"Oops! I did it again . . . " - Courtroom Again Closed in DVD Encryption Case on Trade Secrets Grounds

We first blogged about this case here: http://wombletradesecrets.blogspot.com/. Well, Judge Patel has again closed her courtroom to the public in this case that is examining the secrets of copying DVDs and their encryption.

"I think it's very clear from the licensing with respect to specifications the indepth nature of those specifications," Patel told Myers. "There are trade secrets and there is economic value to them...I'm not going to stop the court proceedings now, not at this late hour."

Again, we think that Judge Patel is doing the right thing in a case where competitively valuable encryption specifications are being examined - this is not a case where you want there to be a forced disclosure of technology and what results is a loss of the secrecy of the technology. It is a tough balance but we think she got this right.

Starwood Hotels v. Hilton Hotels Trade Secret Complaint (pdf)

AmLawDaily has a link to the Starwood Hotels trade secret misappropriation complaint against Hilton Hotels - click the link above to read this fascinating draft. Additionally, we note that the parties entered into a consent injunction that was filed with the court here: http://amlawdaily.typepad.com/starwoodhilton.pdf.

This case is going to be one of the most visible and newsworthy trade secrets theft cases ever litigated. We'll continue to report progress in this matter.

Federal Judge Closes Federal Courtroom in MPAA/RealNetworks Matter

A federal judge sealed a courtroom last week after attorneys for the Motion Picture Association of America and another Hollywood group claimed that confidential information might be disclosed during testimony about DVD-encryption technology.

U.S. District Judge Marilyn Patel kicked the public out of the courtroom at around 2:30 p.m. PDT, overruling objections from ZDNet Asia's sister site CNET News.com and RealNetworks, which also said it opposed the unusual request.

An attorney for the DVD Copy Control Association, which is involved in a Lawsuit over DVD-backup software sold by RealNetworks, said details about the technology used to encrypt DVDs justified the request to give the public the boot during witness testimony--which, according to legal precedent, should be reserved only for rare cases.

"I find that this does meet the requirements for a trade secret," Patel said. "We're going to protect what needs to be protected. I'm ordering everyone not signed off on a confidentiality agreement to leave the courtroom."

"The MPAA is trying to seal proprietary specifications," said DVD-CCA attorney Reginald Steer. He added: "This is critical to our presentation."

Well - we understand the protestations of RealNetworks and the press that courtrooms are public places. That said, special precautions have to be taken in cases where competitively valuable technology or business information will be examined and discussed because the legal system can never put the advantage back into business advantage once the secret stuff is disclosed, purposefully or by accident. We'll keep an eye on this one for you.

ClearOne Clears $9.7 Million in Trade Secrets Damages

We've been covering this matter for a while: http://wombletradesecrets.blogspot.com/2009/02/clearone-obtains-expanded-trade-secrets.html.

A federal court in Utah has issued a Memorandum Decision and Order yesterday in favor of ClearOne Communications, Inc., awarding it approximately $9.7 million jointly-and-severally and individual judgments against the defendants. The court awarded HD conferencing company ClearOne with approximately $9.7 million in damages as part of its trade secret misappropriation case against WideBand Solutions Inc. and Biamp Systems Corporation. In addition the court has granted a permanent injunction prohibiting WideBand from using ClearOne’s proprietary telephony code and other products.

Biamp was named in the case because it bought ClearOne’s technology from WideBand, even though officials at Biamp allegedly knew that the technology was not WideBand’s to sell. Last November a federal jury ruled in favor of ClearOne’s claim that three men working for WideBand Solutions, including a former ClearOne employee, had “willfully and maliciously” stolen ClearOne's trade secrets and used them for financial gain.

The ruling names three of WideBand's principals, Dr. Jun Yang (the former ClearOne employee), Andrew Chiang (previously affiliated with an entity that sold certain assets to ClearOne), and Lonny Bowers. Also named is a company owned primarily by Yang called Versatile DSP, Inc.

The court ruled that Biamp also infringed on ClearOne’s patented technology because it “deliberately ignored numerous warning signs suggesting that the AEC technology offered by WideBand was not WideBand’s to sell.”“Given all the facts presented to Biamp at the time, it could not have held a good faith belief that its use of the WideBand code was valid,” court records state.

