South Carolina Man Charged With Trade Secret Theft from Company He Last Worked With 8 Years Ago

The Sun News from Myrtle Beach, South Carolina is reporting that Thomas Flynn, 60, who was a plant manager at Metglas for more than 20 years beginning in 1975, was arrested last week and charged with misappropriation of trade secret information with intent to injure.

"He was there for quite a while and certainly had a lot of access to a lot of different information and a lot of different proprietary things," said Rachel Platt, Metglas' executive director for human resources. Metglas, which is based in Conway, makes metal ribbons used in electric transformers.

Mr. Flynn's attorney raised an interesting defense "Our position is that not only did he not do anything wrong, but he never worked for Metglas," said Gene Connell, Flynn's attorney. Flynn worked for Honeywell and not Metglas, he said. Tokyo-based Hitachi Metals bought Metglas Solutions Division of Honeywell in 2003.

Flynn retired from the company in 2001 and several years later was approached by Vijai, where he now works, Connell said. When Flynn left the company, he didn't sign any covenant not to compete or any form about trade secrets, said Connell, who said he handled the separation package.

"His reputation is being besmirched for something he didn't do," he said. "We deny categorically that any documents were taken, any plans or any electronic records or anything else."

Metglas began to suspect something was wrong when company officials got a call from one of their manufacturers. The manufacturer told the company it had been contacted by Vijai Electricals and asked to produce a product that was similar to the product it makes for Metglas.

The drawings Vijai submitted raised questions with the manufacturer and prompted them to call Metglas.

"It was specific enough to our vendor that they were concerned and it sent a red flag," Platt said.

Shortly after Metglas got that information, it turned the investigation over to the solicitor's office, which investigated and filed the charges against Flynn. Flynn was arrested Dec. 23, held briefly and then released after posting $25,000 in bail.

We'll keep an eye on this one for you, but we'd like to revisit Mr. Flynn's attorney's defense of "he didn't even work there." It is not necessary that someone be an employee of a trade secret owner for a misappropriation claim to be made. All one needs to think of is the computer hacker - they aren't employees (usually) and they can misappropriate trade secrets. Nor does the attorney's protestation "he didn't sign a noncompete" and "he didn't take any written materials" really matter. Courts have held that memorizing a trade secret, as opposed to stealing paper or data files that the trade secret is contained on, can constitute misappropriation. The trade secret laws are statutues. Those statutes are codified in law. They don't require a contract between the trade secret holder and the alleged misappropriator.

We aren't passing judgment on whether the methodologies Metglas claims this person stole actually rise to the level of trade secrets OR whether Mr. Flynn even assisted Vijai Electricals in doing anything improper. We just thought the attorney's public statements to be interesting.

Documents "Filed Under Seal" in Eaton Aerospace Trade Secrets Case in Mississippi

We've been following this intrigue-filled trade secrets lawsuit pending in Mississippi and the non-trade secrets elements of it: http://wombletradesecrets.blogspot.com/2009/07/judge-from-eaton-aerospace-trade.html.

Seems there are a lot of "sealed" documents being filed in this case that is currently on hold while the court permits the defendants to discover and file evidence regarding Eaton's allegedly improper use of a local Mississippi attorney, Ed Peters, in the case. The defendants allege Eaton hired Mr. Peters to improperly influence the former judge on the case, Bobby DeLaughter. Peters and DeLaughter went way back to a time when Peters was actually DeLaughter's mentor. DeLaughter has since pled guilty to obstruction of justice charges and has been removed from the bench. Eaton Aerospace denies ever improperly retaining or improperly using Peters in their trade secrets case.

We'll keep a watchful eye on this one.

Sanctions Issued in California Trade Secrets Case - Against A Party and its Attorneys

Law.com is reporting that a special master has ordered sanctions against Applied Materials Inc. and attorneys at Boston-based Goodwin Procter for stalling in releasing an e-mail by the company's chief executive.

Special master Thomas Denver, in the U.S. District Court for the Northern District of California, ordered Applied Materials and Goodwin Procter on Friday to pay Advanced Micro-Fabrication a yet-to-be-finalized monetary award. The sanctions follow Advanced Micro-Fabrication's repeated demand during discovery for an e-mail written by Applied Material's Chief Executive Michael Splinter.

Applied Materials, which makes machines that manufacture semiconductor chips, sued competitor Advanced Micro-Fabrication for allegedly stealing trade secrets, interfering with contractual relations, conversion and unfair competition under California laws.

Advanced Micro-Fabrication asked for $25,777.50 in sanctions based on the costs associated with filing a second motion to compel, and Denver asked the company to produce invoices to support the request.

Denver also ordered Applied Materials to review its discovery responses, particularly interrogatory responses "to see that they have been appropriately supplemented in light of the subject email."

The judge wrote, "Plaintiff's failure to produce the email in question is all the more troubling in that defense counsel had provided significant detail as to the document sought in the course of this litigation."

Denver later noted, "Any reasonably organized electronic search should have identified this document, resulting in production."

The order further noted that the plaintiff's estimated cost for searching for the e-mail is not disproportionate "to litigation of this magnitude" and "not a justification for an inadequate search."

Credit Suisse Accuses Former Vice President, Departed For Nine Years, Of Trade Secret Theft and Attempting to Patent Certain Proprietary Methodologies

Attached above you'll find a link to the recently filed complaint in federal court in Manhattan that alleges a former VP of Credit Suisse, who was severed in 2000 and received a substantial separation package, has misappropriated certain trade secrets related to an equities valuation model that Credit Suisse says it developed with the former employees assistance. The methodology went by the name Value Dynamics Framework.

The complaint goes on to allege that by happenstance in late 2008, Credit Suisse learned that their former VP, David Trainer, was seeking a patent for an equities valuation model that tracked many of the same capacities fo the Credit Suisse valuation model. Some letter writing ensued, and Trainer's patent attorney returned to Credit Suisse a compact disc that allegedly contained a significant amount of Credit Suisse data on it relating to Trainer's former work there. The complaint acknowledges that Trainer's counsel objected to any characterization of the data and information Trainer retained as "confidential or proprietary."

The complaint also notes the perverse irony of the situation alleged - that the former VP (Trainer) is seeking a patent to obtain rights that could possibly used to deprive Credit Suisse of their interest in continuing to market and utilize their Value Dynamics Framework methodologies (it's now been renamed) without paying Trainer a licensing fee.

This is a very interesting case for two reasons: (a) it involves an employee defection that is almost a decade old; and (b) it involves a former employee allegedly trying to patent a procedure that his former employer allegedly introduced him to.

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

China Detaining U.S. Citizen on Alleged Theft of "Commercial Secrets"

ABCNews.com is reporting that the Chinese police have detained an American automotive engineer for more than a year on accusations he misused trade secrets — the latest case of vague secrecy laws being used against an American in China.

Hu's wife, a China-born naturalized American like her husband, said Tianjin authorities' real target is a China-based company she managed and whose cutting-edge products competed with those of the former business partner, the Hysci (Tianjin) Specialty Materials Co. Hysci, she said, complained that her startup was developing products unusually fast, prompting the trade secrets investigation.

"You don't sue someone just because you think their R&D is too fast," said Hong Li, who lives in the Los Angeles area with their two teenage children. "This case is being conducted illegally."

Hysci declined comment, as did the Chinese company that employed Hu at the time of his detention. Prosecutors referred inquiries to the Tianjin police. The police information office said the criminal investigation is continuing but refused to elaborate other than to say "it is a complicated case."

Hu's detention comes amid other similar prosecutions of China-born foreign nationals. In recent months, Australian national Stern Hu — an executive with the global mining giant Rio Tinto involved in big-money and politically touchy iron ore negotiations — was detained on state secrets charges that were later reduced to infringing trade secrets.

