure of IBM's Trade Secrets to Apple Is a Risk"

ComputerWorld is reporting that the previously sealed opinion of United States District Court Judge Kenneth Karas has been unsealed and that the opinion and order are predicated on the idea that Mark Papermaster could, without any improper intentions, inevitably or inadvertently disclose IBM's trade secrets concerning semiconductors and microprocessors to Apple. We first reported on this case here: http://womblenon-compete.blogspot.com/2008/10/ibm-sues-top-executive-to-stop.html

"The harm to IBM, however, is more likely to derive from inadvertent disclosure of the IBM trade secrets that have defined Mr. Papermaster's long career," wrote Karas. "Put another way, what other base of technical know-how could Mr. Papermaster draw upon to perform his new and important job?

"Thus, while the Court ascribes no ill-will to Mr. Papermaster, the Court finds that the likely inevitability of even inadvertent disclosures is sufficient to establish a real risk of irreparable hard to IBM," he concluded.

The opinion also revealed that IBM did not know Papermaster started working at Apple on Nov. 3 until three days later, at a hearing before Karas.

Judge Karas was not unsympathetic to Papermaster's plight, and told both parties that he intended to run the case on a fast track. "The Court has ordered that an expedited discovery schedule be arranged and that the trial take place as soon as practicable after discovery is completed," he said.

Fourth Circuit Affirms Denial of Trade Secrets Preliminary Injunction

Technology Partners, Inc. v. Hart, No. 08-1651 (4th Cir. Nov. 4, 2008), represents an illustrative example of how preliminary injunction practice works in the Fourth Circuit, particularly as it relates to trade secrets claims.

The fact pattern is a familiar one: the defendant was a former employee of the plaintiff, TPI, a software development company for healthcare providers, especially radiologists. After working his way up from an hourly programmer, the defendant, in early 2008, accepted a VP position with TPI which required him to enter into a non-compete agreement.

Now go back in time about a year, to early 2007. At that time, a company called AMICAS, also a provider of radio software, negotiated to purchase TPI and conducted due diligence on the company. Although it ultimately determined not to acquire TPI, it did acquire certain proprietary TPI software and the defendant was assigned by TPI to work assist on the implementation of the software at AMICAS. In April 2008, he took a job with AMICAS.

Shortly thereafter, TPI sought a preliminary injunction in North Carolina state court claiming violations of the non-compete and the trade secrets statute. After removal to the United States District Court for the Western District of North Carolina, the motion was denied and TPI appealed to the Fourth Circuit.

The Fourth Circuit reaffirmed the primacy of its seminal preliminary injunction decision, Blackwelder Furniture Co. of Statesville, Inc. v. Seilig Mfg. Co., 550 F.2d 189 (4th Cir. 1977). Under Blackwelder, the court considers three steps: first, the balancing of the likelihood of irreparable harm to the plaintiff and defendant if the injunction is denied or granted; second, whether grave or serious questions are presented; and third, the public interest.

In denying the preliminary injunction with respect to the trade secrets claim, the court found that TPI could not get over the first step because its agreement with the new employer, AMICAS, required the transfer of "substantial chunks" of the alleged trade secrets in any event. In other words, AMICAS had either learned of the trade secrets in connection with the acquisition of the software or was entitled to them in the context of the acquisition agreement.

Thus, the Fourth Circuit upheld the denial of the preliminary injunction.

Full disclosure: our firm represented the departing employee who prevailed on appeal.

Lubrizol Trade Secrets Thief Gets 19 Months

U.S. District Judge Solomon Oliver sentenced former Lubrizol employee Dr. Kyung Kim last week to 19 months in prison. We first started following this case in this post: http://wombletradesecrets.blogspot.com/2008/04/lubrizol-trade-secrets-allegedly-stolen.html

He also was ordered to pay $188,700, which included the $170,000 in cash that SK Chemicals paid Kim, 63, for the secrets.