The court found that Biamp earned over $1.5 million “by purchasing the WideBand technology at half the price offered by ClearOne and then selling the technology at the same price it charged when dealing with ClearOne.”Apparently the court wanted to make an example out of Biamp in order to “send a message deterring other companies from engaging in similar conduct."

In addition to the two companies, the court also ordered each of the individual defendants to pay damages, as there was “evidence of deliberate copying” of ClearOne's trade secrets. Specifically, the secret elements of ClearOne’s Honeybee Code were found on the defendants’ computers at WideBand’s offices. There was also evidence that the defendants tried to hide the code after it had been discovered.

The ruling specifically prohibits WideBand from using “(a) the AEC2w object code licensed to Biamp, (b) the computer code licensed to Harman Music Group, Inc. that was the subject of an October 30, 2008 preliminary injunction order, (c) WideBand’s FC101 product, (d) WideBand’s WC301 product, (e) WideBand’s WC301A product, and (f) WideBand’s Simphonix product.” What’s more the company can no longer continue to use the brand names that were associated with those products.ClearOne intends to request an additional award to cover the cost of its legal fees.

$36 Million Verdict in California Trade Secrets Case

From Law.com, a story concerning a $36 million trade secrets verdict in favor of Hansen Medical against Luna Innovations after a three-week trial in San Jose, California.

The jury found that Luna broke an agreement it had to help Hansen develop a robotic catheter and misused trade secrets to land a lucrative contract with a Hansen competitor, Intuitive Surgical Inc., instead.

A longer story on the then-ongoing case is found here.

The Trade Secrets of Luxury Hotel Concept Allegedly Stolen: Starwood Hotels v. Hilton Hotels

Hilton Hotels was sued by Starwood Hotels & Resorts Worldwide Inc., the third-largest U.S. lodging company, over claims it stole trade secrets to improve its luxury brands.

The complaint, filed in federal court in New York, claims two former Starwood executives hired by Hilton stole information about Starwood’s W hotel brand to develop Hilton’s Denizen hotels.

Hilton recruited the employees, Ross Klein and Amar Lalvani, after it was acquired by Blackstone Group LP in 2007, according to the suit. Both men were involved in developing White Plains, New York-based Starwood’s “lifestyle and luxury” hotels, including the St. Regis, W and Luxury Collection brands, and downloaded confidential Starwood information to use later at Hilton, the suit claims.

“This case involves corporate espionage and the looting through computer fraud of a mountain of information,” the lawsuit claims. “Klein and Lalvani took and encouraged other Starwood employees to take with them to Hilton over 100,000 electronic and hard copy files, many containing highly confidential and proprietary Starwood information and trade secrets,” according to the complaint.

The materials included strategic development plans, negotiation tactics, explanations of how to convert hotels into luxury brands, and marketing and demographic studies.

“We fully intend to move forward on the development of our newest brand, Denizen Hotels,” Michael Buckley, a spokesman for Beverly Hills, California-based Hilton, said in an e-mailed statement. Hilton will defend against the suit, which is “without merit,” Buckley said.

Klein said in an interview last month that Denizen will compete with independent hotels and boutique properties including Starwood’s W line, Morgans Hotel Group Co. and Thompson Hotels.

The company sees Denizen as a return to the luxury of Hilton’s past without making customers look “guilty on an expense report,” Klein said in the interview. “We hope it’s going to disrupt the lifestyle and boutique arena.”

Fourth Circuit Holds That Investigatory And Remedial Expenses May Be Recovered As "Economic Damages" In Computer Fraud and Abuse Act Cases

From our sister blog, the North Carolina Appellate Blog, a story about a new Fourth Circuit case permitting investigatory and remedial expenses as “economic damages” in cases under the Computer Fraud and Abuse Act.

The case A.V. v. iParadigms, LLC held that a claimant bringing a civil action under the federal Computer Fraud and Abuse Act (CFAA), 18 U.S.C. 1030(g), for unauthorized computer access may recover consequential damages such as investigatory and remedial expenses.

Game Maker Activision Sued Over "DJ Hero" Video Game

A pair of indie gaming companies may have tossed a wrench into Activision’s plans to piggyback on the success of its Guitar Hero franchise with the upcoming "DJ Hero" game. Genius Products and Numark Industries, the two companies behind the as-yet-released "Scratch: The Ultimate DJ" game, have filed a lawsuit in California against Activision and developer 7 Studios for “intentional interference with contract, breach of contract, conversion and misappropriation of trade secrets.”