Another China-born, naturalized American, geologist Feng Xue, disappeared into custody two years ago and has been put on trial for passing on state secrets — for arranging the purchase of a detailed commercial database on the Chinese oil and gas industry.

Late last year, Hu was detained for reasons Li said are not wholly clear to her. Hysci began accusing her and the Chinese company that she ran of developing competitive materials too quickly for a startup, she said.

"I don't know what happened. I didn't ask him what was going on with him, and he didn't ask what was going on with me. We were all busy in our work," she said.

Li said she did not know what patented technology Hu is accused of violating. She declined to name the company she chaired or its location, saying it was under a proprietary supplier relationship with Wuxi Weifu.

Wuxi Weifu and Hu's lawyer, Shanghai-based intellectual property rights expert Zhu Miaochun, declined comment. Engelhard was acquired in 2006, two years after Hu left, by the German chemical maker BASF. A BASF spokeswoman said the company had not been contacted by Hu, his lawyer or Chinese authorities about the case.

WE WILL REPORT ANYTHING FURTHER WE LEARN ABOUT THIS MATTER.

After $36 Million Jury Verdict and Contentious Battle, Former Adversaries Hansen Medical and Luna Innovations Form a Partnership

We reported about the $36 million jury verdict in this trade secrets case here: http://wombletradesecrets.blogspot.com/2009/07/36-million-trade-secret-verdict-loser.html.

Well, VirginiaBusiness.com is reporting that Hansen and Luna have settled their ongoing dispute on the following terms: (a) a $5 million promissory note, (b) a block of Luna’s stock, and (c)
agreements that will provide its fiber-optic technology to Hansen.

Under the agreement, Luna will reportedly give Hansen the four-year promissory note, 9.9 percent of its common stock and a warrant to purchase additional stock for three years. In addition, Luna will provide Hansen with fiber-optic shape sensing and localization technology to be used in Hansen’s robotic and non-robotic instruments.

“This settlement with Hansen Medical clears the largest hurdle on our pathway to emerge from Chapter 11 reorganization and pay our creditors what they are owed,” Kent Murphy, Luna’s chairman and CEO said in a statement. “We look forward to integrating our shape sensing technology with Hansen’s surgical devices, as we expand the potential market for our products in robotically assisted procedures. It’s exciting for Luna and Hansen to move forward together in a long-term partnership that is focused on creating enhanced procedures that help save lives.”

Let the hostilities end and the partnership begin.

Reed Construction Data Sues McGraw-Hill Construction Dodge For Trade Secret Theft

BusinessWeek is reporting that Reed Construction Data, a construction information provider, has amended a federal lawsuit against McGraw-Hill Construction Dodge, raising new claims of unlawful misappropriation of trade secrets.

The original lawsuit, filed Oct. 8 in the U.S. District Court for the Southern District of New York, charged that Dodge used a series of fake companies since 2002 to pose as RCD customers and gain access to RCD's construction project information database.

Reed Construction Data is a subsidiary of Reed Elsevier. McGraw-Hill Construction Dodge is a unit of The McGraw-Hill Companies Inc.

The amended complaint alleges that Dodge downloaded hundreds of RCD project-related documents and viewed details for thousands of construction projects.

The lawsuit alleges Dodge made misleading claims that its products were superior to RCD's, preventing companies from making fair and objective comparisons of the companies' products.

Hundreds of companies made misinformed buying decisions, the lawsuit said.

The amended complaint alleges multiple counts of fraud, misappropriation of trade secrets, misappropriation of confidential information and unfair competition, among other allegations.

Spokeswoman Patricia Walsh for McGraw-Hill Construction Dodge said the company denies the allegations. "We believe their legal claims are without merit and we intend to defend against them vigorously," she said.

The suit seeks an unspecified amount in lost profits, punitive damages and a jury trial.

Trade Secrets of . . . Shoe Design: Crocs Gets Sued in Trade Secrets Case

OregonLive.com is reporting that Crocs is being sued Columbia Sportswear for allegedly misappropriating Columbia's trade secrets received from a former Columbia employee.

In a filing in Multnomah County Circuit Court, Washington County-based Columbia accused the Colorado-based company of misappropriating trade secrets, intentional contract interference and aiding and abetting breach of duty of loyalty. The suit seeks at least $310,000 in damages and asks a judge to halt sales of certain footwear and give up all profits.

Tia Mattson, a Crocs spokeswoman, declined comment because she had not seen the amended complaint. The accusations were added to a lawsuit Columbia filed in August accusing Brian O'Boyle of designing footwear for Crocs while working as a senior footwear designer at Columbia. O'Boyle said Tuesday he could not comment on the allegations while the lawsuit was pending.

Columbia alleges Crocs earned $10 million in revenue and $3 million in profit on four models that incorporate O'Boyle's designs, including Electro clog and Prepair collection of recovery footwear, said Peter Bragdon, general counsel and vice president for Columbia. Columbia alleges Crocs paid O'Boyle more than $120,000 for the work.

"We just can't allow a competitor to sneak in the back door to take advantage of the investment we made," Bragdon said. O'Boyle, who spent nearly seven years at Nike before joining Columbia in 2003, no longer works at Columbia. Records show he invented a side element of a shoe upper for which Nike holds a patent.

The Prodigal Son-In-Law: Trade Secrets Theft Damages Issue Submitted to Florida Jury in Weird Family Legal Battle

TCPalm.com is reporting that a decade-old legal battle launched by members of a once-close Palm City, Florida family torn apart by million-dollar financial disputes, arson and industrial espionage is back in court with a new jury seated Monday to pick up where a 2004 jury left off.

Five years ago, a Martin, Florida jury found that in 1998, Port St. Lucie plastics manufacturer Premiere Lab Supply stole a machine and its design — considered trade secrets — from Chemplex Industries, a rival Palm City business founded by Monte Solazzi that uses a thin plastic film to make medical and industrial sample cups and containers.

This jury will determine damages owed to Chemplex.

The machine thief, court records show, was Solazzi’s son-in-law, Anthony Norelli, who worked for Chemplex until Solazzi in 1998 terminated him and sales manager Donato Pompa.

According to court records, Norelli and Pompa established Premiere in part by using the production machine stolen from Chemplex, and soon after began luring away hundreds of thousands of dollars in business from Chemplex.

Norelli though, bent on destroying Chemplex, twice hired someone to torch the building at its former Stuart site. After the second fire in 2000, Chemplex relocated to Palm City.

Federal authorities arrested Norelli, who pleaded guilty to tax charges and arson for hiring an accomplice to burn Chemplex. He was sentenced to five years in prison, but last month a judge ordered him back to prison for three months for violating the terms of his supervised release.

Pompa, who in court on Monday said Norelli was no longer his partner in Premiere, was also convicted in federal court for a theft of trade secret from Chemplex. He was ordered to serve five months in prison, followed by three years of supervised release.

Court records filed in May show Pompa is hoping a judge will dismiss a $240,000 federal restitution order, the amount of money he was ordered to pay to Chemplex following his guilty plea.

In court Monday, Solazzi’s attorney, William Davis of Miami, grilled Pompa about the revenue generated at Premiere Lab between 1999 and 2007, the time frame for which the firm utilized the machine taken from Chemplex.

“Would you agree sir that between 1999 and Aug. 3, 2007, that on average Premiere was selling these thin film products for roughly 57 percent less in terms of price than Chemplex?” Davis asked.

“I don’t know what the calculations is as far as what their selling prices are,” Pompa said. “I don’t have those figures in front of me.”

The trial is expected to last through Friday.

Former Quicken Employee Indicted for Allegedly Stealing Trade Secrets

A Michigan man stole computer secrets from his former employer, Quicken Loans Inc., according to a grand jury indictment unsealed Thursday in Detroit.

Michael Hummel, 35, is charged with wire fraud and theft of trade secrets and faces up to 20 years in prison if convicted of the most serious charge, wire fraud.