It's impossible to quantify the damage to Lubrizol caused by Kim's illegal disclosures. Lubrizol didn't attempt such an estimate in a letter to the judge, but it did ask that Kim be ordered to repay nearly $800,000 in wages and benefits he received from Lubrizol during the time he was spying. Oliver denied the request.

We find Lubrizol's request for all the pay and benefits back interesting - and wonder why the judge didn't grant that request. This kind of clawback is called the disgorgement remedy. It is essentially a remedy that says an employee must disgorge all income and benefits paid/provided while an employee is being disloyal. Perhaps the civil nature of the remedy spooked Judge Oliver - but kudos to Lubrizol's counsel for suggesting the same. This is, in the end, a sad case.

FBI takes new approach to bust foreign spies on US soil

An interesting report (video and text) from Texas Cable News about the FBI’s new approach to economic espionage.

The article starts:

“Residents of a quiet neighborhood in New Orleans learned a spy was living among them in February. That month, the FBI raided the home of Tai Shen Kuo, an intelligence-gatherer for the People’s Republic of China.”

The big quotes:

Robinson said these foreign intelligence-gatherers are not just focusing on military secrets. They’re after anything that could give their country an edge or hurt the U.S. That includes info on everything from petrochemical plants to companies that engineer new software to NASA.

To fight economic terrorism, the FBI has opened its doors and is providing information to businesses. The agency briefs them on threats and lets them know what to look out for.

Could 2009 be an even bigger year for economic espionage prosecutions?

Duke Energy Refund Data Claimed to Be Trade Secret - Ohio Supreme Court Considering Matter

Duke Energy sells electricity in Ohio. They sell that electricity to individuals and companies. Some of those companies are BIG users of electricity. As electricity is a regulated utility, rate increases are effected by political pressures. Big companies routinely have help when political pressures are in play.

Duke Energy allegedly cut a number of side deals with its biggest electrical customers to withdraw their opposition to rate increases. The nature of the side deals was in the form of a refund - bigger users got bigger refunds. Individuals, however, did not get a refund. They got mad.

Ohio has an office called Consumers' Counsel. This is an office charged to look out for consumers. With regard to this rate increase, they thought it sounded fishy. They asked for the documents that identified the amount of the rebates. The Public Utilities Commission of Ohio holds those documents. They wouldn't give them up, claiming they contained Duke Energy's trade secrets.

We get a sense the argument goes like this: Duke Energy has competitors. Those competitors don't know the refunds Duke Energy gives its big customers. Those competitors would benefit competitively if they learned the amount of those refunds. They could offer those customers competitive benefits if they learned the amount of the refunds.

The Consumers' Counsel is apparently not buying that argument. They are arguing that the public has a right to know if individuals got sold out in a sweetheart deal for big companies. The Ohio Supreme Court is considering the issue.

We'll keep an eye on this one for you.

Indictments Handed Down in Alleged Trade Secret Theft from Lubrizol

William J. Edwards, United States Attorney for the Northern District of Ohio, today announced that an Indictment was filed charging Sang Ho Shin, Dong Sik Kim, and Yeon Hee Lee with one count of trade secrets conspiracy, and two counts each of theft of trade secrets.

Sang Ho Shin, Dong Sik Kim and Yeon Hee Lee are residents and nationals of South Korea and were employed as executives of SK Chemicals, a multinational chemical company located in Seoul, South Korea.

The Indictment charges that from in or about late 2001 through in or about January 2008, Shin, Kim and Lee, conspired with Kyung J. Kim to steal and receive trade secrets belonging to the Lubrizol Corporation, a competitor based in Wickliffe, Ohio.

The Indictment charges that they would meet with Kyung J. Kim, a Senior Research and Development Associate at Lubrizol to gather information on trade secrets regarding Thermoplastic Polyurethane and other confidential Lubrizol technology; this included Non-Halogen Flame Retardant Technology (NHFR) sold under the Estane® trade name and static control technology sold under the Stat-Rite® trade name.