Activision tried to acquire the rights to Scratch; once Genius rejected the offer, Activision went on to acquire 7 Studios. The problem is, the developer was still under contract (complete with a non-disclosure and confidentiality agreement) to make the game for Genius.

Genius is arguing that its proprietary trade secrets were exposed, and that the two companies conspired to keep Scratch from getting to market by withholding “work product,” including code and the signature turntable-style controller. Genius and Numark are seeking “substantial damages.” The complaint can be viewed here: http://www.scribd.com/doc/14234613/041409-Scratch-DJ-Game-Complaint-vs-Activision-Publishing-Et-Al.

Rutgers' Ticketmaster Payments Trade Secrets?

One of the fundamental qualities of a trade secret is that it is competitively sensitive - that the owner or holder of the trade secret enjoys a competitive advantage because it knows the trade secret but its competitors don't. But - who are the competitors of a state institution like Rutgers University? Discuss amongst yourselves - and see the story below:

New Jersey officials will not say how much money state entities rake in from fees Ticketmaster charges sports fans and concertgoers.

The ticket-business giant handles ticket sales for New Jersey-owned venues including Rutgers University athletic events and concerts at the Izod Center and Giants Stadium.

The Record of Bergen County used public-records laws to ask the state to provide contracts that spell out the details of how state entities share in Ticketmaster's fees.

But Rutgers and the New Jersey Sports and Exposition Authority blacked out many of the terms, saying they're trade secrets.

State and federal investigators have subpoenaed Ticketmaster to seek information on how ticket brokers can get tickets so quickly.

FBI Investigator Calls Trade Secret Theft Involving Chinese National "An Act of Economic Violence"

The rhetoric is heating up in the U.S. v. China battle over the protection of trade secrets and other intellectual property.

A Chinese national living in the United States has been accused of stealing a software program from his former U.S. employer and selling a modified version to the Chinese government after being fired.

Yan Zhu, 31, a resident of Lodi, was arrested Thursday for stealing programming-source code needed to modify the encrypted program as well as internal sales materials from the company, the FBI said. Authorities would not name the company or identify its corporate headquarters, saying only that it is located in Mercer County, New Jersey.

He and two conspirators sold the program to environmental protection agencies in China's Hebei and Shanxi provinces for about 10 percent of its $1.5 million value, according to the FBI.

The incident is the latest episode in the ongoing battle over intellectual property rights between the two countries. Weysan Dun, special agent in charge of the FBI's Newark field office, estimates that the number of federal investigations into Chinese economic espionage has increased 10 percent since 2001.

"This is an act of economic violence," Dun said Friday of Zhu's alleged theft. "A significant percentage of the FBI's economic espionage investigations are linked to Chinese government agencies, research institutes or businesses."

Zhu has been charged with eight counts of fraud and one count each of conspiracy and theft of trade secrets. He faces 20 years in prison on each fraud count and 10 years in prison for the theft and conspiracy charges.

Zhu, who is in the U.S. on a work visa, was a senior environmental engineer for the company from April 2006 to July 2008. The FBI said he played a key role in its efforts to sell the program, which allows users to manage air emissions and water quality, in China.

The FBI said he was fired after his employer learned he had sent source-code and promotional materials to his personal e-mail address and was attending business meetings in China with his two suspected conspirators, who were not named. Court filings indicate Zhu, a Columbia University graduate, said he needed the documents to work from home.

The Shanxi agency signed a contract with the company to purchase the program in July 2007, but switched to Zhu's modified version after paying only about $300,000 of the $1.5 million it owed. The Hebei agency contacted the company about the same product in November of 2007, but wound up purchasing Zhu's version 11 months later.

Zhu is being held in federal custody pending a detention hearing in Trenton on Monday, when a decision on bond may be made.

Reasonable Efforts to Maintain Secrecy – Learning from the Bad Experiences of the Brits

Virtually every trade secrets statute in the U.S. requires the owner of a trade secret to take “efforts that are reasonable under the circumstances to maintain its secrecy.”

Yet there’s not a lot of guidance about what that means or what is required.