Hummel worked at Quicken's Livonia, Michigan offices from February 2005 until November 2006 as a senior Web developer and software engineer, according to a news release issued by the U.S. Attorney's Office.

He stole developed secrets about how to make the company's Web sites operate quickly and effectively, the news release said.

Beginning in May 2006, while still working for Quicken, Hummel began consulting with another company and stole Quicken secrets to help the other company build its Web sites, the indictment alleges.

"Protecting the competitive edge technology of our companies through vigorous enforcement of our federal trade secret laws is a top priority of this office," said interim U.S. Attorney Terrence Berg.

BUT THAT'S NOT OUR ONLY NEWS FROM DETROIT, FOLKS: CONGRATULATIONS TO DETROIT CATHOLIC CENTRAL AND ITS LONG-TIME COACH TOM MACH FOR RECENTLY WINNING THE 2009 MICHIGAN CLASS A STATE FOOTBALL CHAMPIONSHIP - YET ANOTHER IN A LONG LINE OF STATE CHAMPIONSHIPS FOR THE SHAMROCKS.

Former Home Depot Executive Gets Nailed By the Trade Secrets Hammer

The Atlanta Business Chronicle is reporting that former Home Depot executive Guillermo Martinez of Cumming, Ga., pleaded guilty Wednesday in federal district court to stealing trade secrets from the home improvement retailer.

Martinez was Home Depot’s senior manager of product engineering, responsible for helping company vendors prep to sell products to the company. In his position, he had access to Home Depot’s confidential information and other trade secrets, including pricing and profitability spread sheets and documents relating to product line reviews.

Starting in January 2008, Martinez was assigned to assist a potential local vendor that subsequently invited by Home Depot to participate in a product line review. A product line is where potential vendors make presentations for their products, packaging and marketing ideas. It also involves the submission of the potential vendors’ prices.

From around May 2008 and continuing until around July 2008, Martinez began supervising the local vendor’s presentation to Home Depot (NYSE: HD) as if he was a high-level employee of the vendor. In an effort to have the vendor gain an advantage over its competitors during the product line review, Martinez provided the vendor with Home Depot trade secrets. Specifically, he gave out confidential and proprietary pricing information, including the price the company was paying the vendor's competitors for the products that the vendor wanted to sell to the company.

Martinez provided a document titled “Wire Devices: RFP Summary,” which was marked at the bottom as “Proprietary & Confidential to The Home Depot,” and which contained a summary of the vendor's line review of competitor's price quotes. Martinez also provided a binder containing the line review presentation submitted to the company by a competitor of the vendor.

During this same time, Martinez was negotiating an employment agreement with the vendor.

Sentencing is set for Feb. 3, 2010.

Court Refuses to Give the Hook to The Nook - Preliminary Injunction Denied in E-Reader Trade Secrets Case

We first identified this Barnes & Noble "Nook" case here: http://wombletradesecrets.blogspot.com/2009/11/spring-design-says-to-barnes-nobles.html.

You'll recall that Spring Design has sued Barnes & Noble and the lawsuit asserts Barnes & Noble misappropriated Spring Design's trade secrets and violated the parties' non-disclosure agreement when it copied Spring Design's features into its recently announced Nook e-book.

Spring Design moved for a preliminary injunction and that motion was denied yesterday.

The Court preliminarily found that "Spring Design has not presented sufficient evidence to show that Spring Design is likely to succeed on the merits. Moreover, Spring Design’s motion was heard on the day that Barnes & Noble launched its nook™ product, at which time Spring Design did not have a commercial product available. Thus, the requested preliminary injunction halting the saleof Defendant’s product would alter the status quo, not preserve it."

You can read the full order here: http://stadium.weblogsinc.com/engadget/files/spring-design-order.pdf. This is not the end of the case, folks. This federal judge was just convinced that an injunction stopping Barnes & Noble from marketing and selling its reader wasn't warranted because the court couldn't decide whose evidence made them more or less likely to win later on at trial and and an injunction wouldn't protect Spring Design's interests anyway because its e-reader device wasn't on the market. In other words, the injunction would tend to penalize Barnes & Noble but not benefit Spring Design and protect its real commercial interests.

We'll keep a nightlight on to watch and read about this one as it progresses.

Starwood Hotels and Hilton Hotels Talk Settlement in High Profile Trade Secrets Case

We first reported about this case here: http://wombletradesecrets.blogspot.com/2009/04/starwood-hotels-v-hilton-hotels-trade.html.

Nielsen Business Media is reporting that the parties are talking settlement.

After Starwood filed the suit last spring, Hilton suspended development of its Denizen hotel brand and placed the two former Starwood Luxury Brands Group executives accused of stealing trade secrets on paid administrative leave.The suit appeared headed toward trial, as demanded by Starwood, but in a court filing this month, Charles Gilman, a lawyer for Cahill Gordon & Reindel, which represents Starwood, asked the judge to postpone a hearing set for Nov. 18 until the week of Dec. 14, noting that "the parties have been exploring the possibility of settlement."A Hilton spokesperson last week said the company has no further comment "beyond the document that was filed last week." Similarly, a Starwood spokesperson offered "no comment at this time."

We'll report back regarding any developments in this regard. We'd bet that the topics for settlement include some hands-off "covenant not to solicit or hire" employees provision and additional restrictions on Hilton's abilities to develop the Denizen hotel brand or hotel concepts that look and operate like the Denizen brand was supposed to. More when we learn it.

High-End Photography Companies Settle Trade Secrets Suit in Las Vegas

We first reported about this case here: http://wombletradesecrets.blogspot.com/2009/09/say-cheese-photography-studios-in.html.

Well, the Las Vegas Sun is reporting that this matter has settled.

Peter Lik USA charged in the lawsuit that Scottland, a former Peter Lik employee, had violated his noncompete agreement by soliciting the business of Peter Lik customers on behalf of The Lough Road.

The Lough Road has four galleries around the country and is preparing to open its first Las Vegas location, at MGM Mirage’s CityCenter complex, in December.

The Lough Road, which sells the works of landscape and wilderness photographer Rodney Lough Jr., had denied allegations in the lawsuit that Scottland had violated the noncompete agreement.
Court records show the suit was settled and dismissed last month, with Scottland’s noncompete agreement modified to allow him to continue working for The Lough Road and further amended to specify which customers Scottland could solicit.

This is how these matters often end, folks. So - there you have it.

Alleged Ford Motor Trade Secret Thief Jailed While Awaiting Trial

The Detroit Free Press is reporting that U.S. District Judge Gerald Rosen has ordered that a former Ford product engineer remain jailed while he awaits trial on charges of stealing documents from the Dearborn automaker.

Xiang Dong Yu, also known as Mike Yu, 47, of Beijing, was indicted last month on federal charges of theft of trade secrets, attempted theft of trade secrets and unauthorized access to a protected computer.

On Thursday, Magistrate Judge Mark Randon ruled that Yu could be free while he awaits trial on the charges.

The U.S. Attorney's Office appealed that ruling and Rosen overturned Yu's release on Friday.
During a hearing Thursday, U.S. Assistant Attorney Cathleen Corken argued that Yu, a Chinese citizen, has no family, employment or property in the United States and is a flight risk.

Yu was arrested Oct. 14 at Chicago's O'Hare International Airport, where Corken said the government seized a laptop computer that had thousands of pages of documents from Ford as well as from another, undisclosed company.

The government estimates that the documents are worth $24 million to $32 million.
Corken said Yu, who already faces five felony counts and more than 6 1/2 years in prison, could face additional charges.

Let's face it folks - if you're a highly mobile Chinese national with a number of aliases and you're in Detroit and you're accused of stealing competitively-sensitive secrets from a major auto company, you've got some strikes against you when it comes to being free on bail awaiting trial.