The Indictment alleges that Kyung J. Kim downloaded trade secrets onto an external storage device in preparation for meetings with Kim and Lee and further alleges that Kyung J. Kim communicated trade secrets and other confidential Lubrizol technology by way of handwritten facsimiles sent from his home to Sang Ho Shin.

The Indictment states that the defendants met with Kyung J. Kim at hotels and condominiums at various sites including Tucson, Arizona, Niagara Falls, Canada, and Suwon, South Korea. These meetings occurred on at least 17 occasions and would last for several days. At these meetings, Kyung J. Kim explained the trade secrets and other confidential Lubrizol technology to Sang Ho Shin, Dong Sik Kim and Yeon Hee Lee.

The Indictment alleges that the defendants provided Kim with envelopes of $10,000 in cash (usually in denominations of $100 bills) at each meeting in exchange for the trade secrets and other confidential Lubrizol technology. They also reimbursed all of Kim’s travel expenses (usually $1100).

Kyung J. Kim pleaded guilty to an indictment charging one count of theft of trade secrets conspiracy and two counts of theft of trade secrets on April 8, 2008, in Case No. 1:08CR139 before the Honorable Solomon Oliver, Jr.

Judge Mandates $3 Million Bond in IBM v. Papermaster Case

Under the Federal Rules of Civil Procedure, Rule 65, a party that obtains a preliminary injunction against another must post a bond with the clerk of court that will protect the enjoined party from damages they might incur if it is later shown that the court's injunction should not have been issued.

The court in the IBM v. Papermaster case set the bond in that departing employee case at $3 million. That's a boatload of money for a guy who is being shut down for only ten days.

We'll continue to keep an eye on this case for you. Papermaster's attorneys are currently arguing that the New York choice-of-law provision in the Papermaster agreement shouldn't be respected. They think that California law would be better for Papermaster - knowing that California law abhors covenants not to compete.

We don't think the judge in New York is going to agree on that front. More soon.

Invista Sues DuPont, Rhodia in Delaware Chancery Court for Trade Secrets Theft

Koch Industries Inc.'s Invista unit sued French chemicals maker Rhodia SA in Delaware state court for theft and misappropriation of a chemical process technology used to make a type of resin.

The suit comes two weeks after a federal judge tossed a case filed in New York against Rhodia and DuPont Co. We blogged that dismissal here: http://wombletradesecrets.blogspot.com/2008/10/federal-judge-dismisses-invistas-trade.html An amended complaint was filed a week ago in federal court against DuPont, focusing on misappropriation of intellectual property, unfair competition and breach of contracts.

The suits are seeking damages and a barring of the companies' alleged misconduct.

On Tuesday, DuPont filed a federal patent-infringement lawsuit against Invista, contending Invista is breaching a patent deal related to nylon engineering resins. Invista argues it is abiding by a five-year noncompete deal in the engineering polymers space that expires in the spring.

Regarding the suits it has filed, Invista says it bought the technology in question to make a critical chemical in the creation of the resins. It was part of Invista's $4.2 billion purchase of DuPont's fibers business in 2004, and Invista alleges Rhodia is using trade secrets to build a plant in Asia using that technology. DuPont has said it is an investor in the effort.

The 2004 deal is also subject to a lawsuit, as Invista claimed in a March filing that plants it acquired had serious safety deficiencies that needed fixing. DuPont has sought to have the federal case dismissed, saying the sale agreement was in fact violated by Invista and that DuPont is protected from the legal claims raised by Invista.

$10 Million Verdict in Utah Trade Secrets Case

From the Deseret News of Salt Lake City, a story concerning a $10 million trade secrets jury verdict in favor of ClearOne Communications Inc., a developer of audio and video conferencing systems. The verdict included $3.5 million in damages and $7 million in exemplary damages.