Well, we now have a good answer for what is not a reasonable effort. Last week, British counterterrorism official Bob Quick (pictured here) was fired for allowing a Top Secret document containing information regarding an investigation of an Al-Qaeda terror cell to be photographed as he entered 10 Downing Street.

That got us thinking about some places for guidance.

One source that courts might well consider authoritative is the U.S. government’s own regulations regarding the handling of secret information. These are found at 32 CFR Parts 2001 and 2004 from the National Archives and Records Administration and they are quite extensive.

Among other things, they describe in detail how classified information is to be classified, marked and safeguarded.

Here’s how the U.S. regulations deal with Mr. Quick’s problem:

All classified information physically transmitted outside facilities shall be enclosed in two layers, both of which provide reasonable evidence of tampering and which conceal the contents. The inner enclosure shall clearly identify the address of both the sender and the intended recipient, the highest classification level of the contents, and any appropriate warning notices. The outer enclosure shall be the same except that no markings to indicate that the contents are classified shall be visible.

In considering the appropriate efforts for protecting trade secrets, company’s might look to the government’s regulations as a good place to start.

Reid Elsevier Sues Hank Asher for Alleged Trade Secret Theft and Noncompete Breach

Reed Elsevier, the Massachusetts-based parent of LexisNexis and Seisint, on Thursday filed a complaint in Palm Beach County Circuit Court, alleging that Asher is violating his non-compete agreement by starting a new company, TLFO, in Boca Raton.

In 2004, Asher sold Seisint, his second major database company, to LexisNexis for several hundred million dollars. The deal included a non-compete agreement that is in effect until August.

But, Faith Gay, an attorney for Reed Elsevier, said Asher started violating his five-year non-compete agreement “approximately” two years early. While Asher has said publicly that TLFO is doing only charitable work to help in the hunt for child predators until his non-compete expires, the suit alleges that Asher is already angling for market share.

“He is out, trying to sell a commercial product,” Gay said. “We’re seeking damages for any harm that Asher has caused to our customer base. And, we are seeking a pro rata refund of the $775 million paid for Seisint based upon the length of time Asher has violated his noncompete.”

The suit also alleges that Asher has hired former Seisint employees and is using Seisint’s trade secrets in his new venture.

“This misappropriation of trade secrets is part of defendants’ plan to steal Seisint’s clients by offering them products or services extremely similar to those already developed by Seisint,” the complaint alleges.

Are Standardized Tests Trade Secrets of the School District? So Argues Cincinnati

If a group of Cincinnati school teachers prevails in a case now before the Ohio Supreme Court, enterprising students might be able to ace their tests simply by using the state's public-records law to get a copy of the test before it's given.

So contends the Cincinnati Public Schools, which is fighting the teachers' demands for copies of semester exams given to ninth graders.

The science teacher who brought the case, Paul Perrea, contends that the semester exams -- which account for 25 percent of a student's grade -- might have been poorly designed and might not reflect a student's actual learning.

Without getting a copy of the test, however, it's impossible to be sure, Perrea argues.
The school district responds that if standardized tests are declared public records, it would be open season for students and their parents to invoke the state's open-records laws to get their hands on tests they have not yet taken.

The two sides squared off at the Ohio Supreme Court today, where justices were unusually hostile toward Perrea's side.

At one point, Justice Terrence O'Donnell flatly rebuked Perrea's lawyer, Ted L. Wills: "You are wrong."

Wills pointed to the Supreme Court's 1998 ruling that statewide 12th-grade proficiency tests and vocational competency tests are public records. He also said that because thousands of students and hundreds of teachers already had seen the Cincinnati semester exams, the school district had forfeited its claim that the tests were trade secrets. Moreover, some of the answers appeared on the Cincinnati Public Schools' Intranet site, where students could access the information on school computers, Wills said.

Ohio's public records law requires school districts and other units of government to release records that document the functions of the public office. The law does not specifically exempt school tests. The Cincinnati schools are citing the exemption for trade secrets.

"I would say that test development is part of the operations of public schools," Wills told the court. "This is the final and quintessential goal of education."

Declaring the tests public records won't allow students to cheat, Wills said outside court. Wills said he's asking only for tests that already have been administered, not upcoming exams, and only district-wide tests rather than ones devised by individual teachers.