More China Trade Secrets Cases in the Pipeline

On the heels of the failed prosecution of the two Chinese engineers in the NetLogic trade secrets case, Mark Albertson, writing in the SF Technology Examiner, takes notice of the apparent – but not necessarily politically correct – fact that in trade secrets cases in Silicon Valley “the trail always seems to lead to China.”

The NetLogic case, Albertson notes, is “only one of many recent cases where the recipient of trade secrets was in China.”

Albertson mentions the Boeing case as well as the case of Sheldon Meng, a former engineer for Quantum3D, accused of stealing a simulation program for night vision technology.

Third Party Litigation Financing Funds Delve Into Trade Secrets Matter

We thought this an interesting topic for you to consider - funding of trade secrets litigation by investors unrelated to the firms or the parties involved in the litigation.

MarketWatch is reporting that U.K. commercial dispute investor Burford Capital on Monday announced its first two investments since an initial public offering on the Alternative Investment Market in London last month. The first case involves theft of trade secrets and breach of contract; it is set for trial in a U.S. federal court in May 2010.

Burford will invest $2 million to cover getting it to trial and some legal fees, with potential returns between 35% to 67% of settlements or judgments. The second is shareholder dispute over the application of proceeds from the sale of a business, with a hearing scheduled for February 2010. Burford has invested $2.3 million and could see a return three or four times that amount.

These are interesting arrangements to watch play out. You can read this piece here from AmLaw Litigation Daily regarding a case involving third party litigation financing where the third party wasn't happy with a 10% return and the arrangement itself resulted in litigation.

Idaho Health and Home Products Company Sues Former Employees For Trade Secret Theft - And Ubiquitous News Stories Abound Regarding Longevity Payments

The Associated Press is reporting that an Idaho health and home products company Melaleuca Inc. accuses a Utah company of raiding some of its top sales staff, infringing on company trade secrets and competing unfairly.

Idaho Falls-based Melaleuca filed a lawsuit in federal court Monday against Max International, its top sales executive and dozens of former Melaleuca sales executives.

The complaint seeks more than $10 million in damages and asks a judge to issue an injunction that would stop future sales staff raids. The lawsuit also seeks to cancel a meeting scheduled for Saturday that's described as another attempt by Max International to lure away top Melaleuca sales talent and their customer data.

"Already attempting to piggyback off of Melaleuca's success by duplicating key portions of its business model, Max now seeks to swell the ranks of its (sales) associates by raiding Melaleuca's marketing executives," the lawsuit states.

Max International, a Salt Lake City-based company, was incorporated in 2006 and produces and sells health and wellness products directly to customers.

Melaleuca, founded in 1985, sells about 350 nutritional and household products, including lotions, detergents and powdered drinks. It employs about 3,400 workers worldwide and has 700,000 customers that buy products from sales executives.

Under the company's operating guidelines, sales executives earn commissions on customer sales or by training and motivating other sales staff in gathering new customers. Each sales representative is required to maintain an extensive database, called a business report, of customer contact information and other sales executives they support. The company considers this catalog of information a trade secret.

The lawsuit accuses Max of luring Melaleuca sales staff with lucrative payments and using information from those Melaleuca business reports, causing former Melaleuca employees to violate noncompete agreements that are designed to prevent workers from using inside knowledge to benefit a direct competitor.

The lawsuit accuses Max of attracting at least eight of Melaleuca's best sales staff in the last year and encouraging each to recruit Melaleuca customers, sales staff and others.

Melaleuca is asking for a jury trial and for a judge to issue a restraining order barring Max from recruiting more Melaleuca sales staff. It also seeks a restraining order on a sales presentation planned by Max on Nov. 21 in Atlanta because it "promises to be another unlawful raid of Melaleuca marketing executives."

NOW, we're scratching our heads here in North Carolina - does anyone find it ironic that just two days ago numerous local news oranizations ran these "stories": http://www.localnews8.com/Global/story.asp?S=11526543 or http://www.trib.com/news/state-and-local/article_4d5763f8-b9c8-54ab-ad23-4806f807c95b.html and http://www.nwcn.com/news/business/Idaho-Falls-based-Melaleuca-gives-employees-longevity-payments-70199037.html and http://www.idahobusiness.net/archive.htm/2009/11/16/Melaleuca-issues-checks-to-longterm-employees.

Just wonderin' about the timing of these "news" stories . . . .

Hedge Fund Withdraws Trade Secret Summons After Concluding its "Evidence" Was Too Shaky to Proceed

The AmLaw Litigation Daily is reporting that Amaranth Advisors LLC, the energy trading hedge fund that lost almost $7 billion in 2006 trading in natural gas, has withdrawn its trade secret misappropriation lawsuit summons against Touradji Capital Management, another

You can see the summons here: http://amlawdaily.typepad.com/AmaranthvTouradji.pdf.

According to the summons, Amaranth and Touradji signed a confidentiality agreement in advance of the transfer of Amaranth's base metals portfolio to Touradji. The transfer was part of Amaranth's ultimately unsuccessful attempt to stave off the biggest hedge fund meltdown in history.

Amaranth's summons suggested that Touradji stole confidential and proprietary trade secrets and trading strategies related to the base metals portfolio. But that's where things get complicated. Touradji claims that Amaranth's would-be suit was based on information from two former Touradji employees who are in the middle of their own New York state court litigation with Touradji. Those two former employees are being sued for slander/defamation.

Seems Amaranth had second thoughts about its summons after it learned from Touradji what Touradji intended to prove about their former employees. Suffice it to say that Amaranth concluded that Touradji had the goods on its former employees and, thus, dropped its summons. You can read here about Touradji's claims against its former employees: http://www.bloomberg.com/apps/news?pid=20601087&sid=aGUg0NEnWXwA&pos=6.

IMAX Claims Former Partner, Cinemark, Stole The Trade Secrets of the IMAX Theater Experience

Courthouse News Service is reporting that IMAX claims its former partner Cinemark defrauded it and stole trade secrets by trying to "reproduce" IMAX's "multiplex movie theaters across the Americas." It claims Cinemark used the secrets to create "Extreme Digital" or XD theaters to provide a "bootleg version of the IMAX Experience."

In its complaint filed in state court in New York, IMAX says it teamed up Cinemark in the 1990s after "two principals of Cinemark ... professed an intent to become one of IMAX's biggest customers."

At the time, IMAX says, Cinemark multiplexes "housed standard, conventional-sized auditoriums," while IMAX theaters were "wrap around." IMAX says it went for the deal because Cinemark promised "to install IMAX systems in ... Cinemark's domestic multiplexes ... and to ultimately provide IMAX an expansion opportunity into Latin American markets, where Cinemark touted a strategic presence." IMAX says it disclosed to Cinemark "confidential and sensitive information regarding the IMAX immersion theatres ... all the details that set IMAX apart from all other industry participants."

But now, IMAX says, instead of promoting the IMAX brand, Cinemark is "blatantly" trying "to reproduce the entire, trademarked IMAX Experience in the form of a product that Cinemark unveiled earlier this year," which Cinemark calls "'Extreme Digital Cinema' ... or XD.'" Cinemark has the brass to claim that XD is "just like" or even "better than" IMAX, according to the complaint.

IMAX claims XD is a "bootleg version of the IMAX Experience." It claims Cinemark "fraudulently misrepresented its intentions to IMAX for the purpose of extracting confidential information." It adds that "over a number of years, [Cinemark] has deliberately misappropriated that information, co-opting ... hundreds of millions of dollars worth of strategic research ... and is now ... seeking to profit from its actions at IMAX's expense." IMAX seeks compensatory and punitive damages for tortious interference, unjust enrichment, theft of trade secrets and breach of contract.

We'll keep our 3-D glasses on and watch for developments in this one.