The verdict was rendered in federal court in Utah against Biamp Systems Corp., WideBand Solutions Inc., three of WideBand's principals (former employees of ClearOne and its corporate predecessors) and Versatile DSP Inc.

According to other reports, the trade secrets related to acoustic echo cancellation technology that WideBand sought to sell to Harman Music Group Inc.

Ten Battle-Tested Rules for Communicating Well in Hard Times

Okay, so it’s a little off-the-topic. Nevertheless, we thought folks might be interested in this article by our colleague Henry Fawell in our firm’s Strategic Communications Industry Group.

It deals with the topic generally, but imagine having to communicate to the media that your company had just suffered a massive trade secrets theft that imperiled the company’s future.

Now that you've imagined that, you might want to read Henry's article.

IBM Obtains TRO From Federal Court Ordering Former Employee to Stop Working for Apple

YOU'LL READ IT HERE FIRST - IBM has received an extraordinary TRO from the United States District Court for the Southern District of New York ordering former executive employee Mark Papermaster to immediately cease his employment with Apple until further order of the court.

The court's order was entered today. Papermaster presumably has to resign his employment effective immediately. Should he fail to do so, Apple will presumably have to terminate him pending further order of the court.

This is hot off the press from the court file.

More soon - we don't think this will be the end of the fight about this matter.

Former Intel Employee Charged With $1 Billion Trade Secrets Theft

The Wall Street Journal is reporting that a former Intel Corp. engineer has been charged with stealing trade secrets worth $1 billion from the chip maker while he worked for rival Advanced Micro Devices Inc.

Federal prosecutors in Massachusetts alleged this week in a five-count indictment that Biswamohan Pani, 33 years old, illegally downloaded more than a dozen confidential documents from Intel's computer system in June. Prosecutors say AMD had no knowledge of Mr. Pani's actions and didn't benefit.

Mr. Pani's lawyer, Brad Bailey, declined to comment on specifics of the case. He said Mr. Pani denies the allegations and that they plan to take the case to trial. AMD said it hasn't been charged with any wrongdoing and it is cooperating with investigators.

Tesla Motors Loses Trade Secrets Suit Against Fisker Automotive

We first reported about the Tesla Motors suit against Fisker Automotive here: http://wombletradesecrets.blogspot.com/2008/04/electric-sports-car-maker-tesla-motors.html. Well, an arbitrator has ruled on the case - and made some aggressive findings critical of Tesla Motors' claims and the lack of support for the the allegations.

Fisker Automotive said on Monday that an arbitrator found an interim award in favor of Fisker Automotive and the auto design company which had done work for Tesla last year.
Tesla's communications manager on Monday said that the company will not pursue the case because the arbitrator's ruling was binding.

The case dates back to April of this year, when Tesla Motors filed a suit against famed designer Henrik Fisker's design firm for allegedly taking confidential design information about Tesla's upcoming luxury sedan during a consulting engagement.

Fisker Automotive responded in May when it filed for arbitration. The contract between Fisker and Tesla had a clause that required that any disputes be handled through arbitration in Orange County, Calif., within 90 days, according to Fisker. Tesla filed its suit against Fisker in San Mateo Superior Court.

According to Fisker, the case's arbitrator said that "Tesla's assertion of violations of the Uniform Trade Secrets Act by Fisker were baseless and neither brought nor pursued in good faith."

Those are pretty aggressive findings from an arbitrator. That said, trade secrets cases are often difficult ones to arbitrate. As discovery is curtailed and condensed, it often proves difficult to uncover evidence the plaintiff needs that supports their suspicions and circumstantial proof.

IBM Executive Noncompete Agreement at Issue in Departure for Apple

http://blogs.zdnet.com/BTL/images/papermaster2.pdf

Mark Weintraub has a ComputerWorld blog and has posted a copy of the Papermaster noncompetition clause that is at issue in the brand new IBM/Papermaster case that involves Mr. Papermaster's new employment with Apple. You can click on the link above to review.