The Cincinnati Public Schools' lawyer, Mark Stepaniak, said the 1998 ruling on 12th- grade proficiency tests applied to tests required under state law, rather than those administered by one school district. He said the Cincinnati semester exam contains trade secrets.

California Uniform Trade Secrets Act Preempts Other Tort Claims

The link above is to an interesting piece authored by Patrick Premo and Julie Nokleberg of the Fenwick & West law firm. They identify a recently entered California decision holding that the CUTSA preempted plaintiff's state law claims for breach of confidence, interference with contract and unfair competition because they were "based on the same nucleus of facts as the misappropriation of trade secrets claim."

Premo and Nokleberg note that the Court concluded that a broad view of CUTSA's preemptive effect was correct – specifically that CUTSA's "comprehensive structure and breadth" suggested a legislative intent to occupy the entire field of common law claims relating to trade secret misappropriation. Looking more narrowly, the Court found that the specific language of section 3426.7(b)(2), which reads "(b) This title does not affect...(2) other civil remedies that are not based upon misappropriation of a trade secret," would be rendered meaningless if common law claims based on misappropriation of trade secrets were not preempted. Finally, the language "based upon misappropriation" strongly suggested a factual inquiry, where the conduct alleged in the claim was examined for similarity to the misappropriation claim. Therefore, the Court ultimately agreed with and adopted the standard of prior federal cases, which held that section 3426.7(b) preempts common law claims that are "based on the same nucleus of facts as the misappropriation of trade secrets claim for relief."

Place in The "This Ain't Good" Folder - Georgia Judge Says "We'll Talk About Incarceration" In Trade Secrets Case

Saying he believed a Gainesville tax preparation company willfully misappropriated trade secrets of H&R Block and ignored a court order not to use them, a judge fined Paramount Tax Services more than $12,000 on January 31st for contempt of court.

Paramount Tax Services owner Chris Hardy is expected to appeal the fine, but Judge David Burroughs told him he still expected the money to be paid to H&R Block by Friday.
"If that’s not done, then we’ll talk about incarceration," Judge Burroughs said.

H&R Block sued a former employee, Mary Squire, and Paramount Tax Services in January, alleging Squire made off with information on as many as 16,000 customers who did business with H&R Block in Hall County, Georgia. Squire subsequently went to work for Paramount, and the company sent out a mailer to several thousand people on Jan. 9. H&R Block officials said the mailing list was compiled from the bigger company’s protected database, and several of its customers called to complain.

On Jan. 21, Judge Burroughs issued a temporary injunction order from the bench barring Paramount from preparing the taxes of H&R Block customers. A written order for the injunction was filed Feb. 4. You can read it here: http://media.morristechnology.com/mediafilesvr/upload/gainesville/article/0401TAXDOC.pdf.

Attorneys for H&R Block claim Paramount continued to prepare taxes for former H&R Block customers after Burroughs told them to stop, with 131 such customers served by the smaller business between the time the judge first ruled from the bench and the time a written order was filed.

Mark Alexander, an attorney for Paramount, argued that he and his client misunderstood the scope of the judge’s order from the bench. Hardy believed the injunction only prohibited him from doing business with people who had received the original solicitation mailer.

"I didn’t understand that the court was prohibiting them from doing business with any of the 16,000 names on the list," Alexander said.

David Kight, an attorney representing H&R Block, said he believed the judge’s order was clear from the beginning.

"What we have here is textbook willful misconduct," Kight said.

The judge agreed. He fined the company $12,600, or $100 for each of the 126 instances in which he believed Paramount ignored his order.

"I find that (Paramount) engaged in a concerted effort to compete illegally against H&R Block," Burroughs said, adding that he was skeptical of some of the testimony Hardy and Squire gave in an earlier hearing.

Hardy testified he got the mailing list off the Internet and disposed of it afterward. Squire testified she was not an employee of Paramount but was a unpaid volunteer.

Paramount’s business slid dramatically after the judge’s injunction.

"Paramount has sacrificed its business and essentially shut down its tax preparation services as a result of its efforts to comply with the court’s order," Alexander wrote in a court filing.

Judge Burroughs said the issue was the conduct of Paramount officials.

"This is not about limiting competition," Judge Burroughs said. "This is about simply trying to provide a level playing field for all the competitors, including the big guy on the block like H&R Block."