TSMC v. SMIC Trade Secrets Case Settles: $200 Million Plus Plus Goes to TSMC and SMIC CEO To Resign

LegalPad, a law blog out in California, is reporting that the massive TSMC v. SMIC has settled.

SMIC has agreed to pay TSMC $200 million and an undisclosed amount of stock and warrants, Keker & Van Nest partner Jeff Chanin acknowledged. Chanin and his firm represented TSMC in the matter. TSMC needs to get approval from the Taiwanese government to obtain the SMIC shares, a TSMC spokesman said.

TSMC won big during the liability phase with the jury finding that SMIC stole trade secrets and broke a previous settlement agreement. Chanin said that pursuant to stipulations by both parties a judgment was entered in favor of his client TSMC on all claims and counterclaims.
The two sides were in the midst of the damages phase when the court announced the settlement Monday morning.

Additionally, SMIC announced the resignation of its chief executive, a few hours after the China-based chip maker said it would pay rival TSMC $200 million as part of a deal to settle the legal dispute. SMIC's announcement that founder Richard Chang has stepped down marks the latest twist in China's struggle to build a semiconductor industry, and caps Mr. Chang's effort to build a cornerstone of that industry that could compete with more established overseas rivals like Taiwan's TSMC. Mr. Chang resigned to pursue personal interests, SMIC said in a statement, without elaborating.

SMIC said David N.K. Wang would succeed Mr. Chang. Mr. Wang is an industry veteran who has worked at several companies, including a lengthy stint at Applied Materials Inc.

That's a whopper of a settlement even in the face of possible expert testimony establishing perhaps billions in damages. Goodbye Mr. Chang, hello Mr. Wang.

The Trade Secrets of Insanity: Guy Claims Sarah Jessica Parker Stole iPod Trade Secrets From Him and Then Transferred Them to Apple

Not all trade secrets lawsuits are alike. The one we're going to tell you about here is like no other we've reviewed.

Seems Franz Wakefield thinks he got screwed. He claims he invented the iPod in 1983, but had the design stolen from him by "Sex in the City" star Sarah Jessica Parker, who then sold it to Steve Jobs in a terribly concerning progression of corporate espionage.

Here's how the scheme allegedly worked: In 1989, the suit alleges, Wakefield won first place in a District Arts Competition and was honored by U.S. Congressman William Lehman and movie stars Parker and Robert Downey Jr. A self-described "trade secret and copyright owner," Wakefield, of Miami, Fla., is president and chief product design engineer with COOLTvNETWORK.com. In meeting these people, Wakefield alleges he was asked by the congressman to disclose his "trade secrets" to the FBI, including the concept of the iPod, iTunes, and the iPhone, the last of which he allegedly specifically named nearly 20 years prior to its debut.

The suit claims that Wakefield also developed a friendship with Parker and "made a trade secret deal" with her to commercialize the iPod classic, nano, mini, shuffle, video, touch and photo, as well as iTunes and the iPhone. The supposed agreement would have granted Parker 2 percent of gross revenues from the products. Wakefield said he asked the FBI to watch over him to ensure the security of his inventions and deal with Parker.

Per his "deal" with Parker, Wakefield claims the actress agreed to meet with Apple co-founder Steve Jobs to present his concepts, including the sale of songs via iTunes at $0.99.

In one of the complaint's apparently honest admissions, Wakefield claims he attempted to contact Parker in 2006, only to be told by her attorney that she has no recollection of any conversations regarding the iPod.

So what does Wakefield want? In a letter to Steve Jobs, he demanded: “I… seek legal recourse for the immediate cease and desist from the manufacture, marketing, and sale of all the iPOD, iTunes, and Iphone lines; along with pursuing damages from the products sold to date, unjust enrichment caused by the theft, enforcement of the agreed 2% gross revenues on all sales, and any other applicable damages or compensation.”

We may not keep an eye on this one for you.

TSMC v. SMIC Trial Continues - See CVN Video Links of Opening, Witness Examination and Verdict

We've been following progress in the massive TSMC v. SMIC trade secrets trial going on in California, see here: http://wombletradesecrets.blogspot.com/2009/11/tsmc-wins-major-trade-secrets-verdict.html.

You'll recall that the jury has already found that SMIC had improperly "acquired, used or disclosed" the TMSC trade secrets and violated the 2005 agreement between the companies and that an attorney for TSMC said its expert witness on damages put the requested amount in the range of "ten figures," or $1 billion. This is a whopper of a case, folks - and it's still going on.

CVN - Court View Network - is a provider of live and on-demand video for high-stakes civil litigation. The proceedings they cover via video feed are shown gavel-to-gavel and commercial-free. They even provide live video feeds to their customers. CVN's David Siegel read our blog posts on this case and was kind enough to provide us with a link to CVN's coverage of this trial and we're now providing that link to you from which you can review free sample video clips available from the trial - one from opening statements, one from witness examination and one from the verdict session. Click here: http://www.courtroomview.com/proceedings/tsmc-north-america-vs-semiconductor-manufacturing-international-trial-2009-09-08 and then click on any or all of the links under the heading "free video clips from the case." For those of you who have never seen a real courtroom or real attorneys presenting a case in one - here's your chance.

We thank David Siegel at Court View Network for providing this opportunity to our readers. We've reviewed Court View Network's offerings and were quite impressed with the breadth of their coverage. When you have ten minutes, click on the link above and watch the selected snippets of this major trade secrets trial - and we happily note for you providing video coverage is a first for the Womble Trade Secrets Blog. This is a cool day for us.

TSMC Wins Major Trade Secrets Verdict Against SMIC - Damage Award Not Yet Declared

The Wall Street Journal is reporting the jury in Oakland ruled Tuesday in favor of Taiwan Semiconductor Manufacturing Co. in a long-running legal battle against rival Chinese chip maker Semiconductor Manufacturing International Corp., which TSMC had accused of stealing trade secrets and violating a prior settlement between the companies.

An Alameda County Superior Court jury still must rule on what damages SMIC might have to pay in the case, but they could be hefty. An attorney for TSMC said it hasn't asked for a particular figure, but noted its expert witness on damages put the amount in the range of "ten figures," or $1 billion.

Jeffrey Chanin, the attorney at Keker & Van Nest LLP representing TSMC, said the case involved 65 instances of trade-secrets theft, which he said amounted to "the biggest case of wholesale corporate espionage" he had encountered.

After a nine-week trial, the jury agreed that SMIC had improperly "acquired, used or disclosed" the TMSC trade secrets and violated the 2005 agreement.

SMIC, among other things, argued that the information in question didn't constitute trade secrets and was widely disclosed in technical literature, said David Steuer, an attorney with Wilson Sonsini Goodrich & Rosati who is representing SMIC.

SMIC also raised counterclaims against TSMC, including the argument that the Taiwan company took trade secrets from SMIC. Some of those issues remain to be tried, Mr. Steuer said.

"Obviously, it's a good day for them," Mr. Steuer said, referring to TSMC. But he said the battle remains "in the middle, because our claims haven't been decided."

Stay tuned, folks. We have never reported a billion dollar trade secret theft verdict - but this might be the case where we do.

Spring Design Says to Barnes & Noble's Nook E-Reader: "You've Got Our Chocolate in Your Peanut Butter!"

Reuters is reporting that Silicon Valley start-up company Spring Design has sued Barnes & Noble and the lawsuit asserts Barnes & Noble misappropriated trade secrets and violated the parties' non-disclosure agreement when it copied Alex's features into its recently announced Nook e-book.

"Spring Design unfortunately had to take the appropriate action to protect itsintellectual property rights," said Spring Design Vice President of Sales andMarketing, Eric Kmiec. "We showed the Alex e-book design to Barnes & Noble ingood faith with the intention of working together to provide a superior dualscreen e-book to the market."

Spring Design first developed and began filing patents on its Alex e-book, aninnovative dual screen, Android-based e-book back in 2006. Since the beginningof 2009 Spring and Barnes & Noble worked within a non-disclosure agreement,including many meetings, emails and conference calls with executives ranging up to the president of Barnes and Noble.com, discussing confidential information regarding the features, functionality and capabilities of Alex. Barnes & Noble's Nook, which will compete with Amazon's Kindle, is due to go on sale later this month for $259.

Throughout, Barnes & Noble`s marketing and technical executives extolled Alex`s "innovative"features, never mentioning their use of those features until the public disclosure of the Nook. Alex, with its unique Duet Navigator, provides the capability for interactionand navigation techniques of the two screens and furthermore utilizes the capabilities of Android to enhance the reader`s experience by supporting interactive access to the Internet for references and links. As the first in the market to offer an e-book with full Internet browsing while reading and with easy navigational control via its touch screen, Alex is well-positioned to offer the most dynamic and powerful reading device in the market.

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

Well-Dressed Attorneys Make Closing Arguments in TSMC v. SMIC Trade Secrets Trial

We've been following this TSMC v. SMIC trade secrets trial going on out in Oakland, see here: http://wombletradesecrets.blogspot.com/2009/10/semiconductor-international-has.html.

The parties have now made their closing arguments, and Law.com has an interesting report regarding those arguments.

Jeffrey Chanin, who represents TSMC, compared SMIC to a thief whose "strategy has been to play a game of catch me if you can and play dumb when caught." He argued that SMIC took trade secrets from former TSMC employees to get its plants up and running in short order.
Chanin said that SMIC had agreed to clean out all the stolen trade secrets as part of the 2005 settlement, but kept using them -- and on top of it destroyed documents. Indeed, Judge Brick told jurors they could infer that SMIC had deliberately destroyed TSMC documents in its possession. Chanin and his colleagues tried to capitalize on the instruction by writing it out in large letters on an oversized, glossy plasterboard right beside the jury box.

David Steuer, who represents SMIC, told the jury that TSMC's lawsuit was nothing more than "a mean-spirited attempt to destroy a competitor." He claimed that the case boiled down to "fragments of alleged trade secrets that were not cleaned out." He claimed that TSMC hadn't proven that any trade secrets were misappropriated, because, as Steuer had argued, "information circulates in this industry in a number of ways."

In closing, Chanin told the jury to punish SMIC. "It's time for you to tell this company to act responsibly with your verdict in this case," Chanin said.

Steuer said that SMIC had already paid the price. "They did take responsibility," he said. "They settled the case and it was a huge and painful settlement."

We'll report back on the jury's verdict. Our favorite part of this article - and remember that you can read the article by just clicking on the title to this blog post - is the author's repeated references to what the attorneys and the judge were wearing (e.g., "The nine-week California trial has unfolded before Judge Steven Brick, who on Wednesday was attired in his trademark bow tie and dark-rimmed glasses" or "Dressed conservatively, Chanin delivered his argument in a calm, friendly, slightly didactic tone"). Interesting stuff - you don't usually get that kind of color in trial reporting from the field. We like the use of the word "didactic" too - kudos to Law.com on this one.

Citing Need to Protect Certain Trade Secrets, Iowa Judge Agrees to Close Courtroom For Some Testimony and Evidence in Consumer Fraud Trial

The Des Moines Register is reporting that a Polk County, Iowa judge agreed Tuesday to close his courtroom for parts of a consumer fraud trial brought against a Connecticut-based company by the State of Iowa, ruling that certain testimony and evidence could expose the trade secrets of a company accused of illegal sales tactics. The lawsuit alleges Vertrue Inc. sold discount buyer-club memberships to nearly 500,000 Iowans for such things as home improvement items, entertainment, fashion and fitness products.

Judge Robert Hutchison ruled that specific data about Vertrue Inc.'s membership could open it to attacks from business competitors. The Connecticut company is the subject of a major consumer fraud lawsuit filed by the Iowa attorney general's office.

Lawyers for the discount club membership company said making public internal customer statistics — such as the number who actually use their memberships, and how long they stay enrolled — would place them at a competitive disadvantage.

Hutchison said he wanted "to keep the courtroom open as much as possible," but would not allow exact numbers into the public trial. He said he would close the courtroom to the public only when testimony involved exact company data. The trial started Monday in Polk County.

"I want this information protected," he said. "I'm in hopes we won't have to close the courtroom much, but we may have to while examining a particular witness."

The lawsuit contends Vertrue used unrelated telemarketing calls to lure customers into the memberships without their knowledge. The calls usually began with pitches for products advertised on television, or other solicitations.

Connecticut Mortgage Broker Loses Staff in 2004 and Lawsuit in 2009

CNNMoney.com has an interesting piece about a small mortgage brokerage company that claims to have had 33% of its employees "raided" by another company. Those employees then allegedly worked within 2 miles of their former employer and ate its proverbial lunch.

"It was a complete shock," says Charter Oak Lending Group Co-Founder Debra Killian. "We lost everything that took 10 years to build in one month, because one company stole it. How is that not illegal?"

It's an important question. Are there some things that companies "build" that they're not legally entitled to retain? This court seemed to think so.

Certainly the piece's identification that Ms. Killian and Charter Oak did not use any type of employment agreements that restricted certain post-departure competition was instructive. That definitely hurt them. But one wonders what Connecticut law says about raiding - where the number of employees hired by the competitor is so substantial that it renders the former employer hobbled competitively. Isn't that illegal as unfair competition?

We'll see how the appeal of this matter turns out. I am not persuaded by Ms. Killian's claim that Charter Oak "lost everything" when they lost a third of their employees to a competitor - but I buy the argument that she lost something and that the law distinguishes between losses to pure competition and unfair competition. The former is what we want. The latter is not.

Federal Economic Espionage Trial Employs Unique Evidence Presentation Technique

Johnny Carson used to employ an expression "I did not know that!" for instances where he was surprised by the claim or admission of a guest.

We admit surprise and will acknowledge "we did not know that!" with regard to a report by Law.com that the criminal trial judge is permitting a unique evidence presentation technique for the NetLogic trade secrets theft trial currently underway in California.

The report claims: "after each witness testifies, Northern District of California Judge James Ware will allow lawyers from each side to give a five-minute "summary argument" to "heighten juror comprehension and sharpen the issues in dispute. The side presenting the witness will go first."

Hmmm. Very interesting. Very, very interesting. This is not normal and we've never seen trial courts permit such a protocol - it would seem to benefit the defense in that those attorneys can supply commentary on evidence the government is introducing as it is being introduced. Defense attorneys usually only have the benefit of cross-examination of the witnesses and the proponents of documents or other evidence - and sometimes the value of the cross-examination in complex cases isn't clear to the jury until the defense later (sometimes, much later) explains: "remember when I asked witness x whether so-and-so was at that meeting? well, this is why."

Defense lawyers Thomas Nolan from San Jose and Edward Swanson from San Francisco requested the protocol, "given the complexity of this case and the technical nature of many of the witnesses' anticipated testimony," they wrote in a court filing.

Assistant U.S. Attorney Matthew Parrella opposed the move, calling it a waste of time that serves no productive purpose. But - apparently Judge Ware disagreed.

We anxiously await further reports from this trial - including the prosecution or defense objecting to characterizations made by the other side in these five-minute summaries. Judge Ware will surely have to police these efforts judiciously.

More soon . . . .

Federal Prosecutor Calls Two Engineers "Traitors to NetLogic" In Opening Statements to the Jury in Rare Economic Espionage Prosecution

We want to thank the San Jose Mercury News and ComputerWorld for publishing courtroom accounts of this rare Economic Espionage Act prosecution of Lan Lee and Yuefei Ge.

Calling Lee and Ge "traitors" to NetLogic, Assistant U.S. Attorney Matthew Parrella told the jury that the case was about stealing cutting-edge chip designs to set up a company that was backed by a Chinese venture capital program and China's military.

"There is no doubt about it," the prosecutor said. "They planned to build, market and sell in China the chip that is a direct competitor."

Parrella told jurors that the government would present a "treasure trove" of evidence that the two engineers conspired to steal NetLogic's technology, including e-mails and material found
on their home computers linking them to business plans with China and its venture capital arm, known as the "863 program." Government attorneys also said they have evidence the two stole company secrets from Taiwan Semiconductor.

But while the prosecutor unveiled how the alleged scheme was exposed, including anonymous e-mails and phone calls to NetLogic executives and the FBI from Ge's wife, defense lawyers offered a very different portrait.

In statements to the jury, defense attorneys August Gugelmann and Tom Nolan said the men were carrying out the most commonplace of Silicon Valley stories — using their engineering know-how to build their own company with their own ideas.

Lee and Ge, they said, did not steal trade secrets and never intended to benefit China.

"This case isn't really about economic espionage, it's not about spying and it isn't about stealing trade secrets," Gugelmann said. "What this case is really about is our clients wanting to start a company of their own based on their own ideas, their own design."

The defense also made clear it would attack the FBI's pursuit of the engineers, saying Ge's wife tipped off agents because she didn't want her husband to start his own business but that there was never any evidence to back up her claims they were stealing from NetLogic. She is expected to testify in the trial.

The case against Lee, a Palo Alto resident, and Ge, of San Jose, is the second in the nation to go to trial under the specific provision of the 13-year-old law making it a crime to steal technology to aid a foreign government. ComputerWorld has an informative piece on the trial and prosecution theories here: http://news.idg.no/cw/art.cfm?id=768E949E-1A64-67EA-E4C550C1C0E32C36. [Note: we are quoted in the piece but it is informative, nonetheless].

We'll keep watching this one for you. Of particular interest to us is the development of the evidence concerning this "863 program" - a program set up by The People's Republic of China to generate technologies that will benefit and enrich China. You can read the Chinese government's explanation of this program here: http://www.most.gov.cn/eng/programmes1/200610/t20061009_36225.htm.

This is the hottest trade secrets trial we've covered and it really is a showdown between Silicon Valley's interests and those of a foreign government suspected for years of sponsoring technology theft and copying at the highest levels. Stay tuned . . . .

Rare Criminal Prosecution Under Economic Espionage Act Proceeds - Case Will Examine Issue of Chinese Government's Sponsorship of Technology Theft

We first blogged about this Economic Espionage Act case here: http://wombletradesecrets.blogspot.com/2007_09_01_archive.html.

You'll recall that the Sec. 1831 of the federal Economic Espionage Act of 1996 provides as follows:

"Sec. 1831. Economic espionage
(a) IN GENERAL- Whoever, intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent, knowingly--
(1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains a trade secret;
(2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys a trade secret;
(3) receives, buys, or possesses a trade secret, knowing the same to have been stolen or appropriated, obtained, or converted without authorization;
(4) attempts to commit any offense described in any of paragraphs (1) through (3); or
(5) conspires with one or more other persons to commit any offense described in any of paragraphs (1) through (3), and one or more of such persons do any act to effect the object of the conspiracy, shall, except as provided in subsection (b), be fined not more than $500,000 or imprisoned not more than 15 years, or both."

You'll also recall that the Act contains a separate section, Sec. 1832, that does not require that the misappropriation of the trade secret was done to benefit a foreign government or instrumentality. Most FBI and prosecutorial activity in EEA cases regards Sec. 1832 cases, not Sec. 1831 cases. But - we are now watching a Sec. 1831 case unfold in trial.

The Silicon Valley Mercury News is reporting that Lan Lee and Yuefei Ge have pleaded not guilty to the charges that include theft of trade secrets and violations of the espionage law. If convicted, they face 10 years or more in prison, although most convicted on economic espionage charges in recent years have received much lower sentences. Ed Swanson, Ge's lawyer, declined to comment. Tom Nolan, Lee's attorney, did not return calls seeking comment.

In court papers, defense lawyers suggested Lee and Ge had no intention of doing anything to illegally benefit China. Lee, a U.S. citizen, and Ge, a Chinese national, allegedly stole the blueprints for a superfast computer chip from their employer, NetLogic Microsystems of Mountain View, and another company, Taiwan Semiconductor, for a Chinese-backed program.

The defense does plan to call witnesses with expertise on the technology involved and China's relationship with technology companies, as well as witnesses who will testify about the engineers' character, including wives, co-workers and friends, according to court papers.

Assistant U.S. Attorney Matthew Parrella, who is prosecuting the case, declined to comment.
In court papers, prosecutors allege Lee and Ge conspired to steal secrets from NetLogic to establish their own startup company with funding from a Chinese venture capital arm called the "863 program" — which the U.S. says is intertwined with the Chinese government. Court papers show the two men were first uncovered by anonymous e-mail tips to the FBI traced to Ge's wife.

Prosecutors have already been dealt one blow when U.S. District Judge James Ware refused to allow them to use the testimony of two other former valley executives who pleaded guilty last year to economic espionage charges. They were supposed to testify about China's "863" program.

But prosecutors have other witnesses and material seized from the engineers' home computers, including references to the allegedly stolen data and negotiations with China, court documents show. There are no direct allegations of China's role, except that the technology could be used for the Chinese military and tech businesses.

China has repeatedly denied any involvement with defendants charged in U.S. courts with stealing trade secrets.

Meanwhile, experts say that while the San Jose trial will be an intriguing glimpse into the loss of valley secrets overseas, it also is a reminder that the economic espionage laws are seldom used and most companies wind up protecting themselves. Experts estimate U.S. companies lose more than $40 billion a year from stolen trade secrets.

"So, it's two or three (trials) in 13 years," said Steven Fink, president of Los Angeles-based Lexicon Communications, which advises companies on espionage. "Wake me when some real action is going on. The real story is what took so long and why there aren't more of these."

We'll report on the trial as it continues.

Illinois Judge Grants Injunction Against Former Citadel Employees - One of Whom Claims Additiction to Pornography To Explain Empty Hard-Drive

We've been blogging about this trade secrets case for a while, see here: http://wombletradesecrets.blogspot.com/2009/07/former-citadel-employees-defend.html. You'll recall that Citadel, a huge Chicago hedge fund, has sued some former employees for breach of their noncompete covenants and theft of trade secrets of certain kinds of high-speed trading.

Well, Reuters is reporting that the trial court issued an injunction against the former employees and their new company, enforcing their noncompete agreements and judicially shutting them down until mid-November. The court did not, even though Citadel asked the court to do so, extend the noncompete for additional time in light of the former employees' prior breach. The report does not identify the injunction bond required by the Court - but we'll look into that and report back.

BUT - the singularly fascinating aspect of this case for this purposes of this report is the defense raised by the key departed employee ( Mikhail "Misha" Malyshev, pictured above) to explain why his hard drive was wiped clean of forensic evidence, apparently after a court order was entered requiring the preservation of all electronic evidence. His defense? I am addicted to hard-core internet pornography and wiped my hard-drive clean to save myself the embarrassment of being examined about the forensic details of my addiction.

Res ipsa loquitur.

Georgia Trade Secrets Act and Preemption

The Georgia Trade Secrets Act contains a provision that states that the GTSA supersedes “conflicting tort, restitutionary, an other laws of this state providing civil remedies for misappropriation of a trade secret.” GCGA § 10-1-767(a).

That provision was front and center in a recent opinion of the Georgia Court of Appeals, Professional Energy Management, Inc. v. Necaise, 2009 WL 3050598 (Ga.App. Sept. 25, 2009).

The fact pattern was pretty standard: the defendant Necaise left employment with the plaintiff company and founded his own company. He allegedly used the trade secrets of the former employer and stole customers for his new company.

Plaintiff, in addition to its trade secrets claim, brought claims for breach of fiduciary duty, tortuous interference with contractual relations, conversion, misappropriation of corporate opportunity, unjust enrichment, and constructive fraud.

The trial court dismissed all the claims except the GTSA claims on the grounds of statutory preemption. The trial court followed a decision in a federal case, Diamond Power Int’l, Inc. v. Davidson, 540 F.Supp.2d 1322 (N.D.Ga. 2007), which had ruled that where the “full extent” of a claim relied on the same allegations as those underlying a claim for misappropriation of trade secrets, the claims are “conflicting” under the GTSA and therefore precluded.

The court of appeals agreed with the federal court’s statement of the legal principle but found that each of the claims had to be reinstated because each of them, on the facts alleged, went beyond just trade secrets allegations. Thus, the “full extent” of the claims was not coterminous with the trade secrets claim.

The standard fact pattern of this case could make it a leading one on the contours of preemption under the Georgia Trade Secrets Act.

Ford Motor Design Secrets Allegedly Pilfered by Chinese Ex-Employee

The Detroit Free Press is reporting that an ex-employee of Ford Motor Company has been criminally charged with stealing approximately 4000 pages of documents that included system design specifications for an engine and transmission mounting subsystem, electrical distribution system, electric power supply, electrical subsystem and generic body module.

Xiang Dong Yu, a.k.a. Mike Yu, 47, of Beijing is charged with theft of trade secrets, attempted theft of trade secrets and unauthorized access to a protected computer.

Yu was arrested Wednesday at Chicago's O'Hare International Airport after he exited a flight from China and remains in federal custody in Chicago, where a detention hearing is set for Tuesday.

Yu worked for Ford from 1997 to 2007, according to the indictment. In December 2006, Yu took a job at the Chinese branch of a U.S. company.

The company, Foxconn PCE Industry Inc., is an electronics manufacturer, according to the indictment, and is not accused of wrongdoing in the documents filed Thursday. Officials at Foxconn could not be reached for comment Thursday. Yu was later hired by Beijing Automotive Corp., which also isn't cited for wrongdoing.

U.S. Attorney Terrence Berg told the Free Press that the investigation began when Ford alerted the FBI to its suspicions.

"There's no question that when times are hard that the importance of a company's competitive edge and trade secret information increases," Berg said.

Ford spokeswoman Marcey Evans declined to discuss details of the case.

"We are fully cooperating with authorities," Evans said.

North Carolina Business Court Says Customer Pricing Information is NOT a Trade Secret Per Se

The authors of this blog practice law in North Carolina. In North Carolina we have a specialized "business court" - where cases involving complex issues of corporate and commercial law are assigned/transferred by the Chief Justice of the North Carolina Supreme Court. This business court hears some of our state's more interesting business law disputes - and trade secrets cases are routinely assigned to this court for its consideration and adjudication. This trial-level court also routinely drafts and publishes well-reasoned and persuasive (well, we think so when our clients prevail) opinions. Click on the title to this blog-post and you can read the Edgewater v. Epic opinion and order.

On August 11th this court (per Judge John R. Jolly, Jr.) examined a trade secrets misappropriation argument made by a company called Edgewater Services, Inc. Edgewater negotiates transporting packages and pricing for clients, specializing mostly in full truckload shipping. Another company located nearby, Epic Logistics, was also in this business but they specialized mostly in partial truckload shipping - apparently their clients didn't usually fill a full truck with their goods. Well - as the story goes - they made an oral deal with each other. They were supposed to direct relevant business to each other pursuant to this agreement. At the time the deal was made, Edgewater employed a woman named Osgood.

Osgood, unbeknownst to Edgewater, was in secret discussions with Epic to become employed with Epic. What she was charged with accomplishing upon her arrival at Epic was to get Epic into the full truckload shipping business - in other words, to help Epic do what Edgewater did. Edgewater also claimed that it observed Osgood stealing files from the company offices - and that those files were customer lists and shipping pricing information.

Epic, after the discovery period was up, moved for summary judgment. They claimed that Edgewater couldn't prevail on its trade secrets misappropriation claim because the stuff they claimed Osgood stole were not trade secrets. As such, Judge Jolly had to consider the issue of whether there was legal validity to Edgewater's claim that it maintained trade secrets and that Osgood had stolen them.

The court found that Edgewater could not legally support their claim and dismissed the trade secrets claims, among others.

The court reasoned that: "In her deposition, Plaintiff Dosher conceded that the only thing in the carrier file that might be considered a “trade secret” would be the rate information. With respect to rates, she testified that rates change as variables such as the cost of fuel and insurance change, and that they even can change depending on the economy or how the industry itself is doing. Dosher further testified that when a customer becomes aware of ESI's rate schedule, the customer is not required to sign anything agreeing to keep that information confidential. Plaintiffs do not dispute Dosher's testimony as reflected in this paragraph, and it therefore is deemed to be undisputed for purposes of the Motions. In addition, although ESI only communicates a quote or rate to its customer, it does not instruct that customer to refrain from sharing that rate information with others."

In essence, the court held that customer pricing information, in order to be a trade secret, needed to be treated differently than customer pricing information is usually treated. Judge Jolly concluded that the pricing is provided to the customer - and the customer is under no obligation to keep that information to itself. In fact, customers would presumably have an incentive to use pricing information from one vendor to use it to extract concessions from another potential vendor. As such, the court concluded that this is not information that would constitute trade secrets under the standard definition.

But the court did not stop there. It went on to note that "The carrier files and rate information are kept in an unlocked file room, accessible to anyone. Carrier files, rate information, and customer files are not kept in any locked containers. Dosher conceded in her testimony that anybody could access the information in the carrier files and rate files “if they knew where to go and what they were looking for.” She also testified that the three ESI operations employees at that time would have had access to these files."

This was not good for Edgewater, either. Trade secrets require reasonable means under the circumstances to maintain their secrecy. The court was essentially concluding Edgewater did not use reasonable means to keep the pricing data secret. As such, the information did not constitute a trade secret and thus wasn't protectable as such.

But - you might be wondering: if Osgood was seen pilfering through Edgewater files and taking documents, even if they weren't trade secrets documents, can she get away with that and not have to face trial? No. The court did not dismiss claims for conversion or breach of her confidentiality agreement with Edgewater. Those claims are going to trial.

North Carolina businesses should take note - before you claim trade secret protections for your customer pricing information you might want to consider requiring customers to keep that information confidential and you might want to lock up your pricing files.

Saudi Prince Claims Swiss-Based Drilling Company Stole His Trade Secrets

Transocean, the world's largest offshore drilling company, was sued by a member of the Saudi royal family who claims he was cheated of his share of multimillion-dollar contracts won using his trade secrets.

Soroof International Co., a Saudi trading agency run by Prince Bander Bin Abdullah Al Saud, claims Transocean reneged on a signed 2007 agreement that would have made the prince's firm Transocean's sole agent for pursuing drilling contracts with Aramco, the Saudi Arabian national oil company.

“Instead, using confidential and proprietary information and trade secrets obtained from Soroof, Transocean pursued these opportunities through what appeared to be a competitor, GlobalSantaFe Corp., which — unbeknownst to Soroof — Transocean was in the process of acquiring,” lawyers for the prince's firm said in a suit filed this week in Houston federal court.

Soroof is seeking more than $50 million in compensatory damages and lost profits and at least $90 million in punitive damages. The suit claims Geneva, Switzerland-based Transocean fraudulently induced Soroof to become its Saudi agent to gain leverage in a bid to acquire GlobalSantaFe, a primary competitor that was at the time dominant in the Saudi drilling market.

The complaint claims Transocean owes Soroof 3.5 percent commission on Aramco drilling contracts that are paying, on average, $170,000 a day per rig. The suit was originally filed in Texas state court in Houston in August and removed to federal court yesterday.